Judge Rejects Prosecutors' Lenient Settlement of the Case of the Hidden Defibrillator Defects

We just discussed the proposed settlement of a case in which the Guidant subsidiary of Boston Scientific was alleged to have withheld information about defects in its implantable cardiac defibrillators that were associated with six patient deaths (see next most recent post here with more complete summary).  The devices were manufactured in 2000-02, and the issue first became public in 2005.  The proposed settlement included a seemingly large fine for the company. 

Now the New York Times has reported that the presiding judge has rejected the settlement as too lenient.

A federal judge in Minnesota on Tuesday rejected a plea agreement between the federal government and the Guidant Corporation, saying that the deal did not hold the company sufficiently accountable for an episode in which it sold potentially flawed heart defibrillators.

The ruling was a setback for the Justice Department, which had characterized the agreement as a demonstration of its get-tough approach to corporate crime. The deal called on Guidant to plead guilty to two misdemeanors and pay a $296 million fine, described as the largest by a medical device company.

But in his opinion, the judge, Donovan W. Frank of United States District Court said the provisions of the agreement were 'not in the best interest of justice and do not serve the public’s interest because they do not adequately address Guidant’s history and the criminal conduct at issue.'

The story brought several peculiar aspects of the settlement to light.

- The settlement seemed to ignore the most egregious misconduct alleged:

Recently, prosecutors charged in court papers that Guidant had knowingly sold potentially flawed defibrillators. But that issue was not addressed in the plea agreement. Instead, the company agreed to plead guilty to two misdemeanor charges that related to the completeness and accuracy of its filings with the Food and Drug Administration.

- It was not really the Guidant subsidiary that was going to plead guilty, but a new entity apparently constructed solely to "take the rap."

The company created to enter Guidant’s plea, Guidant LLC, existed only on paper.

In his ruling, Judge Frank took direct aim at that argument, suggesting it contradicted the Justice Department’s own public statements about the case. He noted that a department news release said Guidant’s plea deal was 'about accountability.'

Judge Frank wrote, 'The interests of justice are not served by allowing a company to avoid probation simply by changing their corporate form.'

So, the judge demanded that at least the company be put on probation, and possibly be required to do some good works:

Judge Frank said that prosecutors should have sought probation for Guidant and its parent, Boston Scientific. Probation would have required the companies to take certain steps, like helping to rebuild public confidence in the safety of heart devices, in addition to paying a fine.

The judge also outlined other provisions that might be suitable in a new plea deal, including charitable activities by Guidant to improve heart device safety and improve medical care among minority patients.

Daniel R. Margolis, a lawyer in New York who works on medical product cases, said that probation is effectively a way for a court to maintain some control over a company’s activities after it pays a financial penalty.

However, the judge felt he could not require prosecution of the actual people who authorized, directed, or implemented the misbehavior at issue.

After a hearing this month, several doctors and patients wrote to Judge Frank urging him to reject the deal and arguing that former Guidant executives should be criminally charged in the case. But Judge Frank noted in his ruling that it was up to prosecutors, not a court, to decide who should be prosecuted.

We have discussed a series of settlements and convictions resolving cases of alleged wrong-doing by health care organizations.  Almost none included any penalties for people who authorized, directed or implemented the bad behavior.  None of the financial penalties were so big as to be more than another cost of doing business for the organizations involved.  Some of the cases included gimmicks, like a subsidiary constructed only to plead guilty, that otherwise seemed to lessen accountability. 

Despite the US Justice Department's assertion of a new "get-tough" approach, this new settlement did not seem like any more of a deterrent to bad behavior than the parade of settlements that cam before, that is, until Judge Frank acted. 

We applaud the judge for trying to hold at least one large health care organization accountable for its misdeeds.  However, I again suggest that to truly reform health care, we need rigorous regulation of health care organizations that has the power to deter unethical behavior that may risk patients' health.

Explaining Health Care Executives' Impunity - the (Unexplained) Leniency of Prosecutors

On Health Care Renewal, we noted many legal settlements and criminal convictions in cases alleging unethical behavior by health care organizations.  Some organizations have settled, and/or pleaded guilty, and/or been convicted numerous times.  And we have said repeatedly, (e.g., here) such legal actions will not deter unethical behavior by health care organizations until the people who authorize, direct or implement bad behavior fear some meaningfully negative consequences. Relatively small fines imposed on large corporations pain workers on the line and stockholders while sparing the richly paid top hired management and the boards that will not reign them in.

A recent article in the New York Times about a plea agreement in a case in which the Guidant subsidiary of Boston Scientific was alleged to have withheld information about defects in its implantable cardiac defibrillators that were associated with six patient deaths (see most recent post here) throws some light onto the apparent impunity of top health care leaders.  The article reiterated:

In recent years, the Justice Department has won hundreds of millions of dollars in fines from drug and device makers, including a string of cases in which the companies have pleaded guilty to violating federal laws.

But corporate executives rarely face criminal charges in such actions....

The article noted:

“Prosecutors want the money,” said Mr. Fleder, of Hyman, Phelps & McNamara. “And at least in the big money settlements they have had in pharma cases, it appears that prosecutors are willing to settle even if it means forgoing prosecutions against individuals.”

Yet, as we have said,

Short of executives facing prosecution, companies see the hefty financial settlements demanded by the Justice Department as another price of doing business, industry critics say.

There does not seem to be a legal barrier to holding these executives accountable:

... they can be held liable under federal law for regulatory violations that occur on their watch — whether or not prosecutors can prove the executives participated in the wrongdoing or even knew about it.

But if this is so, why have corporate leaders not faced such penalties before? An experienced prosecutor explained it at one level:

A former prosecutor in many drug and medical device-related cases, Michael K. Loucks, said he never charged corporate executives with misdemeanors — which apply in cases when the violations are deemed unintentional — because he believed that being barred from the industry was too harsh a consequence.


“I think that if you are going to take actions that take away someone’s liberty or livelihood, you should have to prove felony conduct,” said Mr. Loucks, who spent over 20 years as an assistant United States attorney in Boston.

This ends up as a very disturbing response. Professionals who hold positions of trust in society, most particularly health care professionals, can lose their livelihood for unprofessional conduct or unethical actions that are not felonies, or even criminal. In health care (and in some other fields, like law), professionals are held to a higher standard that merely avoiding conviction for felonies. (For examples, peruse the lists of doctors and other health care professionals whose licenses were suspended or revoked by state medical boards.)

In our current world of commercialized health care, leaders of large health care organizations can take actions that have as important consequences for peoples' health and safety as the individual actions of doctors and nurses. Why should they not be at risk of the loss of their current livelihood for actions that risk peoples' health and safety?

I do not know why an experienced prosecutor felt that health care executives deserved so much more leniency than health care professionals may receive from medical boards. Maybe in the future we will begin to hold those who authorized or directed unethical actions that risk health and safety accountable.

What Me Worry? - Leaders Prosper Despite Questions About Their Organizations' Ethics and Performance

There were two examples in the recent news about how the leaders of health care organizations seem to prosper no matter what questions are raised about their organizations' ethics or performance.

WellPoint

It seemed that anger over a rate increase by a subsidiary of the huge insurance company/ managed care organization WellPoint was one reason for the revival of efforts in the US to enact some sort of health care reform legislation.  In our comment on this controversy, we noted that questions about the ethics of WellPoint's actions have appeared again and again.  Wellpoint...

• settled a RICO (racketeer influenced corrupt organization) law-suit in California over its alleged systematic attempts to withhold payments from physicians (see post here).
• subsidiary New York Empire Blue Cross and Blue Shield misplaced a computer disc containing confidential information on 75,000 policy-holders (see story here).
• California Anthem Blue Cross subsidiary cancelled individual insurance policies after their owners made large claims (a practices sometimes called rescission).  The company was ordered to pay a million dollar fine in early 2007 for this (see post here).  A state agency charged that some of these cancellations by another WellPoint subsidiary were improper (see post here).  WellPoint was alleged to have pushed physicians to look for patients' medical problems that would allow rescission (see post here).  It turned out that California never collected the 2007 fine noted above, allegedly because the state agency feared that WellPoint had become too powerful to take on (see post here). But in 2008, WellPoint agreed to pay more fines for its rescission practices (see post here).  In 2009, WellPoint executives were defiant about their continued intention to make rescission in hearings before the US congress (see post here).
• California Blue Cross subsidiary allegedly attempted to get physicians to sign contracts whose confidentiality provisions would have prevented them from consulting lawyers about the contract (see post here).
• formerly acclaimed CFO was fired for unclear reasons, and then allegations from numerous women of what now might be called Tiger Woods-like activities surfaced (see post here).
• announced that its investment portfolio was hardly immune from the losses prevalent in late 2008 (see post here).
• was sanctioned by the US government in early 2009 for erroneously denying coverage to senior patients who subscribed to its Medicare drug plans (see post here).
• settled charges that it had used a questionable data-base (builty by Ingenix, a subsidiary of ostensible WellPoint competitor UnitedHealth) to determine fees paid to physicians for out-of-network care (see post here). 
• violated state law more than 700 times over a three-year period by failing to pay medical claims on time and misrepresenting policy provisions to customers, according to the California health insurance commissioner (see post here).

But a few days ago, according to the Indianapolis Star:

Large stock awards helped boost total compensation to top executives at WellPoint by 51 percent to 75 percent last year over 2008.

The big jumps in take-home pay are detailed in the Indianapolis health insurer's annual proxy report to shareholders filed Friday.

Angela Braly, who is chair of the board, president and chief executive, saw her 2009 total compensation rise 51 percent, to $13.1 million. That compares with $8.67 million in 2008 and $14.8 million in 2007.

Braly's salary of $1.14 million barely budged from 2008, but she earned a $6.2 million stock award, almost triple the award she got in 2008.

Total compensation to other top executives:

Wayne DeVeydt, chief financial officer, $7.25 million, up 75 percent from 2008.

Ken Goulet, executive vice president, $4.43 million, up 62 percent.

Dijuana Lewis, executive vice president, $4.46 million, up 64.5 percent.

So whatever top WellPoint executives are paid for, it is not insuring that the company avoids ethical questions about its conduct, or controls health care costs or mdoerates premiums, for that matter. 

Boston Scientific, and Zimmer Holdings

We just commented on the generous compensation given the new and former CEOs of Boston Scientific, despite a series of ethical questions about that company's conduct, culminating in a guilty plea by the company to charges that it concealed information about important and potentially dangerous defects in its products.

A few days ago, I found a reminder, buried in an article in the Minneapolis Star-Tribune about a dispute between Boston Scientific and St Jude Medical, that current Boston Scientific CEO Ray Elliott has a track record of collecting generous compensation despite ethical questions about the companies he has lead.

Elliott is certainly familiar with the potential ethical minefield surrounding the relationships between sales reps and doctors. He was CEO at orthopedic devicemaker Zimmer Holdings Inc., which paid (along with four other companies) $311 million in 2007 to settle a Department of Justice investigation into the consulting fees paid to doctors.

As we discussed back in 2007, Zimmer Holdings Inc was one of four medical device companies which submitted to deferred prosecution agreements in response to charges that the companies implemented criminal conspiracies to violate federal anti-kickback laws. We posted several times about one aspect of this settlement, the mandate that the companies make public the payments (often huge) to orthopedic surgeons, academic institutions, and medical associations. (See posts here, here, here, here, here.) At the time, I did not think to look into what happened to the leadership of these companies thereafter.

According to the 2008 proxy statement by Zimmer Holdings, Ray Elliott conveniently retired in 2007, just before the deferred prosecution agreement was announced. Since he had been President of Zimmer since 1997 and CEO since 2001, according to the 2007 proxy statement, he appeared to have been in the top leadership of the corporation during the time the actions were performed that resulted in the deferred prosecution agreement. Nonetheless, again according to the 2008 statement, for the part of 2007 during which he served as CEO, his total compensation was $7,987,158. For 2006, his total compensation was $11,998,121. In 2007, the present value of his two pension plans were $269,764 and $5,302,050. In 2007, he owned 1,235,859 shares of stock (now worth $72,952,757 at the current price of $59.03 /share), and had the right to acquire 1,169,987 more within 60 days.

And of course, as we posted earlier, Boston Scientific paid him over $30 million for working part of 2009.

So Mr Elliott prospered mightily from his leadership of ethically challenged Zimmer Holdings, and was then further rewarded by ethically challenged Boston Scientific.

Summary

We have commented again and again that while numerous health care organizations have been charged with unethical, and sometimes illegal behavior, the people who oversaw, directed, or implemented the behavior almost never have had to suffer any negative consequences.  Now we see that while some large health care organizations have been subject to penalties for unethical and illegal behavior, the leaders of these organizations have been compensated so well as to make them rich, rich beyond the dreams of most people.  So the problem is not merely that captaining an organization onto the ethical rocks costs one nothing, but that it can make one very rich.

Clearly we see examples of both profoundly perverse incentives and a complete lack of accountability and responsibility affecting the leadership of major health care organizations.  Is it any wonder that these organizations continue to act unethically, and that the costs of the goods and services they provide rise continuously?

If we truly want health care that is accessible, of high quality, at a fair price, and more importantly, if we want health care that is honest and focused on patients, we need to provide health care leaders with clear, rational incentives in these directions, and make them fully accountable for their actions, and the courses of their organizations under their leadership.

Who Guards the Guardians? - the Case of Boston Scientific

The fallout from the case of the faulty implantable cardiac defibrillators continues.  To summarize the story thus far,

We started posting about Boston Scientific's travails in 2005, starting with allegations that Guidant, which is now a Boston Scientific subsidiary, hid information about defects in the implantable cardiac defibrillators (ICDs) the company manufactured. As we noted in early 2005 here, Guidant executives allegedly knew that ICDs made from 2000-2002 were at risk for short-circuiting and failing, thus making them unable to deliver potentially life saving electrical shocks meant to prevent cardiac arrests, but the company only revealed the problem in 2005. By failing to notify physicians and the public, Guidant executives let expensive and profitable, but potentially useless devices to continue to be implanted, potentially increasing the risk of sudden death for the patients who received them. Then here we noted reports that Guidant continued to ship failure-prone devices even after it had designed and started to manufacture new ICDs that were supposed to be less likely to fail. By June, 2005 we posted that Guidant had recalled thousands of ICDs, including models that were previously not identified as likely to fail. Later that year, the case rated an article by Robert Steinbrook in the New England Journal of Medicine. Towards the end of 2005, we noted that Eliot Spitzer had sued Guidant for fraud.  At the end of the year, more information appeared, suggesting that Guidant knew the ICDs were flawed, but continued to sell them. Still more appeared early in 2006. Then the business media became interested in the bidding war between Johnson and Johnson and Boston Scientific for Guidant, provoking a bit more interest in the tale of the suppression of data about the flawed ICDs.

Then all was quiet until 2009, when Guidant, now a Boston Scientific subsidiary, pleaded guilty to two criminal misdemeanor charges that it failed to properly notify the FDA about problems with its ICDs (see post here). Later, the Guidant subsidiary of Boston Scientific settled charges that it gave doctors kickbacks as part of a "seeding study" to use its devices. At that time, it came to light that Boston Scientific had made another settlement, in 2007, of civil lawsuits alleging that the company hid problems with its products (see post here).

More details about this guilty plea have just been reported.  As noted by the Minneapolis Star-Tribune,

A federal judge on Monday delayed a decision on whether to accept a $296 million plea agreement between the U.S. Justice Department and Boston Scientific Corp.'s Guidant subsidiary, which was charged with concealing critical safety information involving some of its top-selling heart devices.

If approved, the criminal penalty would rank as the largest ever in medical technology for a company that violated the federal Food, Drug and Cosmetic Act. But lawyers representing victims implanted with the potentially faulty devices threw a wrench into what was expected to be a routine hearing by demanding a piece of the settlement.

It appears that this settlement would not do any specific good for patients who claim to have been harmed by being implanted with a device that the manufacturer knew at the time to be faulty.

Also, the Star-Tribune noted:

Boston Scientific bought Guidant Corp., whose cardiac rhythm division is based in Arden Hills, for $27 billion in 2006. Though troubled, the division that makes pacemakers and defibrillators reported $2.6 billion in sales last year and still employs 2,000 people locally.

Thus, the financial penalty to be paid by Boston Scientific only would amount to little over ten percent of the yearly sales generated by the division which failed to disclose the faulty devices.

Adding to the sense that Boston Scientific and its leadership will feel little pain from the "largest criminal penalty ever assessed against a medical device company" (see this AP report) was this op-ed in the Boston Globe. It summarized just how richly the former CEO of Boston Scientific, Jim Tobin, who presided over the acquisition of Guidant and thus became responsible for its ethical lapses, and the current CEO, Ray Elliott have been compensated, in contrast to this supposedly large penalty. Re Tobin:

Tobin came to Boston Scientific in 1999 with similar instructions to clean up somebody else’s mess. He had to close facilities, ward off competitors, and, yes, settle patent lawsuits even back then. His carrot: A million stock options, a big deal in those days.

Tobin did fix some problems, and he brought the company’s new drug-eluting stent to market. Boston Scientific shares climbed, and he made about $39 million on options over the years. But Tobin also collected problems, the ones now in Elliott’s lap, and Boston Scientific shares fell again.

So here’s what the board did in February last year: It awarded Tobin 2 million more stock options, just a few months before announcing his retirement.

Adjusting for a stock split, the second option grant is the same size as what he got upon arrival.

And re Elliott:

Elliott, the man named as CEO of Boston Scientific Corp. last summer, became one of the best-paid chief executives in America in 2009. Separate national surveys published in the past week by The Wall Street Journal and The New York Times, although incomplete, come up with just one or two large-company CEOs with compensation packages that could outdo Elliott’s $33.5 million payday.

And see also this Health Care Renewal post. 

TheBoston Globe editorialist asked "so what exactly was the point of the second award [to Tobin]?"  Perhaps this question should be directed to the Boston Scientific board who approved it, and also approved Elliott's outsize pay package. 

The current board includes two co-founders of the company and the current CEO, two retired politicians, a few others with whom I am not familiar, but also two academics who may be quite familiar to Health Care Renewal readers. 

Recalling that Boston Scientific tried to plead guilty to charges of "making false statements ... to the FDA," and "failing to promptly notify regulators," it is striking that both these academics have had issues with transparency and free speech.  We just posted about the repeated failure of Prof Uwe Reinhardt to acknowledge the conflict of interests generated by his numerous memberships in the boards of health care companies, including Boston Scientific, when writing about health policy issues.  We have previously posted about the the conflicts of Marye Anne Fox, the Chancellor of the University of California - San Diego and hence leader of its medical school and academic medical center.  Chancellor Fox has just been criticized by FIRE (the Foundation for Individual Rights in Education) for allowing the silencing of a student publication and television station which had published or broadcast opinions that apparently offended university leaders.

So who in this sorry tale will stand up for quality care of patients?  The US Department of Justice is to be commended for pursuing deception by a large medical device company, but apparently could not bring itself to request a punishment for unethical practices likely to even inconvenience those responsible for the bad behavior.  The previous and current company CEOs have become quite rich without having to stand up for honesty, or patient safety.  The board of directors who are supposed to take responsibility for the overall direction of the company seem to have been happy just to go along.

As I have said before, endlessly, 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.  Relatively small fines imposed on large corporations pain workers on the line and stockholders while sparing the richly paid top hired management and the boards that will not reign them in. 

Real health care reform needs to make health care leaders accountable, and especially accountable for the bad behavior that helped make them rich. 

New Investigations of Boston Scientific, but New CEO Made $33.5 Million for Half a Year's Work

It appears that device-maker Boston Scientific has a new set of troubles.  The Boston Globe just reported:

Stepped-up government scrutiny of Boston Scientific Corp. stems from heightened concern over medical safety and disappointment that the company made new missteps after resolving previous problems with the Food and Drug Administration, analysts said yesterday.

The Natick medical-device maker, which has been working to settle patent suits and federal investigations dating back years, recently was notified of fresh investigations begun by the Department of Justice and the Securities Exchange Commission into problems that forced it to recall implantable heart defibrillators this month.

Boston Scientific said March 15 that it had halted shipments and recalled unsold units of seven brands of cardioverter and cardiac resynchronization therapy defibrillators. The products represented roughly 15 percent of the company’s $8.2 billion in 2009 sales.

On March 15, the company belatedly filed a notice informing the FDA of the production changes.

Larry Biegelsen, a senior analyst for Wells Fargo Securities, estimated Boston Scientific could lose $5 million in revenue every business day until defibrillator sales resume.

The Boston Globe article noted that:

Boston Scientific’s latest woes are reminiscent of an earlier round of friction with the FDA when defibrillator problems came to light after the company bought Guidant. The agency issued a 'warning letter' in 2006, citing multiple manufacturing violations and limiting Boston Scientific’s ability to get new devices approved until it fixed the problems. The restrictions were gradually loosened over the next two years, as the company strengthened its compliance, and the letter was lifted in 2008.

That summary actually soft-pedaled Boston Scientific's previous woes.

We started posting about the company's travails in 2005, starting with allegations that Guidant, which is now a Boston Scientific subsidiary, hid information about defects in the implantable cardiac defibrillators (ICDs) the company manufactured. As we noted in early 2005 here, Guidant executives allegedly knew that ICDs made from 2000-2002 were at risk for short-circuiting and failing, thus making them unable to deliver potentially life saving electrical shocks meant to prevent cardiac arrests, but the company only revealed the problem in 2005. By failing to notify physicians and the public, Guidant executives let expensive and profitable, but potentially useless devices to continue to be implanted, potentially increasing the risk of sudden death for the patients who received them. Then here we noted reports that Guidant continued to ship failure-prone devices even after it had designed and started to manufacture new ICDs that were supposed to be less likely to fail. By June, 2005 we posted that Guidant had recalled thousands of ICDs, including models that were previously not identified as likely to fail. Later that year, the case rated an article by Robert Steinbrook in the New England Journal of Medicine. Towards the end of 2005, we noted that Eliot Spitzer had sued Guidant for fraud.  At the end of the year, more information appeared, suggesting that Guidant knew the ICDs were flawed, but continued to sell them. Still more appeared early in 2006. Then the business media became interested in the bidding war between Johnson and Johnson and Boston Scientific for Guidant, provoking a bit more interest in the tale of the suppression of data about the flawed ICDs.

Then all was quiet until 2009, when Guidant, now a Boston Scientific subsidiary, plead guilty to two criminal misdemeanor charges that it failed to properly notify the FDA about problems with its ICDs (see post here). Later, the Guidant subsidiary of Boston Scientific settled charges that it gave doctors kickbacks as part of a "seeding study" to use its devices. At that time, it came to light that Boston Scientific had made another settlement, in 2007, of civil lawsuits alleging that the company hid problems with its products (see post here).

However, just as the latest questions about Boston Scientific were revealed, the Boston Globe also reported about how the company compensated its new CEO, who started in the middle of 2009:

Boston Scientific Inc. gave its new top executive an unforgettable welcome gift.

The Natick medical device maker said it paid chief executive J. Raymond Elliott, who replaced former CEO James Tobin last summer, $33.5 million in total compensation last year, making him one of region’s highest-paid corporate leaders.

Elliott’s pay package includes a salary of more than $598,000 for six months, a $1.5 million signing bonus, nearly $608,000 in other incentive awards, and $29.4 million in stock awards and options that will vest over the next few years. He also received other benefits, including a $12,500 executive allowance, nearly $198,000 for personal use of the corporate jet, and more than $1 million in relocation expenses.

Tobin, who retired last year after running the medical device company for about a decade, earned $13.7 million last year, roughly six times his pay level in 2007 and 2008.

And by the way, the compensation paid both these men did not exactly correlate with the company's financial, as opposed to ethical performance:

In February, the company agreed to pay $1.7 billion to settle patent infringement charges from rival Johnson & Johnson.

And for years, the company has struggled with anemic sales growth. Last year, the company reported it lost $1 billion, its fourth straight year in the red. Sales rose 2 percent to $8.2 billion.

The company’s stock rose 16 percent in 2009, reflecting the broader stock market recovery. But shares have slipped 20 percent this year.

You just cannot make this stuff up.

How could the company possible justify paying over $30 million for half a year's work by its CEO at a time when the company is facing multiple investigations, has had to settle civil cases and criminal charges, has had to stop production of one of its most important products due to its failure to meet regulatory requirments, and has lost money for four years? 

This illustrates how leaders of big health care organizations are able to make themselves extremely rich at the expense of share-holders, employees, patients, and ultimately society, completely out of proportion to any claims they can make about their or their companies' performance.  This indicates the collective lack of accountability of many health care leaders, and the perverse incentives that now drive health care. 

But is it any wonder that health care costs continue to rise uncontrollably? Once again, I submit that true health care reform needs to make health care leaders accountable, and subject to clear ethical standards, and to eliminate the sorts of perverse incentives that are transforming them (and other corporate CEOs) into a new aristocracy.  Without such measures, we in the US may have near universal health care insurance, but soon no one will be able to afford access to any sort of quality health care. 

Boston Scientific (Again) Settles - This Time, Charges of Kickbacks Disguised as Clinical Studies

One would think that the stories about bad behavior by health care organizations would quiet down just before Christmas, but no...

As reported by the AP:

U.S. attorneys in Boston said Wednesday heart device maker Boston Scientific will pay $22 million to resolve allegations its Guidant division paid kickbacks to doctors to get them to use its heart devices.

The U.S. Department of Justice said Guidant paid physicians $1,000 to $1,500 each in 2003 and 2004 to participate in four studies, called RaCE, RaCE II, RaCE III, and MERITS. It said the studies were designed to increase sales of pacemakers and defibrillators.

Federal officials said the company targeted doctors who favored products made by other companies, hoping the payments would induce them to use Guidant devices more often. They said Guidant submitted claims for payment on the devices to Medicare.

Boston Scientific did not admit wrongdoing as part of the civil settlement. Under the agreement, its cardiac rhythm management division will have to publicly disclose payments to physicians on a Web site. Boston Scientific also entered into a corporate integrity agreement.

So here we have an example of a "seeding study," that is, a marketing effort to persuade physicians to prescribe a product disguised as a clinical research study, but for medical devices, not drugs.  Seeding studies seem to combine multiple kinds of unethical behavior, deceptive marketing and manipulated research.  There had been some question in the past whether seeding studies exist, but this is the second recent example to come to light, suggesting that not only do they exist, but that they are used by device as well as pharmaceutical companies.

Note that, as Bloomberg reports, this is the third major settlement of allegations of bad behavior made by Boston Scientific,

The company agreed last month to pay $296 million to settle a Justice Department probe into Guidant’s handling of heart devices and restated third-quarter results. [See post here.] In 2007, Boston Scientific agreed to pay $240 million to settle more than 8,000 lawsuits claiming Guidant hid defects in defibrillators, which are devices that shock the heart back into regular rhythm.

Cataloging legal settlements seems to be a useful way to assess the sorts of bad behavior manifested by large health care organizations (see some posts here). However, as we have said frequently, such settlements, including the "corporate integrity agreements" now frequently attached to them, seem to have done little to deter bad behavior.  Usually, the companies involved only need to pay fines, and no individual who performed, directed or approved unethical or illegal acts will suffer any negative consequences. I submit once again that such fines are viewed merely as costs of doing business by the affected companies, and do not deter future bad behavior.

I submit that would-be health care reformers who want to improve care, reduce costs and improve access should advocate for real negative consequences for people who implement, direct or approve the various versions of fraud, kickbacks, and miscellaneous corruption and malfeasance we have discussed on Health Care Renewal.

By the way, the board of directors of Boston Scientific includes two noted academics with leadership roles in academic health care.  Marye Anne Fox is the Chancellor of the University of California - San Diego, and hence the leader of a major medical school and academic medical center.  The university's mission statement, alongside which sits her picture, proclaims it "strives to maintain a climate of fairness, cooperation, and professionalism." Uwe Reinhardt, Professor at Princeton, is a noted health care economist, and blogger on the Economix blog for the New York Times.  Perhaps such august academic personages could tell  us how they are assuring that the company they are paid well to oversee upholds, rather than undermines professionalism and fairness.

Boston Scientific to Plead Guilty (of Suppressing Information about Failure-Prone Defibrillators)

In the early days of Health Care Renewal (2005-2006) we posted several times about allegations that Guidant hid information about defects in the implantable cardiac defibrillators (ICDs) the company manufactured.  As we noted in early 2005 here, Guidant executives allegedly knew that ICDs made from 2000-2002 were at risk for short-circuiting and failing, thus making them unable to deliver potentially life saving electrical shocks meant to prevent cardiac arrests, but the company only revealed the problem in 2005.  By failing to notify physicians and the public, Guidant executives let expensive and profitable, but potentially useless devices to continue to be implanted, potentially increasing the risk of sudden death for the patients who received them.  Then here we noted reports that Guidant continued to ship failure-prone devices even after it had designed and started to manufacture new ICDs that were supposed to be less likely to fail.  By June, 2005 we posted that Guidant had recalled thousands of ICDs, including models that were previously not identified as likely to fail.  Later that year, the case rated an article by Robert Steinbrook in the New England Journal of Medicine.  Towards the end of 2005, we noted that Eliot Spitzer had sued Guidant for fraud.  At the end of the year, more information appeared, suggesting that Guidant knew the ICDs were flawed, but continued to sell them.  Still more appeared early in 2006.  Then the business media became interested in the bidding war between Johnson and Johnson and Boston Scientific for Guidant, provoking a bit more interest in the tale of the suppression of data about the flawed ICDs.

And then there was silence.  The story of the suppressed information about the defective defibrillators became old news, as did the story of the merger between Boston Scientific and Guidant.  The story vanished, nothing more happened, until last week

A lone echo from this story from what now seems long ago was heard, as reported by Bloomberg,

Boston Scientific Corp. agreed to pay $296 million to settle a U.S. Justice Department investigation into its Guidant unit’s handling of heart devices and restated third-quarter results to show a loss.

Guidant will plead to two criminal misdemeanors for failing to properly alert the U.S. Food and Drug Administration about problems with some of its implantable defibrillators, Boston Scientific said today in a statement. The probe concerned product advisories sent by Guidant before its acquisition by Boston Scientific in April 2006, the parent company said.

So even though Boston Scientific's now subsidiary Guidant will plead guilty to a crime involving suppression of information about the flaws in its defibrillators, the current CEO of Boston Scientific denied anyone did anything wrong:

'Guidant and its employees acted in good faith and believed they complied with applicable laws and regulations,' Boston Scientific Chief Executive Officer Ray Elliott said in the company’s statement. 'We elected to resolve this matter so we could put it behind us and devote our full energies and resources to developing our innovative technologies.'

I guess it's not hard to put a little matter of criminal conduct behind a big health care corporation and its leaders when the only downside of pleading guilty is a fine paid seven years after the criminal conduct occurred.  Moreover, that fine that will come out of the company treasury, and its impact will thus be spread among stock-holders, employees, and customers, not targeted at those who performed, directed or approved the acts that lead to the guilty plea.

Although the Bloomberg report was more detailed than others I found, none mentioned that the information that was concealed back in the day was about the failure of an expensive device that was supposed to be life-saving, and whose failure might doom some of its recipients to an early death.  Anyone reading these late 2009 articles would get a sense that Guidant personnel were guilty of some technical reporting violations, not of withholding information that supposed life-saving treatments might be useless.

As in the case of many other cases that resulted in legal settlements or guilty pleas, the company involved only needs to pay a fine, and no individual who performed, directed or approved unethical or illegal acts will suffer any negative consequences.  I submit once again that such fines are viewed merely as costs of doing business by the affected companies, and do not deter future bad behavior.

In this vein, note that in 2005, Boston Scientific agreed to a $74 million settlement of charges that it knowingly sold a defective coronary artery stent system (see post here), which did not deter the company from merging with Guidant. 

This case also demonstrates how the anechoic effect continues.  Bad behavior by large health care organizations still gets little notice, and when it is noticed, its real clinical and human effects are discounted. 

Real health care reform would address how leaders of health care organizations can continue to act with impunity even when their actions can lead to sickness, disability, and death. 

Meet the New Boss, Same as the Old Boss? - Health Care Reform to be Lead by a Director of Boston Scientific, Cerner, and Medco

Today we learned that President Obama has announced his new picks for Secretary of Health and Human Services and for Director of the White House Office for Health Reform. The choice of Nancy-Ann DeParle for the latter position raises some issues. The NY Times provides some background:

He also named Nancy-Ann DeParle to coordinate health policy for the administration. Her position, counselor to the president and director of the White House Office for Health Reform, is not subject to Senate confirmation.

Ms. DeParle was commissioner of the Tennessee Department of Human Services from 1987 to 1989. Under President Bill Clinton, from 1997 to 2000, she was administrator of the Health Care Financing Administration, now known as the Centers for Medicare and Medicaid Services.

Since then, she has gained extensive experience in the business world. That experience, though seen as an asset by many, prompted questions from some of the people vetting personnel for Mr. Obama, supporters of Ms. DeParle said.

Ms. DeParle has been a director of large health care companies including Medco Health Solutions, a pharmacy benefit manager; Cerner, a supplier of health information technology, including electronic medical records; Boston Scientific, a medical device company; DaVita, which runs kidney dialysis centers; and Triad Hospitals.

In addition, according to the Washington Post,

DeParle, 52, was previously commissioner of the Department of Human Services in Tennessee. During the Clinton administration, she worked in the Office of Management and Budget and later oversaw Medicare and Medicaid as the administrator of the Health Care Financing Administration.

DeParle currently is managing director of CCMP Capital, a private equity firm. She also serves on the boards of several firms related to health care. A White House spokesman said she is in the process of resigning all those positions.

Administration spokespeople apparently brushed aside any questions about Ms DeParle's conflicts of interest. A separate article in the NY Times noted:

In picking Nancy-Ann DeParle to champion an overhaul of the nation’s health system, President Obama selected someone with deep roots in the Washington bureaucracy, an intimate familiarity with health policy and respect on both sides of the political aisle — not to mention degrees from Harvard Law School and Oxford University.

But in putting Ms. DeParle in charge of an issue that has bedeviled presidents for decades, Mr. Obama also chose to overlook Ms. DeParle’s business ties to companies that have a direct stake in the health care debate.

In announcing her appointment Monday as the director of the White House Office of Health Reform, Mr. Obama expressed 'absolute confidence' in Ms. DeParle, who ran the agency that oversaw Medicare and Medicaid during the Clinton administration. But the White House instantly faced questions about whether her appointment was skirting the spirit, if not the letter, of the president’s tough conflict-of-interest policy.

Since leaving the Clinton administration, Ms. DeParle has been managing director of a private equity firm, CCMP Capital, and a board member of companies like Boston Scientific, Cerner and Medco Health Solutions. White House officials said Ms. DeParle was severing ties with those companies and would recuse herself from participating in any matter that was 'directly or substantially' related to former clients or employers.

'It is our view, and the view of counsel here, that the incidence of that will be very low,' an administration official said of the need for Ms. DeParle to recuse herself from decisions. The official, who was not authorized to speak publicly, said Ms. DeParle would be working mostly with federal agencies and lawmakers, and not directly with companies.

MedInformaticsMD just posted about his concerns specifically vis a vis Ms DeParle's current position as a leader of Cerner.

My main concern here is that Ms DeParle's ties to multiple health care corporations are so strong as to jeopardize her ability to be the new leader of health care reform for the whole country.

To review, Ms DeParle is currently a member of the boards of three health care corporations, Boston Scientific, Cerner, and Medco. As we have discussed many times previously, a corporate director has a legal obligation to advance the profits and financial fortunes of the corporation he or she serves. As Robert AG Monks put it, corporate directors are supposed to "demonstrate unyielding loyalty to the company's shareholders" [Per Monks RAG, Minow N. Corporate Governance, 3rd edition. Malden, MA: Blackwell Publishing, 2004. P.200.] As compensation for that loyalty, corporate directors are usually exceedingly well-paid for the nominal hours they spend in their meetings.

In particular, per the company's 2008 proxy statement, in 2007, Ms DeParle received $160,338 in total compensation from Boston Scientific, and held 62,020 of its shares. Further, per the Cerner 2008 proxy statement, in 2007 she received $195,051 from that company, and held 27,000 of its shares. Ms DeParle was just elected to the Medco board in 2008, so her compensation and stock holdings were not listed in that year's proxy statement, but presumably her total compensation would mirror what other directors received in 2007: a retainer of $50,000, and an annual grant of shares and options worth $175,000 at the time it would be granted.

Given her previous obligation of "unyielding loyalty"to and generous compensation from major health care corporations, it might be hard to suddenly be indifferent to their interests.

Of course, a White House spokesperson pledged that Ms DeParle would "recuse herself from any matter that was 'directly or substantially' related to former clients or employers." The problem is that most of the issues that might come up in discussions of health care reform might be directly and substantially related to the interests of the companies Ms DeParle now leads. For example, one obvious way to control costs in a reformed health care system would be to reduce the current reimbursement system's bias in favor of procedures over cognition. Boston Scientific makes much of its money selling devices that are used during such procedures. Any general shifting of reimbursement more in favor of cognition rather than procedures could reduce Boston Scientific's profits, profits which Ms DeParle is currently sworn to protect. So would Ms DeParle recuse herself from all discussions of reimbursement?

I submit that if Ms DeParle recused herself from discussion of all issues that might affect the interests of Boston Scientific, Cerner, and Medco, let alone the private corporations she directs whose interests might be less easy to define, and let alone the corporations which she used to direct, she would have very little to do in her new position.

On the other hand, were Ms DeParle to be an active Director of the White House Office of Health Care Reform, would the reform be in the interests of all the US people, or in the interests from the large and powerful corporations whose interests she was so recently pledged to protect? Does this new appointment truly reflect President Obama's statement that he did not come to Washington "to work for the powerful and well-connected interests who have run this city for too long?"

What, The RUC? - A Prominent Health Care Policy Blog Leaves Some Important Things Out

A new US President, health care costs that continue to rise despite declining access and questionable quality, even during an unprecedented global economic crisis all have made health care reform a hot topic once again in the US. This has even lead to discussion of some topics that formerly rarely merited polite discussion, sort of.

Last week, writing in the New York Times Economix blog, Professor Uwe Reinhardt, a noted health care economist at Princeton University, took on the topic of payments to physicians. His main point was:

America’s health care spending issues might have something to do with our fee-for-service payment system.

Studies have shown that physicians are not impervious to the financial incentives inherent in fee-for-service payments. For example, on average, physicians who have a direct financial interest in the use of imaging services, like CAT scans or M.R.I. scans, recommend far more such services for their patients than do physicians without such financial interest....

He noted some possible solutions:

In recognition of the conflict of interest inherent in fee-for-service payment, there is now a worldwide movement to replace the system with so-called 'evidence-based case reimbursement'. Under this approach, one single payment would cover all of the supplies and services that are needed, under best, evidence-based clinical practices, to respond adequately to well-defined medical conditions.

Not all health care, of course, can be categorized into neat, episodic bundles for this purpose. For chronic conditions, for example, payment may shift from fee-for-service to annual or monthly fees per patient, and care for such patients might be organized by clinically integrated health systems or by managed care companies procuring health care from different systems on an integrated basis. And for some patients with very complicated conditions, fee-for-service would still persist. One would think, however, that a move toward these alternative payment systems would not only reduce the geographic variations in per-capita health spending, but help control the annual growth of health spending over all.

What is missing from this picture?

Positive Incentives for Procedures, Negative Incentives for "Cognitive" Services, Especially Primary Care

First, Reinhardt suggested that the major problem with the current way the US pays for physicians is that it gives excess incentives for physicians to order diagnostic tests provided by facilities in which they have financial interests. This is, in my humble opinion, a real problem. But it is hardly the biggest problem with our current system of physician payments.

I submit that the biggest problem with our current system is that it provides big and increasing incentives to do procedures. This may lead to the over-use of some procedures in some instances. Moreover, it promotes high prices for the devices, drugs and support services required by the physicians to do these services. Thus, the current system pays many people well, and makes some people very rich. However, its enormous costs come out of other peoples' wallets, decreasing access and quality. Furthermore, the current system has provided disincentives to provide "cognitive care," especially primary care. Payments to physicians who do primary care do not cover all that they do on behalf of patients. Payments have not even kept up with inflation, nor with the increasing overhead costs of providing primary care, most of which are produced by the demands of government and insurance company bureaucracies. Thus, primary care in the US is dying. It is increasingly difficult for patients to find physicians who will take care them as whole patients, not as a set of different organs.

The Shadowy RUC

These biased incentives that lead to so much mischief are not the product of divine intervention or the laws of physics. They are the result of the actions of people, a few people operating in the shadows.

As we have discussed, the US Medicare system determines what it pays physicians using the Resource Based Relative Value System (RBRVS). This system determines the pay for every kind of medical encounter according to a complex formula that is supposed to account for physicians' time and effort, physicians' practice expense, and the cost of malpractice insurance. The components of physicians' effort assessed are, in turn, technical skill and physical effort; the required mental effort and judgment; and stress due to the potential risk to the patient.

To keep the system, which was started in 1990, current, requires addition of new kinds of encounters, which means encounters involving new kinds of procedures, and updating of the estimates of various components, including physicians' time and effort. To do so, the Center for Medicare and Medicaid Services (CMS) relies almost exclusively on the advice of the RBRVS Update Committee (RUC). The RUC is a private committee of the AMA, touted as an "expert panel" that takes advantage of the organization's First Amendment rights to petition the government. Membership on the RUC is allotted to represent specialty societies, so that the vast majority of the members represent specialties that do procedures and focus on expensive, high-technology tests and treatments. However, the identities of RUC members are secret, as are the proceedings of the group.

This opaque and unaccountable process has resulted in increases outstripping inflation in fees paid for procedures, while fees paid for "cognitive"medicine, i.e., for primary care, and for services that involve diagnosis, management of acute and chronic disease, counseling, coordination of care, etc, but not procedures, have lagged inflation. The effects of the RUC have been amplified by the unexplained tendency of commercial managed care and health insurance to track the RBRVS system when making their own payments to physicians.For further details about the RUC, see these posts on Health Care Renewal (here, here, here, here, and here) and important articles by Bodenheimer et al,(1) and Goodson.(2)

By the way, why the US Center for Medicare and Medicaid Services (CMS) relies de facto exclusively on the RUC to control the RBRVS system, and why the AMA made the RUC into a secret organization apparently beholden only to the organization's proceduralist members are unanswered questions.

What Reinhardt Left Out, and Why?

Professor Reinhardt, one of our most distinguished health care economists, barely touched on the biggest problems with how the US fee-for-service payment system works, and why these problems occurred. Thus, it is not surprising that the few solutions he recommended seem irrelevant to these problems.

As an aside, his discussion is not atypical of what is seen in most writings about health care policy that have to do with costs. It appears that it is politically incorrect to say that incentives are skewed, that this skewing appears to have resulted from the acts of a few individuals, and that these acts occurred with little outside attention or accountability. Why do health care policy experts follow these dictates of political correctness?

I don't know, but one possible explanation is that they are themselves biased by their own incentives. So let us further consider the case of Professor Reinhardt.

Professor Reinhardt's Conflicts of Interest

Not listed in the NY Times official bio of Professor Reinhardt are the following relationships:

- Professor Reinhardt is a member of the board of directors of Amerigroup, a health insurance company specializing in providing Medicaid and Medicare managed care. The company's 2008 proxy statement said that Professor Reinhardt owns the equivalent of 134,482 shares of stock, current value, $3,859,633 (at its current price, $28.70 per Google Financial), and got $221,422 total compensation in 2007.

- Professor Reinhardt is a member of the board of directors of Boston Scientific, a medical device company. The company's 2008 proxy statement said that Professor Reinhardt owns the equivalent of 51, 533 shares of stock, current value, $396,288 (at its current price, $7.69 per Google Financial) and got $118,885 total compensation in 2007.

In addition, per the above proxy statements, Professor Reinhardt is on the board of two funds from H&Q Healthcare Investors, and is a Trustee of Duke University and the Duke University Health System.

Boston Scientific, a device manufacturer, benefits from increased demand for its products due to physicians' pay incentives that favor the procedures for which they are used. As a director of the company, Professor Reinhardt has a duty to advance the financial interests of the company and its shareholders. Amerigroup may benefit from the current status quo in how physicians are paid. As a director the company, again Professor Reinhardt has a duty to advance the financial interests of the company and its shareholders. Thus, it seems that Professor Reinhardt's legal responsibilities to these companies might tend to bias him against actively questioning how physicians are currently paid, or proposing solutions that might upset the status quo.

Professor Reinhardt's leadership roles in US publicly traded corporations are public, but not easily found unless one knows where to look. (A previous post on Health Care Renewal did discuss Professor Reinhardt's previous failure to review relationships relevant at the time to a riposte Reinhardt wrote in response to an op-ed in the New York Times by a physician who decried the increasing commercialization of health care.)

However, the New York Times did not choose to make public these conflicts of interest. I should note that biographies of Professor Reinhardt on the Princeton web-site, and furnished by the Princeton Bioethics Forum, the Commonwealth Fund, and the Henry J Kaiser Foundation did not note these relationships. A transcript of an interview on the Public Broadcasting System Frontline show also did not reveal these relationships.

Without the knowledge of these financial relationships, one might suppose Professor Reinhardt's opinions are only based on his disinterested expertise as a well-known economic scholar. Without knowledge of these financial relationships, one might think that a secretive, opaque process skewing physicians' payments toward procedures is not an important problem for our health care system.

We have come to a critical time in the history of attempts to reform the US health care system. Whether reform occurs, and whether it does any good will depend on the quality of the debate that precedes it. Such a debate should be robust, but those involved ought to make clear where their biases and interests may lie.

Unfortunately, it may be that some of the most prominent voices in the debate are those of people with strong personal financial interests in having health care reform go in certain directions, not others. Furthermore, people with particular interests may not want certain issues to be even brought up. If these interests are not revealed, the debate becomes deceptive.

I fear that much of the debate up to now has been deceptive, and will not lead to good outcomes.

References

1. Bodenheimer T, Berenson RA, Rudolf P. The primary care-specialty income gap: why it matters. Ann Intern Med 2007; 146: 301-306. Link here.
2. Goodson JD. Unintended consequences of Resource-Based Relative Value Scale reimbursement. JAMA 2007; 298(19):2308-2310. Link here.