No Cure for Pharma Frauds?

The procurement process is always considered as one of the most critical activities in any industry. The procurement function in the pharmaceutical industry involves purchase of many sensitive solvents, as well as ingredients that are used to manufacture different kinds of drugs. As with other industries, adoption of best procurement practices helped pharma companies to sustain their cost advantage and improve productivity. Unfortunately, may be due to the lack of proper mechanisms, the procurement process provided enough scope for fraudulent activities as well. Though such frauds are common across all industries, fraud in the procurement of pharma related products could result in life threatening incidences at the patient’s end.

Ways of doing fraud

According to KPMG India’s recently released ‘India Fraud Survey 2012’, procurement, sales and distribution are the top most vulnerable processes to fraud risks in the pharma sector. Rohit Mahajan, Partner and Co-Head, Forensic Services, KPMG India, gives more details, saying that in case of the pharma sector this is more prevalent in the procurement of basic raw materials and other additives like solvents etc, which constitute large parts of routine procurement.

“While the basic risk of a potential kickback payment in the procurement process exists in every sector/ industry/ company, there may be slight differences in the manner in which such fraud is perpetrated in sectors,” says Mahajan. He adds, “In the pharma industry, it is extremely important to procure materials of the right specifications as it may lead to significant non-compliance on regulatory matters.

Another level of fraud occurs at the sales end of the pharma supply chain. For example, says Mahajan, a majority of Indian hospitals are public hospitals and these are a significant revenue source for drug companies. Procurement teams at these hospitals can manipulate prices in return for kickbacks from pharma manufacturers.”

According to Mahajan, such kickbacks, as described in the example above, are quite common and such practices additionally constitute unethical practices by the sales and distribution divisions of the company.

“Leveraging technology also pertains to introducing e-payment to suppliers and service providers of drugs and pharma. The intention is to bring economy and efficiency, while at the same time, reducing corruption.” Chithur Devraj Former Head Global Procurement and Supply chain—Pfizer, and currently the Professor in Supply Chain Management- Somaiya Institute of Management and Research

Chithur Devraj, Former Head Global Procurement and Supply chain – Pfizer, and currently the Professor in Supply Chain Management at Somaiya Institute of Management and Research, reiterates the issues discussed by Mahajan. Adding a few more points to the discussion as well, he informs, “As in other procurement processes, forms of corruption in drug procurement include collusion among bidders leading to higher prices for purchased medicines, kickbacks from suppliers and bribes to public officials overseeing the bidding and contract implementation processes. There are many other opportunities for fraud in procurement processes. Due to the lack of management and monitoring capacity, substandard, expired, counterfeit or harmful drugs can be delivered, partially delivered or not delivered at all. Intellectual property fraud is also another common type of fraud in the pharma industry.”

The Indian pharma sector is even more prone to procurement related frauds because companies around the globe source raw and finished pharma products from India, attracted by the country’s comparatively low labour costs.

“According to a 2011 Global Fraud Survey, 20 per cent of Indian companies are affected by vendor, supplier, or procurement fraud. Apart from vendor kickbacks, the most common procurement-related fraud, which these Indian pharma companies have been subjected to, involved conflicts of interest of the senior management. They obtain favourable rates and terms with manufacturers for their own self-run companies,” says Devraj.

He adds, “In turn, these personal businesses are often suppliers for other local companies, as well as to the competition. They might employ family members and friends in the purchasing organisation who will help conceal the conflicts.” Devraj highlights that procurement fraud is a large risk in hospitals, as virtually all capital spending involves procurement, and medicines and supplies are often the next largest recurrent expenditure item after salaries. Procurement agents may seek bribes or kickbacks from supply companies, or contractors may engage in collusion or offer bribes to hospital officials in order to win contracts.

According to Devraj, drug manufacturers or their agents try to bribe officials to ensure that their medicine or formulation appears on the hospital’s pre-approved drugs list. There is diversion/stealing of hospital medicines for personal use or use in private practice or re-sale.

The bigger picture

“While the basic risk of a potential kickback payment in procurement process exists in every sector/ industry/ company, there may be slight differences in the manner in which such fraud is perpetrated in the sector.” Rohit Mahajan Partner & Co-Head Forensic Services KPMG India

India’s annual budget presentation is always criticised for ignoring the Indian pharma industry. The funds allocated out of the total budget for the healthcare sector as a whole is also very negligible. While the odds are already piling up, fraud/ corruption could further erode the frail Indian healthcare system. This would in turn affect the country’s economy as well, because the funds allocated would not be reaching its actual destination.

Mahajan explains the scenario. He says, “Malpractices in the procurement process in any company/ sector lead to overall value erosion for the company/ sector and hence may reduce the attractiveness of that company/ sector for investors/ other stakeholders. However, in the case of pharma companies, if malpractices in procurement results in non-compliance to pharma regulations, it may additionally lead to enforcement actions by regulators. This in turn can lead to loss of reputation and disruption in business for extended periods of time and heavy fines.”

Devraj opines, “Several studies highlight the fact that corruption in the health sector impacts the poor the most heavily, given their limited access to resources. A study by Amnesty International found that one of the primary causes of deaths of thousands of pregnant women annually (including during childbirth) is due to corruption by health professionals.

He also pointed to further evidence from International Monetary Fund (IMF) shows that corruption has a significant, negative effect on health indicators such as infant and child mortality, even after adjusting for income, female education, health spending, and level of urbanisation. Corruption lowers the immunisation rate of children and discourages the use of public health clinics. In many countries, its pervasiveness impedes improvement in health outcomes and therefore is a serious barrier to the achievement of the country’s economic development.”

He adds, “Ten to 25 per cent of public procurement spending (including on pharma) is lost to corrupt practices. In developed countries, fraud and abuse in healthcare has been estimated to cost individual governments as much as $23 billion per year. Countries with a higher incidence of corruption have higher child mortality rates.”

Technology as a watchdog?

Recently, the Indian Government has decided to directly deposit subsidised money for the LPG cylinder in the LPG holders bank account. This initiative will leave very little chance for fraud during LPG cylinder distribution. In the same manner, if technology comes into play during the pharma procurement process a lot of irregularities could be avoided.

“Use of technology for monitoring transactions through the use of pro-active data analytics can help in significantly reducing the instances of fraud in any organisation. Data analytics is gradually evolving and being accepted/ adopted by organisations. These tools can be used to highlight potential red flags such as duplicate payments, inefficient invoice processing, multiple instances of the same vendor within the master data, inconsistent vendor payment terms across the organisation etc.,” opines Mahajan.

“Advances in information technology offer promising opportunities to increase the transparency and accountability of the drug procurement process,” says Devraj. He points out that an electronic bidding system has been introduced for drug procurement that uses the internet for publishing the lists of supplies offered in tenders with the view to providing public access to prices, products and quantities as well as bidding results. Devraj feels that procurement firms in both private and public sectors and also in hospitals can save around five to seven per cent by using this electronic bidding system. Such an approach also allows transparency at all stages of the procurement process.

“It has been the experience of a large number of organisations worldwide, both in the public and private sectors that e-procurement can bring in economy and efficiency in the procurement of pharma goods, works and services. Apart from these benefits, the process also brings in greater transparency, thus reducing opportunities for corruption. Leveraging technology also pertains to introducing e-payment to suppliers and service providers of drugs and pharma. The intention is to bring economy and efficiency, while at the same time, reducing corruption,” explains Devraj. According to him, pharma procurement fraud controls also include, audits of ERP system (SAP/Oracle) and forensic fraud control techniques to ensure appropriate internal controls are established.

‘Law’gical remedies

Finding procurement related fraud would call for immediate action from the company management. However, there are provisions in the law as well to book the culprit. Termination of the guilty may end the issue for the company. The company may not pursue the matter in the court to prevent any brand damage. However, public sector related procurement frauds are more likely to get heard in the court.

Devraj says, “In India, all procurement frauds are covered under the Prevention of Corruption Act 1988. The normal penal code provisions are applicable, which are inadequate for dealing with complex procurement matters. Typically, in the private sector any procurement fraud is dealt with transfer or sacking of employee or gets charged under the prevention of corruption act, depending on the severity of the charge. In April 2012, Indian Government approved the Public Procurement Bill 2011 that seeks to regulate government purchases of above Rs 50 lakh through a transparent bidding process. The bill provides for a jail term ranging from six months to five years for public servants found guilty of demanding and accepting bribes from bidders of government contracts.”

Giving the US scenario, Devraj informs, “The US Foreign Corrupt Practices Act (FCPA) provisions prohibit corruptly offering, making, or authorising a payment of anything of value to any person, to obtain or retain business. All US pharrma firms in India follow FCPA. Even doctors who are government employees are covered.”

The Indian healthcare sector of which pharma products form a major part, is one of the largest in the world. With an increased influx of the pharma companies in the Indian market, procurement related frauds are going to become more prominent in the future. Instead of having a common law to handle such frauds, it will be wise to formulate a separate law to look into them.

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