Monthly Archives: March 2016

The Drug-Company Ripoff

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How McKinsey Helped Turn Big Pharma into a Rent Extraction Business

Posted on March 25, 2016 by 

The pharmaceutical industry has long enjoyed very generous government support, yet over the last two decades has taken to putting profits (meaning CEO and C-level bonuses) over combatting disease. Drug companies in the US benefit from decades of large-scale research and development by the National Institutes and Health and other Federal agencies. They also get R&D tax credits that to a large degree represent an acceleration of tax break for the expected future profits. Yet when those profits actually show up, they shift them offshore to avoid paying taxes in the US.*

And let us remind you that it not the responsibility of corporate executives; the “maximize shareholder value” theory of governance was made up by economists and does not have a legal foundation (see here for a longer discussion). And even if that were the case, actually trying to achieve that goal is counterproductive. As John Kay of the Financial Times explained in a 2004 article, and expanded in his book Obliquity, in complex systems, attempting to chart a straightforward path to a goal typically fails. Why? We don’t understand the system well enough to define an efficient way through it. For instance, a study that paired companies in a series of industries, one that chose complex and aspirational goal versus ones that set out to “maximize shareholder value,” found that in every case, the company with richer and loftier objectives performed better than its counterpart.**

One of the poster children for anti-social conduct by Big Pharma is Valeant, which is basically an up-market version of Martin Shkreli, a patent troll whose main method of “adding value” has been to buy drug businesses and jack up prices. A post yesterday at Business Insider recaps some of the high points of the well-warranted consternation over Valeant’s practices:

Valeant’s stock has fallen over 85% in the last year, in part because of scrutiny over its pricing practices. The House of Representatives is investigating the company for jacking up the prices of two heart medications over 200% and 500% respectively. Hillary Clinton has called out the company in her campaign videos, and the Senate has gone after the company for this practice as well.

This issue, combined with accounting issues, forced the company to say that it would change its business model, and rely on sales volume to generate revenue last December. It also said it would cut some prices — just some.

Either way, the market isn’t convinced, and some analysts say that Valeant will never be what it once was because without the ability to jack up prices of the drugs that it acquires. See, Valeant doesn’t really do its own research and development. It only spends about 3% of revenue on that, while its peers spend average of about 13% on it.**

Business Insider also pointed out:

Valeant Pharmaceuticals doubled the price of a drug called Seconal, which helps terminally ill patients end their lives peacefully, according to a report from KQED News.

Valeant purchased the drug last February, and jacked up the price from $1,500 to $3,000 after the state of California proposed legalizing assisted suicide.

The KQED report states that Seconal is an 80 year old drug.

John Gapper put the spotlight on the connection between the consulting firm McKinesy and Valeant today in McKinsey’s fingerprints are all over Valeant:

Valeant’s downfall is not exactly McKinsey’s fault but its fingerprints are everywhere. Half of its six-person senior executive team formerly worked at McKinsey, including Michael Pearson, its chief executive, and Robert Rosiello, its finance director. So did Ronald Farmer, the director who chairs its “talent and compensation” committee, which temporarily transformed Mr Pearson into a billionaire….

Like Enron’s “asset-light” strategy of trading power rather than owning power plants, Mr Pearson brought a consultant’s clinical eye to pharma. He despised costly research (“Be prudent about investing ahead of need — curse of the industry” was one motto), preferring to acquire proven drugs and raise prices.

No one did this more abruptly than Mr Pearson: “Our strategy is basically the education I had through McKinsey,” he said in 2014. He turned Valeant into a hyperactive acquisition vehicle, which not only benefited Wall Street banks but consulting firms for whom post-merger integration work is a labour-intensive, high-margin operation.

But what I find most damning is Gapper’s throwaway observation:

McKinsey provided the intellectual underpinning for pharma companies to rethink radically in the mid-2000s, when drugs pipelines seemed to have dried up and research productivity fell. As the firm’s partners concluded repeatedly in calling for “a bolder, more radical approach to Big Pharma’s operating model”, boards and executives had to alter course and cut costs.

And Pearson put that into place not only at Valeant, but for years before that as the head of its global pharmaceuticals practice. Even though drug companies have very handsome cash flows, they now prefer to leave the hard work of discovering new drugs to smaller players like biotech companies,**** snapping them up if they make a breakthrough.

Roy Poses at The Health Care Renewal blog has written with great energy and detail about the corrosive effect of what he calls generic management, or what could also be described as misrule by MBAs, on the delivery and quality of health care. Not only do they increase the cost of the adminisphere through their lofty pay, but they also make clear that they have little interest in or respect for clinical expertise, and wind up degrading care and demotivating staff.

Given how many MBAs have been churned out, and how they’ve wound up ensconcing themselves in other fields, like higher education, which similar dubious effects, one might argue that Valeant-like strategies would have inevitably have taken hold. But McKinsey operated as a major transmitter and legitimator of extractive practices.
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* Pharmaceutical companies pay so little tax that many top tax professionals believe the companies exaggerate the tax savings they will achieve through inversions in order to assure shareholder approval.

** One could argue that “maximizing shareholder value” has served as an excuse for rent extraction by top executives, so this outcome is a feature rather than a bug.

*** Bear in mind that that 13% figure overstates what laypeople would consider to be R&D by a large degree. For the 15 years, well over 80% of FDA “new drug applications” are for extensions or minor reformulations of existing drugs. In other words, the “new drug application” process as currently practiced is mainly about extending license protection, not invention.

**** “What’s the difference between high tech and biotech? How long it takes you to find out you’ve lost all your money.”

Rich black kids are more likely to go to prison than poor white kids

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Humor: The Borowitz Report

Borowitz Report

Sanders Sends Vegan Thugs to Attack Peace-Loving Nazis

By

Credit PHOTOGRAPH BY J. D. POOLEY / GETTY

CINCINNATI (The Borowitz Report)—Republican front-runner Donald Trump was crying foul on Monday after Vermont Senator Bernie Sanders allegedly dispatched an army of vegan thugs to attack a rally of peace-loving Nazis in Cincinnati.

According to Trump, he had begun to address a group of “orderly and civil Nazis” at a downtown arena when his audience was suddenly set upon by an unruly mob of angry vegans, many menacingly clad in Birkenstocks and sustainable garments.

The Sanders supporters, singing an alarmingly militant version of Simon & Garfunkel’s “America,” marched into the arena and began “intimidating and threatening” the Nazis, Trump said.

“Make no mistake about who is starting the violence at these rallies,” Trump said. “It’s the vegans.”

Carol Foyler, a Nazi from suburban Cincinnati, said that she feared for her life when one of the vegans “ripped a Trump sign” from her hands and “tried to recycle it.”

Harland Dorrinson, a Kentucky Nazi who drove to Ohio to hear Trump speak, said he would never have attended the rally if he had known “there would be troublemaking vegans there.”

“One of them tried to swing an NPR tote bag at my head,” the terrified Nazi said.

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Trump

The Prison System

Mass Incarceration: The Whole Pie 2016

By Peter Wagner and Bernadette Rabuy March 14, 2016

Wait, does the United States have 1.4 million or more than 2 million people in prison? Are most people in state and federal prisons locked up for drug offenses? Frustrating questions like these abound because our systems of confinement are so fragmented and controlled by various entities. There is a lot of interesting and valuable research out there, but varying definitions make it hard — for both people new to criminal justice and for experienced policy wonks — to get the big picture.

This report offers some much needed clarity by piecing together this country’s disparate systems of confinement. The American criminal justice system holds more than 2.3 million people in 1,719 state prisons, 102 federal prisons, 942 juvenile correctional facilities, 3,283 local jails, and 79 Indian Country jails as well as in military prisons, immigration detention facilities, civil commitment centers, and prisons in the U.S. territories. And we go deeper to provide further detail on why convicted and not convicted people are locked up in local jails.

Pie chart showing the number of people locked up on a given day in the United States by facility type and the underlying offense using the newest data available in March 2016.Pie chart showing the number of people locked up on a given day in the United States in jails, by convicted and not convicted status, and by the underlying offense, using the newest data available in March 2016. Graph showing the number of people in jails from 1983 to 2014 by whether they have been convicted or not. The number of convicted people stopped growing in 1999, but the number of unconvicted people continues to grow.Graph showing, for the years 2007 to 2014, the number of people -- 11.4 to 13.6 million -- a year who are admitted to jail per year and the number of people -- about 700,000 to 800,000 -- who are in jail on a given day.
Pie chart showing the portion of people incarcerated in federal prisons, state prisons and local jails for drug offenses. While the War on Drugs is a defining characteristic of the federal prison system, it plays only a supporting role at the state and local levelsChart showing the number and portion of people incarcerated in the federal prison system by offense. Drugs and public order offenses are the most common, with drugs being about half.Chart showing the number of arrests for drug possession and drug sales/manufacturing from 1980 to 2012. For the last 20 years, the number of arrests for drug sales have remained flat, while the number of arrests for posession have grown.Chart showing the portion of New York State's and Oklahoma's state prison population that is incarcerated for a drug offense from 1992 to 2014. The portion of New York State's prison population that is incarcerated for drug offenses has been consistently falling, while Oklahoma's rose to a peak in 2006 and has been consistently above 25% since 1999.

With a sense of the big picture, a common follow-up question might be: how many people are locked up for a drug offense? We know that almost half a million people are locked up because of a drug offense. The data confirms that nonviolent drug convictions are a defining characteristic of the federalprison system, but play only a supporting role at the state and local levels. While most people in state and local facilities are not locked up for drug offenses, most states’ continued practice of arresting people for drug possessiondestabilizes individual lives and communities. Drug arrests give residents of over-policed communities criminal records, which then reduce employment prospects and increase the likelihood of longer sentences for any future offenses.

All of the offense data presented comes with an important set of caveats. A person in prison for multiple offenses is reported only for the most serious offense so, for example, there are people in prison for “violent” offenseswho might have also been convicted of a drug offense. Further, almost all convictions are the result of plea bargains, where people plead guilty to a lesser offense, perhaps of a different category or one that they may not have actually committed.

And many of these categories group together people convicted of a wide range of offenses. For example, “murder” is generally considered to be an extremely serious offense, but “murder” groups together the rare group of serial killers, with people who committed acts that are unlikely for reasons of circumstance or advanced age to ever happen again, with offenses that the average American may not consider to be murder at all. For example, the felony murder rule says that if someone dies during the commission of a felony, everyone involved is as guilty of murder as the person who pulled the trigger. Driving a getaway car during a bank robbery where someone was accidentally killed is indeed a serious offense, but few people would really consider that to be murder.

Chart showing the number and portion of youth locked up by offense types, showing that most incarcerated youth are locked up for nonviolent offenses, and that 7,200 youth are incarcerated for 'offenses' that are not even crimes. The graph notes that it does not include the 5,200 youth locked up in adult prisons or jails nor the almost 20,000 youth held by the juvenile justice system in residential facilities away from home.Chart showing that 52,000 people are confined for immigration offenses, with 19,000 in Bureau of Prisons custody on criminal charges, and the remainder in Immigration and Customs Enforcement (ICE) custody on civil detention. About half of those in ICE custody are in ICE facilities, and about half are confined under contract with local jails.Chart showing the 5,487 people civilly committed in 16 states and the federal system. The largest number are in California -- unsurprising, given that it is the largest state in the country -- followed by Minnesota, a state that is seven times smaller and that has one of the lowest prison incarceration rates in the nation.

This “whole pie” methodology also exposes some disturbing facts about the youth entrapped in our juvenile justice system: Too many are there for a “most serious offense” that is not even a crime. For example, there are almost 7,000 youth behind bars for “technical violations” of the requirements of their probation, rather than for a new offense. Further, 600 youth are behind bars for “status” offenses, which are “behaviors that are not law violations for adults, such as running away, truancy, and incorrigibility.”

Turning finally to the people who are locked up criminally and civilly for immigration-related issues, we find that 19,000 people are in federal prison for criminal convictions of violating federal immigration laws. A separate 33,000 are civilly detained by U.S. Immigration and Customs Enforcement (ICE) separate from any criminal proceedings and are physically confined in special immigration detention facilities or in local jails under contract with ICE. (Notably, these categories do not include immigrants represented in other pie slices because of non-immigration related criminal convictions.)

Now, armed with the big picture of how many people are locked up in the United States, where, and why, we have a better foundation for the long overdue conversation about criminal justice reform. For example, the data makes it clear that ending the War on Drugs will not alone end mass incarceration, but that the federal government and some states have effectively reduced their incarcerated populations by turning to drug policy reform. Looking at the “whole pie” also opens up other conversations about where we should focus our energies:

  • What is the role of the federal government in ending mass incarceration? The federal prison system is just a small slice of the total pie, but the federal government can certainly use its financial and ideological power to incentivize and illuminate better paths forward. At the same time, how can elected sheriffs, district attorneys, and judges slow the flow of people into the criminal justice system?
  • Are state officials and prosecutors willing to rethink both the War on Drugs and the reflexive policies that have served to increase both the odds of incarceration and length of stay for “violent” offenses?
  • Do policymakers and the public have the focus to confront the second largest slice of the pie: the thousands of locally administered jails? And does it even make sense to arrest millions of poor people each year for minor offenses, make them post cash bail, and then lock them up when they can’t afford to pay it? Will our leaders be brave enough to redirect corrections spending to smarter investments like community-based drug treatment and job training?
  • Can we implement reforms that both reduce the number of people incarcerated in the U.S. and the well-known racial and ethnic disparities in the criminal justice system?
Chart comparing the racial and ethnic distribution of the total U.S. population with that of the incarcerated population. Whites are a majority of the total U.S. population, but a minority of the prison population. Blacks, Latinos and Native Americans are a disproportionately larger share of the incarcerated population than they are of the total U.S. population. Chart comparing the gender distribution of the total U.S. population with that of the incarcerated population. Men are almost half of the total U.S. population, but are a majority (91%) of the incarcerated population. Women are just 9% of the incarcerated population, but this portion has doubled since 1970.Pie chart showing that people in correctional facilities are only about a third of the people under correctional control in the United States. Most (55%) are on probation. The remainder are on parole.

And once we have wrapped our minds around the “whole pie” of mass incarceration, we should zoom out and note that being locked up is just one piece of the larger pie of correctional control. There are another 820,000 people on parole (a type of conditional release from prison) and a staggering 3.8 million people on probation (what is typically an alternative sentence). Particularly given the often onerous conditions of probation, policymakers should be cautious of “alternatives to incarceration” that sometimes widen the net of criminalization to people who are not a threat to public safety.

Now that we can see the big picture of how many people are locked up in the United States in the various types of facilities, we can see that something needs to change. Looking at the big picture requires us to ask if it really makes sense to lock up 2.3 million people on any given day, giving this nation the dubious distinction of having the highest incarceration rate in the world. Both policymakers and the public have the responsibility to carefully consider each individual slice in turn to ask whether legitimate social goals are served by putting each category behind bars, and whether any benefit really outweighs the social and fiscal costs.

We’re optimistic that this “whole pie” approach can give Americans, who are ready for a fresh look at the criminal justice system, some of the tools they need to demand meaningful changes to how we do justice.

 

Acknowledgments

This 2016 report was made possible by a generous grant from the Public Welfare Foundation and the contributions of individuals across the country who support justice reform. The infographic slideshows and the graph of correctional control were made possible by Gabe Isman of our Young Professionals Network. Bob Machuga and J. Andrew World helped with design issues, and Alison Walsh helped us gather research. Melissa Sickmund at the National Center for Juvenile Justice and Todd Minton at the Bureau of Justice Statistics expanded our knowledge of agencies’ datasets; and Alex Friedmann, Neelum Arya and Drew Kukorowski provided invaluable feedback on earlier drafts of this report. Any errors or omissions, and final responsibility for all of the many value judgements required to produce a data visualization like this, however, are the sole responsibility of the authors.