Value Extractors, "Super-Managers," Vampires and the Decline of the US and US Health Care

Appearing during the last few weeks were a series of articles that tied the decline of the US economy to huge systemic problems with leadership and governance of large organizations.  While the articles were not focused on health care, they included some health care relevant examples, and were clearly applicable to health care as part of the larger political, social, and economic system.  The articles reiterated concerns we have expressed, about leadership of health care by generic managers, perverse executive compensation, the financialization of health care, in part enabled by regulatory capture, and the abandonment by effective stewardship by boards of directors, but with new takes on them.

The articles included "Profits Without Prosperity," by William Lazonick in the the Harvard Business Review,  "Why Have US Companies Become Such Skinflints," by Paul Roberts in the Los Angeles Times, and "How Business Leaders Turned Into Vampires," by Steve Denning in Forbes, which in turn was partially based on "The Rise (and Likely Fall) of the Talent Economy," in the Harvard Business Review.

Let me summarize the main points, and discuss some health care examples.

"Super-Managers" as Value Extractors

Steve Denning's article contrasted people who  add value to the economy versus those who extract value.  The first species of value extractor he listed was:

 ‘Super-managers’ are people who hold administrative positions in the C-suite of private-sector bureaucracies but are masquerading as entrepreneurs. They are, to use Thomas Piketty’s slyly ironic term, “super-managers.” As such, they have been able to extract extraordinary levels of compensation. They have been lavished with stock and stock options and have been able to 'manage' the share price of their firms with massive share buybacks and other financial engineering so that they receive massive bonuses. As Bill Lazonick documented in the September 2014 issue of HBR, the net effect of their activities is to extract value, rather than create value [see below]. 

Presumably, "super-managers" as health care executives are also likely to be generic managers, unlikely to have much actual knowledge of caring for patients, unsympathetic to the values of health care professionals, and hence unlikely to uphold the health care mission.

He noted that

 there is a tendency to dismiss the activities of ‘vampire talent’ as de minimis. 'That’s capitalism, right? Every man for himself. It’s no big deal if there’s an occasional bad apple in the barrel. The ‘invisible hand’ of capitalism will make everything come out right for society in the end.'

However,

 The problem today is that the super-sized executive compensation, the gambling and the toll-keeping of the financial sector aren’t tiny sideshows. They have grown exponentially and are now macro-economic in scale. They have become almost the main game of the financial sector and the main driver of executive behavior in big business. When money becomes the end, not the means, then the result is what analyst Gautam Mukunda calls 'excessive financialization' of the economy, in his article, 'The Price of Wall Street Power,' in the June 2014 issue of Harvard Business Review.

Mr Denning further asserted that the value extraction of super-managers is augmented by the value extraction of two different groups of players, hedge funds that speculate with other peoples' money, and "tollkeepers" who extract rents through the financial system.

Furthermore, Mr Denning stated that

 The growth of super-sized executive compensation is inversely related to performance. The super-managers are in effect being rewarded for doing the wrong thing.

Of course, if executives in health care, like those in other sectors, are mainly concerned with enriching themselves in the short-term, than they are not mainly concerned with patients' and the public's health, or the values of health care professionals, and hence the performance of their organizations in terms of health care processes and outcomes will suffer. 

Furthermore, the ability of commercial health care firms to actually make a positive impact on health care will be decreased as they are whipsawed by other value extractors like hedge funds and tollkeepers.

Example - Renaissance Technologies

Mr Denning's first example of tollkeepers' value extraction was:

James Simons, the founder of Renaissance Technologies, ranks fourth on Institutional Investor’s Alpha list of top hedge fund earners for 2013, with $2.2 billion in compensation. He consistently earns at that level by using sophisticated algorithms and servers hardwired to the NYSE servers to take advantage of tiny arbitrage opportunities faster than anybody else. For Renaissance, five minutes is a long holding period for a share.

In fact, as we noted here, Renaissance Technologies does not hesitate in trading health care firms.  Furthermore, that company has a noteworthy direct tie to health care.  Its current co-CEO, Peter F Brown, is married to the current Commissioner of the US Food and Drug Administration (FDA).

Value Extraction and Share Buybacks

William Lazonick's article also emphasized how corporate leadership is now focused on extracting value from their companies for their own personal benefit, rather than promoting growth, innovation, better products and services, etc.  In particular, large public for-profit companies now tend to use their surplus capital to buy back shares of their own stock, rather than invest in new facilities, equipment, employees, etc.  Perhaps we should not be surprised that this was facilitated by changes in US government regulation, that is deregulation, in this case instituted during the Reagan administration:

Companies have been allowed to repurchase their shares on the open market with virtually no regulatory limits since 1982, when the SEC instituted Rule 10b - 18 of the Securities Exchange Act.

Note that

The rule was a major departure from the agency's original mandate, laid out in the Securities Exchange Act of 1934.  The act was a reaction to a host of unscrupulous activities that had fueled speculation in the Roaring '20's, leading to the stock market crash of 1929 and the Great Depression.

Given the context, and that the deregulation was implemented by an SEC chair who was "the first Wall Street insider to lead the commission," this seems to be an example of regulatory capture in service of corporate insiders.

The issue here is that while it might make some financial sense for companies to buy back their own shares if they are priced at bargain rates, after this change they could buy shares at any price without supervision.  On one hand, such purchases could lead to short-term bumps in stock prices. On the other hand, a major reason for these buybacks appears to be that they enrich corporate insiders, particularly top hired executives, who now receive much of their pay in the form of stock and stock options, and often can get bonuses based on short-term increases in stock prices.  Lazonick wrote,

Combined with pressure from Wall Street, stock-based incentives make senior executives extremely motivated to do buybacks on a colossal and systemic scale.

Consider the 10 largest repurchasers, which spent a combined $859 billion on buybacks, an amount equal to 68% of their combined net income, from 2003 through 2012. (See the exhibit “The Top 10 Stock Repurchasers.”) During the same decade, their CEOs received, on average, a total of $168 million each in compensation. On average, 34% of their compensation was in the form of stock options and 24% in stock awards. At these companies the next four highest-paid senior executives each received, on average, $77 million in compensation during the 10 years—27% of it in stock options and 29% in stock awards. Yet since 2003 only three of the 10 largest repurchasers—Exxon Mobil, IBM, and Procter & Gamble—have outperformed the S&P 500 Index.

Example - Pfizer

Mr Lazonick's noted some potential outcomes of the frenzy of stock buybacks affecting the US pharmaceutical industry and hence the US health care system.

In response to complaints that U.S. drug prices are at least twice those in any other country, Pfizer and other U.S. pharmaceutical companies have argued that the profits from these high prices—enabled by a generous intellectual-property regime and lax price regulation— permit more R&D to be done in the United States than elsewhere. Yet from 2003 through 2012, Pfizer funneled an amount equal to 71% of its profits into buybacks, and an amount equal to 75% of its profits into dividends. In other words, it spent more on buybacks and dividends than it earned and tapped its capital reserves to help fund them. The reality is, Americans pay high drug prices so that major pharmaceutical companies can boost their stock prices and pad executive pay.

Moreover, during approximately the same period Pfizer compiled an amazing record of legal misadventures including settlements of allegations of unethical behavior, and some convictions, including one for being a racketeering influenced corrupt organization (RICO), as most recently reviewed here, and then updated here.  So while it was putting huge amounts into buybacks, it also put billions into legal fines and costs. This suggests that note only does executive compensation not correlate with "performance," it may also correlate with corporate bad behavior.

The "Shareholder Value" Dogma

In explaining how US corporate executives turned to stock buybacks to boost their own pay, at the expense of essentially everyone else, Mr Lazonick sounded some familiar themes.  One was focus on short-term revenues and short-term stock performance drive by the "share-holder value" dogma out of business schools,

the notion that the CEO's main obligation is to shareholders. It's based on a misconception of the shareholders' role in the modem corporation. The philosophical justification for giving them all excess corporate profits is that they are best positioned to allocate resources because they have the most interest in ensuring that capital generates the highest returns. This proposition is central to the 'maximizing shareholder value" (MSV) arguments espoused over the years, most notably by Michael C. Jensen. The MSV school also posits that companies' so-called free cash flow should be distributed to shareholders because only they make investments without a guaranteed return -- and hence bear risk.

But the MSV school ignores other participants in the economy who bear risk by investing without a guaranteed return. Taxpayers take on such risk through government agencies that invest in infrastructure and knowledge creation. And workers take it on by investing in the development of their capabilities at the firms that employ them. As risk bearers, taxpayers, whose dollars support business enterprises, and workers, whose efforts generate productivity improvements, have claims on profits that are at least as strong as the shareholders'.

Mr Denning similarly noted

The intellectual foundation of all this behavior is the notion that the purpose of a firm is to maximize shareholder value. Unless we do something about this intellectual foundation, the problem will remain. Changes in a few regulations or the tax code won’t make much difference. ‘Vampire talent’ will find ways around them.

Nor will change happen merely by pointing out that shareholder primacy is a very bad idea. Bad ideas don’t die just because they are bad. They hang around until a consensus forms around another idea that is better.

Mr Roberts' article "Why Have US Companies Become Such Skinflints," went at this issue from a slightly different angle, noting first

The bigger story here is what might be called the Great Narrowing of the Corporate Mind: the growing willingness by business to pursue an agenda separate from, and even entirely at odds with, the broader goals of society.

He attributed this to the notion promulgated by

conservative economists, [that] the best way for companies to help society was to ditch the idea of corporate social obligation and let business do what business does best: maximize profits.

He noted that this focus on short-term revenues has led to the decline in long-term results,

 But because management is so focused on share price and because share price depends heavily on current company earnings, strategic focus has grown ever more short term: do whatever is needed to hit next quarter's earnings target. And since cost-cutting is a quick way to boost near-term earnings, layoffs and other downsizing once regarded as emergency measures are now routine.

And here is the paradox. Companies are so obsessed with short-term performance that they are undermining their long-term self-interest. Employees have been demoralized by constant cutbacks. Investment in equipment upgrades, worker training and research — all essential to long-term profitability and competitiveness — is falling.

Of course, this is antithetical to the "innovation" that current corporate boosters proclaim as the goal of drug, biotechnology, medical device companies and other players in the brave new world of corporate health care.  


The Incestuous Mechanisms Used to Set Executive Compensation

Another explanation for the rise in value extraction, and specifically the use of share buybacks to reward top corporate hired executives, was the incestuous way in which corporations set pay for top hired executives. Mr Lazonick wrote,

Many studies have shown that large companies tend to use the same set of consultants to benchmark executive compensation, and that each consultant recommends that the client pay its CEO well above average. As a result, compensation inevitably ratchets up over time. The studies also show that even declines in stock price increase executive pay: When a company's stock price falls, the board stuffs even more options and stock awards into top executives' packages, claiming that it must ensure that they won't jump ship and will do whatever is necessary to get the stock price back up.

This is enabled by boards of directors who seem to represent the 'CEO union,' not stockholders, and certainly not other less favored employees, customers, clients or patients, or society at large,

Boards are currently dominated by other CEOs, who have a strong bias toward ratifying higher pay packages for their peers. When approving enormous distributions to shareholders and stock-based pay for top executives, these directors believe they're acting in the interests of shareholders.

Once again, this was also enabled by the dergulation that started with during the Reagan administration, and continues this day (although the specific relevant deregulatory change occurred during the Clinton administration),

 In 1991 the SEC began allowing top executives to keep the gains from immediately selling stock acquired from options. Previously, they had to hold the stock for six months or give up any 'short-swing' gains. That decision has only served to reinforce top executives' overriding personal interest in boosting stock prices. And because corporations aren't required to disclose daily buyback activity, it gives executives the opportunity to trade, undetected, on inside information about when buybacks are being done. 

Summary

Note that while all the discussion above has been about for-profit corporations, we have seen that in health care, various non-profit organizations, particularly hospitals, hospital systems, academic medical institutions, and health insurers, which all now operate in the current market fundamentalist environment, are acting more and more like for-profits.  So while non-profit corporate executives cannot do stock buybacks, they are also all too often generic managers, given huge compensation, but not often for upholding the mission, putting patients' and the public's health first, or upholding health care professionals' values.  

It is striking that we are beginning to see protests like those above not in radical publications, but in the Harvard Business Review and Forbes.  It is more striking that these protestors are beginning to fear the worst.  Mr Roberts wrote,

Sooner or later, markets punish such myopic behavior. Companies that neglect innovation run out of things to sell. Companies that demoralize workers see performance lag. 

Although Mr Denning hopefully wrote,

We are thus about to witness a vast societal drama play out. That’s because we have reached that key theatrical moment, which Aristotle famously called 'anagnorisis' or 'recognition.'  This is the moment in a drama when ignorance shifts to knowledge.  

He then warned,

As usual with anagnorisis and the shock of recognition at a disturbing, previously-hidden truth, there is a disquieting sense that the accepted coordinates of knowledge have somehow gone awry and the universe has come out of whack. This can lead to denial and a delay in action, even though the facts are staring us in the face.

If the recognition of our error comes too late, as in Shakespeare’s Lear, the result will be terrible tragedy. If the recognition comes soon enough, the drama can still have a happy ending. We are about to find out in our case which it is to be.

Let us hope that anagnorisis is really beginning, the anechoic effect is fading, and the drama may yet have a happy ending. 

ADDENDUM (29 September, 2014) - This post was re-posted on the Naked Capitalism blog. 

The RUC. "an Independent Group of Physicians?" - But It Includes Executives and Board Members of For-Profit Health Care Corporations and Large Hospital Systems

Introduction

We just discussed how a major story in Politico has once again drawn attention to the opaque RUC (Resource Based Relative Value System Update Committee) and its important role in determining what physicians are paid for different kinds of services, and hence the incentives that have helped make the US health care system so procedurally oriented.  (See the end of our last post for a summary of the complex issues that swirl around the RUC.)

The Politico article covered most of the bases, but notably omitted how the RUC may be tied to various large health care organizations, especially for-profit, and how the incentives it creates may benefit them. When the RUC membership first became public in 2011 due to efforts by Wall Street Journal reporters, I used internet searches to find that nearly half of the RUC members had conflicts of interest (look here).  Most of them were part-time paid consulting relationships, paid speaking engagements, and memberships on advisory boards involving drug, device, biotechnology and occasionally health insurance companies, or personal stock holdings in such companies.

In preparing my latest post, I found that to its credit, the AMA now makes the RUC membership more accessible (look here, free registration required.)  So I decided to check whether the current RUC roster still seems so conflicted.

As I did in 2011, I ran internet searches on all new RUC members since 2011, and updated searches on the continuing members.  Results are below.  Information new since 2011 is highlighted thus.  Note that I believe all the listed relationships are or were actual, but cannot rule out errors, especially given some RUC members have common names.  Any corrections are welcome.


The RUC Members and Their Financial Relationships

- Barbara S Levy, MD

Chair, RVS Update Committee
Federal Way, WA 2000

Consultant/Advisory Boards: Conceptus; AMS; Covidien; Halt Medical; Gynesonics; Idoman Medical (hysteroscopic surgery and sterilization, endometrial ablation, electrosurgery, vaginal hysterectomy) per UptoDate


-Margie Andreae MD
American Academy of Pediatrics
Ann Arbor, MI

Chief Medical Officer of Integrated Revenue Cycle and Billing Compliance, University of Michigan Health System, per University of Michigan Health System

- Michael D. Bishop, MD
American College of Emergency Physicians (ACEP)
Bloomington, IN 2003

- James Blankenship, MD
American College of Cardiology (ACC)
Danville, PA 2000

Lecture fees from Sanofi-Aventis per New England Journal of Medicine
Financial relationships with  The Medicines Company, Abbott Vascular, Conor Med Systems, Portola Pharmaceuticals, Schering Plough, AGA Medical, Astra Zeneca, Abiomed, Bristol Myers Squibb, Tryton Medical, Kai Pharmaceutical, Novartis (Grants or Research Support) per Society for Cardiovascular Angiography and Interventions Disclosure Summary


- Robert Dale Blasier, MD
American Academy of Orthopaedic Surgeons (AAOS)
Little Rock, AK 2008

-Albert Bothe Jr MD
CPT Editorial Board
Danville PA

Executive Vice President and Chief Medical Officer, Geisinger Health Systems, per Geisinger

- Ronald Burd, MD
American Psychiatric Association (APA)
Fargo, ND 2006

-C Scott Collins MD
American Academy of Dermatology
Rochester, MN

- Thomas P Cooper MD
American Urological Association
Everett, WA

General Partner, Aperture Venture Partners LLC, (health care focused venture capital firm) , per Aperture
Member, Board of Directors, Kindred Healthcare, per Kindred
Member, Board of Directors, Hanger Inc (orthotic and prosthetic care), per Hanger
Member, Board of Directors, IPC/ the Hospitalist Company, per IPC


-Anthony Hamm DC
Health Care Professional Advisory Committee
Goldsboro, NC

- David F. Hitzeman, DO
American Osteopathic Association (AOA)
Tulsa, OK 1996


- Charles F. Koopmann, Jr., MD
American Academy of Otolaryngology-Head and Neck Surgery (AAO-HNS)
Ann Arbor, MI 1996

- Robert Kossmann, MD
Renal Physicians Association (RPA)
Santa Fe, NM 2009

Member of Advanced Renal Technologies Advisory Board, Network 15 Medical Advisory Board, Baxter Home Dialysis Advisory Board, Fresenius Medical Advisory Board per Renal Physicians Association

- Walter Larimore, MD
American Academy of Family Physicians (AAFP)
Colorado Springs, CO 2009

-Alan E Lazaroff MD
American Geriatrics Society
Denver, CO

- J. Leonard Lichtenfeld, MD
American College of Physicians (ACP)
Atlanta, GA 1994

Member, Physician Advisory Board, Aetna per Aetna 
Deputy Chief Medical Officer, American Cancer Society, per ACS

- Scott Manaker, MD, PhD
Practice Expense Subcommittee
Philadelphia, PA 2010

Consultant to Pfizer and Johnson and Johnson. Owns stock in Neose Technologies, Pfizer, Johnson & Johnson, and Rohm and Haas per Chest

-William J Mangold Jr MD
American Medical Association
Tuscon, AZ

Vice President, Board Developer Inc (health care management consulting firm), per Board Developer
Senior Advisor, ADVI (health care management consulting firm), per ADVI
Member, Board of Directors, Sante (post-acute health care company), per Sante

-Geraldine B McGinty MD
American College of Radiology,
New York, NY

- Gregory Przybylski, MD
American Association of Neurological Surgeons (AANS)
Edison, NJ 2001

Stock Ownership: United Healthcare (300 shares); Scientific Advisory Board: United Health Group (B, Spine Advisory Board) per NASS meeting

- Marc Raphaelson, MD
American Academy of Neurology (AAN)
Leesburg, VA 2009

personal compensation for activities with Jazz Pharmaceuticals and Medtronics as a speakers bureau member or consultant per AAN

- Sandra Reed, MD
American College of Obstetricians and Gynecologists (ACOG)
Thomasville, GA 2009


GlaxoSmithKline Consulting, $1750 in 2009, $1500 in 2010 per ProPublica Dollars for Docs search through here

-  David H Regan MD
American Society of Clinical Oncology
Portland, OH

Payment from Cephalon in 2009 for $2200, per ProPublica search 


-Chad A Rubin MD
American College of Surgery
Columbia, SC

-Joseph R Schlecht
Pimrary Care Seat
Jenks, OK 

- Peter Smith, MD
Society of Thoracic Surgeons (STS)
Durham, NC 2006

Eli Lilly, Consulting, $1500 in 2009, $1990 in 2010 per Pro Publica Dollars for Docs search through here
Advisor or consultant to Bayer per Medscape

-Samuel D Smith MD
American Pediatric Surgical Association
Little Rock, AK

-Stanley Stead MD
American Society of Anesthesiologist
Encino, CA

-  J Allan Tucker MD
College of American Pathologists
Mobile, AL

- James Waldorf, MD
American Society of Plastic Surgeons (ASPS)
Jacksonville, FL 2008

- George Williams, MD
American Academy of Ophthalmology (AAO)
Royal Oak, MI 2009

Advisory Team, RetroSense Therapeutics
Shareholder and consultant for ThromboGenics Ltd. and holds intellectual property on the use of plasmin per Review of Opthamology
Alcon Laboratories, consultant, lecturer; Allergan, consultant, lecturer; Macusight, consultant, equity owner; Neurotech, consultant; Nu-Vue Technologies, equity owner, patent/ royalties; OMIC- Ophthalmic Mutual Insurance Company, employee; Optimedica, consultant, equity owner; Thrombogenics, consultant, equity owner per AAO meeting

Pfizer, “Professional Advising,” $5534 in 2009 per Pro Publica Dollars for Docs search through here
Member, Medical and Scientific Committee, Pixium Vision Inc, per Pixium 
Member, Board of Directors, Macusight Inc, per BusinessWeek.  


Summary 

The membership of the RUC continues to have a considerable number of apparent financial conflicts of interest.  By my count, in 2014, nearly half, 15/31 members had such conflicts.

Again, most of the conflicts were financial ties such as part-time paid consulting relationships, paid speaking engagements, and memberships on advisory boards involving drug, device, biotechnology and occasionally health insurance companies, or personal stock holdings in such companies.  A number of members who had such ties known in 2011 have several more such ties in 2014. 

In 2014, new kinds of conflicts of interest that appear even more intense have appeared.  Several members are now known to also be members of the boards of directors of for-profit health care corporations, including biotechnology, device, health care provider, and health care management services companies. 

We have been writing about the severe conflicts of interest presented by service on the boards of  health care corporationa.  In 2006 we first discussed a newly discovered species of conflict of interest in health care, in which leaders of medical or health care organizations were simultaneously serving on boards of directors of 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.]  Of course, after the global financial collapse of 2008 made us sadder and a little wiser, we realized that many board members actually seem to have unyielding loyalty to their cronies among top management.  However, in any case, the stated or actual interests of a member of the board of a health care corporation, like a pharmaceutical company or medical device company, could be very different and at odds with the mission of an academic medical institution or a non-profit ostensibly dedicated to improving health care quality, like in this case, the RUC of the American Medical Association.

Also, one new RUC member is apparently a top executive of a health care management services company, and another new RUC member is apparently a general partner of a health care venture capital firm. Again, such leadership roles create responsibilities that could be very much at odds with a leadership role in a very influential committee run by a physicians' society.

Finally, two new members are top executives of large, although admittedly non-profit hospital systems.  One member is now known to be a full-time executive of a large, non-profit disease specific patient advocacy organization.  While hospital systems' interests may overlap those of physicians, modern  hospital systems are often run by generic managers who put revenues ahead of all else.  Furthermore, in pursuit of revenues, hospital system leaders may be very interested in increasing utilization of the most lucrative, usually high-technology and procedural services, and thus in structuring physicians' incentives accordingly.  While disease-specific patient advocacy goups' interests may also overlap those of doctors, they may tend to be more interested in their diseases than all others.

By the way, note that AMA and RUC leaders often defend the RUC as purely physician run organization, e.g., the testimony of the RUC leader, Dr Barbara Levy, at a Senate hearing, per MedPage Today in 2011, (see this post),

The RUC is an independent group of physicians from many specialties, including primary care, who use their expertise on caring for Medicare patients to provide input to CMS [the Centers for Medicare and Medicaid Services],' RUC chair Barbara Levy, MD, said in a statement. 

But now it is clear that the RUC includes corporate executives and board members, and top hospital system executives.  These people may have MDs, but their loyalties appear divided.

We have questioned the tremendously influential role the RUC plays in setting the incentives that drive the US health care system.  Now it appears that the RUC membership remains conflicted.  Almost half work part-time for drug, device, biotechnology, and health insurance companies.  Several are in the top leadership and/or governance of various health care corporations and large non-profit hospital systems.  Thus it seems that the incentives that drive are health care system are under the influence of people who may put corporate or organizational revenue ahead of patients' and the public's health.

As we wrote before, the prevalence of conflicts of interest among RUC members highlight the need for a more accountable, transparent and honest system to manage how the government pays physicians, and a need for more transparency and accountability in the relationship among the government, health care insurance, and physicians.

As a first step, I submit that all RUC members who are executives or board members of for-profit health care corporations or large hospital systems step down from the RUC, or resign these positions.

Abort, Retry, Fail? - Lancet Avoided Much Recent Unpleasantness in Reporting on New Gates Foundation CEO (Including Her Defense of $55,000 a Year for Bevacizumab)

The April 26, 2014 issue of the prestigious journal Lancet used two full pages and two separate articles by the same author to discuss the ascension of the Gates Foundation new CEO, Dr Susan Desmond-Hellmann.(1-2)

Two Somewhat Redundant Lancet Articles

Dr Desmond-Hellmann trained as an oncologist, spent time working on AIDS and Kaposi's Sarcoma in Uganda, but then spent much of her career as a pharmaceutical/ biotechnology executive, as described in the first article,(1)

After returning from Uganda, Desmond-Hellmann joined the nascent Taxol development programme at Bristol-Myers Squibb, before being poached by Arthur Levinson, the then Head of Research and Development at Genentech. Levinson was convinced Genentech had a strong pipeline of anticancer therapies, and brought Desmond-Hellmann on board to help guide them through to approval. The pipeline went stratospheric, and took Desmond-Hellmann with it. By 2009 she had been promoted to President of Product Development, having overseen the introduction of two of the first gene-targeted therapies for cancer, bevacizumab and trastuzumab.

After Genentech was bought out by Roche, Dr Desmond-Hellmann became Chancellor of the University of California, San Francisco,

Over the next 5 years, Desmond-Hellmann instituted wide-ranging reforms at UCSF, including aggressively cutting administrative waste and putting a greater emphasis on partnerships with the biotech and pharmaceutical sectors, coming in for some criticism in the process. 'Some of the press suggested one of Sue's goals was to take UCSF out of the public system', says [current UCSF interim Chancellor Sam] Hawgood. 'Nothing could be further form the truth. She was very proud of the public mission of UCSF, and had no intent to alter that.' Mindful of how damaging perceived conflicts of interest could have been to her credibility during her time at UCSF, Desmond-Hellmann says she 'specifically avoided being on pharma and biotech boards'.

The article suggested we should expect nothing but great things from Dr Desmond-Hellmann at the Gates Foundation,

it is Desmond-Hellmann's ability to forge partnerships and her wide network of contacts, rather than her knack for cutting administrative overheads, that will have seemed most attractive to the Gates Foundation as it looks to speed up the process of translating research into results.

The second article used remarkably similar wording(2), e.g., regarding her career in the pharmaceutical business,

Soon after joining the Taxol team, Desmond-Hellmann was leading it; the kind of progress that was bound to catch the eye of Genentech's then Head of Research and Development Arthur Levinson. What happened next is part of pharmaceutical folklore, as Desmond-Hellmann helped to mastermind one of the most profitable drug-development pipelines in history, including the approval of two of the first targeted cancer therapies, for Genentech.

Also, regarding her career at UCSF,(2)

 Desmond-Hellmann from embarking on a programme of structural reforms to cut administrative inefficiency and forge closer links with private industry, something that still stirs up controversy. 'There definitely were concerns, and there remain concerns in academia, about conflicts of interest, privatisation. I think what helped most was that I was clear in my actions that I did and do value that UCSF is a public institution, and I think my actions spoke and speak for themselves', she says. But Desmond-Hellmann is robust in her defence of the importance of public—private partnerships for driving innovations that ultimately benefit society.

Finally, regarding expectations for her performance in the future,

'There are a lot of people who are looking to the foundation, and in the world of philanthropy there's a lot of visibility to the Bill & Melinda Gates Foundation, so I certainly feel accountable and responsible for doing a good job.' But, she asserts, 'I'm up for it'. With a track record that ranges from clinical research, global health, and the sharp end of commercial drug development, she seems to be made for it.

So Lancet, a very well known journal which normally is very parsimonious about its use of the printed page, used two full pages for two very similar articles about the new Gates Foundation CEO.  Both articles made the same points,
-  Dr Desmond-Hellmann had a brilliant career in the pharmaceutical/ biotechnology business, and was responsible for the development of several important cancer drugs
-  Dr Desmond-Hellmann made major reforms at UCSF, including pushing for some sort of privatization, and for public-private partnerships, while dismissing concerns about any resulting conflicts of interest
 -  Dr Desmond-Hellmann is likely to be very successful as Gates Foundation CEO.

What the Articles Did Not Say

When Dr Desmond-Hellmann's appointment as Chancellor of UCSF was announced in 2009, I suggested that she was a very unusual choice because of aspects of her track record in the pharmaceutical/ biotechnology business.  Yet the Lancet's two articles on her prospects as new Gates Foundation CEO ignored these considerations, and ignored or downplayed aspects of her track record as UCSF Chancellor.  In particular,

Defending $55,000/ Year Bevacizumab

As I noted in 2009, Dr Desmond-Hellmann's defense as a Genentech executive of the sky high prices the company was charging for its new drugs was well documented in an article in the Journal of the National Cancer Institute)(3)

And cancer biologics, though among the most costly drugs, are still only a tiny fraction of total GDP, said Genentech's Susan Desmond-Hellmann, president for product development, at AACR.

Hellmann and others argue that with these drugs’ potential to alleviate the huge societal burden of cancer, biologics are worth the cost.

The industry has responded to concerns about costs by putting more resources into patient assistance programs. When Genentech received U.S. Food and Drug Administration approval for bevacizumab in lung cancer last October, it also announced a cap on expenditures for the drug for patients with family incomes less than $100,000 a year. In 2005, the median household income was $46,326.

Originally announced as $55,000, the cap actually doesn't kick in until after a patient has received 10,000 mg. At the wholesale acquisition cost, 10,000 mg is about $55,000, said Genentech spokesperson Edward Lang.

What the companies have not done so far is reduce prices. The reason, industry representatives say, is the need to recoup massive research and development costs, including high manufacturing costs for biologics. These costs have long kept biotech companies from making much of a profit overall, Hellmann said. She noted that profit levels of publicly held biotech firms have 'hovered close to zero' throughout the life of the industry.

Whatever the company's nominal profit levels, its executives, including Dr Desmond-Hellmann, have made extremely good money.   According to Genentech's 2008 proxy statement, (the last available, since the company has been bought out by Roche), Dr Desmond-Hellmann's total compensation was $8,361,348 in 2007 and $7,820,142 in 2006. In 2007, her total compensation was equal to 0.3% of the firm's total net income.

Of course, since 2007, and especially since 2009, the problem of hugely expensive pharmaceuticals as a driver of health care costs, especially in the US, has become all too apparent.  The Lancet articles were completely silent about this aspect of Dr Desmond-Hellmann's track record, and what implications it might have for her new role of a foundation that spends $3 billion a year, mainly ostensibly to improve the health of poor people.

Since she began as Chancellor of UCSF in 2009, other aspects of Dr Desmond-Hellmann's track record came to light that might have a bearing on how she will conduct herself as Gates Foundation CEO. 

Investments in Tobacco Stocks

As I posted in 2010, then NY Times reporter Duff Wilson discovered that Dr Desmond-Hellmann and her husband (also a physician), had stock holdings in Altria, the parent company of tobacco company Phillip Morris USA, worth between $100,000 and $1,000,000.  When this made public, they abruptly sold the stock.  The head of the UCSF tobacco control center then said,  “I do find that kind of shocking, but at least she got rid of it,...”

The goals of tobacco companies seem completely antithetical to those of a medical school, especially one with a tobacco control center, and incidentally seem antithetical to those of the Gates Foundation, which has a tobacco control initiative, with a stated goal:

to reduce tobacco-related death and disease in developing countries by preventing the initiation of new smokers, decreasing overall tobacco use, and reducing exposure to secondhand smoke.

The Lancet articles were silent on this issue.  

Questions Whether Industry Partnerships Threaten the University Mission

In 2011, I posted about Dr Desmond-Hellmann's vigorous push to create public-private partnerships, which seemed meant to turn UCSF into a de facto drug company research and development contract shop.  At the time, I noted that many of her arguments seemed to be based on logical fallacies, and that she never provided any good evidence for her claims of marvelous new "innovations" that would result from such supposed partnerships.  The Lancet articles did not mention any substantive concerns about this issue.

Dismissing Concerns about Conflicts of Interest

In 2012, I posted about how Dr Desmond-Hellmann also dismissed concerns that public-private partnerships could lead to damaging conflicts of interest, again employing several logical fallacies.  In particular, she implied that medical academics should no longer just do research to advance knowledge, but had become responsible for getting their "discoveries to society," and therefore would have to "start a company or work with a company to commercialize a product."  She did not seem to acknowledge the possibility that academics could make discoveries, but perhaps other people would be better at turning these discoveries into useful products.  The Lancet articles were silent on these issues.

Minimizing Concerns about Conflicts of Interest due to Membership on the Board of Corporations with Health Care Agendas

As noted above, Dr Desmond-Hellmann stated that she demonstrated her sensitivity to the issue of conflicts of interest affecting academic health care by avoiding membership on boards of directors of "pharma or biotech" companies.  These, of course are not the only sorts of for-profit corporations who have health care agendas.  This statement appears to have been carefully worded to avoid dealing with Dr Desmond-Hellmann's membership since 2010 on the board of directors of Procter & Gamble (see the company's 2013 proxy statement.)   While Procter & Gamble is no longer a major pharmaceutical company, it has a Global Health and Grooming unit, whose products include over the counter pharmaceuticals (e.g., Pepto-Bismal, Metamucil, Prilosec OTC).  Also, while Procter & Gamble does not make it very obvious, it has also owned MDVIP, a company that employs physicians to provide concierge medical services, since 2010, although as Cincinnati.com just reported, it will soon sell this unit to private equity.   So while perhaps Dr Desmond-Hellmann could claim that while she was UCSF Chancellor she was not on the board of directors of any pure pharmaceutical or biotechnology company, she was certainly on the board of a major international company that sells pharmaceuticals and other health care related products, and employs physicians to provide direct patient care.  (Presumably, she will be staying on the P&G board while she is Gates Foundation CEO.)  The Lancet did not mention this issue. 

Privatizing UCSF

Also, the Lancet articles seemed to contradict other reports that Dr Desmond-Hellmann made a serious attempt to privatize at least some aspects of UCSF, but that this effort failed. (Note that quote by Dr Hawgood from the first article above.)    

However, in 2012, I posted about a prevalent conspiracy theory that University of California managers were trying to take the university private.  However, it seemed to be more of a theory, because at least one news report included statements that Dr Desmond-Hellmann wanted to take UCSF out of the state university system.  This week, an article in the San Francisco Business Times suggested that this was a serious plan, in that Dr Desmond-Hellmann

ran into opposition when she  proposed in early 2012 that some of UCSF's functions be separated from the rest of the UC system.

The autonomy coming from the separation, Desmond-Hellmann argued at the time, would have meant that the sole graduate-level-only campus in the 10-campus UC system would no longer subsidize UC undergrad programs. It also would have translated into UCSF having more control over the money it generates from its medical center and other operations.

However, the same article noted that the current University of California President,

dismissed as 'loose talk' a more than two-year-old plan for UCSF to weaken its ties to the larger UC system. 'UCSF is firmly part of the system and will remain so,...'

The current president seemed to thus acknowledge that this plan existed, however "loose" it may have been.  Clearly, the Lancet articles suggested rather that Dr Desmond-Hellmann did not have any privatization plans, whatever the criticisms people could have made of them.  

Summary

We have often discussed the anechoic effect, how it seems taboo to discuss certain unpleasant facts and issues relevant to the health care system, especially those that might lead to questions about the abilities of the current leadership of large health care organizations.  This taboo seems to particularly affect public discourse within the health care system, such as is found in medical and other scholarly health care journals.

The Lancet is one of the largest circulation and most prestigious medical journals.  The Gates Foundation is one of the biggest foundations working in the health care sphere.  In their latest letter, Bill and Melinda Gates stated,

Our foundation is teaming up with partners around the world to take on some tough challenges: extreme poverty and poor health in developing countries, and the failures of America’s education system.

Yet when the Lancet devoted two full pages to often repetitive discussion of the new leader of the Gates Foundation, it avoided discussion of several issues that might have lead to questions about whether her future leadership would really be about challenging "poor health in developing countries," rather than promoting the interests of large pharmaceutical/ biotechnology and other health care related companies, as she had apparently tried to do before.  That such an important medical journal would publish such incomplete health news reporting suggests the operation of the anechoic effect.

I hope the questions that ought to be raised about Dr Desmond-Hellmann's priorities as CEO of the Gates Foundation will eventually be put to rest.  It would be more reassuring, however, if they could be confronted directly rather than obfuscated.  As long as big health care journals remain so deferential to big health care leaders, concerns we have raised before about whether health care is now primarily lead by a small in-group of executives and managers who may put private interests ahead of entrusted responsibilities remain acute.

As we have said many, many times, true health care reform would ensure that leaders of big health care organizations really put patients' and the public's health ahead of private interests. 


References

1.  Holmes D. New CEO takes the reins at the Gates Foundation.  Lancet 2014; 383: 1440.  Link here.
2.  Holmes D. Susan Desmond-Hellmann taking charge at the Gates Foundation.  Lancet 2014; 383: 1455.  Link here.
3.  McNeil C. Sticker shock sharpens focus on biologics.  J Nat Cancer Instit 2007; 99: 910-914.  Link here.

ADDENDUM - Material about MDVIP as subsidiary of Procter & Gamble added 5 May, 2014 PM. 

Planned Obsolescence Disguised as Innovation, Oligopoly Disguised as a Free Market, and the Enrichment of Oligarchs

The New York Times published another article in its series on the high cost of US health care.  This one, focused on the care of type 1 diabetes mellitus and other chronic diseases, shines some light on the business management practices that now determine how our health care system functions, or not, and implies who benefits the most from them.

Planned Obsolescence Disguised as Innovation

The article first discussed the brave new world of type 1 diabetes treatment.  The introductory theme was:

Today, the routine care costs of many chronic illnesses eclipse that of acute care because new treatments that keep patients well have become a multibillion-dollar business opportunity for device and drug makers and medical providers.

Much of modern diabetes treatment seems to depend on medical devices and disposable medical supplies:

That captive audience of Type 1 diabetics has spawned lines of high-priced gadgets and disposable accouterments, borrowing business models from technology companies like Apple: Each pump and monitor requires the separate purchase of an array of items that are often brand and model specific.

A steady stream of new models and updates often offer dubious improvement: colored pumps; talking, bilingual meters; sensors reporting minute-by-minute sugar readouts. [Diabetes patient] Ms. Hayley’s new pump will cost $7,350 (she will pay $2,500 under the terms of her insurance). But she will also need to pay her part for supplies, including $100 monitor probes that must be replaced every week, disposable tubing that she must change every three days and 10 or so test strips every day.

Of course, the device and supply manufacturers claim that the high prices reflect the value of the wondrous new innovations:

Companies that produce the treatments say the higher costs reflect medical advances and the need to recoup money spent on research.

Yet now the Times reporter was able to find physicians who claim the "innovations" are really just the latest version of planned obsolescence:

Diabetes experts say a good part of what companies label as innovation amounts to planned obsolescence. Just as Apple customers can no longer buy an iPhone 3 even if they were content with it, diabetics are nudged to keep up with the latest model.

For example,

Those companies spend millions of dollars recruiting patients at health fairs, through physicians’ offices and with aggressive advertising — often urging them to get devices and treatments that are not necessary, doctors say. 'They may be better in some abstract sense, but the clinical relevance is minor,' said Dr. Joel Zonszein, director of the Clinical Diabetes Center at Montefiore Medical Center.

'People don’t need a meter that talks to them,' he added. 'There’s an incredible waste of money.'

Pharmaceutical companies have also discovered this model.

insulin ... has been produced with genetic engineering and protected by patents, so that a medicine that cost a few dollars when Ms. Hayley was a child now often sells for more than $200 a vial, meaning some patients must pay more than $4,000 a year.

In particular,

Synthetic human insulin is safer for patients, who sometimes developed reactions to animal insulin. But it is made by only three companies: Eli Lilly, Sanofi and Novo Nordisk. Manufactured in microbes, each one’s product has minor dissimilarities that reflect the type of cell in which it was made. Since the companies owned the cell lines, it is nearly impossible for other companies to make exact copies or even similar versions that would be cheaper, even once the patents expire. And the pharmaceutical companies defend the patents ferociously.

What’s more, the three companies continued to refine their product, adding chemical groups that made the insulin absorb somewhat more quickly or evenly, for example. They are called insulin analogues, and their benefits are promoted tirelessly to doctors and patients.

Of course, the pharmaceutical companies also claim that it's all about innnovation,

Dr. Todd Hobbs, chief medical officer of Novo Nordisk, defended the rising prices of insulin, linking them to medical benefits. 'The cost to develop these new insulin products has been enormous, and the cost of the insulin to the consumer in developed countries has risen to enable these and future advancements to occur,' he wrote in an email.

 Not everyone is convinced,

'The insulins are tweaked for minor benefits that may help a small number of patients with difficult-to-control diabetes, and result in major price increases for all,' [Kings College, London, UK Professor] Dr. Pickup said. Because of analogues, he added, Britain’s National Health Service has had to spend 130 percent more on insulin in the past five years.

In the United States, said Dr. Zonszein at Montefiore, the price of Humalog, Lilly’s analogue insulin, was typically two to four times that of its older human insulin line, called Humulin. 'There is not a lot of difference between Humulin and analogues,' he said, but he noted that Humulin was getting 'hard to find.' Sanofi Aventis has stopped selling its older product in the United States, and Mr. Kliff, the financial analyst, said other companies were likely to follow suit, effectively forcing patients to use the costlier versions.

The arguments about valuable innovation also do not explain why the prognosis of diabetes in the US does not seem to reflect all the money we spend on the disease,

Complication rates from diabetes in the United States are generally higher than in other developed countries. That is true even though the United States spends more per patient and per capita treating diabetes than elsewhere, said Ping Zhang, an economist at the Centers for Disease Control and Prevention.

The high costs are taking their toll on public coffers, since 62 percent of that treatment money comes from government insurers. The cumulative outlays for treating Type 1 and Type 2 diabetes reached nearly $200 billion in 2012, or about 7 percent of America’s health care bill.

So to summarize, there is considerable evidence that companies that make drugs and devices to manage type 1 diabetes constantly provide "innovations," yet most are minor changes that encourage obsolescence of previous products, but do not provide important increases in benefits or reductions in harm for patients. 


Oligopoly Disguised as a Free Market

Many in the US sing the praises of our supposed free-market health care system.  As noted above however, the insulin market is an oligopoly, dominated by three companies.  The diabetes device market is also dominated by a few companies, and in particular, the insulin pump market is dominated by a single company,

Medtronic is the dominant insulin pump manufacturer, serving 65 percent of American patients and the majority of those worldwide. Though smaller companies sell cheaper pumps, it is hard to make inroads: Once familiar with the Medtronic system and its extensive support network for troubleshooting problems, patients are reluctant to switch. Doctors are leery of prescribing equipment from a new company that may be out of business in a year; their office computer may not sync with the new software anyway.

Of course, Medtronic public relations will justify it all again based on innovation,

Medtronic declined to talk about specific prices, but said a core tenet was to make only 'a fair profit.' Amanda Sheldon, a spokeswoman, added: 'We are committed to reinvesting in research and development of new technologies to improve the lives of people with diabetes, and our current pricing structure ensures that we can bring new products to market.'

The article also discussed the prices of treating chronic diseases other than diabetes.  For example, see how a nominally non-profit hospital priced treatments for chronic diseases,

Dr. Kivi was on high doses of steroids for debilitating joint pain that left him unable to walk at times.

But when his last three-hour infusion at NYU Langone Medical Center’s outpatient clinic generated a bill of $133,000 — and his insurer paid $99,593 — Dr. Kivi was so outraged that he decided to risk switching to another drug that he could inject by himself at home. 

However,  this pricing appears to have been facilitated by the hospital's increasing market domination generated by its purchase of physician practices,

He had moved his care to NYU Langone to follow his longtime doctor, who had moved her practice from a nearby hospital where the same infusion had been billed at $19,000. The average price that hospitals paid for Dr. Kivi’s dose of Remicade late last year was about $1,200, according to Medicare data.

So in summary, a few companies now dominate the production of drugs and devices for the management of diabetes, and a few large hospitals may increasingly dominate the treatment of particular chronic diseases.  Such oligopolists are able to increase prices without improving treatment to or outcomes of patients.

Enrichment of the Oligarchs

This example shows how the current US health care system is dominated by huge organizations, mostly for-profit corporations but including some nominally non-profit corporations that act similarly.  They loudly proclaim innovation, but much of that innovation seems to provide few benefits to patients, and actually appears to be planned obsolescence.  The result is high and ever-rising prices. So if patients do not benefit from this, who does?

It does not appear to be the health care professionals,

Meanwhile, as the price of supplies rises, endocrinologists remain among the lowest-paid specialists in American medicine, meaning severe physician shortages in many areas and long waits to see a doctor.

We  have seen other examples of how leaders of the big health care organizations have become as rich as royalty.  Therefore, let us consider the pay of the leaders of the organizations mentioned above.  I will focus on the two US based corporations, Eli Lilly and Medtronic, and the New York hospital, NYU Langone Medical Center.

Eli Lilly

According to the company's 2014 proxy statement, the 2013 total compensation of its five highest paid hired executives was

- John C Lechleiter PhD, CEO                                      $11,217,000

- Derica W Rice, CFO                                                   $5,176,822

- Jan M Lundberg, PhD, EVP, Science and Technology   $4,774,535

- Michael J Harrington, General Counsel                          $3,174,222

- Erico A Conterno, President Lilly Diabetes                    $3,009,041

Note that all of these executives save Mr Harrington have also amassed more than 100,000 shares of company stock, and Dr Lechleiter has amassed more than 1,000,000.

It should be no surprise, given our recent discussion (e.g., here) of the currently symbiotic relationship among top health care corporations and academic medicine, that several of the members of the Lilly board of directors that has exercised stewardship over the company, and is thus responsible for these gargantuan compensation packages and the business practices discussed above are top academic leaders.  These include,

- Alfred G Gilman, MD, PhD, Regental Professor Emeritus, recent (until 2009) executive vice presdient, provost, and dean of medicine, University of Texas Southwestern 

- William G Kaelin Jr, MD, Professor of Medicine, Associate Director of Basic Science, Dana-Farber Cancer Center, Harvard University

- Marschall S Runge MD, Executive Dean and Chair of the Department of Medicine, University of North Carolina Medical School

- Katherine Baicker PhD, Professor of Health Economics, Harvard University School of Public Health  (I must note that Prof Baicker is also - amazingly - on the Medicare Payment Advisory Committee, MEDPAC).

- Ellen R Marram, Trustee, New York-Presbyterian Hospital

- Ralph Alvarez, President's Council, University of Miami

- R David Hooper, Trustee, Children's Hospital of Colorado

- Franklyn G Pendergast MD PhD, Professor, Mayo Medical School

All but the newest directors were paid at least $250,000 a year by the company (and thus by the executives the directors are supposed to supervise), and all but the newest directors had accumulated tens of thousands of shares of stock or the equivalent as pay for their services.


Medtronic

Similarly, according to the company's 2013 proxy (the latest now available), CEO Omar Ishrak made $8,975,866 in 2013, and the next four highest paid executives all made over $2,500,000 each.   Mr Ishrak owned or could acquire the equivalent of more than 500,000 shares of stock, and the other top paid executives owned of could acquire from over 100,000 to over 1,000,000 shares of stock.

Again, the executives were nominally supervised by a board of directors that included an academic and non-profit leader, Dr Victor J Dzau, MD former chancellor for health affairs at Duke University, and president-elect of the Institute of Medicine (note that we discussed Dr Dzau's conflicts of interest most recently here).  It also included a former government leader, Michael O Leavitt, former US Secretary of Health and Human Services; and a hospital leader, Preetha Reddy, Managing Director of Apollo Hospitals Enterprise Limited (India). 

NYU Langone Medical Center

The Medical Center's 2011 US form 990 is old, but the latest available, and is remarkably obscure, omitting, for example, mentioning the titles of any of the people listed as highest paid officers and employees.  The current CEO, was listed as receiving total compensation of just over $2.000,000.  Four individuals then received over $1,000,000.  The 990 form also mentioned that the Medical Center provided some individuals with first class travel, tax gross-up payments, housing allowances, and reimbursement for personal services.  Neither the 990, nor the center's web-site makes all the possible conflicts of interest of its trustees obvious.   

So in summary, the large organizations, for-profit and non-profit, that are able to greatly increase their prices through planned obsolescence disguised as innovation, and oligopoly disguised as free markets, are able to make their top executives very rich, and also enrich those who are supposed to exercise stewardship over them. 


Summary

An extensive journalistic investigation revealed how certain aspects of chronic care in the US health care system are dominated by a few large organizations.  These organizations are able to charge very high prices, mainly through market domination, and with the aid of marketing and public relations that tout planned obsolescence as valuable innovation.  The leaders of these organizations have become wealthy, often fabulously so.  This state of affairs has not been challenged by those who are supposed to provide stewardship, including many prominent academics.

The US health care system is the most expensive, on a per capita basis, in the world, and far more expensive than that in any other developed country.  Yet there is no evidence that its results are superior to those of other countries.  What evidence there is suggests in fact that our results are mediocre at best.

The current example suggests how the US system differs from those of other countries.  It has an ostensible free market focus.  Yet the system appears more to be an oligopoly, with most of its market components dominated by a few large organizations, run as an oligarchy, by a small, overlapping in-group of managers, executives and their cronies, with elements of corporatism, that is with the cooperation of, rather than regulation by government entities and leaders

A real free market health care system would include a level playing field.  This could only be achieved by the government acting as a fair umpire, not a crony.  Anti-competitive practices would have to end.  Oligopolies would have to be broken.  Deceptive marketing and public relations would have to be exposed.  Leaders would have to be made accountable, especially for putting patients' and the public's health ahead of their own enrichment.  All this would be horribly difficult, as the oligarchs have amassed much money and control, and would oppose, possibly violently, any effort to challenge them.  If we do not challenge them in the US, however, not only will our health care continue to become ever more expensive, less accessible, and less beneficial to patients, but we will all cease to be citizens of one of the first real democracies, and end up serfs instead. 

Finally, An Article in a Large Circulation Medical Journal with Systematic Data about Leaders of Academic Medicine Conflicted by their Service on Health Care Corporate Boards

Background - a New Species of Conflict of Interest

Since 2006, we have posted repeatedly about  what was then a new species of severe conflicts of interest.  This occurs when leaders of academic medical institutions or other health care non-profit organizations or non-governmental organizations (NGOs) also serve as members of boards of directors of for-profit corporations  whose products and actions have major effects on health care.

Most recently, we discussed the cases of the current CEO of the National Quality Forum and past CEO of the American Board of Internal Medicine who was found to be on the board of for-profit hospital group purchasing organization Premier Inc, and had been on the board of its privately held but for-profit predecessors.  We then discussed the case of the incoming president of the US Institute of Medicine and former Chancellor of Health Affairs at Duke University who was on the boards of Alnylam Pharmaceuticals, Medtronic and Pepsico.  We next discussed the case of the current Dean of medicine at the University of Illinois who is on the board of Novartis. 

We also recently posted about the first time these sorts of severe conflicts of interest issue have been addressed in a large circulation medical journal.  A commentary in JAMA called for many such conflicts to be banned.

A Small Study of the Prevalence of a New Species of Conflict of Interest

Now JAMA has just published a research letter which examined the prevalence of board members of large, for-profit, publicly held pharmaceutical companies who also were among the leadership of academic medical centers. [Anderson TS, Dave S, Good CB et al. Academic medical center leadership on pharmaceutical company boards of directors.  JAMA 2014; 311: 1353-5.  Link here.]

The authors looked at public data about 2012 board membership of the 47 biggest publicly held companies based on global prescription drug sales. They tabulated those who were also leaders at (apparently only US) academic medical centers. 

The most important findings were:
- 19/47 companies (40%) had at least one board member who was a leader of an academic medical center (AMC)
- 16/17 US based companies had at least one board member who was also a leader of a US AMC
-  pharmaceutical company board members included 2 university presidents, 6 deans of medicine, 6 hospital or health system executives, 7 clinical department chairs or center directors
-  28 board members were also members of boards of trustees or directors of US hospitals, medical schools, or their parent universities.

Comments

We have been trying to raise awareness of this issue since 2006.  Now we have some idea of the size of the problem.

Keep in mind that this study did not attempt to determine the prevalence of academic medical center leaders on boards of smaller pharmaceutical companies, privately held companies, biotechnology or device companies, or other health care and health care related companies (e.g., for-profit hospital systems, health insurance companies, for-profit contract research organizations, for-profit medical education and communication companies, large companies with major health care components, etc, etc, etc)  It also did not attempt to determine the prevalence of leaders of other important health care non-profit organizations (e.g., hospitals and hospital systems, insurance companies, professional societies, patient advocacy groups, accrediting boards, etc, etc, etc) on health care or related corporate boards.  It also did not address leaders of health care organizations outside of the US.  So this study likely greatly underestimates the overall prevalence of and the number of people involved in what we first called a "new species of conflict of interest."

But it is a start.  And publishing it in JAMA will begin to make more health care professionals, policy makers, and researchers, and more of the public at large aware of the problem.

As I said before, it is very nice to see that the issue of what we once called a new species of conflict of interest finally has made the big time.  Whether it now gets any more traction remains to be seen.  Unfortunately, since conflicts of interest can be so profitable for the directly affected parties, I fully expect they will continue to oppose any restrictions.  The money they have made will likely be used to deploy marketing and public relations personnel and legal counsel to counter any attempts to try to make this aspect of health care more honest.

As we have said again and again, the web of conflicts of interest that is pervasive in medicine and health care is now threatening to strangle medicine and health care.  Furthermore, this web is now strong enough to have effectively transformed US health care into an oligarchy or plutocracy.  Health care is effectively run by a relatively small group of people, mainly professional managers plus a few (lapsed?) health care professionals, who simultaneously run or influence multiple corporations and organizations.

For patients and the public to trust health care professionals and health care organizations, they need to know that these individuals and organizations are putting patients' and the public's health ahead of private gain. Health care professionals who care for patients, those who teach about medicine and health care, clinical researchers, and those who make medical and health care policy should do so free from conflicts of interest that might inhibit their abilities to put patients and the public's health first.

Health care professionals ought to make it their highest priority to ensure that the organizations for which they work, or with which they interact also put patients' and the public's health ahead of private gain, especially the private gain of the organizations' leaders and their cronies.

ADDENDUM (3 April, 2014) - see also comments by Paul Levy on the Not Running a Hospital blog, on the 1BoringOldMan blog, and by Ed Silverman (welcome back!) on the WSJ Corporate Intelligence blog. 

No Fooling - When a Retired Conservative Politician Warns About Oligarchy...

then things must be getting really bad.

Of course, we have been warning about oligarchy, and related issues such as concentration of power, oligopoly  in health care for a long time.  Basically, we have been warning that health care is increasingly run by a small group of insiders, mostly professional managers/ executives, and their cronies, who often have multiple overlapping leadership positions (e.g., as we discussed recently, leadership of one health care organization while being member of the board of another), or may interchange positions through the revolving door.  It appears that this pattern is merely part of a larger one involving US and even global society.

While warnings about the growing threat of oligarchy or plutocracy have mainly come from people (including your loyal Health Care Renewal bloggers) who might be regarded as out of the mainstream, that is changing.

We have a striking local example.

David Carlin is a former Majority Leader of the Rhode Island Senate.  While he is a Democrat, he could hardly be called a flaming leftist.  He just published an op-ed in the Providence Journal which opened,

I am not a leftist. Far from it. Not only have I become a conservative in my old age, but I find myself growing more conservative every month.

He then went on,

 Nonetheless, I think those on the left are correct about one thing, at least. They are right when they warn us that the United States, where the top 1 percent of people own about 40 percent of the nation’s wealth, has a dangerous imbalance of wealth.

Please don’t misunderstand. I am far from agreeing with the leftist notion that the ideal society would be one in which wealth is equally distributed. This is absurd. Nonetheless, this great inequality of wealth is dangerous for America. For it is making the United States less and less a democracy (a form of government in which the people rule) and more and more an oligarchy (a form of government in which a small number of very rich people rule).

He did propose a specific remedy for the problem.  However, he did warn of the consequences in dire terms.

in the United States we have a special problem. For we are and always have been philosophically democratic. We believe that government is legitimate to the degree — and only to the degree — that it is chosen by the people. When we conclude that in reality our government is controlled by the rich and super-rich, not the people, we will experience a great legitimacy crisis; our government will no longer feel legitimate to us, and thus it will not receive the deference that legitimate authority is entitled to. Lawlessness and disorder will follow.

That is pretty strong, and when people like Mr Carlin start making such strong warnings, things must be really bad.

In my humble opinion, there are already plenty of reasons to have doubts about whether the ostensible authorities in health care are legitimate.  Just to mention some recent examples: we have discussed how the leaders of two major prestigious non-profit health care organizations (look here and here) and one major medical school (look here) were revealed to simultaneously be responsible for the governance of for-profit health care organizations, some of which had clear track records of ethical misadventures which cast doubt on the abilities of these leaders to uphold their organizations' missions.  Two of the three leaders subsequently dropped their outside board memberships, but not their leadership positions, and their previous actions in those positions have not been revisited.

In health care, if we do not re-establish leadership which is accountable for putting the health of patients and the public ahead of self-interest, the deluge will not be far behind.  

Turnabout is Fair Play - Why University of Illinois Students, Faculty and Alumni Should Question the Dean of Medicine about Novartis' Ethical Misadventures

Since 2006, we have posted repeatedly about  what was then a new species of severe conflicts of interest.  This occurred when leaders of academic medical institutions or other health care non-profit organizations or non-governmental organizations (NGOs) also serve as members of boards of directors of for-profit corporations  whose products and actions have major effects on health care.

Most recently, we discussed the cases of the current CEO of the National Quality Forum and past CEO of the American Board of Internal Medicine who was found to be on the board of for-profit hospital group purchasing organization Premier Inc, and had been on the board of its privately held but for-profit predecessors.  We also discussed the case of the incoming president of the US Institute of Medicine and former Chancellor of Health Affairs at Duke University who was on the boards of Alnylam Pharmaceuticals, Medtronic and Pepsico.

We also recently posted about the first time these sorts of severe conflicts of interest issue have been addressed in a large circulation medical journal.  A commentary in JAMA called for many such conflicts to be banned.

The JAMA article, and much of the discussion surrounding the NQF and IOM cases focused on how loyalties to outside for-profit corporations could affect leaders of academic and other non-profit organizations.  However, we also noted (e.g., here and here) how company directors should be accountable for the actions of their companies, even if they also happen to also be academic or non-profit leaders. 

Thus, academic and non-profit leaders may find themselves in the awkward position of being held accountable for unethical or even illegal actions of the companies on whose boards they sit.  Such corporate actions may contradict the mission of the institutions whose leadership is their primary job, and whose mission they are supposed to uphold. 

While we were writing about these somewhat convoluted, but very important issues, a fellow blogger discovered yet another academic leader serving on the board of a health care corporation, while simultaneously the media reported multiple examples of that corporation's ethical misadventures on his watch.  Those who care about that academic institution ought to question whether a leader accountable for such misadventures is fit to continue to lead.  Yet so far, no one has publicly juxtaposed this leaders' responsibilities to his institution's mission and how the corporation over which he is supposed to exercise stewardship has been taking actions that contradict that mission

The Dean of the College of Medicine at the University of Illinois Is a Director of Novartis

Paul Levy, blogging on Not Running a Hospital, noted a print advertisement for the Intuitive Surgical daVinci robot.  The advertisement implied endorsements by academic surgeons at the University of Illinois.  Levy suggested that surgical faculty acting as salespeople for a device company appeared to violate the university code of conduct.  This concern was heightened by the status of several of the surgeons in the advertisement as clinical and academic leaders.    

Mr Levy then discovered that the Dr Dimitri Azar, Dean of the University of Illinois College of Medicine, to whom these surgeon report, was on the board of Novartis, the multinational pharmaceutical and device company.  Dr Azar's position is easily verified by consulting the Novartis web-site.  Mr Levy further discussed the case here and here.  Then he  reviewed  the extensive dealings between the University of Illinois and Novartis and its subsidiaries, raising suspicion that the Dean's known involvement with the company may have lead to its favorable treatment by the university.

But wait, there is another major dimension to this problem. 

Novartis' Recent Ethical Misadventures

Novartis, over which Dr Azar is supposed to be exerting stewardship, has made a series of ethical missteps according to recent media reports.  I will summarize them in chronological order according to the date of media publication.

Novartis, Roche Fined for Anti-Competitive and Deceptive Practices in Italy to Encourage Sales of Lucentis

According to a March 5, 2014 article in the New York Times, Novartis was fined for anti-competitive and deceptive practices, 

Italian antitrust authorities said on Wednesday that they had fined two Swiss pharmaceutical companies, Novartis and Roche Holdings, a total of $250 million for colluding to keep doctors from prescribing a relatively inexpensive eye treatment in favor of a more expensive drug.

The authorities said the two companies had sought to steer doctors away from Avastin, an anticancer drug developed by Genentech that has been used for years as an off-label treatment for common eye problems. Instead, they said, the companies had tried to 'channel demand toward the much more expensive drug Lucentis, through an artificial distinction between the two products,' essentially by overstating the dangers of Avastin use.

It is not the first time such substitution efforts have brought an unwanted spotlight: Genentech got into trouble in the United States in 2010, when it was found to be offering doctors secret rebates to prescribe Lucentis over Avastin.

Novartis, which holds the rights to market the two drugs outside the United States, has been fined 92 million euros by the Italian regulators. And Roche, which acquired Genentech in 2009, was fined 90.5 million euros, for a total of about $250 million in the Italian case. 

Given that many drug companies have been cited for marketing their products for unapproved, or off-label uses, it is ironic that in this case, Novartis managers said they were shocked, shocked by the ruling because it could encourage off-label use:

 Novartis said in a statement that the Italian decision 'openly encourages and promotes the widespread unlicensed intravitreal use of Avastin contrary to the requirements of European and Italian regulatory law,' and 'undermines the European regulatory framework designed to protect patient safety.'

The NY Times also reported that one method the two companies were alleged to use to encourage Lucentis rather than Avastin use was to launder their message through patient advocacy groups,

The Italian authorities discovered numerous messages between Roche and Novartis in which the two companies discussed what kinds of communications would be needed to induce doctors and hospitals to adopt the more expensive product.

According to one such message from early 2013, cited in documents in the case released Wednesday, growing cost pressure in Italy and France to use Avastin had 'reinforced the political dimension of the debate,' and 'further reinforcement of the Lucentis value proposition to all stakeholders is critical.'

Another message called for the companies to 'work with diabetes patient groups to increase voiced concerns about safety risks of unlicensed therapies' — a reference to Avastin — for an eye condition known as diabetic macular edema.

Novartis Paid Doctors to Act as Marketers for Starlix and Other Drug

After the New York state attorney general filed suit against Novartis, a March 15, 2014 Newsday article included interviews with physicians that suggested how the company turned them into disguised marketers:

Dr. Howard Brand says he had one goal when he gave a speech at a Miami hotel in the early 2000s -- to tout the diabetes pill Starlix for the pharmaceutical company Novartis. 

The giant Swiss drugmaker, which reported $57.9 billion in global sales in 2013, paid the Stony Brook endocrinologist $1,500 for his talk at a doctors' meeting, Brand said in an interview. Novartis also paid for Brand's airfare and his weekend hotel stay, he said.

'It was self-serving, but I also thought it was a benefit to patients,' said Brand,...

Furthermore,

 Brand, the Miami speaker, said in an interview that investigators had not approached him about the payments he accepted.

He said Novartis paid him a total of $10,000 to $12,000 for speeches, mostly at restaurant dinners it sponsored. The payments, which Brand said he received before 2010, are not reflected on the Novartis website.
'
Even [with] the notion that we were paid solicitors, I think people really paid attention,' he said. 'Of course, a lot of doctors just enjoyed going to dinner.'

Brand said he accepted more than $60,000 in speaker's fees from drugmakers, including Novartis, in one two-year period.

Another physician allowed that Novartis furnished the material for his "educational" talks,

Dr. Howard Hertz, a Babylon internist, confirmed that he had received $4,000 from Novartis in 2010 and 2011 for talking about its hypertension drugs to colleagues. Hertz said he dealt with a Novartis sales rep who brought information about the company's pills to his office. 'He would educate me about the product, give me slides to study,' he said.

Hertz said the slides were on CDs and made him an expert on Novartis drugs such as Diovan, a blood pressure pill, Lotrel and Valturna. He said he spoke mostly about Diovan and Lotrel.

'We had dinners whereby I would speak about the products and speak to the colleagues,' Hertz said. 'I became somewhat of an expert in these products.'

Note that Dr Hertz's expertise seemed to come exclusively from information provided by a company salesperson, making it obvious that he was not hired for his prior expertise as a physician.

The prosecutors allege that Novartis' payments of some $65 million amounted to illegal kickbacks.  This is only an allegation.  However, it seems obvious that Novartis paid physicians to act as salespeople.  Newsday asked bioethicist Arthur Caplan about these actions,

'To even hear about it just takes my breath away,' Caplan said. 'It sounds like egregious, inexcusable violations of agreed upon legal and ethical standards . . . with an inexcusably complicit group of physicians,' Caplan said.

Japanese Hospital Investigation Alleged Novartis Manipulated Research

A March 17, 2014 article in FiercePharma stated that Japanese investigators found that Novartis had manipulated clinical research to make its results appear more favorable to the company's products,

Novartis employees were more involved in a Japanese drug study than previously suspected, a Tokyo hospital official said. In an investigative report released last week, the University of Tokyo Hospital said doctors not only let Novartis  employees collect patient data from various trial sites but also allowed the Swiss drugmaker into its records on all 255 trial participants, Japanese media reports.

Plus, at least one Novartis employee was involved in planning the trial, designed to compare side effects of multiple leukemia treatments, the hospital found, according to Japan's Mainichi news. Those treatments included Tasigna, the company's follow-up to the hugely successful Gleevec (imatinib).

In fact, according to NHK World, hospital director Takashi Kadowaki said Friday that Novartis employees were 'virtually managing the study.' 

According to Mainichi, this sort of clinical research manipulation is taken very seriously in Japan,

 Senior Ministry of Health, Labor and Welfare officials called the case a serious situation and said the researchers involved showed a lack of ethics. They called for a detailed investigative report from the hospital and are considering punitive measures. The ministry will consider a new law to prevent corruption in clinical tests in the wake of a scandal involving the clinical trial of antihypertensive drug Valsartan.

It is obvious this story is not from the US, because the drug company has already apologized,

 A representative for Novartis Pharma's PR division said, 'We want to apologize to patients and doctors. We must refrain from comment on the investigation, which is being handled outside our company.'

Indian Regulator Cancels Import License Alleging Fraud by Novartis to Market Veterinary Drug

A March 18, 2014 article in the New Delhi Business Standard told how Indian regulators accused Novartis of fraud, opening with,

Swiss drug maker Novaris is likely to face legal action for allegedly faking documents to seek registration of its veterinary product Tiamulin Hydrogen Fumarate (80 per cent granules) in India. The drug regulator, Drugs Controller General of India (DCGI)), has already cancelled the company’s import licences as well as existing registration certificate for the product.

Summary

So in just the last few weeks, evidence appeared that Novartis engaged in collusive anti-competitive and deceptive practices marketing drugs in Italy, paid physicians to act as marketers in the US, manipulated drug studies in Japan, and lost an import license in India due to alleged fraud.  By the way, in 2013, Novartis was fined for anti-competitive practices in its marketing of Fentanyl by the European Commission (look here), and in 2011 its Sandoz subsidiary settled allegations of misreporting prices in the US for $150 million (look here)   Other Novartis misadventures from 2010 and earlier appear here.  So Novartis has quite an impressive, if not infamous record of ethical failures.

While he is Dean of medicine at the University of Illinois, Dr Dimitri Azar is also a director of Novartis, and hence has a fiduciary duty for the company's stewarship.  While questioning Dr Azar's role in the participation of his faculty in advertising for Intuitive Surgical, perhaps those who care about the reputation of the University of Illinois and its ability to fulfill its mission ought to ask how the poor ethical track record of the company Dr Azar is supposed to be overseeing reflects on his ability to defend the mission of the university and the medical school.

While parties that enable or enter into arrangements that create conflicts of interest in health care may be thinking mainly of the advantages that they may accrue, many of these arrangements create accountability and obligations, even if they are honored mainly in the breach.  If leaders of academic medicine and health care non-profit organizations insist on becoming directors, and hence stewards of for-profit health care corporations, they ought to be held accountable for the actions of these corporations, and how these actions reflect on their primary obligations to the academic and non-profit organizations they have also pledged to serve.

True health care reform would make health care leaders accountable for putting patients' and the public's health ahead of their own self-interest.