We have frequently noted how health care organizations accused of kickbacks, fraud, and other unethical and sometimes illegal behavior involving how they produce or market health care products or services often are allowed to settle the charges only with a fines to the companies, and sometimes with corporate integrity agreements. Almost never are the people who authorized, directed, or implemented the unethical behavior required to pay any sort of penalty. We recently commented on a case in which an executive of a medical device company accused of exaggerating the performance of a diagnostic test in development was charged, not with misleading doctors or patients by the US Food and Drug Administration (FDA), but with misleading investors by the US Securities and Exchange Commission (SEC). That executive lost her job, and will be barred from leading any public company.
So up to now, a corporate executive responsible for misleading doctors or patients about issues that could affect clinical decisions or outcomes likely would never pay a penalty, but one responsible for misleading investors about similar issues could lose his or her job and livelihood.
Now, per an article in Fortune, it appear the situation may be changing,
The federal government is fed up with the amount of fraud, especially recurring fraud from the same companies, happening in the pharmaceutical industry. So regulators have decided that when it comes to punishments, it's time to get personal.
From now on, individual executives risk being ejected from their jobs -- and perhaps even barred from the industry -- for fraud their companies commit, even if they did not participate or even know about the crimes.
Furthermore,
The new approach, emerging from the unusually powerful Inspector General's office in the Department of Health and Human Services, reflects frustration with corporate recidivism even in the face of ramped-up fines, penalties and disgorgements.
'We are going to start to use that authority in the appropriate circumstances to get high level executives out of companies, so that the company has a better shot at changing its behavior, so that it does not become a recidivist,' explains Lewis Morris, chief counsel to the Inspector General.
The article noted some cases in which even large fines and corporate integrity agreements seemingly failed to deter future bad behavior by the companies which paid these penalties. For example,
In the government's most recent major settlement -- in which AstraZeneca agreed to pay $520 million -- the fine represented 16.5% of the $8.6 billion income (between 2001-2006) from U.S. sales of Seroquel, a powerful anti-psychotic. AstraZeneca (AZN) turned this narrowly approved drug into a cash cow by marketing it for much wider use, including by the elderly and children, even though they are particularly vulnerable to 'serious and debilitating side effects.'
All the while, AstraZeneca was operating under a corporate integrity agreement (CIA) with the Inspector General, imposed after a 2003 off-label marketing case.
We discussed the AZ settlement here in October, 2009. We asked then, "Does anyone really still believe that integrity agreements, and settlements assessed against huge corporations deter such profitable bad behavior?"
Another example:
Drug company Pfizer (PFE, Fortune 500), which was fined $2.3 billion just last September, is now on its third CIA. Steeper fines and harsh individual penalties should help put more teeth into these agreements and keep companies from flouting them.
We discussed the repeated lack of effect of settlements by Pfizer here in September, 2009. We concluded, "So will even a $2,300,000,000 settlement and yet another corporate integrity agreement make Pfizer or any other health care corporation act more ethically? I doubt it."
The Fortune article quoted Peter Rost, former Pfizer executive turned whistle-blower and ethics advocate (and to whose blog I offer a hat tip for first mentioning the Fortune article), on aspects of corporate culture and corporate incentives that foster repeated unethical behavior by management,
'Usually by the time someone becomes a senior executive they are very aware of the pitfalls in the organization, and they have become masters at not doing something wrong or not getting caught doing something wrong,' explains Peter Rost, a former senior Pfizer executive turned industry gadfly.
Incentive-based compensation systems -- typically 40% to 50% of salespeople's income comes from hitting their numbers -- are one weak point. 'They are going to work real hard to increase those numbers and do whatever it takes, and if they think somebody gave them a wink about doing this or that, they are going to run with it.' says Rost.
Booting senior executives out for any fraud under their watch might end the wink-and-nod system, giving hope to critics.
In my humble opinion, the government's new approach looks like real progress. Giving corporate executives personal impunity was a recipe for increasing unethical, and sometimes criminal behavior. The sorts of marketing fraud they authorized or directed certainly lead to increasing costs, and overuse of unnecessary and sometimes harmful tests and treatments. While there have years of complaints about health care's increasing costs and decreasing quality in health policy circles, it is just amazing that until now, there has been so little action against the bad behavior that was undoubtedly responsible for much of these problems.
So three cheers for making health care organizations' leaders accountable for the bad behavior of their organizations.
After cheering, however, there ought to be some serious inquiry about why they were not held accountable much sooner. It turns out that there has been legal justification for holding leaders so accountable available for a long time:
All that's required for the government to flex this remarkably broad authority -- embedded in the Responsible Corporate Officers Doctrine -- is that the executives were in a position to have stopped the fraud that resulted in a criminal conviction or plea.
Note that the Responsible Corporate Officers Doctrine apparently derives from a US Supreme Court case about the selling of misbranded or adulterated drugs into interstate commerce under the US Food and Drug Act, decided in 1943.
However, it looks like in the hyper laissez faire climate of the last 20 or more years, no one wanted to bother to invoke it. After all, the formerly highly regarded leader of the US Federal Reserve believed there was no need for regulators to punish fraud, because the magic of the market would take care of it. US health care has paid a heavy price for such breathtaking naivete (see the PBS Frontline show, "The Warning." )
