State capture by consultants

I had blogged earlier highlighting the concerns at the increasing role of consultants in advising governments. There are at least two problems. One, consultants typically consider efficiency or revenues maximisation as their primary, often sole, objective to the exclusion of others like equity, fairness, electoral mandates etc. I have again blogged extensively that this pursuit of efficiency to the exclusion of all else is extremely harmful. Two, consultants typically end up simultaneously advising both industry and government on the deeply questionable basis that they have Chinese Walls that ring-fence the engagement with both sides. 

In what will become an iconic example of consultants gone rogue is McKinsey's engagement with both the opioid and tobacco industry and the regulators. 

In late 2020, just before the Presidential elections, McKinsey agreed to pay nearly $600 million in settlements with attorney generals of all American States and its five territories on an opioid use investigation being pursued against it. The settlements helped McKinsey avoid full exposure and possible criminal indictments (with larger civil damage claims) on how it worked to drive sales of Purdue Pharma's OxyContin painkiller. This drug has been documented as being at the centre of the opioid crisis in the US that has claimed more than 450,000 lives over the past two decades.

McKinsey’s extensive work with Purdue included advising it to focus on selling lucrative high-dose pills, the records show, even after the drugmaker pleaded guilty in 2007 to federal criminal charges that it had misled doctors and regulators about OxyContin’s risks. The firm also told Purdue that it could “band together” with other opioid makers to head off “strict treatment” by the Food and Drug Administration...

In 2009, the firm wrote a report for Purdue saying that new sales tactics would increase sales of OxyContin by as much as $400 million annually, and suggested “sales ‘drivers’ based on the idea that opioids reduce stress and make patients more optimistic and less isolated,” according to a lawsuit filed in 2018 by Massachusetts. McKinsey worked with Purdue executives in finding ways “to counter the emotional messages from mothers with teenagers that overdosed” on the drug. In 2013, the federal government reached a settlement with Walgreens, the pharmacy chain, to crack down on illegal opioid prescriptions. Sales to Walgreens began to fall. According to the Massachusetts lawsuit, McKinsey recommended that Purdue “lobby Walgreens’ leaders to loosen up.”

See also this, this, and this.

NYT has excerpts from a new book on McKinsey by two of its reporters, Walt Bogdanich and Michael Forsythe (this is a review of their book). The scale of engagement with the tobacco industry was extensive,

For decades, McKinsey has helped manufacturers boost sales of the most lethal consumer product in American history — cigarettes... McKinsey began counseling the tobacco industry in 1956, when researchers had already reported data suggesting that smoking appeared to cause cancer... In 1964, Surgeon General Luther L. Terry settled questions over the dangers of smoking when he announced to the nation that studies had confirmed the link between cigarettes and cancer... In addition to Philip Morris, the firm’s clients included R.J. Reynolds, Lorillard, Brown & Williamson, British American Tobacco and Japan Tobacco International... As late as 2019, McKinsey’s roster of tobacco clients included not just Altria but also Imperial Brands, British American Tobacco and Japan Tobacco International... From 2018 through early 2020, McKinsey made at least $45 million in fees from these four companies, including more than $30 million from Altria alone, according to McKinsey billing records.

McKinsey saw nothing wrong in advising to maximise sales,

McKinsey saw merit — and profits — in continuing to help companies sell more cigarettes. In a slide deck prepared for Altria, formerly Philip Morris, McKinsey offered ideas for how the tobacco company could keep customers and lure new smokers. It presented a mock-up of what a Marlboro smartphone app would look like, complete with a way for loyal smokers to win points redeemable for small prizes... McKinsey also advised Altria on marketing e-cigarettes, with the goal of making one of its products the “Nespresso of e-vapor”... It wasn’t until 2017 that the consultancy performed a pricing study for Juul’s vaping device. Afterward, McKinsey offered advice on branding, organization, retail, flavor evaluation, youth vaping prevention and regulatory issues... Flavored nicotine had become highly controversial because health care experts blamed Juul for using flavors that appealed to young people... McKinsey had surveyed teenagers as young as 13, asking them to rank flavor names in order of preference.

But the most corrosive aspect was the simultaneous engagement with the regulators of the industry,

McKinsey’s most important work for Juul involved responding to the F.D.A.’s crackdown on youth vaping. With the F.D.A. circling, demanding answers as to why teenagers were so attracted to Juul, the company asked McKinsey to help prepare a defense and respond to the agency’s inquiry. The nature of that work remains a secret, because for those services McKinsey was paid through Juul’s law firm, Sidley Austin, allowing Mr. Alfonso Pulido, a McKinsey partner, to claim lawyer-client privilege... After Congress gave the F.D.A. the authority to regulate tobacco products in 2009, the agency sought McKinsey’s wisdom on a variety of issues, though its leaders apparently were unaware that the firm had been guiding Big Tobacco’s development for decades. In subsequent years, the agency awarded the consultancy $11 million for advice on tobacco regulation and for organizing the F.D.A. office that includes tobacco regulation... McKinsey’s services are highly valued... For companies selling addictive products it also offered deep ties to the Food and Drug Administration, a regulatory agency vital to their survival. In four years under President Donald J. Trump, McKinsey took in $77 million in consulting contracts with the F.D.A.

McKinsey's role in advising addictive industry clients like opiod and tobacco manufacturers on increasing their sales while also consulting for FDA to regulate the drugs and tobacco industry should count as the Great Conceit of Consulting. It's the clearest signal of state capture that McKinsey was even considered eligible to bid for FDA's consulting contract to regulate tobacco and drugs industry even as it was advising the industry also on how to beat FDA regulations.  

There are so many problematic issues here. One, given the widely accepted and official view linking tobacco to cancer, was it appropriate for McKinsey to advise tobacco manufacturers? Even more so in advising the opioid manufacturers? Two, even in advising tobacco and opioid manufacturers, was it appropriate to advise them on maximising the sales of their harmful products? Three, how appropriate was it for McKinsey to bid for the FDA contract, given the clear conflicts of interest? Four, shouldn't their extensive engagement with the industry have automatically barred McKinsey from bidding for a FDA contract? How disingenuous is the claim that FDA did not know McKinsey was also advising the industry? Or this from the book extract,

How could McKinsey, with its booming health care practice, justify advising hospitals and government agencies on how to reduce health care costs and improve medical outcomes when for years its tobacco clients were filling hospital beds with the sick and dying at an enormous cost to society?

These in turn raise fundamental questions about the business model in the consulting industry. Shouldn't it be mandatory for consultants to disclose their clients? This would especially be so for public contracting tenders. Do the public costs of confidentiality on clients far outweigh its private benefits? Shouldn't consultants be barred from advising both sides on the same issue/subject? In practice, how robust and credible are the Chinese walls within the consulting industry? If not credible, shouldn't regulators dispense with this pretence which provides a convenient fig leaf (and legal cover) to perpetuate egregiously bad practices? Shouldn't clearly suspicious round-abouts like engagement by a law firm to prevent scrutiny be barred? If their clients indulge in business practices which are subsequently found legally questionable and hauled up for civil or criminal liabilities, then shouldn't the consultants who advised on those practices be also similarly held liable vicariously?

It also raises questions (in the context of the US) about the practice of off-court settlements which allow businesses (consultants, financial institutions etc) to escape with relatively small financial penalties. Besides, these penalties are borne by the firm, thereby doing little to impact individual incentives on such predatory and abusive practices.