Third Party Distributor Monitoring Program and Measuring Success

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1 Third Party Distributor Monitoring Program and Measuring Success Sapan Singh Director Compliance, Stryker Corporation Emily C. Huebener Fraud Investigation & Dispute Services Ernst & Young, LLP Any views and opinions expressed in this presentation are those of the presenters and do not necessarily reflect the views or opinions of their respective employers. All information provided herein is for informational purposes only and should not be relied upon to make any decisions.

2 Need 90% DOJ FCPA cases involve TPI 2/3 SEC enforcement actions involve TPI 100% SEC and DOJ in 2014 cases involved TPIs 2 Source 2016 Year End Updaed by F. Joseph Warin, Gibson, Dunn & Crutcher LLP,

3 Challenges Corruption perception Lack of operational insight Volume of Indirect Channels Commercial risk Complex local regulations Lack of influence Complex web of relationships Reputation risk Socialized healthcare Lost in translation 4 th 5 th 6 th Party Cyber risk hacking, PHI, IP 3

4 Approach Due Diligence Training & Certification Auditing & Monitoring Relationship Mgmt. 4

5 Due Diligence Due Diligence Risk Assessment Business Rationale Questionnaires Reputational DD On site visit Contracting Audit Rights Reps & Warranties Annual review Self assessment DD renewal Termination Rights Compliance with Laws, Policies, Procedures 5

6 Training & Certification Due Diligence Training & Certification Training Online Policies & Procedures Localized Live training Refresher Certification Annual 6

7 Auditing & Monitoring Due Diligence Training & Certification Auditing & Monitoring On site Tender process Auditing High risk payments review Discounts/ rebate Monitoring Margin analysis Data Analytics Big Data 7

8 Relationship Mgmt. Due Diligence Training & Certification Auditing & Monitoring Relationship Mgmt. Compliance in a Box Periodic visits Define success Policy Procedure Online resources Templates How can we help? 8

9 China s Two-Invoice System Changing rules and the evolving healthcare environment

10 Background January 2009, Ministry of Health and other agencies issue Opinions on Further Regulating Centralized Bidding Procurement by Healthcare Institutions Reduce distribution costs by reducing layers , Two-Invoice System piloted in select China provinces Limited to two invoices Manufacturer Distributor Distributor Hospital May 2017 China s Two-Invoice System

11 Two-Invoice System Timeline Pilot Two-Invoice System in select provinces for drug procurement Release Opinions on the Implementation of the Two-Invoice System Select provinces implement Two- Invoice System for medical devices Shaanxi province issued Opinions on the Implementation of the Two- Invoice System in Drugs and Medical Consumables by Public Medical Institutions Nationwide implementation of Two-Invoice System for drug procurement January 2017 March May 2017 China s Two-Invoice System

12 Developments January 2017, Opinions on the Implementation of the Two-Invoice System in Drug Procurement by Public Medical Institutions (for Trial Implementation) Issued by National Health and Family Planning Commission Implement Two-Invoice System by 2018 January 2017, select provinces implement Two-Invoice System policy for medical devices March 2017, Shaanxi province issued Opinions on the Implementation of the Two-Invoice System in Drugs and Medical Consumables by Public Medical Institutions May 2017 China s Two-Invoice System

13 Two-Invoice System Sales Model Manufacturer Single Distributor Medical Service Provider Contract Sales Organization (CSO compensated separately by manufacturer) May 2017 China s Two-Invoice System

14 Business Implications Changes in business model to a Commission/Service fee Eliminate multiple distributors Need for Contract Sales Organizations (CSO) for marketing and promotion Compensation Compliance management Changes in distribution channel structure Multiple authorized distributors based on province Increased number of distributors to manage May 2017 China s Two-Invoice System

15 Financial Implications Short term impact to sales as distributors clear out current inventories Pricing Ex-factory price Hospital purchase price Transfer pricing Commission/service fee calculations Contract Sales Organizations (CSO) May 2017 China s Two-Invoice System

16 Considerations Medical and healthcare system reform Promote healthy development of the industry Strengthen regulation on distribution Penalties for non-compliance Clean up the distribution environment Reduce distribution layers Eliminate pass through invoices Crack down on money laundering by invoice fraud Increase transparency Pricing Compliance May 2017 China s Two-Invoice System