Why is Johnson and Johnson "Spinning Out of Control?"

Last week, a New York Times article by Natasha Singer and Reed Abelson cataloged some of the problems afflicting the giant health care corporation Johnson and Johnson. 

Little red flags jut out from the shelves at a CVS drugstore in suburban Boston, alerting shoppers to shortages of nearly a dozen Johnson & Johnson products. Among them are Motrin, Rolaids, children’s Tylenol liquid and adult Tylenol, Mylanta, Pepcid AC and even some Neutrogena skin care products.

'Looking for Tylenol pain relief products?' asks one of the signs. The notices at CVS serve as a stark reproof to Johnson & Johnson, whose brands have for more than a century been synonymous with quality. Some of its products are in short supply at drugstores and supermarkets because the McNeil Consumer Healthcare unit of J.& J. last year recalled about 288 million items, including about 136 million bottles of liquid Tylenol, Motrin, Zyrtec and Benadryl for infants and children.

Johnson & Johnson has had to recall such a variety of products because of quality-control problems across product lines, in multiple factories and in several units last year. Some of its consumer products, for instance, may have contained bits of metal. Others came in bottles with a moldy smell. And some products have gone missing from stores with hardly an explanation. All of this has put the company and its manufacturing under the intense scrutiny of lawmakers and officials at the Food and Drug Administration.

'It looks like a plane spinning out of control,' says David Vinjamuri, a former J.& J. marketing employee who now trains brand managers at his company, ThirdWay Brand Trainers.

The article noted how the current widespread manufacturing problems at J+J seem to contradict the company's famous credo.

dating from 1943, saying that the company owed its first responsibility to the mothers and fathers, doctors, nurses and patients who use its products.

The article noted that the company's problems

have not been limited to its over-the-counter products, which could suggest that the company may suffer from even broader problems. Last year, its DePuy medical device unit recalled two kinds of hip implants, affecting tens of thousands of patients worldwide. Its vision care unit recalled millions of soft contact lenses sold abroad.

In fact, the company also has had major ethics problems. We noted here, for example, that last October J&J and Ortho-McNeil Janssen, a Johnson and Johnson subsidiary,were found by a jury to have defrauded the Lousiana Medicaid system by minimizing safety problems with the atypical anti-psychotic drug Respirdal, with a penalty of over $250 million.

Moreover, the NY Times summary is already out of date. The Los Angeles Times just reported yesterday even more recalls.

Why does the company seem to be in a tail-spin? Ms Singer and Mr Abelson listed several possible causes:

The reasons for McNeil’s woes remain unclear. Some critics, including former employees, say Johnson & Johnson has lost sight of its credo, while others suggest that the company decentralized its oversight of manufacturing and quality control in error.

Others say it was simply a matter of cost-cutting. The December lawsuit, for example, cited two unnamed former employees who contended that the company failed to address the manufacturing problems at McNeil because it was trying to save money.

Other former employees who are not involved in the lawsuit say that J.& J. seemed to hesitate in recent years to invest in new manufacturing equipment.

'It takes a lot of money to buy equipment and maintain quality,' says Patrick Bols, who left Johnson & Johnson’s pharmaceutical division in the late 1990s and owns stock in the company.

Why, however, would the company lose sight of its sacred credo? Why would it excessively cut costs in a way that would diminish its ability to carry out its most basic function, to produce pure and unadulterated drugs?

I submit that one clue can be found in a recent news article in Nature Biotechnology about the march of drug and biotechnology companies forced into legal settlements. [Ratner M. Crossing the line. Nature Biotech 2010; 12: 1232-1235. Link here.]

People are rewarded for improving a firm's financial performance - right up the chain to the CEO, [former US Department of Justice and current Vogel, Slade & Goldstein attorney Ms Shelley] Slade says. 'Their concerns are pleasing Wall Street and shareholders, and bonuses are driven by financial performance. There's a real conflict between what the compliance folks want them to do and what's in their immediate financial self-interest. Sometimes the compliance people don't get the full story from the people in operations.

So what we have here is another argument for the importance of perverse incentives as drivers of health care dysfunction. It is likely that all the management of nearly all health care organizations are driven, not by mythic credos or high-minded mission statements, but by the impetus for short-term revenues driven by desire to earn big bonuses and keep their total compensation in six- through eight-figures. These sorts of incentives will predictably lead to excess cost-cutting, unethical behavior, and outright crime.

So, to repeat like a broken record (if anyone remembers what that means, a broken vinyl audio recording skipping due to surface scratches) - if we really want health care reform, if we really want to lower costs, improve access, and improve quality, we need to abolish the perverse incentives that drive managers of health care organizations.  Somehow we need to make the leadership of health care organizations accountable for fulfilling their credos, mission statements, and really their basic responsibilities.  The patients' interests need to come first.  Drug companies must make pure, unadulterated drugs, and promote them honestly and ethically, and their leaders must first be accountable for doing so.