Why some doctors at China state-owned hospitals may not be ‘foreign officials’
Wednesday, May 4, 2016 at 11:38AM
Chang Liu in China, Foreign Official, Jurisdiction, instrumentaility, state-owned enterprises

A recent scandal at a major Chinese public hospital revealed that many of the public hospitals across the country outsource their medical services to private companies and employ doctors as independent contractors.  That could raise doubts about some public hospital doctors in China being "foreign officials" under the FCPA.

Wei Zexi, a 21-year old college student, died from synovial sarcoma after his family spent RMB200,000 (about $30,896) at the Second Hospital of Beijing People’s Armed Police.

Although it was one of the highest-ranked public hospitals in China, reports said it actually outsourced its oncology department to a private company -- Shanghai Claison Bio-tech Co., Ltd, which used an outdated treatment method that has been proven ineffective and long abandoned by other doctors, while falsely claiming it to be the latest medical technology.

The scandal received nationwide attention. The media and public severely criticized the government for failing to regulate and administer the public hospitals, as well as the online false advertising of their outsourced medical services on Baidu.com, a major search engine website in China.

There were also reports the Office of the Central Leading Group for Cyberspace Affairs, the State Administration for Industry and Commerce, and the National Health and Family Planning Commission established a joint investigation team to investigate the case.

As part of China’s state-owned enterprise reforms of the 1990s, the government stopped full financial support to public hospitals. Many hospitals then turned to outsourcing to private companies -- particularly departments such as plastic surgery, dermatology, andrology, gynaecology, oncology, otorhinolaryngology, and other more “profitable” specialties.

The majority of these private healthcare providers are allegedly controlled by a few family-owned businesses from the city of Putian, Fujian Province. For example, the private company in the latest scandal, Claison Bio-tech, was owned by of Huzhou Rui Yuan Rui Kang Investment Limited Partnership, which is wholly owned by the Chen brothers from Putian. Claison Bio-tech was recently sold to a public company, VCANBIO Cell & Gene Engineering Corp., Ltd.

The doctors in these departments are employees not of public hospitals but of private companies. Yet many patients are convinced that the doctors are affiliated with the hospitals because of misleading advertising sponsored by the private companies.

The latest scandal involving private doctors at public hospitals could force the Chinese government to further tighten its regulation on the healthcare industry. Recent enforcement actions and investigations involving hospital officials and pharmaceutical companies already show the government’s emphasis. The public outrage resulted from the latest scandal is likely to further reinforce the government's determination.

The scandal also provides evidence that some doctors at public hospitals may not work under the direction and control of the government. If that's true for any of the doctors from private companies, they may not be "foreign officials" under the FCPA. If they aren't foreign officials, then bribes paid to them to obtain or retain business may not be prohibited by the FCPA.

This is contrary to the traditional view that all the doctors in China’s public hospitals are foreign officials because the hospitals are wholly owned and controlled by the state, and thus constitute “instrumentality” of the Chinese government. 

But bribing the doctors from private companies to influence decisions in public hospitals could still violate laws in China and elsewhere.

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Chang Liu is an attorney in Kaufman Dolowich & Voluck, LLP based in the firm’s Woodbury, New York office. Prior to law school at Hofstra University, he worked for a defense contractor in China on cross-border transactions. He's fluent in Chinese and Spanish. He can be contacted here.

Article originally appeared on The FCPA Blog (http://www.fcpablog.com/).
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