$60 Million Settlement of Class Action Alleging Cost Cutting Led to Poor Manufacturing of Drugs and Devices
Earlier this year, we posted about the $60 million settlement of a class action lawsuit brought by investors in Hospira Inc, a drug and device manufacturer. The plaintiffs had contended that "cost cutting aimed at boosting short-term profitability," and ostensibly "shareholder value" lead to "gutting quality control efforts," and ultimately to quality problems discovered by inspections by the US Food and Drug Administration (FDA).
This case was brought not by law enforcement officials or regulators, but by stock holders who believed that their investments were degraded by management misbehavior. Nonetheless, as is usual in most settlements of civil cases involving big health care organizations, according to Law360, Hospira managers were able to assert,
Defendants deny that they have violated the federal securities laws or any laws and maintain that their conduct was at all times proper and in compliance with all applicable provisions of law.
Note also that company executives, including CEO Michael Ball, were named as defendants, but I could find no record that they had to pay anything themselves.
So this, like many other legal settlements we have discussed, only seemed to serve as a marker of probable, but not definite misbehavior by the leadership of a big health organization that led to problems with the manufacture of drugs or devices. This is concerning since the public and health care professionals trust drug and device manufacturers to proffer products of good quality. Yet the resolution of the case left lingering uncertainty because the defendants could settle without admitting any wrongdoing.
FDA Warnings, and Punitive Damages for Firing a Whistleblower
Some more evidence that there really were quality problems in Hospira's manufacturing operation appeared in October, 2014, when the FDA warned the company about particles found in drugs manufactured in its Australian factory (per the Chicago Tribune).
Furthermore, in November, 2014, a story appeared that not only corroborated the existence of important issues with manufacturing quality at Hospira, but suggested that the company had tried to cover up these problems. As reported by Crain's Chicago Business,
A Lake County jury awarded almost $10 million to a former Hospira employee, finding that the company fired him because he raised concerns that it covered up quality and safety issues with a product.
The former employee, Angel Estrada, was a vice president of quality systems and compliance for the Lake Forest-based pharmaceutical company from September 2010 to September 2011, when the company fired him, according to a lawsuit filed in Lake County Circuit Court.
Estrada raised concerns to supervisors that Hospira was not addressing issues in one of its medical pumps that a hospital in Spain reported to the company. The hospital reported that air bubbles had occurred in the device when used on children, which can cause fatalities, according to the complaint.
The lawsuit alleges that Estrada reached out to his superiors, including Hospira CEO Michael Ball, to address the reported issues and notify the FDA and European regulators of the pump's alleged defects.
The lawsuit alleges that on the same day Estrada sent Ball a report, two employees under Estrada were fired 'purportedly for altering a record during the course of an audit.' Hospira fired Estrada 'under the pretext of not properly investigating' one of the employee's conduct during the audit, the lawsuit says.
The real reason he was fired 'was to quash his reporting of the dangers associated' with the pump, the suit alleges.
The jury issued its verdict earlier this month. Of the almost $10 million Estrada was awarded, $7 million was punitive damages.
So in this case, a high ranking corporate executive tried to blow the whistle because of quality problems affecting the manufacture of a medical device. These problems put patients at risk, and pediatric patients at that. His whistleblowing was vigorous, going as high as the company CEO. Yet, the jury found that the company responded by firing the whistleblower.
Still, not surprisingly,
Hospira said it will appeal and that it maintains that the allegations are 'fully without merit.'
That remains management's contention, but the jury found otherwise, and emphasized this finding with punitive damages.
These cases, added to all our other discussions of legal settlements, crime, and corruption in health care, suggests that bad behavior by leaders of large health care organizations is rampant. Yet these cases also suggest how hard it is to understand the scope of the problem. Each of the cases above involving Hospira seemed to proceed in a vacuum, uninformed by previous cases. None got much media attention. (For example, the latest jury findings only appeared in two media outlets, as far as I can tell, and both were in Chicago.) There have been few efforts, beyond those of your humble servant, to try to link various civil, criminal, and regulatory cases involving large health care organizations together in any sense. Continued lack of awareness of the scope of the problem of management misbehavior in health care mitigates against finding any effective solutions.
Furthermore, the cases above, like most others we have discussed, did not lead to any negative consequences to any individuals for authorizing, directing, or implementing the bad behavior, even though the behavior may have lead to their individual enrichment. Managers in this era of "shareholder value" are often lavishly awarded for cost cutting that increases short term revenue. Note that the top executives of Hospira have been lavishly rewarded. According to the company's 2014 proxy statement, its five top executives each had total compensation exceeding $2,750,000 in 2013. CEO Michael Ball, who was named as a defendant in the case settled earlier this year, and allegedly ignored the whistleblower's warnings in the most recent case, received $9,892,283. It is quite possible that all these executives at least indirectly benefited financially from the cost cutting that lead to the quality problems implied by the cases above. Yet as long as there is no accountability for any person who was directly involved in authorizing, directing, or implementing the bad behavior, or who might have benefited from being furnished plausible deniablity about it, future bad behavior will not be deterred.
So how many more cases will it take before we start holding the leaders of large health care organizations accountable? Will we do so before the back of our health care system is broken?