Former KV Pharmaceutical CEO and Chairman Banned from Government Business

Early this year we noted that a subsidiary of KV Pharmaceutical, Ethex, pleaded guilty to two felony counts, and paid a fine in response to charges "stemming from its failure to make and submit to the U.S. Food and Drug Administration a report on its discovery of undistributed pills that 'failed to meet product specifications,' ...."   At the time, we noted that this was yet another marcher in the parade of legal settlements affecting health care organizations.  In this case, as in many others, despite the acknowledgement that unethical actions, worse, crimes were committed, no person appeared to suffer any penalty or negative incentive.  As usual, we argued that settlements like this would be perceived by unscrupulous leaders as mere costs of doing business, and would not deter future bad behavior.

That was then, and this is now.  Bloomberg just reported:

KV Pharmaceutical Co. said Marc Hermelin resigned as a director and will sell his controlling interest after being banned from doing business with the U.S. government for two decades. KV rose in New York trading.

Hermelin left the board on Nov. 10 and will sell his shares, said Catherine Biffignani, vice president of investor relations, in a telephone interview today. Hermelin, 68, had been fired as chairman and chief executive officer of Bridgeton, Missouri-based KV in December 2008. He held about a 52 percent voting stake, either in his own name or through trusts, according to a company filing on May 7. KV didn’t specify the timing of the stock sales.

The ban takes effect tomorrow.

This was really news. As the article noted:

Hermelin will become the first drug-company owner or executive barred from doing business with the government in an antifraud push involving Medicare, the insurance program for seniors and the disabled, and Medicaid, the health program for the poor, according to the Health and Human Services Office of Inspector General’s website.

We just discussed an indictment of a former GlaxoSmithKline executive. Now we have a KV Pharmaceutical executive banned from doing business with the government. So all of a sudden, it looks like the US government has realized that when health care organizations violate the law, their executives do not have complete impunity.

Of course, things immediately became more complicated. The St Louis Post-Dispatch just reported:

In yet another major shakeup, KV Pharmaceutical's board chairman, a member of its audit committee and its chief financial officer quit this week.

The chairman and audit committee member charged that KV's newly elected board can't provide the independent oversight the company needs. The new board had been elected last Thursday.

The CFO, John Stamp, quit on Monday and has not been replaced, the company said in a regulatory filing released Wednesday afternoon.

KV also revealed that the new board had terminated interim CEO David A. Van Vliet. The company last week announced that Van Vliet had been replaced but gave no details.

What seems to be going on here is resistance to the continued control of the company by the family of the now banned former CEO:

In their resignation letters, board chairman Terry Hatfield and audit committee member John Sampson said they had 'serious concerns regarding the ability of the newly constituted board and senior management to provide the required independent oversight of KVs business during this critical time in the company's history.'

They noted that only three of the board's seven nominees for board seats were elected at KV's annual meeting last Thursday. The remaining elected members were candidates proposed by shareholders.

The family of the firm's founder, Victor Hermelin, retains 52 percent of the Class B shares, which have super voting rights, according to the company proxy issued in May.

Among those re-elected to the board was Marc Hermelin, son of the founder, who was ousted as CEO in 2008. Also re-elected was David Hermelin, the son of Marc Hermelin and a former director of corporate strategy who retained his seat on the board.

David Hermelin was among the board's nominees. Marc Hermelin was not.

As soon as the government appears to get somewhat serious about imposing negative consequences for bad behavior in health care, one can expect that the leaders of organizations who have personally profited from bad behavior in the past will try to come up with work-arounds.

Nonetheless, it may be that if health care leaders realize they do not have complete impunity, and they may be held responsible for the bad behavior of the organizations they lead, they may behave better. One can hope.

One can also hope that increasing evidence about the bad behavior of leaders of health care organizations will lead to increased unwillingness by health care professionals to go along with, or at least ignore such bad behavior that compromises their own professional values.