On December 9, 2015, the Korean National Assembly passed legislation amending the Pharmaceutical Affairs Act, the Medical Devices Act, and the Medical Service Act. Expected to enter into effect sometime in the first half of 2016, these statutory amendments (the “Amendments”) clarify the scope of the so-called illegal “rebates” in the Korean healthcare industry, namely the provision of an economic benefit to a healthcare professional or employee for purposes of promoting a drug or medical device.

1. Background

An illegal rebate is subject to criminal and administrative sanctions under the current regulatory scheme, which was implemented in November 2010 as part of a statutory overhaul aimed at curbing improper sales practices perceived to be widespread in the Korean healthcare industry at the time. Particularly noteworthy at the time was that the scheme provided for a criminal sanction against the recipient as well as the provider of an economic benefit whose purpose was essentially to promote a drug or medical device. However, as with any regulatory scheme, certain ambiguities emerged.  To address this problem, the Amendments were needed.

2.  Key Provisions of the Amendments

  1. Scope of Conduct Includes Economic Benefits to Institutions

Under the express language of the Amendments, the provision of an economic benefit to a medical institution or a pharmacy itself rather than its healthcare professional or employee could constitute an illegal rebate and could therefore subject both the provider and the recipient to criminal sanctions. As such, the Amendments “reverse” the 2014 decision in which the Korean Supreme Court held that it was not an illegal rebate to provide an economic benefit to a medical institution rather than its healthcare professional (Korean Supreme Court Case No. 2013Do4566, decided May 29, 2014).

  1. Scope of Purpose Covers Maintaining Existing Transactions

The Amendments also clarify the scope of purpose required for a finding that a particular practice constitutes an illegal rebate. Under the Amendments, the scope of “promoting” covers “maintaining an existing transaction.” In practice, however, this express language will not expand the current scope of illegal rebates because the existing statutory provisions are widely construed as supporting the expansive view now codified by the Amendments. 

  1. Scope of Conduct Extends to Use of Intermediaries

On the other hand, the Amendments do not specify whether the use of an intermediary, such as a corporate affiliate or an independent sales agent, could constitute an illegal rebate. This is because the case law construes the existing statutory provisions as clearly extending to the use of an intermediary to provide an economic benefit to a healthcare professional. That is to say, even under the current regulatory scheme, such use of  an intermediary constitutes an illegal rebate.