How Executives Can Personally Profit from Bad Corporate Behavior in Health Care

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.


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

– Convictions in two different states for misleading marketing of Risperdal
– A guilty plea for misbranding Topamax
– Guilty pleas to bribery in Europe  by Johnson and Johnson’s DePuy subsidiary
– A guilty plea for marketing Risperdal for unapproved uses  (see this link for all of the above)
– A guilty plea to misbranding Natrecor by J+J subsidiary Scios (see post here)
 – Testimony in a trial of allegations of unethical marketing of the drug Risperdal (risperidone) by the Janssen subsidiary revealed a systemic, deceptive stealth marketing campaign that fostered suppression of research whose results were unfavorable to the company, ghostwriting, the use of key opinion leaders as marketers in the guise of academics and professionals, and intimidation of whistleblowers. After these revelations, the company abruptly settled the case (see post here).
–  Johnson & Johnson was fined $1.1 billion by a judge in Arkansas for deceiving patients and physicians again about Risperdal (look here).
–  Johnson & Johnson announced it would pay $181 million to resolve claims of deceptive advertising again about Risperdal (see this post).
–  Johnson & Johnson settled case by shareholders alleging that management made misleading statements and withheld material information about manufacturing problems (see this post)
–  Johnson & Johnson Janssen subsidiary pleaded guilty to a charge of misbranding Risperdal, and settled for a total of $2.2 billion allegations that it promoted the drug for elderly demented patients and adolescents without an indication, and despite evidence of its harms (see this post).
–  Johnson & Johnson DePuy subsidiary agreed to settle with multiple plaintiffs for $2.5 billion allegations that it sold defective mental-on-metal artificial hip, and hid evidence of its harms .
– Johnson & Johnsonn Janssen subsidiary was found by two juries to have concealed harms of its drug Topamax (see this post for this and above case).
– Johnson & Johnson Ethicon subsidiary’s Advanced Surgical Products and two of its executives agreed to settle charges by US FDA that is sold mislabeled products used to sterilize equipment such as endoscopes (see this post).
– Johnson & Johnson fined by European Commission for anticompetitive practices, that is, collusion with Novartis to delay marketing generic version of Fentanyl (see this post).
– Johnson & Johnson DePuy subsidiary settled Oregan state charges that it marketed the ASR XL metal-on-metal hip joint prosthesis without disclosing its high failure rate (see this post).
–  Johnson & Johnson found by jury to have concealed harms of Risperdal.
–  Johnson & Johnson Ethicon subsidiary found by jury to have concealed harms of its vaginal mesh device.
–  Johnson & Johnson McNeil subsidiary pleaded guilty to marketing adulterated Tylenol. (see this post for three items above.)

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  1. Kris Alman

    It is no longer shocking to see this video of the fake unity at the DNC yesterday. (

    It’s here’s why the TPP will pass and drug prices won’t come down (a recent NC article):

    Global Trade Meets Ugly Reality
    Something funny happened when I didn’t look: the global trade numbers were adjusted down. By a lot. The post-Financial Crisis recovery in trade is suddenly a heck of a lot less vibrant than it looked. And it has completely stalled out over the past two years…

    There’s another aspect to this “perplexing” economy: Pharmaceutical products are the single largest category in US wholesales, and thus in the goods-producing sector. In dollar terms, they account for over 12% of total wholesales. They’re even bigger than groceries. Year-over-year sales have soared 10%, in a sluggish economy, not because of volume increases, but because of price increases.

    Yet, drugs are small and expensive, and shipping volume is relatively small. Since much of the wholesale increase came from price increases, shipping volume has been minimally impacted.

    But without these soaring drug sales, the remainder of the goods-producing economy (“ex-drugs”) at the wholesale level has been heading south for over two years, including in May. This is reflected in the crummy US transportation data over much of last year and so far this year. The growth in drug sales due to price increases covers up part of the weakness in the goods-producing sector “ex-drugs.” But the freight data, where drugs play a smaller role, bring the weakness of the goods-producing sector “ex-drugs” to the foreground.

  2. cnchal

    How can they live with themselves?

    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.

    Ethicon, the best name which describes the pharma business to a tee. Clever marketeers, marrying the words ethics and con just to confuse people. What does it really stand for? Is J&J ethical or a con artist company?

    Why is there no price list at hospital entrances for services provided? If you go to any auto shop people cry bloody murder if the price for services aren’t listed. What makes hospitals and doctor’s offices so special that they are exempt from providing prices to their customers?

    How can one ever find the cheapest price, if the medical system keeps pricing a secret, until you open a bill?

    How can they live with themselves? Millions of dollars of ill gotten gains to the meritocrats makes the living easy.

  3. Northeaster

    The entire healthcare industry is a massive taxpayer subsidized fraud.

    I pulled Form-4’s for all the public health insurers who are crying poor mouth, since the passage of ACA, Executives and directors have looted the companies to the tune of over $1.3 billion (with a B). It’s conservative because I didn’t add anything to the right of the hundredth-thousand:

    UNH – $370 million
    ANTM – $275 million
    HUM – $240 million
    AET – $225 million
    CI – $174 million

    Their returns since ACA passage, while recently taking a small hit, have blown away the S&P 500 by hundreds of percent. While I didn’t look deeply in their proxy filings, like most, I’m sure they all have an EPS bonus, which is of course great after buybacks.

    Talk about looting and income disparity…

    1. Jeremy Grimm

      Please forgive my ignorance. Would you briefly explain what a Form-4 is and where you obtained it?

      1. Jeremy Grimm

        Form 4 is a United States SEC filing that relates to insider trading. Form 4 is stored in SEC’s EDGAR database. [Wiki]
        Your totals are totals for all the insider profits from exercise of their stock options following increases in their stock prices?

    2. Pespi

      Nice work! And good stuff as usual from Roy.

      I have a feeling there are built in fraudulent profit channels in the ACA that the rest of us have yet to discover

  4. Son Snelson

    The court decision raises the question of much drug makers can be held responsible for causing health programs to overpay for a medicine. Customer Behavior – The Pokemon Go craze demonstrates people’s thrill over chasing something down for a reward. So, what lessons about reward marketing can you learn from augmented reality and virtual reality gaming?

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