Illustration by Jan Buchzik

When Market Incentives Undermine Morality

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June 10 (Bloomberg) -- The Greek philosophers were not entirely wrong about markets. When they reward cooperation, people become more obliging and virtuous -- but markets don’t always reward it. Though on balance they have greatly improved our moral behavior, they can also degrade it.

Cases of cheating go back beyond Uruk, and in our time we have witnessed extraordinary frauds such as Enron. Let’s look at a small-scale example to show how it can work.

For years Amgen Inc. and Johnson & Johnson have sold a trio of anemia drugs: Epogen, Procrit and Aranesp. Together, they have been the pharmaceutical equivalent of Ghawar, the vast Saudi oil field, bringing in $8 billion annually for these companies. The star, Epogen, was once the most lucrative drug under Medicare.

Then, in 2011, Medicare issued a study that found no solid evidence that most kidney patients -- the main users of these medicines -- lived longer, felt better or indeed got any “clinical benefit” from the drugs, other than an increased red-blood-cell count. At the same time, the pharma firms had understated the risk for side effects, such as cancer and stroke. In other words, the drugs benefited few people but could harm many who were taking them needlessly. In most cases, they were no better than 19th-century patent medicines.

Yet market incentives had led doctors everywhere to prescribe them. A 2012 story in the Washington Post outlined the steps.

Marketing Campaign

First, the drug companies held drug trials that inflated the benefits while missing the true harm. Amgen, for instance, assured the Food and Drug Administration, “The risks associated with therapy are minimal.” Yet conflict of interest is an obvious hazard when firms test their own potential blockbusters. It’s like asking a job applicant if she’s qualified for a high-paying position.

Then the companies won approval from the FDA and, according to the Washington Post, lobbied Congress assiduously to allow higher dosages. Of course, the more that patients take of a drug, the more companies earn. Moreover, though investigators eventually learned that the medicines seem to help only 16 percent of dialysis patients, those who need blood transfusions, the companies won approval for milder cases and a variety of other ills. So by 1994, one drug’s label stated that it could improve “health, sex life, well-being, psychological affect, life satisfaction and happiness.”

Next, the companies tilted decision making among doctors. For instance, they gave discounts to physicians who ordered a large volume of the drugs. They also overfilled vials, sometimes adding as much as 25 percent extra, presumably so doctors could resell the surplus. And the companies lobbied Congress to allow a markup to physicians of as much as 30 percent each time they prescribed these medicines to Medicare patients. Markups were even higher for patients with private insurance. For instance, one clinic received $900 for doses normally costing $600 so it pocketed $300 for each.

“An oncologist could make anywhere from $100,000 to $300,000 a year from this alone,” said Charles Bennett, a professor at the University of South Carolina. “And all the while they were told that it was good for the patient.”

Finally, in November 2006, an independent study in the New England Journal of Medicine revealed that kidney patients who got higher dosages also had higher rates of stroke, hospitalization and death. The following month, scientists in Denmark stopped a trial of Aranesp in cancer patients because tumor growths and deaths had increased. Amgen sat on this news for three months, until a newsletter revealed it. Asked why his company had not reacted faster, Kevin Sharer, the chief executive officer, replied, “Perfection says we should have done that.”

Higher Doses

Use peaked in 2007. At that time, more than 80 percent of the 175,000 dialysis patients on Medicare were getting higher levels of these medicines than the FDA now deems safe. In 2007, despite intense lobbying, the FDA limited use of the drugs, lowered dosages and warned doctors to prescribe the smallest possible quantities in many cases.

Amgen initially denied any deception. It issued a statement claiming that it updated the product labeling 15 times and “quickly and responsibly” communicated new findings as they appeared. The company asserted it had never misled the public: “On the contrary, Amgen’s primary concern is for patients.”

Amgen’s primary concern, in fact, seemed to be for the bottom line. But were company executives evil? Did they choose to commit statistical homicide, to kill a percentage of customers they would never meet, in exchange for big profits?

We think it’s far more likely that they simply didn’t scout too hard for negative test results. They may have thought of themselves as highly moral, bearers of vital therapy to suffering patients. All of us concoct rationalizations of self-interest. And if we badly want to believe a fact -- say, that my drug is widely helpful and harmless -- the bar of proof drops significantly. We’ll seize on evidence suggesting it does and downplay the counterevidence. Indeed, if a job applicant falsely says she is qualified for a position, she may not even be lying. Self-interest may convince her that she is qualified.

And once we form and express an opinion, we will pay more attention in the future to supporting evidence and slight the rest, a well-known mental quirk called the confirmation bias. We are all vulnerable; no one likes to learn news that undermines one’s beliefs. And where billions of dollars and entire careers are at stake, the bias grows much stronger. So markets can degrade morals by offering gleaming rewards and playing on our need to see ourselves as moral.

Note that this was hardly a farmer’s market. The balance between buyers and sellers leading to a competitive equilibrium was just not there. The government defined many terms of its operation. Yet officials had to deal with relatively sketchy data, as it turned out, and heavy lobbying. Market pressure swayed votes in Congress and allowed the selling of these drugs far beyond the need for them, despite the dangers.

Doctors Decide

Moreover, the decision maker was not the buyer, but the doctor. Doctors prescribe the drugs, but patients, insurance companies and the government all pay.

Overall, the checks and balances of the model market receded, and the opportunities for moral corrosion grew. In the end, it is hard to believe Amgen’s claim that its “primary concern is for patients.”

The larger question here is: Have markets changed the zeitgeist? Have they marginalized the moral dimension in public policy and made market efficiency its key arbiter?

Many think so. In 2009, then President Nicolas Sarkozy of France wrote, “Purely financial capitalism has perverted the logic of capitalism.” It is a system, he declared, in which “the logic of the market excuses everything.”

(Daniel Friedman is a professor of economics at the University of California at Santa Cruz. Daniel McNeill is the author of “Fuzzy Logic.” This is the first of two excerpts from the second edition of their book “Morals and Markets: The Dangerous Balance,” to be published June 11 by Palgrave MacMillan.)

To contact the writers of this article: Daniel Friedman at Daniel McNeill at

To contact the editor responsible for this article: Mary Duenwald at