A pharma cure for moral hazard?

“Moral hazard” – one of the three  principal areas of focus of this blog  – refers to a situation in which there is a disconnect between, on the one hand, those with the capacity and motivation to engage in risky behavior and, on the other, those who will bear the likely negative impact of such risk taking.  Notwithstanding the word “moral” in its name, it is primarily an economic concept – not an ethics-related one.  But anyone familiar with the logic of “heads I win, tails you lose” will see the possible connection to the latter area.

Certainly the government – since the 2004 amendments to the Federal Sentencing Guidelines for Organizations   – has been mindful of the role of  incentives in promoting or inhibiting C&E.  More recently, its concern has been reflected in the C&E aspects of some settlement agreements, such as the 2012 money laundering related case against HSBC (specifying, in relevant part, that bank policies provide that “the extent to which a senior executive meets the bank’s compliance standards and values has a significant impact on the amount of the senior executive’s bonus”).  Beyond these government-imposed C&E elements, some companies are instituting compensation “clawback provisions” involving wrongdoing by executives – including, as described in this recent post, Barclays.

The latest news on this front comes from the Wall Street Journal, which last week reported:  “Under pressure from investors, six of the biggest U.S. drug makers [Pfizer, Merck, J&J,  Amgen, Bristol Myers  Squibb and Eli Lilly] are revising their compensation policies to make it easier to recover payouts to an executive who violates ethics rules or otherwise behaves inappropriately. The changes would let the drug makers . . . reclaim compensation from executives whose actions hurt them or their investors, even if the behavior didn’t force a restatement of financial results. The companies also would be able to recover payments to executives who should have stopped bad behavior and to cancel future payouts.”

Note that from a purely economic standpoint, clawbacks  are not an optimal deterrent – as they permit  what is closer to a  “heads I win, tails we tie” calculation than something more truly punitive.  But the recent steps taken by the pharma companies in this regard still represent real progress in the fight against moral hazard – and one hopes that other industries follow this prescription.

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