[Reporter’s View] More regulations for CSO rebates

Additional regulations must be established swiftly to address persisting CSO rebates

The Office for Government Policy Coordination has designated the eradication of illegal rebates between pharmaceutical companies and contract sales organizations (CSOs) as a government-wide ‘national normalization task.’ The announcement came shortly after the Ministry of Health and Welfare declared its intention to improve the fundamental structure of the domestic pharmaceutical and biotech industry through a reform of the drug pricing system, signaling administrative action that is expected to have a significant impact on the industry.

The move reflects the Lee Jae-myung administration’s strong commitment to achieving its key policy objectives of ‘fostering a globally competitive pharmaceutical and biotechnology industry’ and creating ‘blockbuster innovative drugs.’ However, contrary to the blueprint expected by the government's policy, variant forms of CSO (Contract Sales Organization) rebates are still prevalent in the field of drug prescriptions.

With generic drug price reductions decisively introduced to improve the financial sustainability of the National Health Insurance system and shift the industry toward innovation-driven growth, dishonest CSOs are exploiting regulatory blind spots and hindering the advancement of Korea’s pharmaceutical sector. Reports of some illegal CSOs even taking advantage of preferential criteria in the Ministry’s pricing reform plan, such as R&D investment requirements for innovative drugs, to proactively offer disguised rebate schemes to pharmaceutical companies, underscore the need for both the government and the National Assembly to accelerate regulatory measures through administrative and legislative action.

Another ongoing problem involves medical institution directors establishing CSOs under the names of their children or relatives and receiving excessive kickbacks or fictitious service fees disguised as sales agency commissions. CSOs, which should be growing alongside efforts to modernize the pharmaceutical industry, have instead continued to evolve in undesirable ways that undermine the healthcare ecosystem.

One encouraging sign is that many CSOs advocate greater industry transparency and promote a division-of-labor model in which pharmaceutical companies focus on drug discovery and regulatory approval while CSOs carry out dedicated sales and marketing. While the direction is appropriate, the reality is that pharmaceutical companies still have little trust in CSOs, highlighting the need for broader industry reform and self-reflection.

It is now the time when stronger self-regulation by the industry, coupled with follow-up regulations by the government and NA beyond the recently introduced mandatory CSO reporting system, is required to become free from the criticism that it is difficult to find a ‘clean CSO free of rebate practices’ that pharmacuetical companies can reliably outsource sales activities to.

The time has come to address the long-overdue task of transforming CSOs, which have become synonymous with indirect rebate channels, into legitimate and transparent organizations. Although discussions regarding commission rate controls or licensing systems may raise constitutional concerns or be difficult to implement immediately, policymakers should immediately contemplate, establish, and implement a realistic next-stage regulatory track to elevate the currently proliferating, fragmented CSO (Contract Sales Organization) structures to a more advanced level.

One example of a tangible regulatory proposal is legislation introduced by Representative Jin-sook Jeon of the Democratic Party of Korea, a member of the National Assembly’s Health and Welfare Committee. The bill would require CSOs to submit proof of their business location when filing reports and establish stricter management standards capable of objectively demonstrating that they are legitimate organizations engaged in lawful pharmaceutical sales activities.

The Ministry of Health and Welfare should use the ongoing CSO surveys and comprehensive investigations as a starting point to proactively formulate additional measures aimed at eliminating CSO-related rebates and work closely with both ruling and opposition parties to advance those efforts.

The pharmaceutical industry must also seize this opportunity to break the cycle of illegal rebate supply and demand. Beyond formal compliance training, stakeholders should strengthen measures such as the certification system for medical representatives (MRs) to help CSOs develop into true specialists, while jointly reforming the ‘multi-product generic environment’ that encourages the mechanical misuse and abuse of CSOs as rebate channels.

Greater transparency in pharmaceutical distribution is an irreversible trend. Blockbuster innovative drugs with global competition capability cannot be created through sales practices built on illegal rebates. Now that the government has declared its commitment to restoring normality, the 22nd National Assembly should, upon completing its second-half organizational setup, work with the government to introduce comprehensive measures that both legitimize CSOs and advance Korea’s pharmaceutical industry, enabling Korean pharma and biotech to evolve to the next level.