[Contribution] History of rebate-related regulatory changes and latest regulatory trends

Attorney Daeryun Lee Il-hyung, “After the introduction of the CSO reporting system, interest in pharmaceutical companies has increased.”
"Establishing a sound business method - upgrading the compliance system...an essential task for sustainable development"

1. Entering

Rebates are a long-standing issue in the pharmaceutical industry, but the industry's attention is being focused again due to the government's recent strengthening of regulations, including the introduction of the CSO reporting system. In this contribution, we systematically examine the historical evolution of rebate-related regulations and analyze the latest regulatory trends and future prospects.

2. Concept and features of rebate

A pharmaceutical rebate refers to a payment in cash or in kind by a pharmaceutical company or wholesaler to medical personnel, medical institution founders, or pharmacy operators to promote drug sales. The main forms include ▲supporting expenses for hospitals and clinics to attend overseas training and seminars ▲free supply of medicines to open hospitals and clinics ▲provision of in-kind items such as office equipment.

What distinguishes rebates in the pharmaceutical sector from other industries is the strength of its regulation. Rebates are common not only in the pharmaceutical industry but also in other industries, and are subject to a certain level of regulation under the Fair Trade Act. However, due to its special nature in the pharmaceutical field, a multi-layered and strengthened regulatory system is applied, including the Fair Trade Act, Pharmaceutical Affairs Act, Medical Services Act, and drug price-related laws.

3. History of regulatory evolution: step-by-step reinforcement flow

Looking at the history of rebate-related regulations, we can see a clear trend in which the type and intensity of regulations have been continuously strengthened along with the growth of the pharmaceutical market.

▶ Stage 1: Initial regulation centered on the Fair Trade Act (until the early 2000s)

Initially, regulations were mainly implemented by applying the Fair Trade Act to prohibit acts of enticing competitors' customers to do business with them by providing unfair or excessive profits in light of normal practices.

▶ Stage 2: Introduction of rebate-drug price reduction linkage system (2009)

From August 1, 2009, the Ministry of Health and Welfare will implement the 'Rebate-Drug Price Reduction System' as a means to eliminate the bubble in drug prices caused by rebates and eradicate rebates. However, this system was widely criticized as being unreasonable in administration, and, crucially, as cases of courts canceling dispositions continued to emerge, the system experienced ups and downs in the form of changes along the way. Nevertheless, similar systems continue to be implemented to this day.

▶ Step 3: Introduction of the rebate dual punishment system (2010)

As rebates were not eradicated, the government introduced the ‘rebate dual punishment system’ in May 2010. The dual punishment system for rebates refers to ‘a system that punishes both those who provide and those who receive illegal rebates in the trade of drugs and medical devices’ (refer to the Ministry of Health and Welfare’s pharmaceutical policy website).

The legislative history of the introduction of the dual punishment system is as follows.

• July 1992: Prohibition on ‘providing prizes related to pharmaceutical transactions’
• December 2008: Prohibition of illegal kickbacks in the pharmaceutical sector
• May 2010: Introduction of a dual punishment system that punishes those who receive rebates

▶ Stage 4: Strengthening administrative disposition standards (2011~2013)

∙ June 2011: Sanction standards based on the results of criminal dispositions were established in the “Medical-related Administrative Disposition Rules,” revised by Ordinance No. 62 of the Ministry of Health and Welfare (see Seoul Administrative Court ruling 2017Guhap3526, pronounced on December 14, 2017).
∙ April 2013: Additional strengthening of standards for administrative dispositions (suspension of qualifications and suspension of work) (refer to the Ministry of Health and Welfare Pharmaceutical Policy website)

▶ Step 5: Implementation of CSO reporting system (2023)

On April 18, 2023, Article 47 of the Pharmaceutical Affairs Act was further revised, and the CSO reporting system came into full effect, including provisions such as 'prohibiting entrustment of drug sales promotion work to persons other than drug promotion business operators.'

4. Latest regulatory trends: Joint enforcement becomes routine

What is noteworthy in the latest regulatory trends is that government management is becoming more tight. Currently, kickback investigations are not simply conducted by investigative agencies such as the police or prosecutors, but have the following characteristics.

▲Joint investigation: Generalization of joint investigation between related agencies such as prosecutors, police, Health Insurance Review and Assessment Service (HIRA), National Health Insurance Corporation, Ministry of Health and Welfare, etc. ▲Multi-faceted detection: Expanded to capturing the circumstances of rebates during the tax investigation process and transferring the case to related agencies.
▲All-round surveillance: Establishment of a rebate detection system through various channels, including insider reports

5.Future outlook and conclusion

Summarizing the history of regulatory changes above, the government's consistent position regarding rebates focuses on 'strengthening regulations', and it seems very unlikely that it will reverse this trend in the future.

Therefore, although it may be a bit cliché, pharmaceutical companies are likely to face greater difficulties if they do not fundamentally improve their constitution beyond simply responding one-time whenever an issue arises. Establishment of a sound business method that does not rely on rebates and advancement of the compliance system are emerging as essential tasks for the sustainable development of the pharmaceutical industry.

Next, we plan to cover it in more depth, including a summary of punishment cases.

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[Contribution] History of rebate-related regulatory changes and latest regulatory trends (link)