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Price-Gouging Drug Company CEOs Must Answer for Their Sky-High Pay

Congress needs to get serious about finally regulating drug pricing, ending the monopoly patent pipeline, beefing up antitrust oversight—and reining in runaway executive pay

Johnson & Johnson’s pay ratio, based on $29.8 million in reported CEO compensation, is a whopping 452:1. (Photo: Floris Van Cauwelaert/Flickr/cc)

Johnson & Johnson’s pay ratio, based on $29.8 million in reported CEO compensation, is a whopping 452:1. (Photo: Floris Van Cauwelaert/Flickr/cc)

It’s clear to everyone who cares to look that prescription drug price gouging is literally killing patients. Health care executives -- at Big Pharma and pharmacy benefit managers (PBMs) alike -- are moving an inelastic product their customers can’t live without. They know they can charge sick people as much as the government will let them get away with. Sometimes, they press their luck and impose what look very much like coordinated price hikes, practically daring Congress to try to do something about it.

The drug companies’ wild ride may soon be coming to an end. On Tuesday, the House Committee on Oversight and Reform will hold its first hearing of the new 116th Congress, which Chair Elijah Cummings is using to launch a comprehensive review of pricing practices.

While Cummings has Johnson & Johnson, Pfizer, and AbbVie in the room, he might consider asking how they justify their exorbitant executive compensation packages. Shareholders would certainly like to know.

Because CEOs are primarily compensated in stock options, they’re heavily incentivized to jack up prices, sell more drugs, and do whatever they can to increase earnings per share—disastrous health outcomes, exploding inequality, and outrageous headlines be damned.

Because CEOs are primarily compensated in stock options, they’re heavily incentivized to jack up prices, sell more drugs, and do whatever they can to increase earnings per share—disastrous health outcomes, exploding inequality, and outrageous headlines be damned.

With Big Pharma now fully financialized, executives are spending their time looking for opportunities to extract value—including through massive share buybacks—rather than focusing on ways to create it. Their fixation on stock price above all else, enabled by systemic, unregulated self-dealing, is how executives get away with paying themselves an average of $20 million a year.

This is all especially galling because we know that health care is less a market than a protection racket: few wholesale purchasers, secrecy around true pricing, and a complicated kickback (rebate) scheme make it absurd to suggest that patients can meaningfully “shop” for better drug prices the way they can for real commodities.

Drug company executives owe the fact that they have a product to peddle in the first place to tens of trillions of taxpayer dollars allocated annually to government research, and particularly to scientific innovation driven by the National Institutes of Health. Drug patent holders effectively have a license to print money, even—or especially—when they’ve contributed nothing that warrants monopoly protection.

The drug pricing problem shines a spotlight on the true nature of the pharmaceutical industry’s relationship with the federal government: it’s an elaborate machine built to funnel vast public resources to the top 0.01 percent. The government pays for corporate R&D. It permits executives to behave like speculators and wring cash out of companies the American healthcare system depends on. And it picks up the extortionate tab for drug prices set by fiat. Economist Mariana Mazzucato describes this state of affairs as a “long con,” emphasizing that “[t]he supposed partnership between public and private sectors is increasingly parasitic.”

In order to dismantle the machine, Congress needs to get serious about finally regulating drug pricing, ending the monopoly patent pipeline, beefing up antitrust oversight—and reining in runaway executive pay.

CEO pay has been snowballing for decades: it’s grown a full 70% faster than the rise in the stock market since 1978. But the extraordinary disparity between this explosive growth in executive compensation and what regular workers are paid couldn’t be adequately illustrated until this past year, when the Securities and Exchange Commission started requiring disclosure of CEO pay ratios.

We now know that AbbVie’s chief executive, reportedly paid $22.6 million in 2017, makes 144 times as much as the company’s median employee. Pfizer’s CEO, at $27.9 million, sits atop a 313:1 pay ratio. Johnson & Johnson’s pay ratio, based on $29.8 million in reported CEO compensation, is a whopping 452:1. An accurate accounting of actual take-home CEO pay would push these ratios even higher.

The American public erroneously believes the average gap for CEO to unskilled worker pay is just 30:1. (It thinks the ideal gap should be around 7:1.) This disconnect from reality brings home how impossible it is for human beings to wrap our minds around the astronomical sums being pulled down by CEOs -- and should give all stakeholders pause about how well these huge earners are actually managing corporate resources.

Father of modern management” Peter Drucker warned us long ago that a CEO pay gap greater that 20:1 has unsustainable negative impacts on worker morale, productivity, and retention. As these gaps continue to widen, it’s incumbent upon CEOs to justify their pay ratios, to workers, shareholders, and the government alike.

Kim Lehmkuhl

Kim Lehmkuhl is a policy analyst with the Center for Study of Responsive Law's CEO pay project. Her email is kimlehmkuhl@csrl.org.

 

 

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