On April 1, 2014, the National Health Insurance Act (the "NHIA") was amended to include significant changes  to the penalties for companies found to be guilty of paying illegal rebates (hereinafter “Rebate Payment”).   The amendments will go into effect on July 2, 2014, and the Ministry of Health and Welfare (the "Ministry")  recently announced a new enforcement decree of the NHIA, which provides further details of the amendments and how the amendments will be enforced. The Ministry will receive public comments from March 25, 2014  to May 24, 2014 on the proposed enforcement decree. Under the amended NHIA, the Ministry may apply the  following penalties for a Rebate Payment: (i) suspension of health insurance reimbursement of the rebaterelated pharmaceutical product for a maximum of one year or (ii) completely exclude health  insurance  reimbursement to a company. 

Under the current system, a Rebate Payment is punishable according to the following remedial actions for  both the paying and receiving entities:  

  1. administrative orders, including suspension of business activities, cancellation of business license, and drug price reductions; and/or 
  2. criminal penalties, including imprisonment of up to two years or criminal penalty not exceeding KRW 30 million.

In comparison, the new scheme under the proposed enforcement decree adds penalties based on the amount  of the Rebate Payment and the frequency of the Rebate Payment for a particular drug as follows:

Click here to view table.

An exception is provided for orphan drugs and those drugs, which the Ministry determines to be essential for treatment but are economically unviable, such as in the situation where (i) reimbursement to manufacturers  is necessary to ensure cost recovery (e.g., for the  “Shortage-Preventive Drug”) or (ii) the Ministry  acknowledges that there is a special reason to believe that exclusion of a certain drug will pose a significant  danger to public health (e.g., the only drug on the market with a particular active ingredient). In such cases,  the Ministry may impose, in lieu of suspension or exclusion, an administrative fine not exceeding 40 percent of  the total amount of health insurance reimbursement paid for the rebate-related drug for a maximum duration  extending for a one-year period immediately preceding the year when the rebate was initiated.  The amount  of such fine will be calculated according to the following formula, which requires utilizing the table above  based on the amount of the Rebate Payment and frequency of a Rebate Payment for a particular drug.

Click here to view table.

The proposed scheme, if the enforcement decree is implemented without amendment, will create a significant  economic burden to companies found guilty of paying rebates by subjecting such companies to a suspension  of health insurance reimbursement, exclusion from receiving health insurance reimbursement, or a massive  administrative fine. Both alternative schemes will be imposed in addition to the current administrative and  criminal penalties. For example, a drug manufacturer found guilty of a first Rebate Payment of KRW 5 million,  which received KRW 100 billion in health insurance reimbursement for a certain drug may either lose one  month's health insurance reimbursement or face a fine of KRW 15 billion (15 percent of KRW 100 billion).

Therefore, we recommend taking precautionary measures to prevent rebate-related activities, provide  relevant training to employees, and create internal action plans in preparation for the implementation of the  proposed scheme. In addition, we highly recommend reviewing the proposed scheme and participating in providing public comments to the Ministry.