Another "Surprising" Headline about Conflicts of Interest

Today's New York Times has a brief article by Robert Pear with one of the most un-surprising headlines I can remember: "Doctors Who Profit From Radiation Prescribe It More Often, Study Finds".

Well, sure.

That doesn't mean I"m happy about it, of course.

I've written before about how easily humans are swayed, even by a pharmaceutical sales rep's "gimme" pens (full post, here), and about how hard it can be to see a conflict of interest, especially from the inside (full post, here), so I do sympathize... up to a point.

Today's article draws from a July 2013 report from the Government Accounting Office (full report, in .pdf format, here) on the recommendation of doctors for IMRT (Intensity-Modulated Radiation Therapy), a relatively common and costly prostate-cancer treatment.

The bottom line: "Doctors who have a financial interest in radiation treatment centers are much more likely to prescribe such treatments for patients with prostate cancer."

The report stated that,

The number of Medicare prostate cancer... IMRT services performed by self-referring groups increased rapidly, while declining for non-self referring groups from 2006 to 2010.... The growth in services performed by self-referring groups was due entirely to limited specialty groups -- groups comprised of urologists and a small number of other specialties -- rather than multispecialty groups.

The report explains that "self-referral" means that "a provider refers patients to entities in which the provider or the provider's family members have a financial interest", and goes on to explain that the Medicare beneficiaries are generally unaware of the financial connection.

For those of us on the outside, it isn't hard to see the conflict of interest.

But I can understand how easy it might be to overlook from the inside. A group of urologists may purchase the radiation therapy equipment, and honestly believe that their brand-new machine is better than anyone else's in town.

And it's possible that it is.

But wouldn't you want to know that the bills for the machine's use will eventually work their way back to the doctor who recommended that treatment center? (The GAO report recommends that "Congress should consider directing the Secretary of Health and Human Services ...to require providers to disclose their financial interests in IMRT to their patients.")

Disclosure is always a good first step. But it shouldn't be the only step. It's valuable to try to step outside of one's own perspective whenever possible: How will this action look to someone who doesn't know me?

It Take More than Not Doing Wrong to Do Right

We often think of ethics as "doing the right thing". In other words, we think of it as resisting the temptation to do wrong: somebody drops a $20 bill as they're stepping away from a cash register, and, instead of pocketing it quietly ourselves, we call out to the person and return the lost money.

But I've been thinking about the flip side of ethics lately. In one version of the Episcopal Church's communal confession of sin, congregants ask God for forgiveness not only because "we have done those things which we ought not to have done", but also because "we have left undone those things which we ought to have done."

Just the other day, I drove right past an older, heavy-set woman walking slowly up a hill, laden with packages. How hard would it have been for me to stop and offer her a ride? I didn't have anyone else in the car; I wasn't late for any appointment. It would have been easy. And I didn't do it.

I've been thinking about leaving things "undone" since reading an article by Winnie Hu in Friday's New York Times, where she reports about a suit filed by deaf customers against the Astor Place (New York) Starbucks for allegedly discriminating against the deaf. A small group of deaf New Yorkers had been meeting regularly at that coffee shop, and say that "Starbucks workers refused to take some of their orders at these meetings, stared when they signed to each other, complained that they were not buying enough coffee and pastries, and eventually told the group not to come back."

As Hu wrote, "The legal battle has jolted many New Yorkers who have made the ubiquitous coffee shops part of their routine, and served as a reminder that even in a city as tolerant as New York, intolerance can be all too common for some populations."

The lawsuit "seeks to compel the company to conduct sensitivity training for employees and adopt policies to better serve deaf customers". A Starbucks spokeswoman would not comment on the specific litigation, but said that the company "does not agree with the allegations contained in the complaint" and noted that the company already provided sensitivity training for its employees and supported "equality, inclusion, and accessibility" for both employees and customers.

We don't hear a lot (if you'll pardon the expression) about discrimination against the hearing-impaired. Hu quotes a civil rights lawyer who said that "discrimination against the deaf often goes overlooked because it is subtle and sophisticated, and because some deaf  people may be isolated and may not speak up when it happens to them." He added,

It's not like putting up a sign on the door, 'No deaf people allowed." But when deaf people are treated differently than others, it does hurt and it's illegal.

Illegal and unethical aren't always the same, but in this case they certainly run together. I'd like to suggest, however, that it's not enough to "do the right thing". People who are hearing-impaired are already outsiders in a hearing world, just as the blind are in a seeing world. It isn't enough to get out of the way of a blind person being led by her guide dog. How hard is it to ask her if she needs assistance? It's not enough to accept a hand-written request for a super-tall extra-strong four-sugars iced coffee from someone who is deaf; how hard is it to offer a warm smile?

As for me, the next time I see someone to whom I should offer a ride, I'm going to try to remember what I left "undone" the last time. And this time, I want to do the really right thing.

Does a Traffic Ticket Mean You're More Inclined to Fraud? Maybe....

I'll be the first to admit that I have been known to exceed posted limits on the highway. By how much? Hmmm. Maybe I'd better lay claim to the Fifth on that.

Oh and I can justify my speeding, of course: I'm just keeping up with traffic! Statistics have shown that being an outlier on either end of the bell curve (driving significantly more slowly than traffic or driving significantly faster) is much more dangerous than flowing along with the rest of the vehicles on the road.

So it's not really that I want to go fast: I want to be safe.

Yeah, and I've got a bridge to sell you.

But now I may have to rethink my vehicular behavior.

The New York Times' Floyd Norris has a fascinating article in today's paper, based on an academic report written and recently published by Robert Davidson (Georgetown University), Aiyesha Dey (University of Minnesota), and Abbie Smith (University of Chicago), that suggests that "off-work" behavior can give a strong clue about "at-work" behavior. An abstract of the paper, which is to appear in the Journal of Financial Economics,  is available here; a .pdf of the full paper is also available there.

The authors explored whether two forms of "off-work" behavior by senior corporate executives -- living "high on the hog", and having any kind of criminal record (including traffic violations) -- were correlated to misfeasance or malfeasance on the job:

We predict and find that CEOs and CFOs with a legal record are more likely to perpetrate fraud. In contrast, we do not find a relation between executives’ frugality and the propensity to perpetrate fraud. However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high probabilities of other insiders perpetrating fraud and unintentional material reporting errors. 

 Wow.

First of all, I wasn't aware that people with criminal records could even be CEOs or CFOs. Norris reports that

Of the 109 chief executives of companies found to have committed fraud, 12 had previous encounters with the law that were more serious than a speeding ticket. The academics counted eight felony drug charges, four case of domestic violence and four traffic violations so serious that they were lumped under the heading of reckless endangerment. (Some of the bosses had more than one item on their record.)

The professors had turned to SEC fraud cases dating from 1992 to 2004, and then looked for companies as similar to those, but with fraud filings, as possible: similar in size, in the same industries, similar (pre-fraud filing) stock market performance, etc.

So, what kind of legal record had the CEOs and CFOs of the non-fraud companies have? None of them had anything more serious than "an ordinary traffic violation." And even there, the differences were compelling. Norris notes:

Of the 109 chief executives from nonfraudulent companies, just five had traffic tickets. Sixteen of the fraud company chief executives had such tickets. Some of them had more serious violations. Altogether, 22 of the 109 had some previous violation.

As the paper's authors state,

we interpret an executive’s prior legal infractions, including driving under the influence of alcohol, other drug-related charges, domestic violence, reckless behavior, disturbing the peace, and traffic violations, as symptoms of a relatively high disregard for laws and lack of self-control. We predict and find a direct, positive relation between CEOs’ and CFOs’ prior records and their propensity to perpetrate fraud....

Or, as Norris puts it, more simply: "What this could indicate is that people who are willing to violate one set of social norms are more likely to be willing to violate far more serious ones."

I've written before of our human capacity for self-delusion (e.g., here, writing about the need to get rid of the "gimmes"). While I don't think that a speeding ticket on my record should automatically mean that I couldn't be a great CEO (on the other hand, felony drug charges? Really?), I do think that before the board offers me the job, they should do a background check. And look for answers more compelling, and less self-serving, than "I was just keeping up with traffic."

If Greed is Good, Is Speed Even Better?

To coin a phrase: The early bird catches the worm.

Being first with the news is an obvious advantage, and not just if your livelihood comes from trading either stocks or gossip. If you're in the market for a Manhattan apartment, knowing that a friend-of-a-friend is about to sell and move out to the 'burbs can mean landing that perfect (tiny) West Village condo.

Sometimes being first is just good luck.

Sometimes it comes from greasing the right palm, a.k.a. insider trading, which is illegal -- although proving the illegality can be tough.

And between pure luck and insider trading, there's a lot of grey.

As Nathaniel Popper reports in today's New York Times, "first access" has become a profitable business model.

He writes, "Dow Jones recently announced the creation of DJ Dominant, a program that will release news articles two minutes early to subscribers who pay more."

Another examples Popper cites is

a service that the Nasdaq market and Chicago Mercantile Exchange introduced in May, which promises to get Nasdaq's market data to customers in Chicago -- and Chicago data to the East Coast -- 2 milliseconds faster than it is otherwise available thanks to the use of microwave transmission. The cost for the advantage is a reported $20,000 a month.

Similarly, Thomson Reuters has offered clients information about the University of Michigan's influential consumer confidence index "a full two seconds" before its "early" release, itself two minutes before the official release.

As trading is increasingly computer-driven and high-speed, even two seconds can make a significant difference.

But Thomson Reuters has just suspended its early-early release, under pressure from the New York attorney general's office, which is reportedly taking a "broad look" at the practice. According to a New York Times DealBook article by Peter Lattman (published Monday), the state's "investor protection bureau" is looking into the question of "whether preferential disclosure of data is a fair and appropriate business practice."

The New York attorney general's office has considerable power over Wall Street, thanks to the Martin Act, which gives "the attorney general broad powers to pursue either criminal or civil actions against companies... [and] does not require the government to show proof that a company intended to defraud anyone."

Popper quotes state attorney general Eric Schneiderman as saying, "The securities markets should be a level playing field for all investors and the early release of market-moving survey data undermines fair play in the markets."

Since I'm not a lawyer, I can't speak to the legality of Thomson Reuters' behavior (nor that of Dow Jones, the Nasdaq, et al.). But I can speak to the ethics.

The stock market is often held up as an example of a perfectly level playing field -- if you can spot a great investment opportunity before your neighbor can, it doesn't matter that she's a high-powered hedge fund manager and you're a day trader working from your home office: You'll win.

But if that hedge fund manager can pay to get information about that potential opportunity two seconds before you can ... Just how level is that playing field, really?

Want to Get Paid? Pay a Fee.

How many more ways can we find to make it seem reprehensible to be poor?

The working poor used to be admired for their grit and perseverance in the face of remarkable road-blocks. People talked about the "dignity" of working poverty (this was generally said by those who had never experienced the soul-corrosiveness of genuine poverty).

Today, we seem to specialize in finding new ways to nickel-and-dime the people who are barely making it by as it is.

Today's New York Times has a lengthy, depressing, but valuable article by Jessica Silver-Greenberg and Stephanie Clifford on the new way to pay workers: not with a paper check, or by direct deposit, but prepaid cards, similar to a debit card.

Companies and card issuers, which include Bank of America, Wells Fargo and Citigroup, say the cards are cheaper and more efficient than checks — a calculator on Visa’s Web site estimates that a company with 500 workers could save $21,000 a year by switching from checks to payroll cards.

Savings like that can get the attention of corporate financial officers. 

The cards are particularly popular with retailers and restaurants, which have large numbers of minimum-wage employees. According to the Times, "$34 billion was loaded onto 4.6 million active payroll cards [in 2012], according to the research firm Aite Group." And the total is expected to grow to $68.9 billion( and 10.8 million cards) by 2017.

But what does it mean for the workers? In theory, it should be just as easy to use as a debit card. In practice... not so much:

...In the overwhelming majority of cases, using the card involves a fee. And those fees can quickly add up: one provider, for example, charges $1.75 to make a withdrawal from most A.T.M.’s, $2.95 for a paper statement and $6 to replace a card. Some users even have to pay $7 inactivity fees for not using their cards. These fees can take such a big bite out of paychecks that some employees end up making less than the minimum wage once the charges are taken into account...

As an example, the Times reporters spoke to a young man who works at a McDonald's in Milwaukee, earning $7.25 an hour (which is the current minimum wage in Wisconsin). He gets paid via a prepaid card, and spends "$40 to $50 a month on fees associated with his JPMorgan Chase payroll card."

Do the math. $7.25 per hour for a standard 40-hour week is $290. Multiply that by 52 for a year, without any vacation time, and you're up to $15,080. Forget about Social Security or other payroll tax deductions for the moment, and you try living on that. $45 a month in fees adds up to $540, which is more than 3.5% of his gross earnings, and a substantially higher bite on net earnings. Do the math backwards, and this young man is now earning $6.99 an hour. A 3.5% drop in earnings may not sound like much, but when you're living this close to the edge, it can easily mean the difference between having enough to eat and not.

To be fair, it's worth noting that some 10 million American households are now "unbanked", and

Some employers and card issuers say that the payroll cards are useful for low-wage workers who do not have bank accounts. They also say that the fees on the cards are usually lower than those associated with check-cashing services, which are often the only other option for people who do not have bank accounts. 

But I think the more important factor for the issuing banks is that prepaid cards have been virtually untouched by recent financial regulation.

The lack of regulation in the payroll card market, while alluring for some of the issuers, can potentially leave cardholders swimming in fees. Take the example of inactivity fees that penalize customers for infrequently using their cards. The Federal Reserve has banned such fees for credit and debit cards, but no protections exist on prepaid cards. Cards used by more than two dozen major retailers have inactivity fees of $7 or more, according to a review of agreements. 

Some employees can also be hit with $25 overdraft fees, called “balance protection,” on some of the prepaid cards. Under the Dodd-Frank financial overhaul law, banks with more than $10 billion in assets are barred from levying overdraft fees on customers’ checking accounts [but not on prepaid cards].

So the people who are least able to pay the fees are the ones getting hit with the fees. And those cost savings for the companies? If you're wondering where they go, I suggest you check out a headline on page-one of the business section in Sunday's New York Times: "That Unstoppable Climb in CEO Pay".

The Toxic Legacy of Tax-Avoidance Schemes

As an ethicist, I suppose I shouldn't indulge in schadenfreude -- the delight in someone else's misfortunes -- but then, I'm human too.

In this particular instance, however, the pain doesn't fall on the right party.

New York Times business reporter Floyd Norris writes today that "Tribune Company, the publisher of The Chicago Tribune and The Los Angeles Times, among other publications, ... seems likely to have to pay hundreds of millions of dollars in taxes that it would never have owed had it not tried to be so clever."

The shenanigans began with the 2007 takeover of the Tribune Company by real estate billionaire Samuel Zell, a man with essentially zero experience in the media business.

(Aside: Back at the dawn of time, when I worked -- briefly -- as a journalist, most newspapers were owned by people who actually gave a damn about journalism. Sigh.)

The initial $8.2 billion transaction was complicated enough (the Chicago Tribune ran a lengthy piece in January, by Michael Oneal and Steve Mills, unfurling the whole long sad tale), and things got more complicated still, and quickly.

To be fair -- not that I really want to be -- not everything was Zell's direct fault: the 2008 financial collapse effectively prevented Zell from selling off assets that would have buoyed his plans. Advertising was already weakening under the digital onslaught, and it was about to get much worse.

The Tribune Company slid into bankruptcy about a year after Zell's acquisition, emerging in 2012 a shadow of its former self, with thousands fewer employees than in its heyday (many of whom had given up contributions to a retirement pension in exchange for agreeing to a now-worthless Employee Stock Ownership Plan). And the future does not look bright, thanks to the huge tax bill that the company now faces.

The key shenanigan in the whole deal -- which is now coming back to haunt the Tribune in a very very big way -- revolved around taxes. Or more to the point, how not to pay them.

Those of you who have read more than a few of my posts know that I am a big believer in taxes and regulation, that I am firmly in the Justice Oliver Wendell Holmes Jr. camp ("Taxes are the price we pay for a civilized society.").

This is what happens when you structure a deal entirely to avoid paying taxes. As Oneal and Mills wrote,

Taxes were a special problem for anyone hoping to take control of Tribune Co. by using a lot of borrowed money. Federal income taxes reduced the company's cash flow each year by hundreds of millions of dollars, limiting the amount available to pay interest. And while the company boasted many prize assets like the Chicago Cubs that could be unloaded to pare down the acquisition debt, selling them piece by piece would trigger huge capital gains taxes because Tribune Co. had owned most of the assets for so long.

The Zell team's brainstorm was to take the company private and convert it into what's known as an S-Corp ESOP, a Subchapter S corporation owned by an employee stock ownership plan. Because an ESOP is officially a retirement vehicle, the structure immediately eliminates corporate income tax. 

So far, so good, right?

Floyd Norris quotes tax analyst Robert Willens: "In conception, it was brilliant... It would have been probably the greatest tax avoidance structure ever devised, had they earned income."

The catch is that, as Norris notes, a company that converts "to S status may still be subject to capital gains taxes if it sells assets within 10 years after the conversion. If that happens, it owes taxes on the gain in value that accrued before the company converted."

The Tribune did sell some assets, and Zell apparently had another "clever way" to handle that potential tax problem. 

The Internal Revenue Service is now questioning many Tribune Co asset sales, but especially the sale of Long Island, NY-based Newsday and that of the Chicago Cubs. Norris notes drily that the IRS concluded that Zell's gimmick was "so outrageous that it added a 20 percent 'accuracy related penalty' to the $190 million tax that should have been paid when Tribune sold ... Newsday to Cablevision in 2008. Under the law, that penalty is reserved for transactions that show 'negligence or disregard of rules or regulations,' or are 'lacking economic substance.'"

Fortune senior editor-at-large Allan Sloan wrote a few days ago, 

I used to consider Zell and his tax avoidance schemes sort of amusing. But the amusement -- and congeniality -- are both long gone.

I'm sure that after litigation or the threat of it, Tribune will ultimately settle [for] considerably less than the $600 million likely total of the claims, penalties and interest. However, my bet is that Tribune will ultimately fork over more than $100 million to pay for the tax games Zell played with Newsday (one of my former employers) and the Cubs.

That's just what the company, struggling to survive in a hostile landscape for media companies, needed in its new life -- a big, fat tax bill from the past. Thanks a lot, Sam.

I believe in taxes. I don't believe in totally simplistic one-size-fits-all flat taxes. But I want a system that rewards companies and employees, not $1,000-an-hour lawyers who can figure out ways to avoid paying taxes. If Zell had been a little less clever, or a lot more ethical, ... well, a person can dream, can't she?

"Brand You" Really Does Belong to You!

It's taken several years for the case to wend its way to the Supreme Court, but today, thankfully, the Court ruled unanimously that your genes are your own.

Seems obvious, doesn't it?

More than three years ago, I commented on round one of this case, when US District Court Judge Robert W. Sweet struck down seven patents held by Utah-based Myriad Genetics that were the basis of tests that looked for mutations of the BRCA 1 and 2 genes. Those mutations are associated with a substantially greater risk for breast and ovarian cancer. The only way to know whether you have the mutations is to pay approximately $3000 for the Myriad Genetics test; Myriad has refused to license the test to other companies. The suit had charged that by doing so, Myriad kept prices artificially high and prevented woman from getting a second opinion from another testing company.

Myriad had argued that without the potential for significant financial gain that the patents represent, there would be no incentive to invest in potentially life-saving research.

As I wrote then: "I think that many of us, who are not genetic scientists, find it hard to understand (and more than a little ambiguous morally) that a corporate entity could own genes that come from our own bodies."

The Supreme Court today, as reported by the New York Times' Adam Liptak, ruled that "isolated human genes may not be patented." (Full article, here)

Writing for the Court, Justice Clarence Thomas stated, "A naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated. It is undisputed that Myriad did not create or alter any of the genetic information encoded in the BRCA1 and BRCA2 genes."

There's some wiggle room left for companies like Myriad, however: The manipulation of a gene "to create something not found in nature" would be patentable.