We have frequently posted, some may say tiresomely, about the lack of consequences or negative incentives for health care organizational leaders involved in wrong-doing. For example, see the numerous cases against health care organizations that resulted in legal settlements, almost never requiring any penalties against individuals who authorized, directed, or implemented the behavior in question.
Now a major article in the New York Times by Gretchen Morgenson and Louise Story explains some of the history behind this aspect of the decreasing accountability of corporate leadership. Their article focused on financial corporate leadership, but clearly is generalizable to health care corporate leadership.
Banks Asked to Report Their Own Misbehavior
The Times article documents how the US Department of Justice deliberately became more lenient in the 1990s, supposedly to conserve scarce investigational resources:
dating to the mid-1990s … banks were asked to regularly report suspicious activities to the Treasury Department, an effort that aimed at relieving regulators of some of their enforcement loads.
The Effect of the Arthur Andersen Case
Around the beginning of the 21st century there had been some vigorous prosecution of corporate financial wrong-doing:
The names have become synonymous with corporate wrongdoing — and forceful prosecution: Not just Enron, but also WorldCom, Tyco, Adelphia, Rite Aid and ImClone. In the early part of the last decade, senior executives at all these companies were convicted and imprisoned.
However, for reasons that were not explained, a single unsuccessful case caused reconsideration of this approach:
The department began pulling back from a more aggressive pursuit of white-collar crime around 2005, say defense lawyers and former prosecutors, after the Supreme Court overturned a conviction it won against the accounting firm Arthur Andersen. That ended an era of brass-knuckle prosecutions related to fraud at companies like Enron.
Sympathy for the Targets of Investigation
The pullback was rationalized for a sudden sympathy for the objects of investigation:
But by 2005, a debate was growing over aggressive prosecutions, as some business leaders had been criticizing the approach as perhaps too zealous.
That May, Justice Department officials met ahead of a session with a cross-agency group called the Corporate Fraud Task Force. It was weeks after Justice Department lawyers had presented to the Supreme Court their case against Arthur Andersen, which was seeking — successfully, it would turn out — to overturn its criminal fraud conviction in a prominent case.
In the meeting, the deputy attorney general at the time, James B. Comey, posed questions that surprised some attendees, according to two people there who asked to remain anonymous because they were not supposed to discuss private meetings.
Was American business being hurt by the Justice Department’s investigations?, Mr. Comey asked, according to these two people, who said they thought the message had come from others. He cautioned colleagues to be responsible. ‘It was a total retrenchment,’ one of the people said. ‘It was like we were going backwards.’
Mr. Comey said recently that he did not recall this conversation.
Around the same time, the Justice Department was developing instructions on dealing with companies under investigation — particularly companies that work with the government. It issued a memo in 2003 that gave companies more credit for cooperating than in the past. That message was reinforced in another memo in 2006.
As the first memo put it, ‘it is entirely proper in many investigations for a prosecutor to consider the corporation’s pre-indictment conduct, e.g., voluntary disclosure, cooperation, remediation or restitution, in determining whether to seek an indictment.’
During this period, the Justice Department increased the use of deferred prosecutions or even nonprosecution agreements.
Many well-known companies have benefited. In 2004, the American International Group, the giant insurer, paid $126 million when it entered a deferred prosecution agreement to settle investigations into claims that it had helped clients improperly burnish financial statements.
Deals over accounting improprieties also were struck that year by Computer Associates International, a technology company, and in 2005 by Bristol- Myers Squibb, a pharmaceutical concern. Prudential Financial entered into a deferred prosecution in 2006 over improper mutual fund trading.
Note that while the emphasis of this article was on the financial services industry, big health care organizations were also benefiting from more lenient treatment. Note also that one firm given lenient treatment, AIG, went on to threaten collapse, a collapse that was feared could take down the entire world financial system, and hence was given a very generous government bail-out, which has not be paid back to this day.
In 2008, the approach was formalized:
As the financial storm brewed in the summer of 2008 and institutions feared for their survival, a bit of good news bubbled through large banks and the law firms that defend them.
Federal prosecutors officially adopted new guidelines about charging corporations with crimes — a softer approach that, longtime white-collar lawyers and former federal prosecutors say, helps explain the dearth of criminal cases despite a raft of inquiries into the financial crisis.
Though little noticed outside legal circles, the guidelines were welcomed by firms representing banks. The Justice Department’s directive, involving a process known as deferred prosecutions, signaled ‘an important step away from the more aggressive prosecutorial practices seen in some cases under their predecessors,’ Sullivan & Cromwell, a prominent Wall Street law firm, told clients in a memo that September.
The guidelines left open a possibility other than guilty or not guilty, giving leniency often if companies investigated and reported their own wrongdoing. In return, the government could enter into agreements to delay or cancel the prosecution if the companies promised to change their behavior.
The NY Times article documented a number of opinions that increasing leniency was resulting in less deterrence of bad behavior:
‘If you do not punish crimes, there’s really no reason they won’t happen again,’ said Mary Ramirez, a professor at Washburn University School of Law and a former assistant United States attorney. ‘I worry and so do a lot of economists that we have created no disincentives for committing fraud or white-collar crime, in particular in the financial space.’
Why So Much Sympathy from Prosecutors?
What was not really clear from the article is why US federal prosecutors seemed to go from their stereotypically tough on crime personas to bleeding hearts for corporate criminals. The one rationale the article provided from the Department of Justice was:
Defending the department’s approach, Alisa Finelli, a spokeswoman, said deferred prosecution agreements require that corporations pay penalties and restitution, correct criminal conduct and ‘achieve these results without causing the loss of jobs, the loss of pensions and other significant negative consequences to innocent parties who played no role in the criminal conduct, were unaware of it or were unable to prevent it.’
This, however, makes no sense. Well directed prosecutions of the people who apparently authorized, directed or implemented the wrong-doing ought to have very little effect on “innocent parties.” The only jobs and pensions that should be lost should be those of the accused.
This seems to be the most recently documented example of important but overlooked, or concealed changes in government policies that have enabled the health care system to become more unethical, dishonest and corrupt, and hence more dysfunctional.
Here we discussed a Supreme Court decision interpreting US anti-trust law that has been used to prevent medical societies from enforcing ethical rules, and hence helped medicine to become increasingly commercialized, and to increasingly put money ahead of patient care.
Here we discussed little discussed legislation from 1945 that allowed US insurance companies/ managed care organizations to avoid federal anti-trust investigation and enforcement, and hence to increased market power.
Here we discussed failure of the executive branch, and especially the Department of Justice to use existing legal doctrine, the Responsible Corporate Officer Doctrine, available since 1943, to make corporate leaders responsible for their companies’ bad behaviors, leading to their increasing lack of accountability and less deterrence of malfeasance.
Now we have seen a deliberate turn away from even direct penalties on corporations which have misbehaved, in return basically for a promise that “we won’t do it again.”
The first two examples may be of unintended consequences.
The last two seem to signal an increased coziness between some in government and corporations. The origins of this coziness just beg for investigation.
Meanwhile, there seems to be no evidence that the government’s new leniency has protected innocent people who would have been harmed by the previous tougher approach. Instead, there seems to be a growing tide of bad behavior by health care organizations, exemplified by the nature of some of the bad behavior that lead to the march of legal settlements, and to the deferred prosecution agreements and corporate integrity agreements generated in response to the new policies.
What Is to Be Done?
- There clearly needs to be investigation, both by journalists and at a congressional level, of Department of Justice policies that have been increasingly lenient to and cozy with large corporations, including health care corporations.
- Current Department of Justice officials need to be reminded that their clients are the US people, not corporate executives, no matter how hearty and well-met.
ADDENDUM (12 July, 2011) - See this related post on the Naked Capitalism blog.
ADDENDUM (19 July, 2011) – See related post by Dr Howard Brody on the Hooked: Ethics, Medicine and Pharma blog.