Negotiating with Crooks

The pharmaceutical industry is indignant that the Biden Administration is actually moving ahead with plans to implement the provision of the Inflation Reduction Act that allows Medicare to negotiate drug prices. Responding to an announcement of the first ten medications that will be targeted, the trade association PhRMA complained about a “rushed process,” even though the law was passed a year ago and the negotiated prices will not become effective until 2026.

The industry is not just complaining—it is fighting the law in court and doing everything possible to retain its longstanding power to set prices at astronomical levels. The price-gouging is just part of the problem. Drugmakers also have an abysmal compliance record in their dealings with government healthcare programs.

Take the eleven companies which produce the medications included in the first round of negotiations: AbbVie, Amgen, AstraZeneca, Boehringer Ingelheim, Bristol-Myers Squibb, Eli Lilly, Johnson & Johnson, Merck, Novartis, Novo Nordisk and Pfizer.

Over the past two decades, these companies and their subsidiaries have been penalized in more than 100 cases brought under the False Claims Act (FCA) or related laws relating to government contracting. As shown in Violation Tracker, they have paid a total of more than $5 billion in fines and settlements for overcharging federal agencies and others forms of fraud.

Six of the companies—AbbVie, AstraZeneca, Johnson & Johnson, Merck, Novartis and Pfizer–have each been involved in ten or more FCA cases, paying out enormous sums in penalties.

Pfizer, for example, has paid $1.15 billion in fines and settlements linked to 16 different FCA cases. The biggest of these was a $784 million payment by Pfizer and its subsidiary Wyeth to resolve allegations that Wyeth knowingly reported to the government false and fraudulent prices on two of its proton pump inhibitor drugs.

Novartis has paid $926 million to resolve a dozen different FCA cases. Among these is a $642 million settlement of allegations that included the payment of illegal kickbacks to doctors to get them to prescribe its products.

Merck has also been involved in a dozen FCA cases, paying total penalties of $796 million. The bulk of the total came from a $650 million settlement of allegations that included both illegal kickbacks and failure to offer Medicaid the same rebates it was offering hospital systems.

Johnson & Johnson’s $556 million FCA penalty total comes from four kickback cases as well as several involving the submission of inflated wholesale prices used in setting the rates for Medicaid reimbursements.

Among AstraZeneca’s FCA cases is a $354 million settlement of civil and criminal charges that the company provided large quantities of free samples of a prostate cancer drug to urologists, knowing that many of them were giving the medication to patients as free samples and then billing Medicare and Medicaid.

Seventeen of the 21 FCA cases involving AbbVie and its subsidiaries concerned allegations of falsified drug price reporting to federal and state agencies.

What all this shows is that when federal negotiators sit down at the bargaining table, they will be facing a group of companies that for years have not only been charging high prices but have allegedly also used a variety of illegal means to extract even more revenue from taxpayer-financed healthcare programs.

Rather than expressing indignation, Big Pharma should be displaying penitence for its fleecing of the public for so long.

Targeting the Price Fixers

The Justice Department and the Federal Trade Commission have been promoting the adoption of new guidelines that would give them a greater ability to block anti-competitive mergers. Now DOJ may also be taking a tougher stance with regard to the other main branch of antitrust enforcement: prosecuting price-fixing conspiracies that harm consumers.

DOJ’s Antitrust Division has just announced the resolution of a case brought against generic drug giant Teva Pharmaceuticals and a smaller Indian producer called Glenmark Pharmaceuticals for conspiring to fix the price of pravastatin, a cholesterol medication. Teva was also charged with anti-competitive behavior with regard to two other drugs. Teva was compelled to pay a criminal penalty of $225 million and to donate drugs worth $50 million to humanitarian organizations. Glenmark was penalized $30 million.

Along with the fines, which in Teva’s case is well above the norm in DOJ Antitrust Division actions, the agency imposed a novel penalty: requiring the two companies to divest their pravastatin business line. And although the criminal charges were softened by allowing Teva and Glenmark to enter into deferred prosecution agreements, the DOJ included a blunt warning that “both companies will face prosecution if they violate the terms of the agreements, and if convicted, would likely face mandatory debarment from federal health care programs.”

Forcing a company to leave a business in which it has engaged in misconduct can be a more effective punishment than monetary penalties, which large corporations can usually absorb with little difficulty. This is an especially appropriate approach in prosecuting companies that have shown themselves to be repeat offenders.

Among the more than 240 companies shown in Violation Tracker to have faced criminal charges brought by the Antitrust Division since 2000, there are about half a dozen which have been penalized more than once. One of those is the Swiss bank UBS, which in 2011 paid $160 million to resolve allegations of engaging in anti-competitive practices in the municipal bond market but was offered a non-prosecution agreement. The following year, UBS was accused of manipulating the LIBOR interest rate benchmark and paid penalties totaling $500 million. While a subsidiary had to plead guilty, the parent company was offered another non-prosecution agreement.

Antitrust enforcers should leave the use of financial penalties to private litigation. As I showed in a report called Conspiring Against Competition published earlier this year, class action lawsuits brought by the victims of price fixing have yielded $55 billion since 2000, more than twice as much as the penalties collected by federal regulators.

Among the most frequently sued companies were Teva and its subsidiaries, which paid out a total of $1.4 billion in 19 different class actions. Most of these involved an indirect form of price fixing in which companies collude to delay the introduction of lower-cost generic alternatives to expensive brand-name drugs.

Government regulators should use their power not just to put a dent in an egregious price-fixer’s bottom line but to force the company out of a market in which it failed to follow the rules.  

Is ESG Worth Defending?

The varied environmental, social and governance efforts that go under the name ESG are facing increasing attacks from the Right. Attorneys general in red states have sought to prevent public pension funds from doing business with investment managers promoting sustainability. Public officials such as Florida Gov. Ron DeSantis bash what they call woke corporations to score cheap political points. Groups that successfully dismantled affirmative action in higher education are now targeting diversity programs in the business world.

In the face of this opposition, some large corporations are backing away from ESG-type initiatives or at least are keeping quieter about them. References to ESG are reported to be disappearing from the earnings calls companies have with analysts and investors. Some companies are exiting from alliances created to accelerate the movement toward net-zero greenhouse gas emissions.

The ease with which conservative ideologues have brought about this retreat is a sign of the shortcomings of ESG. Although companies have presented these as high-minded initiatives, they are often little more than public relations ploys.

Much of ESG originated in greenwashing—the attempt by large companies facing pressure over their environmental impact to give the impression they were changing their ways. Eventually, some large companies went from placating critics to presenting themselves as the vanguard in bringing about change. For example, in the 2000s oil giant Chevron launched an advertising campaign with the tagline Will You Join Us urging the public to emulate its supposed green behavior.

Companies followed the same pattern on other issues, depicting themselves as proponents of reform after being pressured by progressive shareholder activist groups such as the Interfaith Center on Corporate Responsibility and As You Sow.

Along with being an attempt to undercut activism, ESG amounted to an effort to weaken government regulation. Proponents did this by promoting voluntary initiatives in lieu of legal mandates. Companies could decide which environmental and social goals to pursue and how to do so. They could also decide how to measure success.

Although there were later efforts to standardize practices and metrics, ESG remained largely under the control of corporations seeking to use it to paint themselves in the best possible light.

Seeing ESG under attack presents a dilemma for those of us who have long pressured corporations to change their behavior. We have no sympathy for those rightwing ideologues who are targeting ESG as part of an agenda that includes preservation of the fossil fuel industry and reversing progress in racial equity. Yet it is difficult to rush to the defense of what was often little more than corporate p.r.

The challenge is to separate the valid issues ESG purports to promote—sustainability, racial justice, fair labor practices, consumer protection, etc.—from the self-interested companies and investment managers pursuing their own agenda.

One way to start is to replace the term ESG with corporate accountability. This reinforces the idea that big business is the problem, not the solution with regard to many of the challenges facing the world today.

Another step is to change the way we assess corporate behavior. Evaluations of companies should be based on independently verifiable data rather than self-reporting and on compliance with government regulation rather than voluntary initiatives. When judged by these metrics, as the data in Violation Tracker make clear, most large corporations can hardly be considered paragons of social responsibility. Some are close to being criminal enterprises.

But most important is to remember that those working from outside the executive suite—environmental groups, labor unions, public interest advocates, corporate accountability activists—are the real agents of change in the business world.

Whether or not ESG survives the rightwing assault, the movement to bring about true corporate accountability will continue.

The Donald Trumps of the Corporate World

There is a word, recidivists, for those who repeatedly commit crimes. But there is no term, as far as I know, for those who commit the greatest variety of offenses.

If we are talking about public figures, the term should probably be Trumpist—given that the former president has racked up an unprecedented assortment of legal entanglements that continue to grow. But what about corporations? Which companies have engaged in the widest range of misconduct?

To answer this question, I drilled down into the data collected in Violation Tracker. The database tags each of its more than 500,000 entries with one of eight broad offense groups: competition-related offenses; consumer-protection-related offenses; employment-related offenses; environment-related offenses; financial offenses; government-contracting-related offenses; healthcare-related offenses; and safety-related offenses. These, in turn, are divided into a total of nearly 100 more specific offense types.

I set out to discover whether any of the more than 3,000 parent companies for which we aggregate data are linked to cases in every one of the eight offense groups. It turns out that 13 parents meet that criterion, but if we look only at those with substantial penalties—over $1 million—in each category, the list narrows down to five corporations. These include one freight giant (United Parcel Service), two major pharmacy chains (CVS Health and Walgreens Boots Alliance) and two large drugmakers (Bristol-Myers Squibb and Merck).

Among the wide-ranging rap sheets of these five companies, the one that stands out is that linked to Merck. It has the largest cumulative penalty total dating back to 2000: more than $10 billion. That includes ten-figure totals in three offense groups: financial, healthcare-related and safety-related.

Merck has achieved its position as the Donald Trump of the business world as a result of 86 entries in Violation Tracker. Chief among its safety-related cases is the $4.9 billion it paid to settle multi-district litigation brought by thousands of plaintiffs claiming the company’s heavily promoted anti-inflammatory drug Vioxx caused injury or death. The Vioxx scandal was also at the center of the company’s biggest penalty in the healthcare-related category, a $950 million settlement of civil and criminal charges brought by the U.S. Justice Department, as well as several consumer protection cases.

As for financial offenses, Merck had to pay over $2 billion to settle tax issues brought by the Internal Revenue Service. Merck’s government-contracting-related cases include a $650 million False Claims Act case involving improper kickbacks to healthcare providers to get them to prescribe its medications.

Merck’s competition-related penalties include a $60 million settlement by its subsidiary Schering-Plough of allegations it improperly blocked the introduction of a lower-cost alternative to one of its products. In the environmental area, Merck has paid over $33 million in penalties in nearly three dozen federal and state enforcement actions.

Finally, Merck’s record of employment-related offenses includes eleven cases dealing with retirement plan administration, gender discrimination and violation of the Family and Medical Leave Act.

One thing that can be said in Merck’s defense is that few of its penalties are from the past few years, indicating that it may be trying to improve its compliance. It’s a different story with CVS and Walgreens. Since the beginning of 2020, Walgreens has paid penalties more than two dozen times, while CVS has done so in 69 cases. Both are involved in pending multistate lawsuits relating to their role in the opioid crisis, so their penalty totals are likely to go on growing.

Companies that have paid multiple penalties in multiple categories exemplify misconduct that is not compartmentalized but instead can be found throughout a firm’s operations. Regulators and prosecutors need to do more to get these corporations to clean up their act across the board.