Saturday, February 26, 2011

Uncle Sam and trial lawyers loot the medical sector as Naderites cheer: The capital strike on the healthcare sector--and our health--continues and worsens.

The pharmaceutical sector needs capital.  Not so the industry can get richer, but rather so that we can get better.    It's not shareholders we should be worried about--it's us.

Everyone is free to criticize "Big Pharma," and muckrakers will sometimes make powerful and condemnatory points.  But as we listen to the critics who have made a career out of Pharma-bashing, we should keep in mind a basic point: Nobody ever was cured through criticism.   Medicine is life-improving and life-saving technology; by contrast, exposes, regulatory findings, and lawsuits are at best a means to an end.  In the end that is, somebody has to figure out how to fix abuses and make healthcare processes cleaner, better, and more effective.  And that's never the lawyers.

And yet today, the medical system is seriously out of kilter; it has, in  word, been "lawyerized."  Not just "regulated," which is fine, because the way our system works, but "lawyerized" in the sense that the real whip hand of regulation is not the career lawyers in the government, but rather entrepreneurial trial lawyers who form a new layer of regulation on top of the "alphabet soup" federal agencies and can make personal billions as they do so.  That is, the lawyers and regulators are gaining, while the scientists and doctors are waning.   This state of affairs might please the activist graduates of elite law schools, but in the long run, it's not going to please medical patients and their families.

To put it another way, we've had a decades-long experiment. The experiment was this: How best to advance personal and public health: Should the leaders be lawyers and regulators, or doctors and scientist?   And the results are in--we are getting both higher costs and less medicine.   The worst of both worlds.

Back on February 10, we took note of an important piece by Michael Milken noting the existence of what could be called a "capital strike" against the pharmaceutical industry--which is to say, of course, a capital strike against our future health.  A "strike," we might add, in the sense of a stoppage, but also a "strike" in the sense of an attack--like a hammer coming down.

For many of us--indeed, for just about all of us--it's the existence of medical drugs that spells the difference between a healthy future and a future of pain, disability, and premature death.   And so here at SMS hwe  we have augmented Milken's argument, because there's plenty of evidence that a combination of negative forces--the role of the FDA, the impact of the trial lawyers, Obamacare price controls, and a general lack of leadership from Washington--have all conspired to ratchet down the pharma industry and thus to dry out the new-drug pipeline, as well as the medical device pipeline.  This dolefully downward phenomenon adds up to what we have called the Serious Medicine Crash.

Now another piece of evidence comes from the Health Research Group at Public Citizen, the Ralph Nader-inspired activist group.  It shows clearly how governments are taking billions away from the Pharma industry:
The Public Citizen/Health Research Group (HRG) report finds that fines against the Pharma industry levied by the federal and state governments--mostly the feds under the False Claims Act--have jumped from $10 million dollars in 1991 to $4.4 billion in 2009.  (2010 data are only partial.)   Have a look: 
Needless to say, the HRG celebrates this spike in fines as a triumph of their left-litigious ideology.  Naderite activism rules; lawyers overwhelm corporations, even corporations engaged in activities that have much more to do with the public interest than left-wing lawyers substantially funded by the tort bar, which uses Naderite activism as the battering ram for billion-dollar cases.  As the website Trial Lawyers Inc. observed of Public Citizen back in 2005, "Public Citizen Foundation's board looks like a Trial Lawyers, Inc. leadership meeting, including Lisa Blue of plaintiffs' firm Baron & Budd and Joseph Cotchett, who's also on the Association of Trial Lawyers of America board." So low-paid activists and high-paid tort entrepreneurs find common cause in lawsuits.  The Naderite presumption is that corporations are evil, and that the antidote is a stern dose of regulation and litigation; while the trial lawyer presumption is that great wealth is fine, so long as it is made by suing other people. 

In the meantime, HRG, ever true to its Naderism, writes, 

While the defense industry used to be the biggest defrauder of the federal government under the False Claims Act (FCA), a law enacted in 1863 to prevent defense contractor fraud, the pharmaceutical industry has greatly overtaken the defense industry in recent years. The pharmaceutical  industry now tops not only the defense industry, but all other industries in the total amount of fraud payments for actions against the federal government under the False Claims Act.   

You can read the whole report here.  To sum up, though, in the minds of the HRG authors, the issue is  simple and easy to solve: As with every other problem in America, the answer to any possible Pharma abuse is another lawsuit, another big judgment, another contingency fee, and then maybe a new bureaucracy--preferably with criminal enforcement power.   

As a national political cause, we might note that this Naderite vision crested back in the 70s--the idea that we could litigate and regulate our way to a better society was firmly repudiated by Ronald Reagan in the 1980 presidential election--but as politicians have chosen to concern themselves with other issues, the trial lawyers have been free to enrich themselves in certain sectors, aided, of course, by the Naderite activists.   As the report says in its conclusion:

Over the past two decades, there has been a marked increase in the number of settlements between pharmaceutical companies and the federal and state governments as well as in the size of the accompanying financial penalties paid by these companies. The reasons for these increases are unclear, but are likely related to a combination of increased violations by these companies and increased enforcement on the part of federal and state governments.  Despite increased  government enforcement, illegal pharmaceutical company activities continue to endanger public safety and rob the government of increasingly scarce state and federal resources. These offenses require a more robust response. Given the small size of current financial penalties relative to these companies’ profits, we believe that both significantly increased financial penalties and criminal prosecution--including jail--of company leadership would provide a more effective deterrent to this unlawful behavior. 

Yet at the same time, we might step back and ask:  Why it is that fines against the industry have jumped 44000 percent in less than two decades?   Are we really to believe that Big Pharma is 440 times as corrupt as it was in the early 90s?  Or are we to believe that something else is at stake?   

Many observers think that the Justice Department, across presidential administrations, has found an easy way to make itself look good.  That is, it can win these kinds of cases, and thus up its "batting average."   In addition these cases are an easy way to raise revenue.  Indeed, as a former Member of Congress told me, "The Department of Justices sees these cases as a guaranteed piggybank."  That is, DOJ brings cases, and the Pharma companies pay up--or else.  So they pay up, and a mutant form of "public sector entrepreneurialism" prevails.  

A further part of the problem is the abuse of the so-called "whistleblower provisions," which have been greatly expanded in recent years.  In recent years,  whistleblowers have taken home as much as $96 million for their efforts.  And of course, of that sum, trial lawyers' contingency fees might well total 40 percent, or nearly $40 million.  Is that really a good way to regulate drugs and to protect the public safety?   Of course not.  Indeed, the retrospective nature of whistleblowing can actually hurt public safety. 

In the words of attorney Marty Robins, the huge rewards for whistleblowers actually seem to encourage employees to ignore mistakes or wrongdoing until it "ripens" into a lucrative case to take to the government:  

What the new incentives for whistleblowers will do is at the least encourage and cause more whistleblowing and probably more -- not less -- wrongdoing. What is optimal for society is to deter and stop wrongful activity by business before it starts and not after it comes to fruition and does its damage. Giving people 10-30 percent of fines and settlements resulting from wrongdoing encourages those who become aware of such incipient wrongdoing to wait until it "ripens" to the point that a fine or settlement is in order. It also provides no deterrent for the firm in question if the fine or settlement is a fixed amount which is shared by the SEC and whistleblower.

Is this really the way that we are going to raise capital to produce new medicines and cures?  Or is this just an example of why investors are shunning the Pharma sector, as Mike Milken says?   The answers to those questions, respectively, are "no" and "yes."  

No wonder the Serious Medicine Crash continues.  

Anyone familiar with this blog knows that the point of Serious Medicine Strategy is not to defend the Pharma industry.  Instead, the goal is to push for medical advancement.   Here at SMS, we are open to ideas for private, public, or private-public cooperation.  We also think that the international community should be much more involved in the effort, especially when leaders in other countries realize that the US pharma sector is no longer the dynamic and robust force that it once was.  

That's a daunting process, to be sure, and yet it must begin with a clear-eyed understanding of where we are right now.  And the Public Citizen Health Research Group points to a big part of the current problem. 


  1. Nice post. My published views on the 'evils' of Pharma are found here.
    These guys have become Big Scapegoats. If we fleece them, where will tomorrow's cures come from? The government?

  2. Thanks, Dr. Kirsch. I updated the piece a bit. Same argument, but a greater elaboration of the dueling worldviews--law on one side, medicine on the other.

  3. Great column Jim. It really got my Irish up.
    The Pharma sector needs capital to pay off the Ambulance Chasing Gonifs’ legal fees!
    I have a dream: “that one day all 535 of the ‘Hill People’ can’t be lawyers. Presently, their “Sicilian” consanguinity with the ABA exceeds the Mafias’!

    The Terrorists wont focus on blowing up Law Schools in America. Wanna know why? ;-)
    The products of law schools are doing a pretty good job of destroying America themselves.
    A new-drug pipeline can be started immediately. Just let Pharma keep their patents for 30 years before generic can cut in on the dance floor.
    Sounds easy, but then there are the Gonifs!
    I believe the ‘marked increase in the number of settlements’ is due to corporate defense costs. It’s cheaper to pay the penalty. The Gonifs win again!
    It’s the same with a breach birth in Brooklyn. The ABA shouts Hooray, we get $50K from the City’s Hospital.

    How about besides the 30 yrs. above, ...... Losers pay?
    You don’t have to be a genius to figure out the answer; all you have to be is HONEST!

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  5. The Naderite presumption is that corporations are evil, and that the antidote is a stern dose of regulation and litigation; while the trial lawyer presumption is that great wealth is fine, so long as it is made by suing other people. The reasons for these increases are unclear, but are likely related to a combination of increased violations by these companies and increased enforcement on the part of federal and state governments.
    Anyone familiar with this blog knows that the point of Serious Medicine Strategy is not to defend the Pharma industry. Instead, the goal is to push for medical advancement.
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