Finding Out About Health Care Bureaucracy the Hard Way

A persistent theme for Health Care Renewal has been how concentration and abuse of power in health care trap patients and heath care professionals in a maze of bureaucracy, perverse incentives, deception, and conflicts of interest.  To anyone who has to make the transition from person to patient, some of these problems become immediately obvious.  Consider, for example, this account of "going into a hospital for a minor procedure":

The very idea of being a patient is anathema. To people of my generation -- the 'me' generation -- who like to be in control, the experience begins with loss of control. First the paperwork -- three or four times paperwork has to filled out and given to a succession of strangers. Then they take all of your belongings, they tell you to take your clothes off, and make you put on a gown that leaves you nearly naked, put in you in very small room, bring you inedible food according to a schedule they determine.

And if you try to sleep, they leave lights on, and do everything they can to make sure you can't. At the end, if you are lucky, they deign to discharge you. Those of us who are boomers, entering a period where we will be drawing the biggest healthcare expenditure, will not put up with this.

This description of health care in the real world may not seem surprising to readers of Health Care Renewal. When health care is run by business people with no experience or training in actual patient care, and controlled by a proliferation of managers and bureaucrats (whose numbers increased by a factor of 8.26x from 1983 to 200), usually with similar business backgrounds, all motivated by short-term financial incentives to "make the numbers" at all costs, what other result would one expect?

Of course, many people outside of health care may not appreciate these problems until they become patients themselves. The person who wrote the description above apparently had avoided in-patient hospital care until the events he described, so on that basis his surprise can be excused.  On the other hand, his outrage was understandable.

But wait - the above is actually a quote by a speech to the Innovation Forum by no other than Jeffrey Kindler, Esq, the current CEO of Pfizer, the world's largest pharmaceutical company.

So his apparent surprise at what he found when he became a patient is ample evidence how unfamiliar he had been with real health care on the ground until this experience.  In fact, that the CEO of the world's largest drug company was so unfamiliar with the real world of health care until he had to become a patient ought to prompt some outrage too. 

I am not recommending that all executives of health care organizations undergo procedures. However, making sure that no one gets to a top leadership position in a health care organization without some real world health care experience might lead to some salutary changes in how health care is run.

Also, we noted here that Mr Kindler had been rewarded last year by his board of directors for his "constructive participation in the US legislative process to advance Pfizer's goals of achieving a more rational operating environment...." Maybe had he had his minor procedure earlier, he might have also wanted to advance the goal of making health care less bureaucratic and more focused on the patients.

Hat tip to Jim Edwards' blog on BNet.

Guest Post: A Hospital Passing "That Low Cost Onto the Community" - By Secret Payments to Insurance Brokers to Sign Up Policy Holders?

Health Care Renewal presents a guest blog by Steve Lucas, a retired businessman who formerly worked in real estate and construction who has a long standing interest in business ethics, and has long observed the health care scene.

We have a verdict in the largest legal suit, $110M, ever brought before the court in Stark County, Ohio. The issue at hand has been the payment of fees by a nonprofit hospital (Aultman) through its for-profit insurance subsidiary (AultCare) to switch clients to this hospital's insurance plan. Aultman is the only in program hospital in our area.

Confidentiality agreements have kept this practice in place for a total of 12 years, with knowledge of the arrangement only recently becoming public.

First the back story: What is today Mercy Medical Center is owned by The Sisters of Charity. This hospital had popular community and business support. Wishing to get away from the business of running a hospital and focus on philanthropy, half of the hospital was sold to Columbia Health in 1996.

Columbia traded on the name and community support and followed a common course of action of reducing staff and maintenance in an effort to maximize profit. Realizing their mistake, the Sisters entered into another partnership with a nonprofit in 1999 and have recently been able to regain total control of the facility.

During this time Aultman Hospital, owned by The Aultman Health Foundation, was able to leverage this discontent into a massive expansion of both its physical plant and position in the community.

Unknown to the community at large this growth was being driven by questionable business practices:

The case revolves around allegations by Mercy that Aultman 'bribed' brokers with extra payments – in some cases, as large as $1 million – to persuade employer groups to switch to Aultman’s insurance plans, AultCare and McKinley Life Insurance.

These payments weren’t disclosed to the brokers’ clients or on federal tax forms that non-profits must fill out to maintain their tax-exempt status, lawyers told jurors in court.(1)

The point of contention was the payment of to a select group of brokers of what amounted to a kick-back, without notifying their customers of the additional payments.

We then find:

The leader of Aultman Health Foundation on Tuesday defended the nonprofit’s practice of using tax-exempt money to fund confidential payments to select insurance brokers. (2)

I guess it is ok as long as nobody knows, and the 65,000 people covered under this scheme should be happy.

We then find that Mercy’s CEO:

... said he first learned of Aultman’s program that gave extra payments to select brokers who switched clients from other insurance companies in a 2004 Akron Beacon Journal article. (3)

The Aultman CEO responded:

Roth said those payments were part of a business strategy to save area businesses money by sharing the results of Aultman Hospital’s cost cutting measures since the 1980’s.

'We want to pass to pass that low cost onto the community,' Roth said. (4)

It is interesting to note that Aultman changed the structure of its agreements with doctors to allow for them, the doctors, to receive co-pays directly. It was also revealed Aultman was paying at least one large medical group direct payments for exclusive referrals.

So now we come to the jury’s decision: $6.1M for Mercy, both sides claim victory. Mercy feels it will change the way Aultman does business.

Aultman plans to continue business as usual and won’t make any changes as a result of the verdict, President and Chief Executive Edward Roth said. (5)

In our small market, the dollars are so large in health care that a multi-million dollar settlement will not change behavior. The use of tax-exempt funds to pay kickbacks and bribes is ignored and there is no public out cry, only Aultman filing another suit to have the verdict set aside.

Altman claimed it needed the payments to be competitive with Columbia. This, win at any cost business attitude, has taken over great parts of medicine reducing what was once a proud profession into a simple process of number crunching.

Aultman focused time and time again during the trial on its size, the largest employer in Stark County, and its position in the community. This is no excuse for corrupt behavior.

Has health care become so corrupt, the dollars so large, that a little corruption is ok, as long as it does not hurt the bottom line?

Follow on radio reports made it very clear Aultman would suffer no financial hardship due to the verdict and there would be no change in services. Business would continue as usual.

References


(All from The Akron Beacon Journal)
1. April 3, 2010. Canton hospital exchange charges in court.
2. April 14, 2010. Aultman executive defends payments.
3. April 23, 2010. Mercy CEO testifies in court.
4. May 5, 2010/ Aultman defends “unique” incentives.
5. June 9, 2010. Jury awards Mercy $6.1 million.

Public Trust at NIMH?

Public Trust at NIMH?

The NIMH Director, Thomas Insel, MD, is under siege for his problematic relationship with Charles Nemeroff. In his own defense, Insel placed a remarkable new post today on his official blog. It signals that Insel and NIMH just don’t understand the current controversy. Since the story appeared in The Chronicle of Higher Education 2 days ago, it has reverberated on Health Care Renewal, on Pharmalot, on University Diaries, on the Nature blog, on the Science blog, and on Drug Monkey, to name just a few. The authors on these sites have been uniformly critical of Insel and of NIMH, as have almost all the comments.

What does Dr. Insel say in his defense today? Mainly, he demonstrates that he doesn’t get it. The very way in which he frames the issue tells us that. First he says it is about financial conflicts of interest. It isn’t. It is about the corruption of academic psychiatry. Financial conflicts of interest are just a part of that problem. Second, he says it is about whether the bad boys and girls in psychiatry were badder than those in other medical specialties. It isn’t. It never was. Third, he says he is surprised by criticism that he and NIMH have not taken firm action against the bad boys and girls, then he spends the rest of his column evading that issue. This degree of sophisticated indirection is achieved only in the highest echelons of bureaucracies.

Instead of a frank discussion of the real issues, we get a self serving description of the ways in which NIMH has taken steps to preserve the integrity of the research that it funds (starting after the scandal about the bad boys and girls broke within the Senate Finance Committee in 2008 – a detail not included by Dr. Insel. Where were they before?). By the time one makes it through this glossed-up history and the new promissory notes, it is easy to lose sight of what provoked the controversy this week.

It’s about the appearance of hypocrisy, with Insel assisting the compromised Nemeroff to land a new job at Miami while he is co-chairing a NIH effort to revise ethics guidelines.

It’s about consistency of discipline. After Emory University went through the wringer to discipline Nemeroff, at long last, and to ban him from involvement with NIH grants for 2 years, doesn’t NIH have a responsibility to make the discipline stick? After all, NIH deferred to Emory in the investigation of Nemeroff to begin with. What message does it send for Insel, a well known crony of Nemeroff, to blithely assure Pascal Goldschmidt at Miami that Nemeroff is “absolutely in fine standing” with NIH and that he “not only could begin applying for NIH grants as soon as he arrived in Coral Gables, but that he could also continue to serve on the NIH's expert panels that help decide on which grant applications win federal financing?” As Drug Monkey said, “It’s about optics, NIH. This doesn’t look good.” It looks instead like cronies exploiting the gaps and inconsistencies in administrative oversight between academic centers and NIH.

It’s also about common sense and administrative propriety. Let us perhaps grant that Insel could not prevent or discriminate against Nemeroff in applying for new NIMH funding. There is weasel wording to cover Insel if he chose to take such a position. But does that mean Insel has no discretion over whether Nemeroff is invited onto two new NIMH review panels? Nemeroff has no entitlement to claim a place on these peer review panels. Whatever possessed Insel to extend this privilege to a compromised individual like Nemeroff? The answer plainly is that Insel doesn’t recognize the compromise and corruption of his crony Nemeroff. The appearance is that Insel is setting out to help Nemeroff get back into circulation after his fall from grace at Emory.

By his own blog posting today Insel tells us that he lacks the grasp of nuanced issues that his position requires. He doesn’t get the big picture in this controversy or, if he does, he wants to evade it. Either way, NIMH deserves better.

Bernard Carroll.

"A Kind of Blackmail": A Not-for-Profit Health Insurance Company CEO's Salary So Large It "Had Broken the Law"

Here is another case in the annals of over-paid executives of not-for-profit health care organizations, this time from the Burlington (VT) Free-Press,

Blue Cross and Blue Shield of Vermont overpaid its former chief executive officer by $3 million over an eight-year period and has been ordered to pay the money back to its subscribers by 2012 in the form of reduced premiums, a top state regulator said Wednesday.

The action by the state Banking, Insurance, Securities and Health Care Administration Department follows last year’s disclosure that William Milnes, the nonprofit firm’s former CEO, received a $7.2 million payout when he stepped down in 2008.

Furthermore, note that

[Commissioner of the Banking, Insurance, Securities and Health Care Administration Department Paulette] Thabault said her department had concluded Blue Cross had broken the law by paying Milnes more money than necessary to perform his functions as head of the nonprofit health-benefits provider.

The Department's review found obvious flaws in how Blue Cross Blue Shield set its former CEO's pay:

The department’s review found that Milnes’ salary package while at Blue Cross was excessive, and in some years, he was paid more in bonuses than he received in base pay. In 2005, for example, Milnes was paid $425,000 in salary and $489,800 in bonuses.

'Other health insurance or managed care organizations of a similar size to the Vermont company compensate their chief executive officers at a level of about 45 percent to 50 percent less than the compensation levels set by the company for Mr. Milnes,' the department order said in part.

The department said Blue Cross used a 'peer group' study to justify the pay it gave Milnes, but regulators concluded the study was flawed because it put Milnes’ position on the same level of chief executive officers of much larger Blue Cross sister companies.

'The peer group ... used in 2007 included 14 companies, all but one of which were substantially larger in terms of annual gross premiums,' the department’s order said. 'Nine of the 14 companies had gross premiums in excess of $1 billion.' Blue Cross gross premiums for 2007 were $590 million.

This story is striking because it seems that the overpayment of a not-for-profit health care organization's executive this time seemed to rise to the level of crime. However, current Blue Cross leaders seemed unconcerned.

'The company accepts the findings of the department, and it just wants to move on at this point,' [Blue Cross and Blue Shield spokesman Kevin] Goddard said.

Somehow, whenever a health care organization's conduct is publicly revealed to be shameful, the response is not sorrow or apology, but let's just "move on." Moving on, of course, minimizes the accountability of those initially responsible for the bad behavior.

Furthermore, do not expect corporate leadership to acknowledge anything wrong with how the pay for the top hired corporate executive was determined.

Goddard said the company thought the peer group numbers it was using were sound.

'Our board used a comprehensive analysis to come up with a compensation package for Bill,' he said. 'We relied on what we thought was professional information.'

One begins to feel a little sorry for the poor spokesman who is obligated to mouth these sorts of sentiments. Whether the analysis was rational, or the "professional information" was relevant or correct seems not to have bee anyone's concern.

In addition, although Blue Cross and Blue Shield is now obligated to reimburse its policy-holders for former CEO Milnes' excessive pay, do not expect the money to come out of his pocket:

None of the $3 million the company has to pay back will come from Milnes. Blue Cross asked Milnes, through his attorney, if he would give back some of the money but was rejected, according to documents in the case made public Wednesday.

'He has made it quite clear that Mr. Milnes is not willing to make a voluntary repayment of any portion of the Supplemental Executive Retirement Program distribution,' Christopher Gannon, a Blue Cross vice president, wrote in a letter to Thabault’s department Jan. 21.

One would think that the current company management would be so upset about its new $3 million obligation, that it would aggressively try to recover the money from the person who benefited from it. However, it seems that all the current Blue Cross and Blue Shield management was willing to do was politely requesting that Mr Milnes return it. Suing a former CEO, of course, is just something that is not done. Perhaps it would be too disturbing to  the cozy atmosphere now prevailing among top executives and the boards of trustees who are supposed to be supervising them. This seems to make clear that no one at Blue Cross and Blue Shield ever really was responsible for what Mr Milnes was paid.

As an editorial in the Rutland Herald put it:

On its face, it was an outrage. Blue Cross is a nonprofit corporation that insures about 150,000 Vermonters. That a nonprofit with a mission of providing health care coverage should be a source of extravagant personal profit was an affront to all Vermonters, including those struggling to pay escalating premiums, those struggling to find adequate care, or those with no coverage at all.

The usual excuse from companies is that big money is necessary to attract big talent. It's a marketplace. But this excuse is really a kind of blackmail that allows corporate executives to collude in the inflation of their own worth.

So the notion of the "imperial CEO" who can virtually set his or her own pay, unencumbered by any real accountability to a board of trustees who would dare not ruffle the imperial feathers has now been imported even into relatively small health care organizations in New England states once famed for their common-sense and frugality.

So here we go again.... We have discussed numerous examples of compensation of health care organizations' leadership that seems orders of magnitude above that which would be rationally justified. These latest examples of the wealth being accumulated by leaders of supposedly mission-centered not-for-profit organizations are a product of the current management culture that has been infused into nearly every health care organization in the US. That culture holds that managers are different from you and me. They are entitled to a special share of other people's money. Because of their innate and self-evident brilliance, they are entitled to become rich. This entitlement exists even when the economy, or the financial performance of the specific organization prevents other people from making any economic progress. This entitlement exists even if those other people actually do the work, and ultimately provide the money that sustains the organization.

Although the executives of not-for-profit health care organizations generally make far less than executives of for-profit health care corporations, collectively, hired managers of even not-for-profit health care organizations have become richer and richer at a time when most Americans, including many health professionals, and most primary care physicians, have seen their incomes stagnate or fall. They are less and less restrained by passive, if not crony boards, and more and more unaccountable. In a kind of multi-centric coup d'etat of the hired managers, they have become our new de facto aristocracy.

Or as we wrote in our previous post, executive compensation in health care seems best described as Prof Mintzberg described compensation for finance CEOs, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit." As it did in finance, compensation madness is likely to keep the health care bubble inflating until it bursts, with the expected adverse consequences. Meanwhile, I say again, if health care reformers really care about improving access and controlling costs, they will have to have the courage to confront the powerful and self-interested leaders who benefit so well from their previously mission-driven organizations. It is time to reverse the coup d'etat of the hired managers.

An Attempt to Hold Health Care Leaders Accountable for Their Organizations' Bad Behavior?

We have frequently noted how health care organizations accused of kickbacks, fraud, and other unethical and sometimes illegal behavior involving how they produce or market health care products or services often are allowed to settle the charges only with a fines to the companies, and sometimes with corporate integrity agreements.  Almost never are the people who authorized, directed, or implemented the unethical behavior required to pay any sort of penalty.  We recently commented on a case in which an executive of a medical device company accused of exaggerating the performance of a diagnostic test in development was charged, not with misleading doctors or patients by the US Food and Drug Administration (FDA), but with misleading investors by the US Securities and Exchange Commission (SEC).  That executive lost her job, and will be barred from leading any public company.

So up to now, a corporate executive responsible for misleading doctors or patients about issues that could affect clinical decisions or outcomes likely would never pay a penalty, but one responsible for misleading  investors about similar issues could lose his or her job and livelihood.

Now, per an article in Fortune, it appear the situation may be changing,

The federal government is fed up with the amount of fraud, especially recurring fraud from the same companies, happening in the pharmaceutical industry. So regulators have decided that when it comes to punishments, it's time to get personal.

From now on, individual executives risk being ejected from their jobs -- and perhaps even barred from the industry -- for fraud their companies commit, even if they did not participate or even know about the crimes.

Furthermore,

The new approach, emerging from the unusually powerful Inspector General's office in the Department of Health and Human Services, reflects frustration with corporate recidivism even in the face of ramped-up fines, penalties and disgorgements.

'We are going to start to use that authority in the appropriate circumstances to get high level executives out of companies, so that the company has a better shot at changing its behavior, so that it does not become a recidivist,' explains Lewis Morris, chief counsel to the Inspector General.

The article noted some cases in which even large fines and corporate integrity agreements seemingly failed to deter future bad behavior by the companies which paid these penalties. For example,

In the government's most recent major settlement -- in which AstraZeneca agreed to pay $520 million -- the fine represented 16.5% of the $8.6 billion income (between 2001-2006) from U.S. sales of Seroquel, a powerful anti-psychotic. AstraZeneca (AZN) turned this narrowly approved drug into a cash cow by marketing it for much wider use, including by the elderly and children, even though they are particularly vulnerable to 'serious and debilitating side effects.'

All the while, AstraZeneca was operating under a corporate integrity agreement (CIA) with the Inspector General, imposed after a 2003 off-label marketing case.

We discussed the AZ settlement here in October, 2009. We asked then, "Does anyone really still believe that integrity agreements, and settlements assessed against huge corporations deter such profitable bad behavior?"

Another example:

Drug company Pfizer (PFE, Fortune 500), which was fined $2.3 billion just last September, is now on its third CIA. Steeper fines and harsh individual penalties should help put more teeth into these agreements and keep companies from flouting them.

We discussed the repeated lack of effect of settlements by Pfizer here in September, 2009. We concluded, "So will even a $2,300,000,000 settlement and yet another corporate integrity agreement make Pfizer or any other health care corporation act more ethically? I doubt it."

The Fortune article quoted Peter Rost, former Pfizer executive turned whistle-blower and ethics advocate (and to whose blog I offer a hat tip for first mentioning the Fortune article), on aspects of corporate culture and corporate incentives that foster repeated unethical behavior by management,

'Usually by the time someone becomes a senior executive they are very aware of the pitfalls in the organization, and they have become masters at not doing something wrong or not getting caught doing something wrong,' explains Peter Rost, a former senior Pfizer executive turned industry gadfly.

Incentive-based compensation systems -- typically 40% to 50% of salespeople's income comes from hitting their numbers -- are one weak point. 'They are going to work real hard to increase those numbers and do whatever it takes, and if they think somebody gave them a wink about doing this or that, they are going to run with it.' says Rost.

Booting senior executives out for any fraud under their watch might end the wink-and-nod system, giving hope to critics.

In my humble opinion, the government's new approach looks like real progress. Giving corporate executives personal impunity was a recipe for increasing unethical, and sometimes criminal behavior. The sorts of marketing fraud they authorized or directed certainly lead to increasing costs, and overuse of unnecessary and sometimes harmful tests and treatments. While there have years of complaints about health care's increasing costs and decreasing quality in health policy circles, it is just amazing that until now, there has been so little action against the bad behavior that was undoubtedly responsible for much of these problems.

So three cheers for making health care organizations' leaders accountable for the bad behavior of their organizations.

After cheering, however, there ought to be some serious inquiry about why they were not held accountable much sooner.  It turns out that there has been legal justification for holding leaders so accountable available for a long time:

All that's required for the government to flex this remarkably broad authority -- embedded in the Responsible Corporate Officers Doctrine -- is that the executives were in a position to have stopped the fraud that resulted in a criminal conviction or plea.

Note that the Responsible Corporate Officers Doctrine apparently derives from a US Supreme Court case about the selling of misbranded or adulterated drugs into interstate commerce under the US Food and Drug Act, decided in 1943.

However, it looks like in the hyper laissez faire climate of the last 20 or more years, no one wanted to bother to invoke it. After all, the formerly highly regarded leader of the US Federal Reserve believed there was no need for regulators to punish fraud, because the magic of the market would take care of it. US health care has paid a heavy price for such breathtaking naivete (see the PBS Frontline show, "The Warning." )

HAPPY TIMES AT NIMH – PART III

Happy Times at NIMH – PART III

The unraveling of Thomas Insel, MD, Director of the National Institute of Mental Health continues. His ties with the poster boy for conflict of interest in psychiatry, Charles Nemeroff, MD, are getting new exposure. The story is notable not only for what it says about Insel and Nemeroff, but also for what it says about the ethical culture within NIMH.

The latest exposé is from Paul Basken in yesterday’s Chronicle of Higher Education. Mr. Basken laid out the appearance of hypocrisy within NIH, with Insel leading an NIH initiative for strengthening ethics rules for medical researchers while he was “quietly help(ing) one of the most prominent transgressors get hired by the University of Miami after a decade of undisclosed corporate payments…” That, of course, would be Nemeroff.

Nemeroff’s new boss at the University of Miami was reassured by Insel last July “that Charlie was absolutely in fine standing" with the NIH. Pascal Goldschmidt, MD, the dean at U Miami, told Mr. Basken “…he was pleased to hear from Dr. Insel that Dr. Nemeroff not only could begin applying for NIH grants as soon as he arrived in Coral Gables, but that he could also continue to serve on the NIH's expert panels that help decide on which grant applications win federal financing.”

Let’s think about what is going on here. If Insel wanted to do favors for Nemeroff, because he owes Nemeroff big time, his rationalization was that Nemeroff has not (yet) been adjudicated a felon. Nemeroff’s case was referred to the Inspector General of HHS by Senator Charles Grassley (R-Iowa) and we don’t know what the outcome will be. So Insel encourages Nemeroff to apply for NIH grants and he allows Nemeroff to begin new service on NIH review committees. As one of Insel’s lieutenants put it, “The NIH must "treat everyone equally unless they have been 'debarred' from funding… " Thus do federal bureaucrats cover their asses by invoking procedural technicalities in order to help their cronies. For NIMH under Insel’s leadership to extend these privileges to a compromised individual like Nemeroff makes as much sense as would allowing the unindicted Michael Corleone to serve on the jury in the trial of Hyman Roth, upon the recommendation of Senator Pat Geary (consult the plot of The Godfather, Part II). Paul Basken’s exposé contains much additional information about cozy, private E-mail traffic between Insel and Nemeroff. As I have commented before, maybe it is time for Insel to recalibrate his ethical compass.

All of this new information validates concerns that I raised over recent months here and here. I said then that Dr. Insel appeared disingenuous in trying to put distance between himself and Dr. Nemeroff. These new revelations by Paul Basken confirm the cronyism in their relationship. In his recent published commentary, Insel downplayed the gravity of the ethical issues surrounding Dr. Nemeroff and some other academic psychiatrists. Basically, he allowed for them to cop a plea on the issue of disclosing payments from corporations, and he tried to point fingers at other medical specialties, while he glossed over the evidence of their wider corruption. With some sadness, one needs now to say that the Director of NIMH cannot or will not recognize the corruption of his cronies. Is that the style of ethical leadership we should expect from an NIH Institute Director?

Bernard Carroll.

Sequenom Executive Pleads Guilty, Banned from Leading Any Public Company (for Misleading Investors About the Performance of a Diagnostic Test?)

We have frequently noted how health care organizations accused of kickbacks, fraud, and other unethical and sometimes potentially illegal behavior involving how they produce or market health care products or services often are allowed to settle the charges only with a fines to the companies, and sometimes with corporate integrity agreements.   

This report from Bloomberg describes a case in which a health care corporation was accused of lying to investors about the performance of a product which it hoped to market. The product was a diagnostic test, and so exaggerating its performance could have affected medical decisions, and hence patients' outcomes, as well as affecting investors' finances. Note how this case was handled.

Elizabeth A. Dragon, former senior vice president of research and development at Sequenom Inc., pleaded guilty today in federal court to conspiracy to commit securities fraud for lying to investors about the company’s prenatal test for Down syndrome, U.S. officials said.

Dragon admitted to making false claims to investors and analysts about the effectiveness of the San Diego-based company’s test as well as attempting to 'inflate and sustain' the price of Sequenom’s shares, said Laura E. Duffy, the U.S. Attorney for the Southern District of California in San Diego, in a statement. Dragon said in a court appearance before U.S. Magistrate Judge Barbara Major that she and others manipulated data to make the Down syndrome test appear more accurate than it was, Duffy said.

Dragon also was accused of lying to investors in a civil complaint filed today in San Diego by the U.S. Securities and Exchange Commission. Dragon settled the claims without admitting or denying wrongdoing and agreed to be barred from serving as an officer or director of a public company, according to the agency’s statement.

Here was how the SEC summed it up:

'Elizabeth Dragon knew the truth about Sequenom’s Down syndrome test, yet she told the public it was a near-perfect success,' Rosalind Tyson, director of the SEC’s Los Angeles office, said in a statement. 'Her actions misled investors with exaggerated information about a significant new product that never materialized.'

What had the company done about this in the past?

In June 2009, the company announced an SEC investigation, and, in September, Sequenom said it dismissed Dragon and Chief Executive Officer Harry Stylli and couldn’t rely on the earlier test results.

And how did it respond to the latest news?

'At this time the company has no comment to make other than we continue to cooperate fully with the government agencies and their investigations,' said Ian Clements, Sequenom’s senior director of corporate communications, in an e-mail.

We have discussed multiple new entrants to the parade of legal settlements by health care organizations. We posted about the most recent entrant here.

It is instructive to compare what happened to the company and personnel involved in that settlement (which happened to be St. Jude Medical) to the events of the current case. As we noted above, when accusations are made about how a company produced or marketed health care products or services, the worst result for the company is usually a fine, rarely amounting to more than a small fraction of the sales of the product or service in question, and sometimes a corporate integrity agreement. Often meanwhile the company may make a statement that it did nothing wrong, and merely settled the case to get on with things.

In the Sequenom case, however, the accusation was of misleading investors (by statements that perhaps just coincidentally could have also misled doctors and patients were the product to have been marketed). The results, however, were that the executives who seemed to be responsible were fired as soon as the government investigation was made known, and a later guilty plea by the executive who seemed most immediately responsible, accompanied by her banning from future service as an "officer or director of a[ny] public company."

It is striking that misleading investors, and thereby potentially endangering their financial health, may result in severe penalties to the individuals involved. However, up to now, misleading doctors or patients, and thereby potentially endangering the former's reputations, and more importantly, the latter's health and even survival, rarely has resulted in any penalties to the individuals involved.

What is wrong with this picture?

If executives who endanger investors' finances can lose their jobs, and be barred from leadership positions in any public company, why can't executives who endanger patients also lose their jobs, and be barred from leadership positions in health care? Inquiring minds would really like to know.

As we have repeated endlessly, the usual sorts of legal settlements we have described do not seem to be an effective way to deter future unethical behavior by health care organizations. Even large fines can be regarded just as a cost of doing business. Furthermore, the fine's impact may be diffused over the whole company, and ultimately comes out of the pockets of stockholders, employees, and customers alike. It provides no negative incentives for those who authorized, directed, or implemented the behavior in question. 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.

St. Jude Medical Settles

We could not let more than a week go by without discussing another legal settlement by a major health care organization.  From the Pioneer Press,

Little Canada-based St. Jude Medical will pay $3.7 million to resolve allegations the medical device company provided kickbacks to hospitals in Kentucky and Ohio to secure sales of heart devices, the U.S. Department of Justice announced Friday.

The government alleged that St. Jude Medical provided rebates that were retroactive and paid based on a hospital's previous purchases of heart device equipment from the company. Prosecutors also charged that St. Jude Medical paid rebates for purchases of heart-device equipment sold by its competitors to induce purchases of similar equipment from St. Jude Medical in the future.

As I understand it, the issue was that the rebates did not amount to a simple volume discount, but were given only if the hospital allowed St. Jude to become its dominant supplier of certain devices, for example,

One such rebate was offered to Parma Community General Hospital in Parma, Ohio, a suburb of Cleveland, according to settlement papers made available by the government on Friday. The medical center could earn discounts on products if it gave St. Jude Medical 90 percent of its annual usage of mechanical heart valves, 80 percent of its annual usage of conventional pacemakers and 50 percent of its annual usage of conventional implantable defibrillators, according to the settlement agreement.

The two-year contract began in April 2003 and St. Jude Medical at the time did not have government approval to sell newer 'biventricular' pacemakers and ICDs. A rival company, however, did have approval for such products, and the settlement agreement asserts that St. Jude agreed to give the Ohio hospital a rebate for each biventricular pacemaker and ICD purchased from the competitor so long as Parma hospital maintained market share targets on St. Jude Medical products.

'The contract also mandated that once (St. Jude Medical) gained Food and Drug Administration approval for its own biventricular devices, the rebates would end, and (Parma) could earn discounts by giving (St. Jude Medical) 80 percent of its annual usage of biventricular pacemakers, and 50 percent of its annual usage of biventricular ICDs,' the settlement agreement states.

What was the problem with this?

'Hospitals should base their purchasing decisions on what is in the best interests of their patients,' Tony West, assistant attorney general for the Justice Department's civil division, said in a statement.

St. Jude's response was that it was all so trivial and so long ago,

In a statement issued Friday, St. Jude Medical said: 'The allegations centered on small, isolated product rebates that the company paid more than five years ago. The company entered into a settlement agreement in order to avoid the potential costs and risks associated with litigation.'

So add another marcher in the parade of legal settlements. While most of the marchers in this parade seem to be pharmaceutical companies, it appears that device manufacturers are trying to catch up.

We have been noting new entrants to this parade for a while mainly as a way to document how often health care organizations, including some of the largest and seemingly most respectable organizations, have been accused of unethical conduct.  Often this conduct seems likely to increase health care costs, by driving up the prices of goods or services, or by encouraging the use of expensive tests or treatments when perhaps something simpler and cheaper would be just as good for the patient.  Sometimes, this conduct seems likely to decrease health care quality, and worsen patient outcomes because the tests or treatments being pushed by the unethical behavior may be less effective, and/or more likely to cause harm than other credible alternatives.

We also have repeatedly said that the usual sorts of legal settlements we have described do not seem to be an effective way to deter future unethical behavior.  Even large fines (and the one described above would be peanuts to a large health care corporation) can be regarded just as a cost of doing business.   Furthermore, the fine's impact may be diffused over the whole company, and ultimately comes out of the pockets of stockholders, employees, and customers alike. It provides no negative incentives for those who authorized, directed, or implemented the behavior in question. 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.