Despite Recalls, Legal Settlements, Guilty Plea, Johonson & Johnson Board Paid CEO $29 Million, Says He "Met Expectations"

For our latest story about the tremendous disconnect between the pay and performance of leaders of health care organizations, we turn to Reuters. 

Astronomical Pay

Despite having a very bad 2010, Johnson and Johnson continued to reward its CEO royally:

After a year in which Johnson & Johnson's product quality control was deemed such a shambles that the U.S. government will oversee some plants, the board had praise for Chief Executive William Weldon and awarded him almost $29 million in overall compensation.

The once golden reputation of the diversified healthcare giant was severely tarnished by seemingly endless recalls of widely used consumer products as well as recalls of medical devices and products from other units in 2010.

U.S. consumer product sales fell by more than 19 percent in 2010 and the company's 2011 forecast for earnings growth of only 1 percent to 3 percent fell shy of Wall Street projections.

Weldon's compensation was trimmed 7 percent, but in what appears to be a disconnect with the reality of its situation, J&J's (JNJ.N) board, in a year-end regulatory filing, said his performance 'generally met expectations' despite a year in which 'operational sales declined and fell below the goals for the year.'

'The board believes that Mr Weldon provided strong leadership during a very demanding year and has worked to resolve multiple challenging issues and position the company for future growth,' it said in the filing.

The rash of consumer medicine recalls in 2009 and 2010 were largely responsible for the first back-to-back years of company sales declines since World War Two.

Last week, U.S. health regulators filed a consent decree against J&J's McNeil consumer unit that will put some of its manufacturing plants under government supervision for at least five years.
The McNeil unit has recalled more than 300 million bottles and packages of Tylenol, Motrin, Rolaids, Benadryl and other products in the past year over faulty manufacturing and quality control problems.
The recalls cost the company $900 million in sales last year and hurt earnings, and Weldon was called to testify before Congress about problems that left pharmacy and supermarket shelves without Children's Tylenol.

But Weldon's 2010 compensation fell just 7 percent to $28.7 million from the $30.8 million he received in 2009. His performance bonus for 2010 was down 45 percent to $1.98 million.

The Wall Street Journal article on Weldon's pay also mentioned that Weldon also received " perquisites and other benefits in 2010 [which] included personal use of company aircraft, valued at $89,796; a car and driver for commuting and other personal transportation valued at $29,635; and a nominal amount of home security system monitoring fees."

The 2011 Johnson and Johnson proxy statement also noted that the other four of the five most highly paid Johnson and Johnson executives received compensation valued from $5,632,285 to $8,851,965 in 2010. In particular, Ms Colleen A Goggins, who retired under fire as head of the embattled Johnson and Johnson consumer group, walked away with $7,738,614 in 2010.

Other Aspects of Bad Company Performance

The WSJ Health Blog has been keeping an eye on the running total of Johnson and Johnson recalls. On 9 March, 2011, the list included 18 separate recalls of various different drugs and devices since July, 2009, from over-the-counter cold medications to sutures and hip replacements.

While suffering such a massive breakdown of the ability to perform the company's most basic function, to supply pure, unadulterated medicines and well-made devices, the company has also suffered from ethical lapses which were not listed in the Reuters article. In 2010, these included a jury verdict that the company had committed marketing fraud in its promotion of the atypical anti-psychotic drug Respirdal (see post here), and a guilty plea to a misdemeanor for and civil settlement of charges of "misbranding" Topamax by Johnson and Johnson subsidiary Ortho-McNeil-Janssen Pharmaceuticals (see post here).

Of course, we once speculated that the Johnson and Johnson CEO commanded such astronomical pay in part based on his ability to influence US government health policy in favor of his and his company's interests (see this post).

Who Made Up the Board Who Was Responsible?

Responsible for the astronomical amounts paid to Mr Weldon despite his company's ongoing inability to make pure, unadulterated medicines, and to other executives who presided over the company's recalls, guilty plea, and legal settlements was the company's board of directors.  Its members are listed below.  For explanation of the color coding, see the explanation below:

• Mary Sue Coleman - President, University of Michigan.
• James G Cullen - Retired Chairman and CEO, Bell Atlantic Corp
• Ian E L Davis - Senior Advisor, Apax Partners; Former Chairman and Worldwide Managing Director, McKinsey & Company, non-executive director, BP plc
• Michael M E Johns - Chancellor, Emory University, Past Chair of the Council of Teaching Hospitals, member of the editorial board, JAMA, chair of the publication committee, Academic Medicine
• Susan L Lindquist - Member and Former Director, Whitehead Institute for Biomedical Research, Co-Founder of FoldRx Pharmaceuticals, Inc, a subsidiary of Pfizer Inc.
• Anne M Mulcahy - Former Chairman and CEO, Xerox Corp, director of the Washington Post Company, previously director of Citigroup Inc, and Federal National Association (Fannie Mae)
• Leo F Mullin - Retired Chairman and CEO, Delta Airlines, director of Education Management Corporation
• William D Perez -Senior Advisor, Geenhill & Co, Inc, Trustee of Cornell University and Northwestern Hospital
• Charles Prince - Senior Counselor, Albright Capital Management LLC, Retired Chairman and CEO, Citigroup
• David Satcher - Director, Center of Excellent on Health Disparities, Director, Satcher Health Leadership Institute and Poussaint-Satcher-Crosby Chair in Mental Health, Morehouse School of Medicine, and trustee of the Kaiser Family Foundation

Of Johnson and Johnson's 10 directors (excluding its CEO), four have leadership positions at teaching hospitals, academic medical centers, medical schools or their parent universities.  Of these, two also had leadership positions at other influential non-profit health care organizations, including medical journals, a teaching hospital association, and a charitable foundation.

One had a management position at a competing pharmaceutical company.

Four had leadership positions in  financial services corporations, including some that were implicated in the global financial collapse, and/or required massive federal bail-outs to avoid collapse.

Three had had leadership positions in other organizations now under fire , that is, McKinsey, for the role of one of its former executives in an alleged insider trading scandal (e.g., latest coverage in the NY Times); several for-profit higher education companies caught up in allegations of luring students destined to fail in order to collect tuition funded by government loans;  and BP, under investigation for its role in a massive oil spill.

Summary

So here we have the latest striking case that indicates the confluence of forces that can lead to health care dysfunction.  Not only has the compensation given to health care leaders got so large that it is per se a cause of increased health spending, but also, and more importantly, such compensation often provides perverse incentives that perpetuate mismanagement, raising costs and lowering quality.  This situation appears to be enabled by governance by individuals who are often fellow members of the CEOs' club, and hence who may feel more sympathy with the executives they are supposed to supervise than the stockholders whose financial interests they are supposed to protect, or the public whom the companies' products and services are supposed to benefit.  Moreover, these individuals often have conflicts of interest which may mitigate against objective scrutiny of the executives they are supposed to oversee.  Finally, these individuals often may come from corporate cultures which do not espouse the values that we in health care are supposed to uphold.  (See this post and its links for other examples of the sorts of people who are supposed to provide stewardship to health care organizations.)

So to repeat once more-

I strongly believe that there needs to be much more investigation, academic, journalistic, and perhaps legal, of the identity, nature, and culture of the leaders of health care, and their relationships. A few bloggers cannot do it all. Obviously, the anechoic effect mitigates against medical and health care academics looking into their own leaders. However, failing to understand who is leading our march to the brink of health care failure ought not to be something such academics would want on their conscience.

Finally, and obviously, health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research.

If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

ADDENDUM (17 March, 2011) - Also see comments on by Jim Edwards on the Placebo Effect blog: "heads he wins, tails shareholders lose," as do patients and doctors. 

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Some Dare Call It "Corruption" - the Massachusetts Blue Cross Blue Shield Golden Parachute Scandal Continues

We have discussed many cases of health care organizations' leaders reaping rewards disproportionate to any concept of their performance, and especially to any concept of the effect of their conduct on patients' or the public's health.  Most of these cases have been pretty anechoic, but for some reason, the case of the huge golden parachute given to the outgoing CEO of Massachusetts Blue Cross Blue Shield despite a tenure  marked by financial losses and no particularly brilliant advances in patients' care or outcomes, (see this post) continues to generate responses. 

One editorial suggested that should the non-profit health insurance company continue to pay so lavishly, it should lose its tax exemption.  Another noted that the company should start putting its stakeholders, defined as its policy-holders "first and its funding of overly generous compensation packages to board members and outgoing CEOs somewhere far below."  Finally, an editorial in the local Providence Journal used the "c" word, "corruption," to define the company's and its CEO's behavior.

So it should not be surprising that defenders of the company have appeared.  The Boston Globe published an article which featured attempts to minimize the importance of the CEO's golden parachute. Further analysis of the points are in order.

Executive Salaries are a Minimal Component of Cost

The article quoted an expert who asserted executive salaries are not themselves a big component of cost:

The outcry grew big enough to force Blue Cross board members to vote to suspend their own payments and to lead the insurer to make promises to curb excessive payouts to executives. There�s just one problem: Those steps will do little to fix soaring health care costs.

'I have the same outrage,' Stuart H. Altman, a national health policy professor at Brandeis University, said about Blue Cross�s payments. But, 'We need to put executive pay and board salaries in perspective. It is not the major force, or even close to the major force, in driving up health care costs.'

My comment is that just because administrative costs are not the largest component of health care costs does not mean they do not drive health care costs.

As I have argued before, the biggest problem created by excess compensation for health care organizations' leaders is not the amount of money they get, per se.  The problem is the effect of the perverse incentives created by the money.  One concern is that people paid that much may make decisions that support their pay in the short-term, but damage the organizations' mission in the long-term.  Another is that the sorts of people attracted by the possibility of big pay packages are those least likely to uphold the mission in the first place.  Another is that the huge disparity between the pay of the top leaders and of everybody else is demoralizing for the relatively poorly paid staff who actually must do the work.

Finally, it may be worth quoting the former President of Princeton University, just interviewed about what academic leadership was like in the days before giant pay packages:

I�m not a fan of huge salaries for presidents of academic institutions. These are hard jobs. But people don�t really do them for the money. What kind of message do you really want to convey concerning the nature of the institution and its leadership? I always thought that it was important to convey a message of we�re all in this together. If you as president earn so much more than everyone else, it�s hard to argue that we�re all in this together.

Focusing on Executive Compensation Distracts from the Real Issues

The final argument in the Boston Globe piece was that huge executive compensation just is a distraction from the real issues:

Yet [current Massachusetts Blue Cross Blue Shield CEO Andrew] Dreyfus said he is concerned that the focus on executive and director pay will distract insurers, providers, and policy makers from addressing factors driving health care costs higher. Those factors range from an aging population to increases in obesity to expensive tests, drugs, and treatments that cure diseases and prolong lives.

'If you had a dozen health economists sitting in this room and you asked them what�s driving health care [costs], you know executive and board compensation wouldn�t be at the top of the list,' he said. 'It would be chronic illness and prices of hospitals and doctors and medical advances and discoveries and technology.'

That list of the "real" drivers of health care costs sounds very familiar.

Wendell Potter's Deadly Spin, is an expose of how how insurance and managed care corporations' public relations departments used deception, propaganda, and outright disinformation campaigns to make sure health policy supported the companies' interests.

Potter wrote (p.110) about how PR campaigns were designed to distract the public and policy makers from the industry's responsibility for health care dysfunction:

Rather than admit responsibility for the failures, insurance executives pointed the finger of blame at their customers, the 'consumers' of health care, and, of course, the providers of care. In introducing the concept of their new silver bullet - consumer driven health care - insurance executives claimed that the 'real drivers of health care costs' (one of my CEO's favorite expressions) were the people who sought care when they really didn't need it and the doctors and hospitals who were all too willing to provide this unnecessary care. Sure, the aging population and expensive new technology were also factors, but the main culprits were people who just didn't realize how expensive health care had become.

I color coded the factors listed by the current Blue Cross CEO as the real "drivers" of health care using the same colors with which I coded Mr Potter's list the specific distractors created by insurance company executives to deflect attention from the companies' inability (and probable) disinclination to control costs.
So it appears that Andrew Dreyfus is working from the same playbook that Wendell Potter described, down to the "drivers of health care costs" terminology. 

Summary

The Massachusetts Blue Cross Blue Shield kerfuffle seems to be enlarging into a good case to teach about what health care dysfunction is really all about.  It shows how the leaders of large health care organizations seem to be putting their self-interest ahead of the missions they are supposed to uphold.  Without governance structures that hold them accountable for upholding these missions, they have set up perverse incentives to pay themselves very well regardless of the effects of their actions on patients' or the public's health. 

So it appears, as the Providence Journal editorial asserted, that the leadership of health care organizations is increasingly corrupt, at least using the Transparency International definition of corruption, abuse of entrusted power for private gain. 

True health care reform would make leaders of health care organizations accountable for upholding their missions, and for patients' and the public's health.  Leaders of health care organizations ought to get reasonable incentives for improving health, but not incentives so large as to demoralize the people who actually do the work and take care of the patients. 

Post Script: More Undisclosed Conflicts of Interest

It is obvious why Andrew Dreyfus, the new CEO of Massachusetts Blue Cross Blue Shield might quote the health insurance industry public relations party line about drivers of health care costs that conveniently do not include insurance company practices and executive compensation. 

It was not obvious when reading the Boston Globe article why Professor Altman might be susceptible to that party line.  Perhaps his conclusions were only based on his scholarship.

However, the Boston Globe article failed to disclose Prof Altman's part-time jobs.  As per this 2010 proxy statement, he is a member of the board of directors of Lincare, a company that provides respiratory care services, including disease management, and of Aveta Inc, a privately held health insurance company.  Prof Altman's total compensation from Lincare in 2009 (per the latest proxy statement available, i.e., that issued in 2010), was over $1.7 million.   Note that corporate directors, as we have discussed previously, have a fiduciary duty to exhibit "unyielding loyalty" to the stockholders of the company and their interests  [Per Monks RAG, Minow N. Corporate Governance, 3rd edition. Malden, MA: Blackwell Publishing, 2004. P.200.].  Given Prof Altman's membership in the board of directors of a health insurance company, and his towering compensation as a director of a health care company that may need to maintain good relationships with health care insurers, it would seem that he has multiple financial relationships that could lead to sympathy with the health insurance industry's public relations party line.

So it seems that regardless of the intent of the reporter who wrote it, the latest Boston Globe article about the Massachustts Blue Cross Blue Shield CEO golden parachute scandal ended up being an apologia for excess compensation of health care insurance executives that followed the script written years ago by health care insurance corporate public relations.

So I need to add another conclusion.  The discussion of health care policy needs to be informed by disclosure of the financial interests of those participating, particularly those participating as experts in the media.   True health care reform would lead to such disclosure.  However, in our currently dysfunctional health care environment, be very skeptical about the interests of "health policy experts" who seem eager to support the powers that be.

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On the Interconnectedness of the Leadership of Health Care Organizations: the Abbott Laboratories Case

We just posted about some misbehavior by Abbott Laboratories: a physician Abbott paid as a "key opinion leader" to help market its cardiac stents was accused of inserting stents in many patients who had no need for them; Abbott settled for over $400 million a lawsuit alleging the company defrauded Medicare and Medicaid; and it settled an unrelated suit for over $40 million alleging the company paid kickbacks to physicians for prescribing its drugs.  I thus thought it would be interesting to see how well paid are the corporate leaders who presided over these activities, and who are the board members who were supposed to be providing stewardship of this company.

According to the company's 2010 proxy statement, the five highest-paid executives were:

Miles D White, Chairman of the Board and CEO - $26,213,966 total compensation
Thomans C Freyman, Executive Vice President, Finance, and CFO - $9,561,227
Olivier Bohuon, Executive Vice President, Abbott Pharmaceutica Group - $5,232,589
Laura J Schumacher, Executive Vice President, General Counsel, and Secretary - $5,724,060
James V Mazzo, Senior Vice President, Abbott Medical Optics - $10,394,085

Now, let us turn to the company's board of directors.  Note that I looked for board members who also held leadership positions in other health care organizations whose interests may not be aligned with the corporation.  I also looked for those who held leadership positions in the discredited financial services corporation who helped usher in the global financial collapse.  (I  used similar methodolgy here.)

Abbott currently has 12 board members, including

• Robert J Alpert MD - Ensign Professor of Medicine, Professor of Internal Medicine, and Dean of the Yale School of Medicine.  He also "serves as a Director on the Board of Yale-New Haven Hospital."
• Roxanne S Austin - President and Chief Executive Officer, Move Networks Inc, and President, Austin Investment Advisors
• William M Daley -"Vice Chairman and Head of the Office of Corporate Responsibility and Chairman of the Midwest, JP Morgan Chase & Co."  He is the board of directors of  "Loyola University of Chicago and Northwestern University."
• W James Farrell - Retired Chairman and Chief Executive Officer of Illinois Tool Works Inc
• H Laurence Fuller - Retired Co-Chairman of BP Amoco, former chief executive officer of Amoco
• William A Osborne - Retired Chairman and Chief Executive Officer of Northern Trust Corporation and the Northern Trust Company.  He is "Chairman of the Board of Trustees of Northwestern University."
• Rt Honorable Lord Owen - Chairman of Europe Steel Ltd
• Roy S Roberts - Managing Director, Reliant Equity Investors.
• Samuel C Scott III - Retired Chairman,  President and Chief Executive Officer of Corn Products International.  He "currently serves on the board of directors of Bank of New York Mellon Corporation."  He also is on the board of "Northwestern Healthcare."
• William D Smithburg - Retired Chairman, President and Chief Executive Officer of Quaker Oats Company.  He is on the "board of trustees of Northwestern University."
• Glenn F Tilton - Chairman, President and Chief Executive Officer of UAL Corporation and United Airlines Inc.  He is on the "board of directors of Northwestern Memorial Hospital."
• Miles D White - Chairman of the Board and Chief Executive Officer, Abbott Laboratories, "is on the board of trustees of "Northwestern University." 

Of Abbott's 12 directors, seven have leadership positions at teaching hospitals, academic medical centers, medical schools or their parent universities (Northwestern University, its medical school and teaching hospitals, in particular, are stewarded by six Abbott directors). 

Two have leadership positions in  financial services corporations that were implicated in the global financial collapse.  (Note that JP Morgan Chase staffers helped to invent some of the kinds of financial derivatives widely viewed as causative of the collapse, but the firm itself did not fail. [See Tett G. Fool's Gold.]  Through TARP, the US government took preferred equity stakes in both JP Morgan Chase and Bank of New York Mellon.  [See Ritholtz B.  Bailout Nation. p. 222]) 

Two more are leaders of financial services firms.  All but one are current or former high-level hired executives (seven are or were CEOs), or chairpersons or co-chair persons of corporations (the one exception is a dean of a medical school.) 

Note how similar our findings were here to those found after our perusal of the boards of Genzyme and Medtronic (see post here).   So we find again that executives of health care organizations who preside over various questionable activities not only rarely pay any penalty, but usually become extremely wealthy in the process.

We also find how interconnected is the leadership of health care.  The boards and leadership of drug and device companies overlap with the boards and leadership of medical schools, teaching hospitals, and their parent universities. 

Yet, as we have noted before, there are obvious conflicts.  In particular, teaching hospitals and medical schools are supposed to provide unbiased teaching, including about issues relevant to drug and device corporations, such as choice of diagnostic strategies and treatments, and relevant health policy.  They are supposed to perform unbiased research, including research that evaluates drugs and devices.  They are supposed to provide the best possible patient care at a reasonable cost, which relates to choices of and prices paid for drugs and devices. 

On the other hand, drug and device companies are supposed to put making a profit for their share-holders first.  The directors of such companies, like the directors of all for-profit corporations, are supposed to show an unyielding loyalty to their companies' financial health and profits, although contemporary corporate directors have been accused of acting more like cronies of the hired management.  (See this post.)

Also, we note that the vast majority of people chosen as stewards of a given health care organization are current or former top hired executives of other corporations.  The board members, that is, stewards of health care organizations, to whom the top hired executives reports, are usually not people with large ownership interests in the organizations (in the case of public, for-profit corporations.)  For the most part, they also do not seem to be people with clearly demonstrated devotion to the values of health care, in particular, putting the care of individual patients first, and advancing health care teaching and research.  Instead, they seem to be people with the perspective of hired executives, who may be prone to putting the interests of hired executives, rather than patients, doctors, teachers, scientists or the public at large, first.

So here is another admittedly limited case study of the board of directors, that is, the ostensible stewards of a health care corporation, selected this time because of its history of ethical missteps, which showed  - that the leadership of health care organizations is incredibly interrelated, interlocked, incestuous.  Again, it appears that top leaders of various health care organizations may be more familiar with and identify more with each other, and with other hired executives and managers, than with their organizations, their organizations' missions, and their organizations' professionals, staff, students, clients, and patients.

So to repeat-

I strongly believe that there needs to be much more investigation, academic, journalistic, and perhaps legal, of the identity, nature, and culture of the leaders of health care, and their relationships. A few bloggers cannot do it all. Obviously, the anechoic effect mitigates against medical and health care academics looking into their own leaders. However, failing to understand who is leading our march to the brink of health care failure ought not to be something such academics would want on their conscience.

Finally, and obviously, health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research.

If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

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Duke Divinity Students Protest Pay of Chancellor for Health Affairs

This may be a first.  A small group of Duke University divinity students publicly protested the compensation given to some top university leaders, specifically including the Chancellor for Health Affairs.  According to the Raleigh-Durham News-Observer:

Theo Luebke strolled the plaza outside Duke's Bryan Center on Thursday afternoon with a bucketful of apples and a tale of woe.

'Come on! Everyone's in this together! Get your apples!' he exhorted students passing by during the lunchtime rush. 'With all the cuts we have around here and all the bonuses we have to give to the big guys, we need to raise all the money we can.'

Luebke isn't really the Depression-era fruit peddler his costume suggested. Luebke and a couple of other Duke divinity students hawked apples, ostensibly to raise money for the university, while others dressed as paperboys distributed a mock newspaper railing against bonuses paid to top officials within Duke's healthcare system and investment company.

For Duke workers whose pay has been frozen of late, the bonuses appear staggering.

A couple of examples: Neal Triplett, president of the management company, received a $729,749 bonus on top of his $413,603 salary; Victor Dzau, chancellor of the Duke health system, got a $983,654 bonus, bringing his total compensation to more than $2.2 million.

Thursday's skit, which mostly drew befuddled looks, was the third in a series mocking executive pay.

It turns out these munificent compensation amounts were paid at a time when Duke is in some financial difficulty:

In recent years, Duke has frozen pay and eliminated jobs in an attempt to pare its annual operating budget by $100 million.

Nearly 400 workers have accepted buyout offers since early 2009. Their jobs were then eliminated.

'During a time when the administration is saying we all needed to tighten our belts and make sacrifices...as it turns out, some of the folks who lost money for Duke were giving themselves bonuses,' said Amy Laura Hall, a tenured professor of Christian ethics. 'I think that's obscene.'

I cannot recall a previous example of students demonstrating against the compensation of a leader of a medical school and/or university health care system.  Maybe these students have started something.

In fact, we have frequently discussed executive compensation given by health care organizations that seems wildly out of proportion to the value of the health care they provide or the clinical value of their products.  Although compensation is even higher for executives of for-profit health care corporations, even leaders of not-for-profit organizations, including academic institutions, is now often in the millions per year range.

Service on (Mostly Health Care) Corporate Boards

Dr Dzau's compensation may appear even more extreme in the context of the money he brings in from outside work.  As Prof Margaret Soltan pointed out on the University Diaries blog, Dr Dzau also serves on multiple corporate boards.  The multiplicity of his outside work is not fully acknowledged in the most complete official biography posted on the Duke web-site, here, which only notes service on the Genzyme board.  In fact, he also serves on the boards of Anylam Pharmaceuticals, Medtronic, and PepsiCo.

According to the Alnylam Pharmaceuticals 2010 Proxy Statement, Dr Dzau's compensation as a director in 2009 was $234,433.  In 2009, Dr Dzau owned the equivalent of 45,000 shares, worth $424,800 at today's $9.44 price per share. 

According to the Genzyme 2010 Proxy Statement, Dr Dzau's compensation as a director in 2009 was $412,942.  In 2009, Dr Dzau owned the equivalent of 75,137shares, worth $5,312,937 at today's $70.71 price per share.

According to the Medtronic 2010 Proxy Statement, Dr Dzau's compensation as a director in 2009 was $173,698.  In 2009, Dr Dzau owned the equivalent of 14,552 shares, worth $493,895 at today's $33.94 price.

According to the PepsiCo 2010 Proxy Statement, Dr Dzau's compensation as a director in 2009 was $260,000.  In 2009, Dr Dzau owned the equivalent of 25,065 shares, worth $1,622,458 at today's $64.73 price per share.

So, in summary, in 2009, Dr Dzau received  $1,081,073 in compensation to be a director of these four companies.  In 2009, Dr Dzau owned stock or equivalent in these four companies valued at $7,854,090.  He has become what most people would consider rich just from his work on these boards, in addition to the millions he has received from Duke.

Conflicts of Interest and Other Questions

So this raises even more questions.  The most obvious is how the good doctor has time to simultaneously fulfill his responsibilities at Duke and for the four corporations? 

The next most obvious is why the university does not make a full disclosure of what appear to be severe conflicts of interest?  Anylam and Genzyme are biotechnology pharmaceutical companies.  Medtronics is a medical device company.  PepsiCo is a food and beverage company whose products affect nutrition and public health.  Dr Dzau's service on the board of each of these companies means he has fiduciary duties to each company, and is supposed to show unyielding loyalty to the companies' stockholders.  Of course, many business commentators have charged that most corporate directors are mainly chosen to be compliant with the top hired management's wishes, if not to be frank cronies of the management.  Even in the best case, showing unyielding loyalties to the stockholders of companies that make drugs, medical devices, and sugary drinks seems to be likely to influence a leader of an academic medical institution in ways that risk degrading the leader's responsibilities to uphold the institution's mission, i.e., to create severe conflicts of interest. 

Dr Dzau has a fairly severe case of what we labeled as a "new species of conflict of interest" in 2006.  Concerns about such conflicts affecting university presidents, but not specifically chancellors or vice presidents for health affairs, appeared in the New York Times last summer (see post here).  Maybe some day student protesters will see such conflicts as a problem.

However, should Dr Dzau make the usual defense of such conflicts, that they promote collaboration with industry needed for innovation, maybe Duke students or alumni might ask questions about the other side of the coin.

The Other Side of the Conflict of Interest Coin

Dr Dzau is supposed to be responsible for the stewardship of Genzyme.  We have recently posted about the company's seeming recent inability to make pure, unadulterated pharmaceuticals, and while exhibiting such inability to perform such basic functions, its payment of extremely lucrative compensation to its hired CEO.  Maybe someone could ask Dr Dzau what he thought about such actions, and whether he would take any responsibility for them?

Dr Dzau is supposed to be responsible for the stewardship of Medtronic.  Medtronic recently settled thousands of patients' lawsuits that alleged injuries due to a faulty lead on one model of a Medtronic implantable cardiac defibrillator for over $200 million. Medtronic has been the source of several alleged conflicts of interest involving influential physicians (see posts about Medtronic here).   Maybe someone could ask Dr Dzau what he thought about such actions, and whether he would take any responsibility for them.

Finally, a larger question is: is it good to have a leader of a medical school and academic medical center who has presided over such ethical lapses by health care corporations?  Let's see if anyone does get to ask Dr Dzau such questions. 

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What a Conflicted Web We Weave: Academic Economists, Finance, the Global Economic Meltdown, and the Impending Health Care Collapse

We have been writing about conflicts of interest in health care now for a long time.  We started with a focus on academic physicians'  and leaders' financial ties to pharmaceutical/ biotechnology/ device companies, then went on to the intense conflicts generated by academic medical and other health care non-profit leader who also sit on boards of directors of for profit health care corporations, and to conflicts affecting various kinds of respected not-for-profit health care organizations, like medical societies and patient advocacy groups.

Meanwhile, we uncovered the curious dominance of the boards of some health care organizations by leaders in the finance world, including some of the leaders of the failed companies that brought us the "great recession."  This did seem like a leadership problem for health care, in terms of the dominance of health care leadership by the elite of another industry that did not exactly seem to share the values we physicians swear to uphold.  However, it did not seem to be a conflict of interest problem, until now.

The Chronicle of Higher Education just published an article by the director of a soon to be released documentary on conflicts of interest and academics, but this time academic economics.

Charles Ferguson, the author, used as an example the Larry Summers, the former President of Harvard University (and hence leader of the Harvard Medical School, School of Public Health, and Harvard's teaching hospitals).  We had commented here about Summers' poor fit for the role of an academic medical leader, and here and here about the dominance of Harvard leadership by leaders of (sometimes failed) financial institutions.  Ferguson summarized (bad pun, sorry) the problem thus:

Summers is unquestionably brilliant, as all who have dealt with him, including myself, quickly realize. And yet rarely has one individual embodied so much of what is wrong with economics, with academe, and indeed with the American economy.

The problem is essentially one of huge conflicts of interest:

the revolving door is now a three-way intersection. Summers's career is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power.

Summers bear huge responsibility for the current economic mess:

Consider: As a rising economist at Harvard and at the World Bank, Summers argued for privatization and deregulation in many domains, including finance. Later, as deputy secretary of the treasury and then treasury secretary in the Clinton administration, he implemented those policies. Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously illegal merger that created Citigroup, and allowed further consolidation in the financial sector. He also successfully fought attempts by Brooksley Born, chair of the Commodity Futures Trading Commission in the Clinton administration, to regulate the financial derivatives that would cause so much damage in the housing bubble and the 2008 economic crisis. He then oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives, including exempting them from state antigambling laws.

Also,

Over the past decade, Summers continued to advocate financial deregulation, both as president of Harvard and as a University Professor after being forced out of the presidency.

Not only did Summers set up the structure that allowed reckless bets with other people' money on opaque financial derivatives by finance leaders who stood to make huge gains if they won their bets, but could foist all losses on others, but he actively attempted those who tried to warn us all of the impending economic collapse.

Summers remained close to Rubin and to Alan Greenspan, a former chairman of the Federal Reserve. When other economists began warning of abuses and systemic risk in the financial system deriving from the environment that Summers, Greenspan, and Rubin had created, Summers mocked and dismissed those warnings. In 2005, at the annual Jackson Hole, Wyo., conference of the world's leading central bankers, the chief economist of the International Monetary Fund, Raghuram Rajan, presented a brilliant paper that constituted the first prominent warning of the coming crisis. Rajan pointed out that the structure of financial-sector compensation, in combination with complex financial products, gave bankers huge cash incentives to take risks with other people's money, while imposing no penalties for any subsequent losses. Rajan warned that this bonus culture rewarded bankers for actions that could destroy their own institutions, or even the entire system, and that this could generate a 'full-blown financial crisis' and a 'catastrophic meltdown.'

When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a 'Luddite,' dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector. (Ben Bernanke, Tim Geithner, and Alan Greenspan were also in the audience.)

Amazingly, rather than ending up an economic pariah after that, Summers regained power over the economy in the last few years.

Then, after the 2008 financial crisis and its consequent recession, Summers was placed in charge of coordinating U.S. economic policy, deftly marginalizing others who challenged him. Under the stewardship of Summers, Geithner, and Bernanke, the Obama administration adopted policies as favorable toward the financial sector as those of the Clinton and Bush administrations�quite a feat. Never once has Summers publicly apologized or admitted any responsibility for causing the crisis. And now Harvard is welcoming him back.

Summers was tightly aligned with the finance world, and benefited from the dominance of financial leaders on Harvard's board (see post here):

After Summers left the Clinton administration, his candidacy for president of Harvard was championed by his mentor Robert Rubin, a former CEO of Goldman Sachs, who was his boss and predecessor as treasury secretary. Rubin, after leaving the Treasury Department�where he championed the law that made Citigroup's creation legal�became both vice chairman of Citigroup and a powerful member of Harvard's governing board.

Yet in between his government and academic leadership roles, Summers got rich from finance firms' money.

Summers became wealthy through consulting and speaking engagements with financial firms. Between 2001 and his entry into the Obama administration, he made more than $20-million from the financial-services industry. (His 2009 federal financial-disclosure form listed his net worth as $17-million to $39-million.)

Ferguson went on to list several other conflicted academic economists:

The route to the 2008 financial crisis, and the economic problems that still plague us, runs straight through the economics discipline. And it's due not just to ideology; it's also about straightforward, old-fashioned money.

Prominent academic economists (and sometimes also professors of law and public policy) are paid by companies and interest groups to testify before Congress, to write papers, to give speeches, to participate in conferences, to serve on boards of directors, to write briefs in regulatory proceedings, to defend companies in antitrust cases, and, of course, to lobby. [Ed: they are thus the "key opinion leaders" of economics and economic policy.]  This is now, literally, a billion-dollar industry. The Law and Economics Consulting Group, started 22 years ago by professors at the University of California at Berkeley (David Teece in the business school, Thomas Jorde in the law school, and the economists Richard Gilbert and Gordon Rausser), is now a $300-million publicly held company. Others specializing in the sale (or rental) of academic expertise include Competition Policy (now Compass Lexecon), started by Richard Gilbert and Daniel Rubinfeld, both of whom served as chief economist of the Justice Department's Antitrust Division in the Clinton administration; the Analysis Group; and Charles River Associates.

In my film you will see many famous economists looking very uncomfortable when confronted with their financial-sector activities; others appear only on archival video, because they declined to be interviewed. You'll hear from:

Martin Feldstein, a Harvard professor, a major architect of deregulation in the Reagan administration, president for 30 years of the National Bureau of Economic Research, and for 20 years on the boards of directors of both AIG, which paid him more than $6-million, and AIG Financial Products, whose derivatives deals destroyed the company. Feldstein has written several hundred papers, on many subjects; none of them address the dangers of unregulated financial derivatives or financial-industry compensation.

Glenn Hubbard, chairman of the Council of Economic Advisers in the first George W. Bush administration, dean of Columbia Business School, adviser to many financial firms, on the board of Metropolitan Life ($250,000 per year), and formerly on the board of Capmark, a major commercial mortgage lender, from which he resigned shortly before its bankruptcy, in 2009. In 2004, Hubbard wrote a paper with William C. Dudley, then chief economist of Goldman Sachs, praising securitization and derivatives as improving the stability of both financial markets and the wider economy.

Frederic Mishkin, a professor at the Columbia Business School, and a member of the Federal Reserve Board from 2006 to 2008. He was paid $124,000 by the Icelandic Chamber of Commerce to write a paper praising its regulatory and banking systems, two years before the Icelandic banks' Ponzi scheme collapsed, causing $100-billion in losses. His 2006 federal financial-disclosure form listed his net worth as $6-million to $17-million.

Laura Tyson, a professor at Berkeley, director of the National Economic Council in the Clinton administration, and also on the Board of Directors of Morgan Stanley, which pays her $350,000 per year.

Richard Portes, a professor at London Business School and founding director of the British Centre for Economic Policy Research, paid by the Icelandic Chamber of Commerce to write a report praising Iceland's financial system in 2007, only one year before it collapsed.

And John Campbell, chairman of Harvard's economics department, who finds it very difficult to explain why conflicts of interest in economics should not concern us.

I once naively thought that the primary conflict of interest problems affecting academia involved health care, the dependence of medical schools and academic medical centers on commercial research funding, the emphasis these schools placed on faculty ties to commercial firms, leading to faculty "key opinion leaders" functioning as marketers of drugs and devices operating under the cloak of academia, and the major conflicts of academic leaders who also sit on health care corporate boards.

Now I wonder if all this came to pass because academic leaders already were comfortable with conflicts of interest after having profited from conflicts generated by relationships with the finance industry.

This now suggests that the dominance of university boards of trustees by finance leaders is a conflict of interest issue, too.

It also suggests that we in medicine should be paying more attention to how conflicts of interest shape not only the marketing of drugs and devices, but the health care policy that has lead to our currently dysfunctional system. If economists paid by finance companies could have been a major cause of the global financial meltdown, could health care policy experts paid by health care corporations be a major cause of our collapsing health care system?

Hat tip to the Naked Capitalism blog. See additional comments on the University Diaries blog and on Felix Salmon's blog.

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Should the President of the University of Michigan be Held Accountable for Johnson and Johnson's Adulterated Drugs and Defective Devices?

We first started to discuss the intense conflicts of interest generated when leaders of academic medicine are also members of boards of directors of for-profit health care corporations in 2006.

The issue really made the big time in 2010 when the New York Times published a front page article in its Sunday Business section about whether university presidents who also were corporate directors were part of an "academic-industrial complex."

University of Michigan President Mary Sue Coleman as a Director of Johnson and Johnson

One such director we discussed this year is Mary Sue Coleman, President of the University of Michigan, and hence leader of a prestigious medical school and academic medical center, who is also Director of the large health care conglomerate, Johnson and Johnson. This relationship became locally controversial when President Coleman supported a smoking ban on campus, and critics pointed out that Johnson and Johnson is a prominent maker of smoking cessation products.

Now President Coleman's role on the Johnson and Johnson board made it into the national media, as the topic of an editorial in the Detroit News:

Should public officials moonlight as corporate operatives? This is a question being raised at the University of Michigan in the wake of the administration's decision to ban smoking on campus.

While some students have criticized the ban, many take issue with the priorities of the administrators who backed it: Specifically, U-M President Mary Sue Coleman, whose decision-making may have been influenced by her membership on the board of Johnson & Johnson, a private company. The right thing for Coleman to do would be to resign from her corporate position, or, at the very least, refuse to accept payment.

(Not to toot my own horn, but I thank the editorial writer for quoting me as a "high-profile" ethicist.)
The issue in this editorial, and in the earlier discussion of President Coleman's responsibilities for Johnson and Johnson, was whether the latter could influence specific decisions made in the former role.

However, events since our original posts on this case should create a new set of concerns.

Johnson and Johnson's Recall of Over-the-Counter Childrens' Medications

Johnson and Johnson has been dealing with a series of crises generated by revelations of problems in how it manufactures many of its marquee drugs and devices.

We posted here about problems in the manufacture of well known over-the-counter childrens' medications, such as childrens' Tylenol (acetaminophen) and Motrin (ibuprofen), by Johnson and Johnson's McNeil Consumer Healthcare subsidiary. Medications were found to be contaminated, and the plant making them was shut down.

Stringent Cost Cutting, Merger Mania, and Executives Who Don't Understand their Company's Business

Since then, investigative reporting by Fortune suggested that quality control problems were the result of that tactic popular among corporate executives to boost profits and hence their own over-stuffed pay checks, stringent cost cutting:

McNeil's quality-control department thrived for a few years. Then, not long after Larsen retired in 2002, it began to slowly weaken. The culprit was a familiar one -- cost cutting -- but in a subtler form. There were no wholesale layoffs in quality control. Instead experienced staffers were repeatedly laid off and replaced with newbies who mostly lacked technical pharmaceutical experience. By 2008 the analytical laboratory, formerly staffed almost entirely by full-time scientists, was half-full of contract workers, according to a former manager there.

Once stricter than a schoolmarm, the department grew lax. The team that tested the production lines was dubbed the 'EZ Pass system,' according to a former quality-control employee.

Quality problems also appeared to be products of another familiar tactic that "brilliant" CEOs use to quickly boost the bottom line, mergers and acquisitions:

At the end of 2006, J&J, on the hunt for growth amid slowing sales and profits, completed the $16.6 billion acquisition of Pfizer's (PFE, Fortune 500) consumer health care division....

The merger dramatically altered McNeil's position. It had previously been part of the pharma unit, but after the deal it was folded, along with the Pfizer group, into J&J's consumer sector, headed by Colleen Goggins. According to former executives, the difference between divisions was both cultural and financial. 'The people who ran pharma understood the requirements associated with [regulatory] compliance and the investments required to keep that up,' says a former executive. Consumer relied more on marketing, or 'smoke and mirrors,' as an ex-McNeil director scoffs. Perhaps the most striking difference was in profit margins. Companies in the consumer group typically had margins around 10%; McNeil generated more than twice that.

So,

Their new consumer bosses were now in charge of reducing McNeil's spending so that the company could meet the merger targets. Goggins looked to squeeze every cost, former employees say, and her team leaned heavily on McNeil, with its juicy margins, to absorb the cutbacks. 'I was given savings goals that were mind-boggling, unheard-of,' says one former executive.

And the merger brought out another common feature of contemporary management, executives with plenty of power, but almost no knowledge about or experience in the sort of work done by their subordinates:

Because the consumer executives lacked pharmaceutical experience, former McNeil employees say, they demanded ill-advised operational reductions. One VP remembers arguing with one of Goggins's

A Growing List of Recalls and Mistakes

While we learned about how Johnson and Johnson executives pursued all the currently fashionable management techniques to make more money, but likely to the detriment of the quality and safety of their products, we also learned that the problems at the company were not limited to a single factory, the specific products listed above, or a single unit of the company.

The company also recalled some contact lenses made by Johnson and Johnson Vision Care, as reported by the Associated Press,

Health giant Johnson & Johnson has issued its ninth recall of a consumer health product in a year, this time covering millions of 1 Day Acuvue contact lenses sold in Japan and two dozen other countries in Asia and Europe.

The affected contact lenses were mostly sold in Japan and none were sold in the U.S. or Canada, the company said.

Johnson & Johnson said Monday it had received a limited number of complaints from customers in Japan that they experienced an unusual stinging or pain when inserting the Acuvue TruEye Brand contact lenses.

Then it recalled prosthetic hips made by its DePuy orthopedic unit, as reported by Medscape,

An orthopaedic unit of Johnson & Johnson (J&J) is voluntarily withdrawing 2 implant systems for hip replacement after learning that roughly 1 of 8 patients in England and Wales who received the implants needed a second hip replacement operation.

The 2 devices under recall are the ASR XL Acetabular System, a metal cup fitted into the pelvis and the corresponding metal ball that replaces the femoral head, and the ASR Hip Resurfacing System, which is similar except that a metal cap is fastened to the femoral head. Both devices are manufactured by DePuy Orthopaedics of J&J.

Then the US Food and Drug Administration (FDA) warned Johson and Johnson's DePuy unit about its marketing of some different joint replacement products, as reported by the Wall Street Journal,

A Johnson & Johnson (JNJ) unit is marketing joint-replacement products without the required approval from federal regulators, the U.S. Food and Drug Administration said in a warning letter recently made public.

In the letter, the FDA said J&J unit DePuy Orthopaedics Inc. is illegally marketing its TruMatch Personalized Solutions system because it hasn't received appropriate clearance to sell the product. Additionally, the FDA found that DePuy is promoting another system--its Corail Hip System--for uses that haven't yet been approved.

'A review of our records reveals that you have not obtained marketing approval or clearance before you began offering the TruMatch Personalized Solutions System for sale, which is a violation of the law,' the FDA said in the letter.

The FDA added that the Corail Hip System has been misbranded and asked DePuy to immediately stop marketing the Corail system for unapproved uses.

And a few days ago, the now embattled head of the Johnson and Johnson consumer products unit, which was central to some of the earlier recalls, but not to some of the later problems, announced her resignation, as reported by Natasha Singer and Reed Abelson writing for the New York Times,

A longtime senior executive at Johnson & Johnson in charge of the consumer products division is leaving the company early next year, signaling a shake-up after a troubling series of recalls, including of children�s Tylenol, tarnished the company�s reputation in the last year.

The company said Thursday that the executive, Colleen A. Goggins, who testified this spring before a Congressional committee investigating the recalls, would retire in March. Ms. Goggins, 56, has worked at Johnson & Johnson since 1981 and was a member of the company�s senior leadership.

Who Will Be Accountable for a Company in Disarray?

Johnson and Johnson was one of the most trusted names in health care for a long time, perhaps partially because of its forthright response to the apparently external contamination of its Tylenol products in the 1980s. Now it appears to be a company in disarray, battered by numerous recalls of apparently contaminated, adulterated, or defective products, both drugs and devices, allegations that its conventional management wisdom lead to these quality and safety problems, and now with at least one key senior manager leaving.

All that went wrong is not exactly clear yet. Clearly, however, top managers, and the board of directors to whom they report ought to be accountable.

Here is where we return to the case of University of Michigan President Mary Sue Coleman. She is, after all, well-paid to be a director of Johnson and Johnson. Therefore, she ought to be accountable for the type of people hired as top managers, and the general direction of their management. She ought to be accountable for letting Johnson and Johnson CEO William Weldon and consumer products head Colleen Goggins continue in office, and receive outsized compensation, ($19,847,026 and $5,345,737  total compensation respectively last year, see here). She also ought to be accountable for the general thrust of their management, including excess cost-cutting, seeking mergers without clear plans for assimilating them, and putting people who did not understand pharmaceuticals in charge of pharmaceutical production.

The original controversy about President Coleman's role on the Johnson and Johnson board focused on whether her decision to promote a smoke free campus resulted from her conflict of interest.  Then, one defense mounted by President Coleman's spokesperson was:

'It's essential that U-M have a voice and interact with the business world,' said Rick Fitzgerald, a U-M spokesman. 'She thinks it's her duty to understand what the commercial world is doing.'

Now President Coleman has had a chance to have a voice and interact with Johnson and Johnson, and understand what it is doing by assuming a position that gives her ultimate responsibility for the company's top leadership and the direction they took. Now it appears the leadership may have been faulty, and their direction ill-advised.

Will President Coleman take responsibility for that? Maybe some enterprising student journalists at the university should ask her.

Meanwhile, this case now illustrates another important facet of the problems created when leaders of academic medicine serve on boards of directors of health care corporations. The mission of the University of Michigan's medical school and academic medical center includes taking the best possible care of individual patients. Taking the best possible care of individual patients cannot be done when the drugs physicians recommend or prescribe in good faith turn out to be adulterated, or when the devices they employ in good faith turn out to be faulty.

President Coleman's primary interests and entrusted responsibilities include upholding the best possible care for individual patients. Presiding over a company whose sloppy and ill-informed leadership, and misplaced priorities lead to the production of adulterated medicines and defective devices seems to conflict with this primary interest and entrusted responsibility.

Maybe all those academic leaders who accepted apparently cushy jobs on corporate boards will reconsider their decisions when they start being held responsible for their companies' poor leadership and poor decisions leading to poor health care outcomes of the use of their companies' products. They may really start to reconsider when journalists learn that academic leaders are more accessible than the current and ex-CEOs who also populate corporate boards.

Meanwhile, academic medicine ought to really rethink whether continuing to defend the "new species of conflicts of interest" will soon become counter-productive.

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Forest Pharmaceuticals Pleads Guilty to Obstruction of Justice, No Individual Pays Any Penalty

The parade of legal settlements marches on.  The latest story is about Forest Laboratories and its marketing of Celexa (citalopram ) and Levothyroid (l-thyroxin).  Here is the most complete version, courtesy of Natasha Singer reporting for the New York Times. First, the lead sentence:

A unit of Forest Laboratories, the maker of the antidepressant Celexa, agreed on Wednesday to pay more than $313 million to settle criminal and civil complaints, including a claim that it had illegally promoted the drug for use in children.

Here are the charges:

Among the criminal charges was one that the subsidiary, Forest Pharmaceuticals, marketed Celexa, which was approved only for adult depression, to treat children and adolescents. The government also claimed that, in conjunction with the company�s off-label promotion, Forest publicized the positive results of a study on Celexa in adolescents while failing to tell doctors about a similar study that had negative results.

'Forest Pharmaceuticals deliberately chose to pursue corporate profits over its obligations to the F.D.A. and the American public,' Carmen Ortiz, the United States attorney for the District of Massachusetts, said in a statement Wednesday.

In addition, federal prosecutors accused Forest of paying doctors to induce them to prescribe Celexa and another antidepressant, Lexapro. The remuneration included 'cash payments disguised as grants or consulting fees, expensive meals and lavish entertainment, and other valuable goods and services,' the government said in its civil complaint.

Among the items that Forest sales representatives gave to doctors from 1998 to 2005, the complaint said, were tickets to St. Louis Cardinal games, which were to be 'leveraged and sold as a reward for prescriptions'; a $1,000 gift certificate to Alain Ducasse, a gourmet French restaurant, for a high-prescribing child psychiatrist; a deep-sea fishing trip off Cape Cod for a doctor and his three sons; $400 in Broadway theater tickets for a doctor and his wife; and Red Sox tickets worth $2,276 to be used for doctors in the Boston area.

So we not just off-label marketing, but suppression of clinical research (of course, a study whose results were not favorable to the product being marketed), and payments to doctors as an "inducement to prescribe."

But wait, there is more:

As part of the criminal settlement, Forest Pharmaceuticals, which is based in St. Louis, agreed to plead guilty to one felony count of obstructing justice, acknowledging that employees had lied to F.D.A. officials during a plant inspection in 2003.

The company also agreed to plead guilty to two misdemeanors, one of which covers the company�s misbranding of Celexa by marketing the antidepressant for use in children from 1998 to 2002.

The other misdemeanor covers the illegal distribution from 2001 to 2003 of an unapproved drug, Levothroid, to treat a thyroid hormone deficiency. Such thyroid pills, made by various drug makers, had been sold in the United States since the 1950s without F.D.A. approval. But in 2001, the agency told drug makers that they needed to reduce their distribution of such medications until the companies obtained agency approval to market the pills.

The criminal charges accused Forest of making a deliberate decision to continue distributing the drug in quantities exceeding the F.D.A.�s directive. After the agency sent a warning letter to Forest, the company directed employees to work until 1 a.m. to continue shipping as much Levothroid as possible, according to the criminal complaint.

So there was also obstruction of justice in the form of lying to the FDA, and selling drugs that the FDA had ordered not to be sold.

So what are the penalties?

The criminal settlement calls for the company to pay a $150 million fine and to forfeit an additional $14 million in assets. Forest will also pay more than $88 million to the federal government and more than $60 million to the states to resolve a civil complaint that its actions caused false claims to be submitted to federal health care programs. In addition, two whistle-blowers will split $14 million from the federal share of the settlement.

Forest has also entered into a five-year corporate integrity agreement, requiring an independent expert to review the company�s compliance with drug marketing regulations.

So here we go again. A large drug company was up to no good, suppressing research, paying doctors for their prescriptions, lying to the FDA, and disobeying its orders.

The penalty seemed large, over $300 million. However, Celexa was a big revenue generator at the time the events above occurred, topping $1 billion in revenue first in 2002 (per Forbes here). Furthermore, as noted by Ed Silverman on Pharmalot, it seems no individual will suffer any negative consequences for authorizing, directing, or implementing the conduct described above. Finally, as best I can tell, despite the fact that a Forest subsidiary will plead guilty to a felony, the company is not going to be barred from doing business with the government. 

So, despite pleading guilty to a felony and three misdemeanors, neither Forest as a company nor any individual working for the company will really suffer very much.  On the other hand, the leaders of Forest have been doing very well.  The company's CEO, Howard Solomon, was number 18 on Wall Street Journal list of the 25 highest paid CEOs over the last decade.  His total realized compensation was over $385 million over the last 10 years.  According to the company's 2010 proxy statement, his total compensation in 2009 was $8,267,236.  The four other highest paid executives made from just over $2.5 million to $5.3 million.

So here we go again.  Another large health care organization has been found to have done wrong, but the only penalty is a fine that whose impact will be diffused across the whole company, and ultimately be paid by its employees, its customers, including patients, and its stockholders.  Meanwhile, the people who authorized, directed, or implemented the wrong doing apparently will pay nothing and receive no negative incentives.  Furthermore, the top leaders of the company, whose huge compensation in the past was increased by the results of the wrong doing, will continue to prosper.

As we have said again and again,  we will not deter unethical behavior by health care organizations until the people who authorize, direct or implement bad behavior fear some meaningfully negative consequences. Real health care reform needs to make health care leaders accountable, and especially accountable for the bad behavior that helped make them rich.

By the way, the current case offers an avenue for those who do not like what Forest did to ask those who are supposed to be ultimately responsible for its behavior how this was allowed to happen.  The board of directors of the company is supposed to be ultimately accountable for the company's actions.  As we have noted before, these directors are supposed to "demonstrate unyielding loyalty to the company's shareholders." [Per Monks RAG, Minow N. Corporate Governance, 3rd edition. Malden, MA: Blackwell Publishing, 2004. P.200.]

The current directors of Forest Laboratories, according to the company's 2010 proxy statement, include Dr Nesli Basgoz, "Associate Chief for Clinical Affairs, Division of Infectious Diseases, Massachusetts General Hospital (MGH)," and "Associate Professor of Medicine at Harvard Medical School."  Also, it includes Dr Lester B Salans, "Clinical Professor" at Mount Sinai Medical School, not to mention Dr Peter J Zimetbaum, "Director of Clinical Cardiology" at Beth Israel Deaconess Medical Center in Boston (BIDMC), and "Associate Professor of Medicine at Harvard Medical School."   Maybe some enterprising student journalist will get to ask the good doctors how they let things at Forest get so ethically out of hand.

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Where There's Smoke? ... A University President Who Simultaneously Lead a Failed Financial Company and a Tobacco Company Which Apologized for International Bribery

A long time ago, in 2006, we first blogged about a "new species of conflict of interest" which we thought might prove to be even more important than those afflicting health care that were then starting to be discussed.  This involved health care organizational leaders who were simultaneously members of the boards of directors of for-profit health care corporations.  We posited these conflicts would be particularly important because being on the board of directors entails not just a financial incentive.  It ostensibly requires board members to "demonstrate unyielding loyalty to the company's shareholders" [Per Monks RAG, Minow N. Corporate Governance, 3rd edition. Malden, MA: Blackwell Publishing, 2004. P.200.]   Thus, for example, the conflict posed by the president of a university, to whom a medical school and academic medical center report, who also is the director of a pharmaceutical company, would be extreme.

Since then, we noted yet another variant on this theme, university presidents who were supposedly the top leaders of failed financial firms, and then who did various dances to try to avoid accountability for these firms' fates.  That theme recently made it to the big time, a front page article on the Sunday Business section of the New York Times.

The most extreme version was the case of that of Eugene Trani, the former President of Virginia Commonwealth University ( full disclosure: I spent 7 years on the faculty of its medical school, and am still an adjunct faculty member).  Trani turned out to be on the board of a tobacco company, and soon after this was revealed, retired from the presidency (see most recent blog post here).

Now a Washington Post blogger has yet another twist on this case:

Eugene P. Trani left the presidency of Virginia Commonwealth University in 2009 after improving the school and expanding its presence in downtown Richmond. But Trani was also a director of LandAmerica Financial Group, a Richmond-area title insurer that went belly-up in 2008, taking with it millions in investors' money.

Today, Trani is on the board of Richmond-based Universal Corporation, a global tobacco marketer. Universal's subsidiaries have just agreed to pay $8.98 million in a tobacco bribery scandal that stretches from Brazil to Thailand to Africa. The firm has issued a public apology. Trani received $159,032 in total compensation for his board service.

So Trani was not only on the board of directors of a tobacco company, he was on the board of directors of a tobacco company that was forced to settle charges of international bribery and issue apologies for same, and just to ice the cake, was on the board of a failed financial company whose failure affected residents of the locality which his university served.

As the saying goes, "the fish rots from the head down."  How can academic leaders expect integrity from their faculty when they willingly take on such grotesque conflicts?  Leaders who thus try to serve two, or many masters are likely to run health care organizations that do not serve their primary constituents, patients who expect good care, learners who expect honest, competent teaching, and the public who expects important, unbiased research, well.  If we really want to reform health care, we need leaders who put the mission, not their own pocketbooks, prestige, and cronies, first.

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The New York Times Reports A University President's Conflict of Interest

Three months ago, we discussed the controversy at the University of Michigan about  the university president's position on the board of directors of the big pharmaceutical, medical device and medical supply company Johnson and Johnson as a potential conflict of interest that could have influenced her decision to make the campus smoke-free.  (Johnson and Johnson makes drugs to aid in smoking cessation.)  I argued that by the Institute of Medicine definition, President Coleman did have a conflict of interest, and while it was not possible to tell whether it influenced the smoke-free decision, the issue with conflicts is that they constantly raise the possibility of undue influence on decisions.

Now this issue has made it to the big time.  New York Times reporter Duff Wilson, wrote in the Times' Prescriptions Blog

The University of Michigan medical school became the first in the nation last month to say it would refuse any funding from drug companies for its continuing medical education classes. The decision could cost it as much as $1 million a year, but it was worth it, the medical school dean said, for education to be free from potential bias.

At the same time, Mary Sue Coleman, president of the entire University of Michigan, sits on the board of directors for the pharmaceutical giant Johnson & Johnson. Last year, the company paid her $229,978 � roughly half in stock and half in cash � for attending a limited number of meetings, corporate filings show.

Conflict of interest? Conflict of policies? If the med school and mere professors could be tainted by drug money, what about the university president?

She says no. Responding to questions on Ms. Coleman�s behalf Monday, Kelly E. Cunningham, a spokeswoman for the university, said the president satisfied the policy by disclosing her outside work. Ms. Coleman has never had to recuse herself from any discussion or action at the university because medical purchasing and investment decisions are so remote from her, Ms. Cunningham said.

'The same is true at J&J,' she added. 'There has never been a discussion or decision at the board level that involved something related to the UM. But, of course, if there were, she would recuse herself.'

The story was picked up by the Detroit Free Press, which reiterated the official line that President Coleman's role on the Johnson and Johnson board did not pose a conflict:

A student group at the University of Michigan is calling on President Mary Sue Coleman to resign from her seat on the Johnson & Johnson board of directors, saying it's a conflict of interest.

But Coleman has no plans to resign, and university officials say her role on the board is not in conflict with university operations. Last year, she earned nearly $230,000 for her board duties. Coleman's U-M salary is about $550,000.

'It's essential that U-M have a voice and interact with the business world,' said Rick Fitzgerald, a U-M spokesman. 'She thinks it's her duty to understand what the commercial world is doing.'

So, as I did last time, let us turn to the Institute of Medicine's definition of conflict of interest (in a health care context) found in its report, Conflict of Interest in Medical Research, Education, and Practice.

Conflicts of interest are defined as circumstances that create a risk that professional judgments or actions regarding a primary interest will be unduly influenced by a secondary interest. Primary interests include promoting and protecting the integrity of research, the quality of medical education, and the welfare of patients. Secondary interests include not only financial interests....

I asserted then that President Coleman has a conflict of interest. Her primary interests as President of a university are to uphold the university's academic mission, and as President of a university that includes a medical school, a school of public health, and an academic medical center, also to uphold the integrity of patient care and public health practice. Her secondary interest as a member of the board of directors of a public, for-profit corporation is her fiduciary duty to that corporation and its stockholders, which means she must "demonstrate unyielding loyalty to the company's shareholders" [Per Monks RAG, Minow N. Corporate Governance, 3rd edition. Malden, MA: Blackwell Publishing, 2004. P.200.] Such unyielding loyalty to the shareholders of a pharmaceutical and medical device company clearly creates a risk of influencing judgments or actions that could affect the corporations' sales or operations, economic or health policy, or the general environment in which it operates. Many of the judgments of or actions performed by the leader of a medical school, public health school, and academic medical center could so so, and are thus at risk of being so unduly influenced.

As the IOM report said, though,

a judgment that someone has a conflict of interest does not imply that the person is unethical. Such judgments assume only that some situations are generally recognized to pose an unacceptable risk that decisions may be unduly influenced by considerations that should be irrelevant.

However, note that the sorts of decisions that may be influenced by a conflict of interest go beyond just those that involve the specific secondary interest causing the conflict. So the University spokesperson's statement that the president would recuse herself from any decision at the university that directly involved Johnson and Johnson, but that no such decision has ever been necessary, missed the point.

Meanwhile, the university's insistence that the president's part-time position at Johnson and Johnson is justified by the need to "have a voice and interact with the business world" rings hollow. There are many ways a president could do that which do not involve getting corporate pay (and for "unyielding loyalty"). It rings especially hollow at a university that has identified corporate funding for continuing medical education as an unacceptably bad conflict of interest.

But then again, conflicts of interest are known to create confused thinking, and such confused thinking is likely to be prevalent at an institution that has one set of rules for the little people, and another for the top leaders.

Maybe this story in the New York Times will lead to some discussion about whether it is good for academic medical institutions to tolerate this previously "new species of conflict of interest" (as we termed it in 2006).

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Board Member Blows Whistle on Health Insurance Company's Accounting

We previously posted about some of the travails of for-profit health insurance company/ managed care organization Wellcare.  In August, 2009, we posted about Wellcare's "admission" that it had made numerous questionable campaign contributions.  In May, 2009 we posted about WellCare's submission to a deferred prosecution agreemeent based on charges that it defrauded state programs by inflating its expenses. In 2007, we posted about how the state of Connecticut stopped WellCare from running a plan for poor children after the company refused to reveal what it was paying physicians, and why it was failing to pay for particular services. So WellCare has been cited for three different kinds of unethical behavior in 2007-09.

Here's a story about Wellcare with a new twist in the Wall Street Journal:

A prominent director at WellCare Health Plans Inc. resigned Wednesday and raised questions about accounting practices at the Medicare and Medicaid company.

Regina Herzlinger, the head of the board's audit committee and a professor of business administration at Harvard Business School, said internal audits found WellCare overbilled the Illinois Medicaid program by $1 million in 2009 and potentially overcharged states for almost $500,000 worth of maternity care. Additionally, the Tampa, Fla., company ran afoul of Georgia's requirements that it account for each patient visit for which it paid providers, resulting in a $610,000 fine, she said.

Ms. Herzlinger said those problems, which the company corrected last year and this year after an internal auditor discovered them, are evidence of weak accounting practices. Ms. Herzlinger said she had hoped to provide oversight, as chairwoman of the audit committee, but that the board didn't renominate her for re-election at this year's annual meeting of shareholders. Ms. Herzlinger alleges that the board forced her out for asking questions about accounting problems and corporate-governance practices.

Wellcare offered the response one might expect:

WellCare said good corporate-governance practices require it to bring in new board members periodically to provide a fresh perspective. The company said the accounting errors Ms. Herzlinger identified were relatively small and the company's own internal controls identified them, indicating that its processes are working well. The company said the board chose not to renominate Ms. Herzlinger.

'At any company, you are always going to have these kinds of immaterial amounts pop up,' said Thomas Tran, WellCare's chief financial officer, who added that it is important to 'address them and document them and learn from them to change your processes.'

That might have been more convincing were Wellcare not to have the track-record discussed above.

Every now and then we have discussed cases of whistle-blowers from within health care organizations, but I cannot remember another instance in which the whistle-blower was on the board of directors.  In our post of August, 2009, we noted Prof Herzlinger's position on the Wellcare board, and urged her, as a main stream health policy expert, "to acknowledge that health care leadership may be unaccountable, opaque, dishonest, and sometimes flagrantly corrupt."  We also urged her to "pay a bit more attention to the mischief being committed by those who answer to her."  From this new story, it looked like she did just that, and hopefully made a contribution to more transparent and honest governance of health care organizations.  Good for her!

It is time for the often well-paid and not over-worked members of the board of directors of health care corporations to take some responsibility for the actions of the corporations over which they are supposed to exercise stewardship.

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Failed Leaders of Citigroup as Leaders of Health Care

When we began this blog, I never dreamed I would do so much writing about finance and the financial services sector of the economy, but,... 

The Governance of Citigroup

The discussions and revelations generated by the global financial collapse/ great recession continue to provide insights into the ongoing health care crisis.  Let me start with a small item from the Dow Jones Newswire this week:

The California Public Employees' Retirement System said it opposes the re-election of two Citigroup Inc. (C) directors, in part because of their roles in the recent financial crisis.

The nation's largest public pension fund, which owns about 61.2 million Citigroup shares, plans to cast 'withhold' votes for board nominees Andrew Liveris, chairman and chief executive of Dow Chemical Co. (DOW), and Judith Rodin, Rockefeller Foundation president, at the annual shareowners meeting Tuesday.

Both served on the company's audit and risk committee before the financial crisis. During the crisis, the banking giant accepted a total federal government infusion of $45 billion, which it has repaid.

'It's time for new blood in the boardroom,' said Anne Simpson, the senior portfolio manager who heads the Calpers corporate governance program....

Let me back up a bit.

The near-failure of global banking giant Citigroup, prevented only by a massive US government bail-out, was one of the central components of the global financial collapse. We noted recently how Mr Robert Rubin, one of the key leaders of Citigroup was accused of "being asleep at the switch," "irresponsibility and misjudgment," and being a "very well paid boob" after his testimony at hearings by the committee investigating the collapse. We also noted his link to health care. As senior member of the Harvard Corporation, Rubin is one of six top stewards of the US' oldest and arguably most presigious university, containing one the country's most prestigious medical schools and teaching hospitals.

Although all those who were members of the Citigroup at the time it collapsed have not been hauled in front of the committee, there has been considerable discussion of their responsibility for the company's failures. For example, in 2008, soon after the government rescue of Citigroup began, the Wall Street Journal published an editorial:

"Citi never sleeps," says the bank's advertising slogan. But its directors apparently do. While CEO Vikram Pandit can argue that many of Citi's problems were created before he arrived in 2007, most board members have no such excuse. Former Treasury Secretary Robert Rubin has served on the Citi board for a decade. For much of that time he was chairman of the executive committee, collecting tens of millions to massage the Beltway crowd, though apparently not for asking tough questions about risk management.

Chairman Sir Win Bischoff has held senior positions at Citi since 2000. Six other directors have served for more than 10 years -- including former CIA Director John Deutch, Time Warner Chairman Richard Parsons, foundation executive Franklin Thomas, former AT&T CEO C. Michael Armstrong, Alcoa Chairman Alain Belda, and former Chevron Chairman Kenneth Derr.

When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi's dubious investments, how can these men possibly say they deserve to remain on the board?

While other banks can claim to be victims of the current panic, Citi is at least a three-time loser. The same directors were at the helm in 2005 when the Fed suspended Citi's ability to make acquisitions because of the bank's failure to adhere to regulatory and ethical standards. Citi also needed resuscitation after the sovereign debt disaster of the 1980s, and it required an orchestrated private rescue in the 1990s.

Last year, as reported by Bloomberg,

Citigroup Inc. investors should vote against re-electing four of 14 board members, including John Deutch and Michael Armstrong, to improve management of the company�s risks, a shareholder advisory group said.

Deutch, former U.S. Central Intelligence Agency director, Armstrong, former AT& T Inc. chief executive officer, and Alain Belda, chairman of Alcoa Inc., should be opposed 'for poor risk oversight,' RiskMetrics Group Inc.�s ISS Governance Services said today. Xerox Corp. CEO Anne Mulcahy shouldn�t be re-elected because she sits on more than three boards, which may limit her effectiveness, the group said.

'The pattern of chronic oversight failure at Citi and the magnitude of the corresponding shareholder losses warrant removal from the board of directors most responsible for risk oversight,' RiskMetrics said in the statement.

Furthermore,

'Despite the fact that the board has many incumbent directors that have been successful in their respective fields and have been on the board for some time, their track record taken as a whole is dismal given that the company is currently surviving on federal assistance,' RiskMetrics said.

Rick Conrad, of the Seeking Alpha blog, thus berated the CEO of Citigroup at its 2009 shareholders meeting,

Mr. Armstrong, who has been a director since 1989 is no longer part of the Audit Committee, as of this year, continues his 'service' to our Company on the Nomination as well as the Compensation Committee. Much as this company has suffered under an illusion of prosperity, it appears to continue to suffer under an illusion of competence.

John [Deutch] has served on the Audit Committee of our Company since 1997 and hence, likely drank the Kool-Aid as to the Illusion of Prosperity.

I note that the audit and risk management committee has many members who, like Mr Deutch and MrArmstrong presided over this seemingly out of control disaster.

Andrew Liveris since 2005 on Audit

Ann Mulcahy since 2007 on Audit

Dr Judith Rodin since 2004 on both Executive and Audit Committees.

Overlaps Among Citigroup's Board and Health Care Organizations' Leadership
So there seems to be good reason to believe that the board of Citigroup at the time the firm collapsed were a collective example of inattentive goverance and poor stewardship. We have previously documented overlaps among poor governance and leadership of finance, and the governance and leadership of health care, suggesting that the poor leadership and governance of the latter may be in part a result of infection from the former. So I looked for overlaps among the Citigroup board and health care organizational leadership.

A list of the membership of the failed board comes from the 2008 Citigroup proxy statement.  The biographies provided therein, supplemented with some Google searching, produced the following overlaps:

- C Michael Armstrong - is also Chairman, Johns Hopkins Medicine, Health Systems and Hospital

- Alain J P Belda - was a Trustee and member of the Corporation of Brown University (including the Warren Alpert Medical School) (see link).  (He stepped down prior to 2009 at an unknown time.)

- Sir Winfried Bischoff, Chairman of the Board - is a director of Eli Lilly and Co.

- Kenneth T Derr - is a director of the University of California San Francisco Foundation.

- John M Deutch - no overlap found

- Roberto Hernandez Ramirez - no overlap found

- Andrew N Liveris - is a Trustee of Tufts University (including the School of Medicine and Tufts- New England Medical Center)

- Anne M Mulcahy - in 2009, was appointed to the Board of Directors of Johnson and Johnson (see link)

- Vikran S Pandit, CEO - is a Trustee of Columbia University (including the College of Physicians and Surgeons and Columbia University Medical Center)

- Richard D Parsons - is a Trustee of Howard University (including the College of Medicine and Howard University Hospital)

- Judith Rodin - is President of the Rockefeller Foundation

- Robert E Rubin - is a member of the Harvard Corporation (including Harvard Medical School and multiple Harvard teaching hospitals), and a Trustee of Mount Sinai Medical Center

- Robert L Ryan - was a director of UnitedHealth Group, is a Trustee of Cornell University (including Weill Cornell Medical College, and Weill Cornell Medical Center), and was a Senior Vice President and CFO of Medtronic

- Franklin A Thomas - no overlaps found

Summary

So in summary, of 14 board members, 2 are trustees of major medical centers (Johns Hopkins and Mount Sinai), 6 were or are trustees or equivalent of universities that include medical schools and medical centers (Brown, Tufts, Columbia, Howard, Harvard and Cornell), one is a trustee of such a university's foundation (University of California San Francisco Foundation), 2 are or would be board members of pharmaceutical corporations (Eli Lilly and Johnson and Johnson), one was a board member of a commercial managed care organization/ health insurance company (UnitedHealth), one was a former top executive of a medical device company (Medtronic), and one is the President of a large charitable foundation which historically has supported multiple medical and public health initiatives (Rockefeller Foundation).  Only 3 of 14 did not have a major leadership role of a health care organization.  

Most of these health care organizations have been involved with cases we have discussed on Health Care Renewal (see links above).

Given the seriousness of the failure of Citigroup, one has to wonder why so many of the directors who presided over it still have such influential positions in health care organizations?

As we have pointed out, as the world economy was driven to near ruin by "masters of the universe," some of the same also became leaders of academia and academic medicine in their spare time. Maybe this made sense 10 or 20 years ago, but why does it still make sense? On the other hand, now that we understand how bad the leadership of finance really was, it is a little easier to understand why the leadership of health care has become so bad. Iit seems reasonable to hypothesize that some of the problems of academia, and particularly the problems of medical academia, may have been at least enabled by leadership more used to working in an increasingly amoral marketplace than to upholding the academic mission.  The failures of the leadership and governance of finance thus suggest we need to re-examine the leadership of health care.

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