healthy4u: Allergan

The Managers' Coup: How the "Hired Hands" Got "Paychecks as Big as Tajikistan"

We have frequently discussed the perverse incentives provided to the leaders of health care organizations.  They almost never pay a penalty for presiding over organizational actions that are unethical, harmful to patients, or even <a href="http://hcrenewal.blogspot.com/search/label/crime">criminal </a>(e.g., see posts <a href="http://hcrenewal.blogspot.com/2011/06/ucb-settles-pleads-guilty.html">here </a>and <a href="http://hcrenewal.blogspot.com/2011/06/two-more-settlements-one-more-corporate.html">here</a> for some very recent examples.)  However, they often collect outrageously huge <a href="http://hcrenewal.blogspot.com/search/label/executive%20compensation">compensation</a> disproportionate to any reasonable measure of their organizations' performance.  (e.g., see posts <a href="http://hcrenewal.blogspot.com/2011/04/johnson-and-johnson-runs-afoul-of.html">here</a> and <a href="http://hcrenewal.blogspot.com/2011/03/despite-poor-financial-results.html">here</a> for relevant recent examples.) Now two news articles, based in turn on research studies, further illuminate how hired managers and executives have become so wealthy and unaccountable. The <a href="http://www.nytimes.com/2011/06/19/business/19gret.html">first news article</a> was in the New York Times, and was in turn based on an accounting study.  In summary, <blockquote>a recent, <a href="http://www.accountingobserver.com/Home/tabid/36/Default.aspx">immensely detailed report </a>in The Analyst’s Accounting Observer, a publication of R. G. Associates, an independent research firm in Baltimore. Jack Ciesielski, the firm’s president, and his colleague Melissa Herboldsheimer have examined proxy statements and financial filings for the companies in the Standard & Poor’s 500-stock index. In a report titled 'S.& P. 500 Executive Pay: Bigger Than ...Whatever You Think It Is,' they compare senior executives’ pay with other corporate costs and measures. </blockquote> Here are some of the major comparisons the report makes: - Paid More than the GDP of Tajikistan <blockquote>Total executive pay increased by 13.9 percent in 2010 among the 483 companies where data was available for the analysis. The total pay for those companies’ 2,591 named executives, before taxes, was $14.3 billion. That’s some pile of pay, right? But Mr. Ciesielski puts it into perspective by noting that the total is almost equal to the gross domestic product of Tajikistan, which has a population of more than 7 million. </blockquote> Again, note that all comparisons below refer only to these 2591 most highly paid executives of 483 companies, not all the companies' executives. - Paid More than Audit Expenses <blockquote>158 companies paid more in cash compensation to their top guys and gals last year than they paid in audit fees to their accounting firms.</blockquote> - Paid More than Income Taxes <blockquote>Thirty-two companies paid their top executives more in 2010 than they paid in cash income taxes. </blockquote> - Pay Rises While Stock Prices Fall <blockquote>The report calculated that at 179 companies in the study, the average value of stockholders’ stakes fell between 2008 and 2010 while the top executives at those companies received raises. </blockquote> - Paid a Substantial Fraction of Total Operating Revenue <blockquote>It identified 24 companies where cash compensation last year amounted to 2 percent or more of the company’s net income from continuing operations. </blockquote> The article used a health care example to illustrate this one: <blockquote>Topping this list is Allergan Inc., the health care concern whose top executives received, after taxes, an estimated $2.6 million in salaries last year. That amounted to 50 percent of what the company earned from continuing operations, the report said. </blockquote> Further details made this a particularly telling example of perverse incentives given to executives: <blockquote>Caroline Van Hove, an Allergan spokeswoman, said that the salaries were large when compared with net income in 2010 because one-time charges reduced earnings significantly that year; in previous years, she noted, earnings were far higher than executives’ pay. She also said the company’s C.E.O. had not received an increase in salary over the past three years. </blockquote> Parenthetically, some of the charges that affected Allergan's earnings were clearly due to a $375 million fine after a guilty plea to a federal misbranding charge and $225 million related civil penalties the company paid in 2010. As we noted in <a href="http://hcrenewal.blogspot.com/2010/09/at-end-of-summer-everybody-well-nearly.html">this post</a>, the US Department of Justice alleged that Allergan paid kickbacks to promote a drug for unapproved uses. Thus, what cost the company a major piece of its revenues were costs related to unethical behavior including one federal misdemeanor, and allegedly paying kickbacks to doctors to promote a drug for unapproved uses. However, while this behavior caused a marked drop in earnings, the research above showed the impunity of the executives who presided over this behavior, whose compensation held steady or rose. - Paid a Substantial Proportion of Research and Development Expenses <blockquote>Moving on to R.& D. costs, the report examined the 62 technology companies in its sampling that reported such an expense, excluding certain costs associated with acquisitions. Mr. Ciesielski found that the median level of executive pay was equal to 5.3 percent of these companies’ R.& D. expenditures. </blockquote> - Pay Equal to a Substantial Proportion of Market Capitalization <blockquote>Finally, there’s the comparison of executive pay with market capitalization. As Mr. Ciesielski noted, this calculation provides the biggest shock value. Eleven companies analyzed in the report gave top executives a combined pay package amounting to 1 percent or more of the companies’ average market value over the course of the year. </blockquote> To put it a different way, for a few corporations, the pay of the top five executives was equal to at least one percent of the total value of the corporations as measured by the value of all stock shares outstanding. In summary, the R. G. Associates' report suggests that the salaried executives, who the NY Times article reminded us are "hired hands," were generally paid amounts that seemed outrageously disproportionate to every metric used. Furthermore, a <a href="http://www.washingtonpost.com/business/economy/with-executive-pay-rich-pull-away-from-rest-of-america/2011/06/13/AGKG9jaH_story.html">second article </a>in the Washington Post provided an even more astonishing comparison. - Paid Enough to Become a Majority of the Richest Americans <blockquote>The largest single chunk of the highest-income earners, it turns out, are executives and other managers in firms, according to a landmark analysis of tax returns by economists Jon Bakija, Adam Cole and Bradley T. Heim. These are not just executives from Wall Street, either, but from companies in even relatively mundane fields such as the milk business. The top 0.1 percent of earners make about $1.7 million or more, including capital gains. Of those, 41 percent were executives, managers and supervisors at non-financial companies, according to the analysis, with nearly half of them deriving most of their income from their ownership in privately-held firms. An additional 18 percent were managers at financial firms or financial professionals at any sort of firm. In all, nearly 60 percent fell into one of those two categories.</blockquote> Summary So now it appears that the disproportionate compensation given to hired executives of large corporations, including health care corporations, have made them the majority of the very rich.  Most of the very rich are thus hired corporate employees, not company owners, not entrepreneurs, not even those who inherited wealth, or who are sports stars or rock musicians. This transformation of the face of the very wealthy has occurred at a time when the other employees of those corporations have generally stagnant incomes, and when those who have invested in those corporations, including many in the middle-class who have invested their retirement savings, have barely made money. So it turns out that in large corporations, including large health care corporations, it has become all about the top bosses.  The top bosses are likely to be paid enough to make them some of the richest US citizens.  Their pay likely comes off the top, so it has priority over profits and stock-holders gains, much less the pay of the lesser employees.  So it is clear that hired executives of large corporations have engineered perverse incentives for themselves that means never having to say they're sorry, never having to be accountable for anything the company does wrong.  Hence, there should be no mystery why US health care is the most expensive in the world, and despite its expense, is not very accessible and not of good quality.  The main culprit is a peculiar perversion of laissez faire capitalism in which the top managers have staged a coup, and have become the new oligarchs and plutocrats, and thus put their interests ahead of all others.  So to reform health care, we must reverse the managers' coup d'etat, and restore leadership of health care organizations that puts the mission, and the health of patients and the population first, and is accountable to corporate owners (when applicable) and to patients and the public.  But that will mean now going up against those who have made themselves the richest and most powerful people in the country and the world, who will not lightly give up their oligarchy.

The Managers' Coup: How the "Hired Hands" Got "Paychecks as Big as Tajikistan"

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20 Jun 2011

At the End of Summer, Everybody, Well, Nearly Everybody (Allergan, CVS Caremark, Stryker, WellStar) Settles

Many US health care organizations announced legal settlements as the dog days of summer drew to a close.  The hit parade included, in order of dollar amount: Stryker Corp As reported <a href="http://www.bloomberg.com/news/2010-08-26/stryker-to-pay-1-35-million-to-settle-massachusetts-marketing-claims.html">by Bloomberg News</a>: <blockquote>Sryker Corp., a maker of artificial hips and knees, will pay $1.35 million to settle claims it marketed items without regulatory approval and misled health care providers about the use of its products, the Massachusetts attorney general said. Stryker’s biotech unit engaged in unfair and deceptive trade practices that boosted sales of products used to strengthen and promote growth of bones, Massachusetts said in a filing in state court in Boston. 'Stryker Biotech subverted review procedures designed to safeguard patients and promoted uses of its products that were not shown to be safe or effective,' Martha Coakley, the attorney general, said today in a statement. </blockquote> Note that this appeared to be one of those rare cases in which allegations were made against individuals, as well as the company as a whole: <blockquote>In October 2009, the biotech unit and former president Mark Philip were indicted by a federal grand jury for misleading the U.S. Food and Drug Administration about the use of the products. Philip, who was president from 2004 to 2008, was accused along with three sales managers of promoting therapeutics in a manner contrary to their FDA-approved use. They pleaded not guilty, according to the case docket. </blockquote>However, the case has not yet gone to trial. As usual, the company denied anybody did anything wrong: <blockquote>As part of the Massachusetts settlement, Kalamazoo, Michigan-based Stryker didn’t admit any liability, the company said in an e-mailed statement. </blockquote> As usual, the penalties were trivial compared to the company's revenues: <blockquote>Under the agreement, Stryker will pay $325,000 in civil penalties, $875,000 to fund efforts to combat unlawful marketing and other programs to benefit health-care consumers, and $150,000 to cover attorney fees and investigative costs. The company reported 2009 revenue of $6.72 billion. </blockquote> CVS Caremark As reported very briefly by the Associated Press <a href="http://www.boston.com/business/articles/2010/08/31/cvs_settles_pricing_case_for_265m">via the Boston Globe</a>, <blockquote>CVS Caremark Corp. has agreed to pay $2.65 million under a settlement with the Massachusetts attorney general’s office, which accused the pharmacy chain of overcharging public entities for prescription drugs. CVS will pay Massachusetts and about 200 cities and towns in the state that were allegedly overcharged under the workers compensation insurance system, Attorney General Martha Coakley said yesterday in a prepared statement.</blockquote> WellStar This story was published <a href="http://www.ajc.com/health/wellstar-agrees-to-2-602802.html">in the Atlanta Journal-Constitution</a>: <blockquote>WellStar Health System has agreed to pay $2.7 million to settle allegations that it improperly billed the state Medicaid system, Attorney General Thurbert Baker announced Monday. The agreement came after a six-month state investigation which found that WellStar mishandled claims involving patients covered by both Medicare and Medicaid. WellStar filed claims that did not properly reflect payments it received from Medicare, allowing it to receive excessive payments from Medicaid.</blockquote> As expected, the hospital system denied it was anything more than a soft-ware glitch: <blockquote>The allegations related to patients served at WellStar’s five hospitals: Cobb, Douglas, Kennestone, Windy Hill and Paulding. 'Upon learning from the state of this potential billing issue, WellStar immediately conducted an internal investigation and fully cooperated with the state,' WellStar said in a statement. The hospital system said a flaw in claims processing software caused the problem. 'The State specifically found no intent to defraud,' WellStar said. WellStar admitted no wrongdoing as part of the settlement , according to the attorney general’s office. </blockquote>It is not entirely clear whether any individuals suffered any negative consequences because of this soft-ware "flaw" which went undiscovered until the state investigated. In <a href="http://www.ajc.com/news/cobb/wellstar-ceo-fired-by-606194.html">another AJC story</a>, which did not directly refer to the one above, published four days later: <blockquote>WellStar Health System’s president and CEO Gregory Simone was fired by the system’s board on Thursday. Board chairman and Marietta attorney Randall Bentley said the decision was a personnel matter and provided no information on the reason for Simone’s termination, which is effective immediately. Earlier this week Bonnie Wilson, WellStar’s executive vice president and general counsel, received notice that her contract would not be renewed. Bentley did not say if the terminations were related.</blockquote> Then, in <a href="http://www.ajc.com/news/cobb/questions-surround-wellstar-dismissals-606572.html">a third story</a>, the hospital denied any relationship among the firings and the legal settlement: <blockquote>WellStar Health System's board this week fired the Gregory Simone, president and chief executive of the non-profit operator of five north metro hospitals and dozens of other facilities. Board chairman Randall Bentley, a Marietta attorney, gave no explanation other than to say Simone's termination was a personnel matter. It was announced Thursday and was effective immediately. His firing follows the Aug. 31 departure of Bonnie Wilson, WellStar’s executive vice president and general counsel. She was told her contract would not be renewed, according to WellStar. Bentley did not say if the Simone's firing and Wilson's departure were related. WellStar and Bentley said Simone's firing was not related to a six-month Medicare and Medicaid investigation. In August, the hospital system agreed to pay $2.7 million to settle allegations that it improperly billed the state Medicaid system, resulting in excessive payments from Medicaid.</blockquote> [sarcasm on] Of course, it was just a soft-ware "flaw," so no one was responsible, just the soft-ware. [sarcasm off] Allergan As reported again <a href="http://www.bloomberg.com/news/2010-09-01/allergan-will-pay-600-million-plead-guilty-to-misdemeanor-in-botox-probe.html">by Bloomberg</a>: <blockquote>Allergan Inc., maker of the wrinkle smoother Botox, agreed to pay $600 million and plead guilty to a misdemeanor in settling a U.S. investigation of its marketing practices. Allergan will pay $375 million to the government as part of a 'misbranding' charge that the marketing of Botox from 2000 to 2005 led to use in treating headache, pain, muscle stiffness and juvenile cerebral palsy, purposes for which the Food and Drug Administration during that time hadn’t approved marketing. Allergan will also pay $225 million to resolve civil claims from the Justice Department, the company said today in a statement. </blockquote> Once again, although the amount this time appears large, it is small compared to the revenues produced by the product in question. The total fines amount to about $100 million per year of sales, but: <blockquote>Botox, [is] Allergan’s top product with $1.3 billion in annual sales,.... </blockquote> Once again, the company denied it did anything all that bad, (even though it did plead guilty to a crime), reported <a href="http://online.wsj.com/article/SB10001424052748703882304575465371767239834.html">by the Wall Street Journal</a>, <blockquote>The company, meanwhile, said the settlement resolves the investigation while avoiding substantial litigation costs and other risks associated with a government enforcement action. Allergan said its plea to the single misdemeanor 'misbranding' charge didn't involve 'false or deceptive conduct.' Specifically, the Botox marketing from 2000 to 2005 resulted in intended Botox use for four unapproved conditions, Allergan said. The drug didn't have directions for these uses, which means it was misbranded, the company said. </blockquote> Got that? On the other hand, <blockquote>Prosecutors alleged Allergan engaged in tactics to promote the drug for unapproved uses, including paying kickbacks to doctors. For example, the government charged that in 2005, Allergan hosted about 100 doctors at an invitation-only program at its corporate headquarters and a Newport Beach, Calif., resort while paying them $1,500 'to listen to off-label marketing presentations.' </blockquote> I did not see anything in any news article that suggested any individual at Allergan would suffer any negative consequences as part of this settlement. Summary So, the parade of<a href="http://hcrenewal.blogspot.com/search/label/legal%20settlements"> legal settlements</a> marches on.  We have now documented a very large number of heretofore respectable health care organizations who have made legal settlements of all sorts of charges of wrong-doing.  As we have repeatedly noted, these settlements have certain characteristics.  The amount of money involved, although it may seem big to those paid less than CEOs, is usually much smaller than the amount of money that could be made by the bad behavior.  The settlement is usually paid by the organization as a whole, and so its effect may be diffused among the employees, the patients or clients, and the stock-holders, if any.  The settlement rarely involves any negative consequences for those who might have authorized, directed, or implemented the bad behavior.  Rarely is the settlement widely reported, and rarely does the organization involved seem to suffer any stain on its reputation. So is it any wonder that the bad behavior that leads to such settlements continues?  Is it any wonder that health care organizational leaders now just seem to think of such settlements as a (relatively negligible) cost of doing business? Inquiring minds may want to know how this state of affairs came to be.  Why are leaders of health care organizations (and other large organizations) able to behave with such relative impunity?  The answer may have to wait for more historical inquiry (although I recently saw what might be a clue, so stay tuned.)  My refrain has been: 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.

At the End of Summer, Everybody, Well, Nearly Everybody (Allergan, CVS Caremark, Stryker, WellStar) Settles

Many US health care organizations announced legal settlements as the dog days of summer drew to a close. The hit parade included, in order of dollar amount:Stryker CorpAs reported by Bloomberg News:S…

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06 Sep 2010

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