J&J CFO: Biggest Nightmare Is Public Health Option

Dominic Caruso fears that a government-run plan would opt for the cheapest product, not the best one.
David KatzSeptember 23, 2009

Reflecting a widespread fear expressed by many finance chiefs at the CFO Rising West conference in Las Vegas, Dominic Caruso, CFO of Johnson & Johnson, said on Tuesday that the prospect of a health system run by the federal government is the worry that keeps him up at night most often these days.

“Right now for me, the biggest worry of the moment is that the movement in health care will actually cause a decrease in new products and research in the health-care industry,” Caruso told in an interview after his presentation at the conference. “I think that will be a sad time for a very, very important part of the U.S. economy.”

The most damaging thing the reform effort could do would be to create a public option in which “pricing is so restricted and choice is so limited that there’s no incentive to innovate,” he added. “If the movement is toward not providing adequate reimbursement for research that’s done to create a new product, my fear is that not enough research will be done.”

Noting that J&J’s pharmaceutical and consumer-health-care products segments are pinning their hopes for growth on a strategy of “comparative effectiveness,” Caruso said he fears a public health-care option would place a greater value on buying the cheapest product rather than buying the best one. J&J’s strategy, he said, is to create “a certain amount of innovation that meets an unmet need.”

In an attempt to clearly differentiate a drug from current offerings in the marketplace, he added, “sometimes we run head-to-head trials comparing our new product to the current gold standard in the market…. The one way to grow is to create innovation.”

In his presentation at the conference, Caruso outlined a number of longstanding principles of financial management that helped the company through many past crises as well as the current economic downturn. In describing one of them — “make sustainable cost reductions” — the finance chief noted the company had an aversion to the phrase cost cutting — preferring, instead of reducing costs hastily in response to a crisis such as the current downturn, to make lasting changes in the company to hold expenses down to a reasonable level for the long term.

Concerning travel and entertainment spending, for instance, Caruso and his colleagues did ask for a 40% reduction in response to the recession. But at the same time, the company invested in upgrading its videoconferencing system with the installation of Telepresence, a technology provided by Cisco Systems. By enabling employees to conduct more business remotely, he said, J&J was able to save a “significant portion” of the 40% — and to produce savings that would last beyond the current need as well.

In another attempt to cut costs in a sustainable way, the health-care products maker is processing more of its administrative tasks, especially in the areas of finance and information technology, in shared-service centers. Unlike many other large companies, J&J doesn’t do much outsourcing. Instead, the company is using its own shared-service centers to consolidate the work and do it in a much more efficient and standardized way, according to Caruso.

For example, J&J has been processing the accounts payable of most of its 250 businesses at a single site in the Czech Republic, rather than have each of the businesses process A/P itself. The site handles nearly 75% of the corporation’s U.S. volume and 100% of the European volume of A/P transactions.

Another of the company’s bedrock financial tenets is to “partner with suppliers and manage risk” of the suppliers going out of business. As a result, J&J has sought to not only reduce the price it pays to suppliers but also have vendors teach company purchasing executives “how to deal with multiple machine parts and multiple vendors in a consistent way,” added Caruso.

The company favors a decentralized approach to management, the CFO said in his presentation. But although it allows operating units to manage their own purchasing, there are also “category leaders” within the overall corporate procurement organization. While such leaders have a specialty within one of J&J’s particular businesses, they’re also a procurement leader in a particular category within the corporation as a whole. As such, they collect information, share best practices, and work with vendors to get the best solution for J&J, the finance chief explained.