Is the health care industry healthy?

12-12-2011 | Triodos Bank recently removed Johnson & Johnson and Quest Diagnostics from its Sustainable Investment Universe. There were too many breaches of legislation that when added up was reason enough to exclude these companies from further investments.

Involvement in violation of legislation is one of the minimum standards we use to assess companies on their sustainability performance. For two health-care companies the number and severity of violations reached the limit.

Scene setting – culture important

Triodos Sustainability Research looks at a variety of factors when assessing cases involving violation of legislation – the type of case, the number of cases, those affected, the amount of the fine or settlement, and the company’s response and measures taken to prevent recurrence. Another important factor we look at is the legal culture of a company’s home country. When analysing US based companies, we therefore also take in to consideration that the US has a highly litigatious culture, with also many so-called frivolous law-suits. This cultural consideration played a role in our initial assessment of Johnson & Johnson and Quest Diagnostics. Both companies were selected for our Sustainable Investment Universe. However, the repeated involvement of these two companies in breaches of legislation proved too much to be considered cultural alone.   

Johnson & Johnson

Two years ago, Johnson & Johnson was selected into the Triodos Sustainable Investment Universe. At that time, Triodos Sustainability Research discussed at length the company’s involvement in violation of legislation. Johnson & Johnson showed great transparency when contacted by us, and so it was decided that the company was operating within the limits set by the relevant Triodos standards. In 2011, several new concerns emerged. This time the concerns shifted to marketing malpractices. Again the company was contacted and responded adequately to our concerns. But the breaches continued. In June, Johnson & Johnson received a large fine in the US state  of South Carolina for the off-label marketing of Risperdal, an antipsychotic medication. When this new fact was combined with the knowledge that it was a second and large fine for the same offence, and that similar lawsuits in seven other states were pending, we found it too much of a pattern and removed the company from our Sustainable Investment Universe.

Quest Diagnostics

Quest Diagnostics is involved in lawsuits for overcharging medical programmes. Many companies in the US are brought to court under the False Claims Act (FCA). This national law imposes liabilities on companies that defraud governmental programmes. It includes a whistleblower provision that allows people who are not affiliated with the government to file actions on behalf of the government. Those that file are eligible to receive a portion (usually about 15%–25%) of any recovered damages, which is quite an incentive to try bringing cases forward. Court rulings or settlements for US companies can amount to large penalties and claims under the law have typically involved government spending programmes, like health care. We see that many health care companies are involved in such, very often frivolous, cases. It is considered to be so common for the industry that Triodos tends not to exclude companies confronted with these types of lawsuits from its investment universe. Yet, for Quest we decided otherwise. In May 2011 the company settled a lawsuit in California for USD 241 million. The settlement amount far surpassed the company’s yearly earnings from the medical state programme and meant that the company had to restate its earnings. The amount is the largest recovery in the history of California’s False Claims Act. Quest had settled a comparable lawsuit in 2009, also for a large amount. In the end, the ratio between settlement amounts and revenues, plus the expectation that more lawsuits may surface was reason enough for Triodos to remove the company from the Sustainable Investment Universe.

Note: The issues explored in this article are relevant for sustainable investments on the stock market. Triodos Bank believes that our socially responsible investments are a powerful means of promoting our values and working for greater sustainability, while enabling us to offer a complete range of attractive investment options to customers who choose to invest on the stock market.