By Roy Poses, MD, Clinical Associate Professor of Medicine at Brown University, and the President of FIRM – the Foundation for Integrity and Responsibility in Medicine. Cross posted from the Health Care Renewal website

The resolution of two related cases involving drug/ biotechnology/ device giant Johnson and Johnson opened a small window on the perverse incentives driving bad managerial behavior in health care.

The Settlement of the Allegedly Illegal Marketing of the Stratus Device

The basics of the case, which looks like a typical marcher in the march of legal settlements, were best explained by Ed Silverman in Stat on July 22, 2016,

A Johnson & Johnson subsidiary has agreed to pay $18 million to resolve charges of causing health care providers to submit false claims to Medicare and other federal health care programs, which then paid for a device that was illegally marketed.

In particular,

In 2006, Acclarent won FDA approval to market its Stratus device to be used only with saline to maintain sinus openings following surgery. But the feds alleged the company intended to market Stratus as a drug-delivery device for prescription corticosteroids and maintained the device was specifically designed and engineered for this use, according to court documents.

Note that as is usual, the settlement involved a monetary penalty that would not even be spare change to Johnson and Johnson, which last year had total revenues of more than $70 billion according to Google Finance. As is additionally usual, the settlement did not seem to be informed by Johnson and Johnson’s huge record of previous settlements and other legal actions suggesting its misbehavior (see a list of these in the appendix below.) As is also usual, the settlement involved no admissions of guilty or innocence by Johnson and Johnson itself, but as is further usual, a company public relations person said it was a long time ago, we have changed, and we will just move on. As the Wall Street Journal reported,

A spokeswoman for Johnson & Johnson said the company has since put in place tighter compliance controls. She noted the agreement, which didn’t include an admission of liability or wrongdoing, resolves alleged conduct that took place almost entirely before Johnson & Johnson acquired Acclarent.

Two Johnson and Johnson Executives Convicted of Distributing Misbranded and Adulterated Devices

But one part of this case was unusual. Not only did US government authorities pursue a settlement with Johnson and Johnson, they prosecuted two executives who were involved in setting up the bad behavior alleged in the settlement. Per Mr Silverman in Stat,

The settlement with the US Department of Justice, which was disclosed on Friday, comes just two days after a pair of former executives at the J&J subsidiary, which is known as Acclarent, were found guilty of several misdemeanor charges of distributing a misbranded and adulterated device. A federal court jury in Boston found the executives marketed the Stratus device for a use that was not approved by the US Food and Drug Administration.

So while the Johnson and Johnson spokesperson denied that the company was guilty of anything, it appears that two people who eventually became Johnson and Johnson executives were found guilty of having a company that Johnson and Johnson acquired distribute a misbranded and adulterated device. At best, the spokesperson seemed to be asserting a distinction in the absence of a meaningful difference.

Especially, since the allegations that led to the convictions of the executives included actions that occurred after their company was acquired by Johnson and Johnson, per the Stat article,

Between 2008 and 2011, the men allegedly concealed a scheme to illegally distribute and promote a device they planned to market for delivering steroids to sinuses. The feds charged, however, they deceived the FDA by falsely claiming the intended use was to maintain an opening to the sinus, and that the device was supposed to be used with saline. Acclarent, where Facteau was the chief executive and Fabian was the vice president of sales, was eventually sold to Johnson & Johnson in January 2010 for $785 million. Following the acquisition, Acclarent management was told to stop marketing the device for unapproved uses, but they continued to do so anyway, court documents stated.

So why would Mr Facteau and Fabian do this? An article in Reuters implies an answer:

Prosecutors said Facteau and Fabian had hoped to increase the company’s revenue to make it an attractive acquisition target, and concealed the off-label marketing from potential buyers, including J&J unit Ethicon Inc. Ethicon bought California-based Acclarent in early 2010 for about $785 million. Facteau and Fabian received compensation worth about $30 million and $4 million, respectively, from the deal, according to the indictment.

So the former Acclarent executives, later Johnson and Johnson subsidiary, made what seems to be a lot of money from directing their company to distribute a misbranded and adulterated product. In fact, they made considerably more money than Johnson and Johnson paid to settle the case. Conclusions So this case appears to be a step forward, in that not all the people who apparently authorized, directed, or implemented the bad behavior could escape any negative consequences. Keep in mind, however, that no one above the two convicted executives, no one at Johnson and Johnson who decided to acquire Acclarent, and let it continue its previous activities, seemed to suffer any negative consequences. How much money those executives might have received in response to the revenues that the new subsidiary brought in is unknown. In conclusion, this case shows the perverse incentives at work that drive bad behavior by health care oragnizational leaders. One can obviously become very rich by directing this bad behavior. Up to now, the likelihood that one would eventually pay any penalty for doing so was tiny. Now it is slightly higher. Whether those up the ladder, who might have authorized the behavior, turned a blind eye to it, or avoided enquiring about anything that could be bad behavior, as long as the money came in, will suffer any negative consequences from these actions or inactions in the future is still unclear. We will not make any progress reducing current health care dysfunction if we cannot have an honest conversation about what causes it and who profits from it. True health care reform requires ending the anechoic effect, exposing the web of conflicts of interest that entangle health care, publicizing who benefits most from the current dysfunction, and how and why. But it is painfully obvious that the people who have gotten so rich from the current status quo will use every tool at their disposal, paying for them with the money they have extracted from patients and taxpayers, to defend their position. It will take grit, persistence, and courage to persevere in the cause of better health for patients and the public.

Appendix – Johnson and Johnson Legal Record since 2010