Health care costs in the US continue their seemingly inexorable rise. Even the parts of health care that used to seem reasonably priced now are affected. As Ed Silverman discussed on PharmaLot
prices for many generic drugs have been climbing, prompting concerns that a low-cost staple of the U.S. health care system might soon strain budgets.
Generic drugs, like practically every other part of US health care, have become big business. As a Forbes article pointed out, the industry is becoming more consolidated, and more likely to suffer from manufacturing and regulatory issues. However, there may be other reasons for increasing generic drug costs.
Case: Mylan Purchased Properties Developed by its Own Board Vice Chair
A recent Wall Street Journal scoop on the big generic pharmaceutical company Mylan suggested that maybe such companies are now suffering from the same leadership and governance ills we have been finding throughout US - and indeed global - health care. Furthermore, to understand the impacts of such health care dysfunction, one must consider the incentives that underlie them, that is, who benefits?
The story concentrated on some dodgy deals involving the company and firms linked to the Vice Chairman of its board of directors. The first part of the story was:
Generic-drug maker Mylan NV moved into new headquarters in December 2013 after buying vacant land in an office park near Pittsburgh and erecting a five-story building for about 700 employees.
The company hasn’t publicly disclosed that the office park’s main developer is Rodney Piatt, Mylan’s vice chairman, lead independent director and compensation-committee chief. The new headquarters was a big boost for the mixed-use real-estate development, called Southpointe II, where all the land has been sold and some of the last buildings are now rising.
Securities regulators require public companies to tell shareholders about any significant transactions with directors, executives or other 'related persons.' Members of boardroom compensation committees have special duties under securities and tax laws to avoid dealings that compromise their independence.
Mylan, now fighting a three-way takeover battle in the pharmaceutical industry, says there was no need to disclose Mr. Piatt’s connection to the $60 million real-estate project because he and the company avoided any direct dealings with each other.
The day before Mylan announced plans to build the new headquarters, a company managed and partly owned by Mr. Piatt sold a 7-acre site for $1 to an entity owned by a business partner in Southpointe II, according to property records reviewed by The Wall Street Journal. The partner’s firm sold the same land to Mylan for $2.9 million later the same day.
Real-estate records show a similar transaction in May. Mylan paid $9.2 million to buy an adjacent 11 acres from Mr. Miller, whose firm previously bought the land for $10 from a company partly owned by Mr. Piatt.
'Mr. Piatt was not a party to either transaction' involving Mylan and 'had no direct or indirect material interest in the transactions,' says a Mylan spokeswoman.
She adds that Mr. Piatt didn’t make a profit on either sale to Mylan because Mr. Miller separately arranged to buy out Mr. Piatt at cost and then sold the land directly to Mylan. Mr. Piatt didn’t return calls seeking comment.
Note however that
Securities rules require disclosure of any transaction of more than $120,000 where a related person will have a direct or indirect material interest, regardless of whether the person makes a profit.
In the case of compensation-committee members, related-party transactions can jeopardize the independence required of them under tax and securities rules. That can threaten the tax-favored status of some executive-pay programs and require executives to disgorge some of their gains on stock sales.
Some securities-law and corporate-governance experts say Mylan should have been more transparent about the real-estate transactions or handled them differently.
'The optics are terrible,' says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware and a director at HealthSouth Corp. and Bob Evans Farms Inc. 'Pittsburgh is a big town with no shortage of real estate. Either they could have gone somewhere else, or [Mr. Piatt] could have relinquished the directorship and eliminated the conflict.'
Just to emphasize the questions about Mr Piatt's independence,
The new headquarters is named the Robert J. Coury Global Center, after Mylan’s executive chairman. Mr. Coury, 54, was chief executive from 2002 to 2012.
A few months after the project’s approval by local officials, Mr. Piatt signed a pension amendment that increased the value of Mr. Coury’s promised benefits by 40%. His overall pension of $48.8 million is 11th-largest among executives at U.S. publicly traded companies, according to Standard & Poor’s ExecuComp.
Further muddying the waters,
During construction, Mylan hired project-management firm RIZ Consulting & Management Inc. to oversee the general contractor and architect. RIZ has the same business address and phone number as Mr. Piatt’s real-estate company, and he is listed as the contact person for RIZ in the local chamber of commerce’s membership directory.We often discuss how health care is tangled in a vast web of conflicts of interest. The kinds of apparent conflicts of interest in play in this case are somewhat different from those we frequently discuss, but still seem part of this web.
RIZ’s president also is a top executive at Mr. Piatt’s company, and some employees of Mr. Piatt’s company worked for RIZ on the project, according to state records, construction documents and the minutes of permit meetings. RIZ’s president didn’t return calls seeking comment.
'They set it up that way because [Mr. Piatt] sits on the board of Mylan,' says Jeff Yates, a project manager with PJ Dick Inc., the general contractor for the Mylan headquarters project. 'It was kind of a conflict of interest, [so] RIZ was a separate company set up to be the owner’s rep.'
In the last few days, other Pittsburgh newspapers have jumped into the fray, and found their own experts to question these deals. Per the Post-Gazette,
'It doesn’t pass the smell test'” said Mel Fugate, a management professor at Southern Methodist University. Mr. Fugate said that while the SEC places legal requirements on which transactions must be disclosed, the legal obligations are 'the lowest hurdle of them all.'
'This smells bad … even if they can prove legally there are no conflicts' he said.
Again, as noted above the law in certain instances may define conflicts of interest more narrowly than ethical definitions. For example, the Institute of Medicine defined conflicts of interest in medicine: occurring "when an individual or institution has a secondary interest that creates a risk of undue influence on decisions or actions affecting a primary interest."
The Tribune weighed in,
'The whole thing stinks,' said Douglas Branson, a University of Pittsburgh law professor and an expert in corporate governance.Board members'have to serve the best interest of the corporation,' he said. 'You can't be both a seller and buyer — that's the classic definition of conflict of interest.
So here we see serious allegations of conflicts of interest affecting the Vice Chair of the Mylan board, and perhaps affecting another board member and former CEO. These conflicts suggest that company operations could have been manipulated for these individuals' benefits.
Other Questions about Mylan's Leadership and Governance
Yet these are not the only examples of questions about Mylans' leadership and governance, questions which suggest that managers and board members may have been putting personal gain ahead of the larger interests of the corporation, its shareholders, and the patients who take its drugs
A Pittsburgh Business Journal article noted the "allegations of impropriety" raised by the current case, but also hinted at larger problems with the leadership and governance of Mylan.
Current CEO's Invalid MBA
Per the Pittsburgh Business Journal
Mylan (Nasdaq: MYL) has had ethics questions in the past. An MBA awarded to CEO Heather Bresch was withdrawn in 2008 following an investigation that found she didn’t complete the necessary course credits.
However, that finding did not apparently affect her ongoing career trajectory at Mylan
Former CEO's Use of Company Jet to Help Son's Rock Music Career
The Pittsburgh Business Journal also stated,
And in 2012, the Wall Street Journal found that [former CEO] Coury transported his son to rock concerts on the corporate jet, which was allowed as part of his employee benefits package.
That WSJ article emphasized,
Nina Devlin, a spokeswoman for Pittsburgh-based Mylan, said Mr. Coury's employment contracts have allowed outside personal activities, 'including those related to his son Tino's career.' She said Mr. Coury isn't required to use the corporate jets but his employment contracts for the past decade have allowed personal use by him and his family.Thus these contracts apparently allowed valuable Mylan resources to be expended in support of the former CEO's son's career, even though Tino did not apparently have any direct role in the company. Note that these revelations also apparently did not affect Mr Coury's career trajectory with the company, nor did those below.
Transactions Between Former CEO's Brothers and Mylan
That same WSJ article also found,
This wasn't the only business relationship between the elder Mr. Coury and his brothers. Coury Investment Advisors, a company in which two of his brothers, Gregg and Paul, are principals, has served as a broker for Mylan's employee-benefit plans. Various insurers paid them $597,000 in the past three years for Mylan-related business, according to U.S. Labor Department filings.That appeared to be another conflict of interest, benefiting different members of the former CEO's family.
However, that is still not the whole story. A quick look through our magic files, and Google, revealed some other pieces.
Mylan Settled Allegations of Inflated Pricing
In 2010, we briefly posted about a settlement by Mylan of charges it falsely inflated prices for several drugs.
As is usual in such settlements, none of the people who authorized, directed or implemented the actions leading to this settlement apparently suffered any negative consequences, including the top managers on whose watch they occurred.
Mylan Fired Executive Allegedly for Filing Whistleblower Lawsuit Against Another Company
In June, 2014, the Pittsburgh Tribune reported,
When Mylan Inc. learned that its vice president of marketing had filed a whistleblower lawsuit against his previous employer, it fired him, the man alleged in a federal lawsuit filed Tuesday.
Note that the lawsuit was against Cephalon, not Mylan. Rocking the boat, or blowing the whistle apparently are not rewarded at Mylan.
Current CEO Named US Patriot of the Year, then Moved Mylan to Netherlands
In 2014, some wondered how Heather Bresch, still the Mylan CEO, could have claimed to be ultra-patriotic while she was planning to move her company out of the US. In 2011, Esquire listed Ms Bresch in an article on "Americans of the Year: Patriots." They were apparently particularly impressed that she had called for more inspections on foreign drug companies whose products are imported into the US. However, in 2014, per Ron Fournier in the National Journal.
This story is about a gilded class of people and corporations enriched by the new American economy while the rest of its citizens pay the tab. The protagonists could be any number of institutional elites, but this column happens to be about a Democratic senator from West Virginia, Joe Manchin, and his daughter, Heather Bresch, the chief executive of Mylan, a giant maker of generic drugs based outside Pittsburgh.
Her company's profits come largely from Medicaid and Medicare, which means her nest is feathered by U.S. taxpayers. On Monday, Bresch announced that Mylan will renounce its United States citizenship and instead become incorporated in the Netherlands – leaving this country, in part, to pay less in taxes.
This is the sort of story that makes blood boil in populists – voters from the Elizabeth Warren wing of the Democratic Party to libertarians who follow Rand Paul and including tea party conservatives. These disillusioned souls, growing in numbers, hate hypocrites who condemn the U.S. political system while gaming it.
Later, Ms Bresch's father, Senator Manchin, said what his daughter did should be illegal, again per another Ron Fournier article in the National Journal, whose title says it all:
Senator Manchin: What My Daugher Did Should be Illegal
Nonetheless, late in 2014, Bloomberg reported that not only would Mylan go ahead with the inversion, but it would pay the excess taxes personally incurred by its own executives due the transaction. Such taxes were meant as a negative incentive to discourage such maneuvers. Even so, top managers seemed to be able to pay themselves to avoid the effect of these incentives, and of course any resulting personal financial losses.
The latest story about Mylan seemed to show a leading board member financially benefiting from transactions between the company over which he was supposed to exercise stewardship and his own company. Other stories showed Mylan executives seeming to gain outsized benefits for themselves or their family members from Mylan beyond conventional salaries and corporate benefits packages. Of course, since Mylan is not just any company, but a very large generic drug company, putting top hired managers and boards of directors first may mean putting patients second. The cost of these managers' and boards' interests may be at the expense of patients, and the public at large.
Thus perverse incentives enable mission-hostile management and ultimately health care dysfunction.
So once again, when considering how US, and global health care has become so dysfunctional, it makes sense to think about who is benefiting from the current dysfunction. It very often is organizational insiders, particularly top hired managers, and sometimes those who are supposed to keep an eye on them.
Thus, like hired managers in the larger economy, health care managers have become "value extractors." The opportunity to extract value has become a major driver of managerial decision making. And this decision making is probably the major reason our health care system is so expensive and inaccessible, and why it provides such mediocre care for so much money.
One wonders how long the people who actually do the work in health care will suffer the value extraction to continue?
As we have said far too many times - without much impact so far, unfortunately - true health care reform would put in place leadership that understands the health care context, upholds health care professionals' values, and puts patients' and the public's health ahead of extraneous, particularly short-term financial concerns. We need health care governance that holds health care leaders accountable, and ensures their transparency, integrity and honesty.
But this sort of reform would challenge the interests of managers who are getting very rich off the current system.
As Robert Monks said in a 2014 interview,
People with power are very reluctant to give it up. While all of us recognize the problem, those with the power to change it like things the way they are.
So I am afraid the US may end up going far down this final common pathway before enough people manifest enough strength to make real changes.