J&J $2.2 Billion Settlement: Necessary in a Third-party Payer System

November 10, 2013
Martin Merritt

Huge government fines designed to punish marketing tactics are almost unique to the field of medicine because of the third-party payer system.

Johnson & Johnson has agreed to pay over $2.2 billion to resolve criminal and civil allegations that the company promoted powerful psychiatric drugs for unapproved uses in children, seniors, and disabled patients, the Department of Justice announced recently.

According to The Huffington Post, the agreement is the third-largest settlement with a drugmaker in U.S. history, and the latest in a string of actions against drug companies allegedly putting profits ahead of patients.

Justice Department officials alleged that J&J used illegal marketing tactics and kickbacks to persuade physicians and pharmacists to prescribe Risperdal and Invega, both antipsychotic drugs, and Natrecor, which is used to treat heart failure.

"J&J's promotion of Risperdal for unapproved uses threatened the most vulnerable populations of our society - children, the elderly and those with developmental disabilities," said U.S. Attorney Zane Memeger, of the Eastern District of Pennsylvania.

The settlement is the most recent example of regulators cracking down on aggressive pharmaceutical marketing tactics, namely trying to increase sales by pushing medicines for unapproved, or "off-label," uses. While doctors are allowed to prescribe medicines for any use, drugmakers cannot promote them in any way that is not approved by the FDA.

If this article happened to be a video presentation, this is the point where I would hit “pause” to explain what is really going on here. Huge government fines designed to punish marketing tactics is a phenomenon that is almost unique to the field of medicine.

In a pure market economy, prices and availability are controlled by “supply and demand.”  How much a company sells is driven by the consumer’s ability to pay for goods and services. When a person runs out of money, he stops spending. Health insurance provides the consumer with something he probably cannot afford out of pocket.  Thus, the law of supply and demand normally does not apply.

Like it or not, something must take the place of market economics.  In the case of healthcare economics, government regulations fill the gap vacated by the free market. In fact, the sole purpose of many regulations seems to be to slow spending. (You won’t find a “Stark Law” for auto maintenance in most states, for example, even though I am equally confused by automobile diagnostics. Cheating is possible, but not on a scale we might see if someone else were paying for maintenance.)

Private insurance, such as Blue Cross Blue Shield networks, accomplish the same end through policy exclusions and external utilization audits. Often, the Blues, acting as claims processors for self-insured employers, are instructed to find a reason (“any reason”), to cut reimbursement. This usually means, “Find where the money is being spent, and put an arbitrary limit on it.”

This isn’t unique, by the way, to healthcare. (Third-party auto insurance companies contract with auto collision repair shops in a manner very similar to managed healthcare. If too much money is being spent, the carrier will find a way to impose cutbacks. The key, again, is the presence of a third-party payer.)

This all leads to headaches for physicians, who are caught in the middle. There is one good thing about third-party payment systems, however; at least it means you are still in business.

If the government took over healthcare, and everyone became a government employee, there would be no need for Stark Law, Blue Cross Blue Shield audits, or FDA “off-label” marketing regulations. On the other hand, there would be no profit potential at all in healthcare delivery.