Bethany McLean’s dissections of corporate disaster are always worth reading, The Valeant Meltdown and Wall Street’s Major Drug Problem being no exception.
Human greed clearly knows few bounds. It’s shocking. Our first reaction is to wonder about the limits of that greed. But it’s not worth wasting time on such thoughts—to think of the way the world should be rather than how it is. The more useful starting point for any thought experiment on the matter is to assume that some percentage of the population will do just about anything for an incremental dollar of easy profit. It’s a sound bet, and now we’re actually working with human nature rather than wishing it was different.
Capitalism at its best works not because ethics classes convince the greediest to act with restraint, nor even by excluding the greediest from the process, although some of that does and should happen. Rather, robust systems – competitive, regulatory, media and others—work to channel that greed in ways that provide productive outcomes for customers and everyone else affected. A bad system most encourages the very greediest, a great system encourages the most useful and/or innovative in a way that benefits everyone.
As the Valeant scandal shows, the US health system is a long, long way from capitalism at its best. It’s a disgrace. But a handful of well-designed systemic changes would have saved much heartache, so much so that just about any know-nothing could design a better system. Here are a few suggestions:
- The FDA process seemingly does little to encourage the potential for generics to compete. As per the suggestion of “J” (a character in the article), if the price of a generic drug rises, say, more than 3x the inflation rate, the F.D.A. should add resources and fast-track the approval process for competition. Really, can it be that hard to approve a generic alternative to a drug that’s already being sold and consumed? They’re identical! It’s essential if players are otherwise going to charge $1,000 for something that costs mere dollars to produce and should sell for $10.
- Change the co-pay system. This was an essential cog in the wheel of the Valeant profit machine. Take that illustrative but fictional $1,000 drug highlighted above, and let’s say the co-pay was $200. The customer generally pays $200, the insurance company the remaining $800. That system was set up to give the customer a financial incentive against overuse or unnecessary use of drugs, and to encourage shopping around and use of available alternatives. But Valeant often reimbursed all or part of the co-pay amount to the consumer, ameliorating the incentive for the consumer to ask questions, while still allowing the company to net $800 for a drug that should sell for $10. This system could be changed through regulatory intervention—banning co-pay reimbursement from the private system (much as Medicare already does in the public system) or through wholesale rejection by insurance companies of such set ups (as is happening currently).
There, two changes put together by any idiot (me) that would have resulted in much better outcomes in US health without questioning the foundations of the capitalistic system. There seems to be plenty more low-hanging fruit in this story, such as changes to laws on drug companies owning/controlling specialty pharmacy businesses like Philidor and extreme punishments for anyone caught committing fraud by forging doctor’s signatures or instructions on prescriptions, an accusation leveled at Valeant subsidiaries that went unmentioned in McLean’s article. But I don’t want to step outside my scant knowledge of the situation. Plenty of insightful stuff has been written elsewhere, the Bronte Capital blog and the Southern Investigative Reporting Foundation being fine starting points for more reading.
The point of this post wasn’t to add any specific insight to the Valeant story but rather to remind that we can never hope to successfully outlaw the limits of human greed. Proof of that comes from places like North Korea and Cuba where the destruction of capitalism resulted in something rather short of utopia. Greed is a human constant—channelling it effectively and putting it to productive uses is usually the best way forward.
8 thoughts on “Valeant and Limitless Greed”
You make two pretty powerful and seemingly obvious suggestions Gareth Good on you. As well as providing a prompt for a bit more reading.
I think what is often lost when we think of the capitalist base for our economy is its ethical base (however one wants to express that).
Adam Smith’s most famous book The Wealth of Nations (often derided as a textbook case of justifying greed and hence the rotten foundations of capitalism) requires his other book The Theory of Moral Sentiments to provide the necessary balance.
I’m still reading another book one of your readers suggested on the terrible corporate behaviour displayed within one of the biggest banks in Britain (Shredded. Inside RBS The Bank That Broke Britain) and it’s pretty depressing reading.
Whether it is health products, or banking, one certainly should expect a higher standard of behaviour than is currently on show with many of our corporate leaders. Moral pygmies is a term that has been ‘bandied around’. We all would like to make some money and build wealth but not at that price. This is why the failings of ASIC as the corporate watchdog has such a multiplier effect. If you substituted success for failings the multiplier effect would be the same but in the opposite direction.
Might I suggest “Scottish Banking: A History, 1695-1973” by Checkland, S. G.
Published by Collins, 1975 ISBN 10: 0004601084 / ISBN 13: 9780004601083
It’s lengthy, but solid (in all senses). Hard to really get a handle on the history of banking (in general) without it.
Sounds like rent seeking, not capitalism?
Yes, if it keeps deteriorating one day we will each go to our bank accounts or share portfolios and find nothing there. Why do we tolerate the deadbeats highlighted in your article.
Agencies such as ASIC, ICAC and the like need to be strengthened and the sentences for the transgressors needed to be severely upped.
FDA does not just approve generics (the product). The factories have to meet certain standards, too.
It is not as easy as approving a product once.
Thanks Martin. I’m aware of those strict production standards – we watched (fortunately from the sidelines) one of the big Australian generics manufacturers (Pan Pharmaceuticals) bankrupted overnight 12 years ago when the Australian equivalent of the FDA pulled its licence. I understand these approvals don’t and probably can’t progress particularly fast. But there does seems to be a bottleneck there. My point is that getting that generic licence must be easier than when the original drug goes through that process AND animal trials and humans trials and all that crucial stuff.
Clearly the FDA process is only one small piece of the puzzle here. Valeant were apparently selling Jublia (for toe nail fungus) at $8,000 a treatment. How absurd, and I’d guess not for a lack of alternatives.
I think the Valeant case highlights the perils of having too much access to management. I don’t think it’s necessary to have access to management to be a good value investor. Most individual investors don’t.
I think Bill Ackman and others got in so deep in this because they were impressed with Michael Pearson.
Good salesmen can really get to you. None of us are completely immune to that.