The cost of corporate malfeasance
Who picks up the health care tab when makers of faulty and dangerous devices pay a minimal price for their misbehavior? We all do.
Earlier this week, the Dutch conglomerate Royal Philips NV agreed to pay $1.1 billion to settle a class action lawsuit brought by 58,000 people claiming they were harmed by the company’s nighttime breathing machines.
That’s less than $20,000 per claimant. And that’s before the 20-30% that will be taken by the trial lawyers who brought the case on their behalf.
Here’s the background: In 2021 Philips voluntarily recalled one million of its market-leading DreamStation CPAP (continuous positive air pressure) machines after discovering they were shooting volatile organic compounds for muffling sound into users’ throats and lungs. The fear, expressed through thousands of patient complaints, was that the chemicals caused cancer.
The company’s follow-on device also ran into problems, triggering an investigation by the Food and Drug Administration in 2023. This past January, Philips stopped selling CPAP machines in the U.S. entirely.
How much damage did these dangerous products cause? That’s hard to know exactly. But the stock market weighed in on the subject this week.
Philip’ stock price soared 33% to $28 a share on the news before settling in at just under $27 a share yesterday. Stock analysts had expected the company to pay anywhere from two to four times that amount with some predicting a worst-case scenario of $10 billion. The company’s insurers, according to news reports, will pick up about half the tab.
Clearly, the company is paying out far less than what investors expected for the long-term damage caused by the devices.
About 33 million people nationwide use CPAP machines for sleep apnea and other night-time sleeping disorders. When left untreated, many patients with interrupted sleep patterns experience high blood pressure and are at increased risk of heart disease, liver disease and diabetes.
Untreated sleep apnea also disturbs the sleep of their partners, which probably accounts for the machines’ soaring use. Global sales of CPAP machines will top $5 billion this year and are expected to double over the next decade, right along with the growth of our obese and aging population. Obesity and aging are the two major risk factors for sleep apnea.
The people who purchased the dangerous products will receive at least something for their travails. But who will pick up the health care costs that people who used the faulty machines will experience years from now? Not Philips.
Most of those costs will be picked up by users’ health insurance, which in most cases will be Medicare. Treatment for every side effect of these faulty machines (cancer, heart attack, stroke, liver disease) will cost the government program far more than the machines themselves, 80% of whose cost the agency also picked up.
Cost-benefit analysis
Economists have a word for shifting the cost of corporate malfeasance to the public domain. It’s called an externality. Companies only pay for labor, capital investment, supplies, overhead and marketing, and set a price that allows them to make a profit. Any societal costs associated with using a product — including its negative impacts on health or the environment — become an externality that is left for someone else to pay.
That’s where government regulation steps in. Congress has the ability to pass laws that either prevent or reduce these externalities. But the federal government doesn’t have a blank check when writing regulations. It must take into account both the costs of those regulations and their benefits. For example, the cost of requiring new air pollution controls on cars, factories or power plants must be weighed against the societal benefits, which are measured by their ability to reduce health care costs, save lives and improve productivity.
This weighing of costs and benefits, first imposed by an executive order issued by President Bill Clinton in 1993, isn’t dispositive, however. “Agencies do not typically make decisions solely on the outcome of their cost-benefit analyses,” the Congressional Research Service noted in a 2022 issue brief. “Other factors will likely be part of an agency’s regulatory decision, such as statutory mandates and considerations, as well as the political and policy priorities of the current Administration.”
Those priorities can differ radically depending on who sits in the White House. Shortly after taking office in 2017, President Donald Trump unveiled his priorities. He issued an executive order establishing a “one-in, two-out” requirement for any agency seeking to impose a new rule carrying out its mandate to provide cleaner air or water, safer food or drugs, or sounder banks and financial markets. His appointees at the Office of Management and Budget, which reviews all proposed regulations, also set a cost cap for any new regulation, which effectively eliminated consideration of benefits.
On January 20, 2021, the day President Joe Biden took office, he immediately repealed Trump’s order. He reinstated the Clinton order pretty much as originally written.
Uneven application
Not every regulation takes cost-benefit analysis into account. The FDA regulates drugs and devices like CPAP machines by weighing their health benefits against their safety risks. It does not consider costs when approving new medical technologies.
More than a decade ago, I served as the consumer representative on several federal advisory committees weighing whether new medicines should be approved. I never heard a single presentation that calculated the future cost of achieving the medical benefits of the drug. Nor did I hear a presentation about the total cost of treating the side effects from its use. All discussions hinged on whether the medical benefits, measured by the improved outcomes in the clinical trials submitted for approval, outweighed the safety risks, which were also drawn from those trials. The cost to patients and their insurers had nothing to do with it.
Every discussion of the use of cost-benefit analysis in the U.S. (usually referred to as cost-effectiveness analysis when used in the medical context) inevitably devolves into a highly politicized discussion. Negotiate prices based on their cost-effectiveness? That will cut off innovation, the drug companies say. Refuse to cover the drug or device because its price is too high? That will be used to ration care like in Great Britain.
The Institute for Clinical and Economic Review, a non-profit based in Boston, has taken the lead in conducting cost-effectiveness studies in the U.S. But the group has no official regulatory standing. That’s very different from the National Institute for Health and Care Excellence (NICE) in Great Britain, whose analyses are routinely used by the country’s single-payer National Health Service to determine what price it will pay for a drug or device or won’t cover at all if the manufacturers demands a price deemed not cost-effective.
We’re seeing this issue play out with the new class drugs that have proven remarkably successful in reducing weight in people who are obese — now over 40% of the U.S. population. Novo Nordisk has set the price of Ozembic and Wegovy (generic name semaglutide, the former approved for weight loss; the latter for diabetes) at about $11,000 a year. To maintain weight loss, these drugs must be taken for life.
A recent op-ed in the New York Times co-authored by Brian Deese, the former head of the National Economic Council, estimated that at that price, weight-loss drugs could wind up costing the health care system $1 trillion a year or nearly five times the estimated cost of treating the ill-health caused by obesity. “This is a staggering sum,” the op-ed noted. “It is almost as much as the government spends on the entire Medicare program and almost one-fifth of the entire amount America spends on health care.”
Deese and his co-authors called on Congress to add semaglutide to the list of drugs whose price will be negotiated by the government to bring it more in line with what Europeans pay and, more importantly, its actual medical benefits.
Semaglutide isn’t the only drug where such analyses are necessary. One agency already has the power and the data to contrast the costs and benefits of drugs and medical devices: the Food and Drug Administration. Indeed, the FDA routinely conducts such analyses for its food regulations.
Just this week it issued a “regulatory impact analysis” for a proposed rule that will reduce the allowable microbial content in water used to irrigate agricultural crops. Though the cost to farmers ($17.7 million — the mid-point in a range) exceeded the benefit to consumers from reduced foodborne illnesses ($10.1 million), the agency is moving ahead with its proposal.
When it comes to approving new drugs and devices, Congress has determined that the FDA should only consider safety and effectiveness. But agency scientists are well positioned to consider what the financial impact will be on society.
They are the ones who should be doing the work that ICER now does (not that I want to put ICER out of business — there’s always room for independent analysis). Agency scientists could easily determine the size of the potential patient population. They could calculate how many will benefit based on the outcomes in the clinical trials. They could then calculate the societal benefit from reducing other health care costs.
They also know the side effects — at least those that show up in the relatively short time period of the trials. From that, they could calculate what the medical costs would be from treating those side effects.
The only missing data points are the expected price for any new product. If companies were required to submit that along with their new drug or device applications, the FDA could conduct a regulatory impact analysis as part of its evaluation process and provide that information to policy makers and the general public.
It wouldn’t affect the final approval determination. But the country would have a much clearer picture of the value of new treatments.