Bonus case 4-5
Harry Kraemer’s Moment of Truth
During August and September of 2001, kidney dialysis patients started dying in Spain. Nothing seemed exceptional about the deaths of these old, sick patients on dialysis, and the world’s attention was focused on the terrorist attacks in New York and Washington on September 11, 2001. The hospital officials notified the manufacturers of the equipment and searched for a common denominator. The only link—the dialysis filters used in all of the cases had come from a single lot manufactured by Althin Medical AB. The American company Baxter International had bought Althin less than a year earlier.
In the next few weeks, there were 53 deaths in the United States and six other countries that could be linked to Baxter’s filters. Baxter and its CEO Harry M. J. Kraemer Jr. faced a moment of truth. How the company responded to the crisis would affect the company’s relationships with patients, doctors, employees, and investors.
Baxter International sells IV bags, biopharmaceuticals, and drug-delivery systems. Its products treat millions of patients a year. Nearly every product that Baxter sells is a matter of life and death. That makes it incredibly difficult to determine whether a death is due to the disease and predictable or whether the treatment somehow failed.
Although Baxter quickly recalled the lot of filters associated with the patient deaths in Spain, it did not publicly accept responsibility. But in October 2001, news media in Croatia reported that 23 dialysis patients had died during the previous week at clinics across the country. The Croatia filters were manufactured around the same time as the ones in Spain, but not the same batch. Clearly, something was wrong with the filters.
Alan Heller, president of Baxter’s renal division, immediately ordered a global recall of all of Althin’s filters and a distribution hold on the ones that had already been made. The action cost Baxter about $10 million. Then Heller assigned an internal task force the responsibility of confronting the disaster and identifying the cause. The team of 27 brought in specialists in manufacturing, toxicology, marketing, communications, and other specialties and found nothing. Neither did a team of European physicians assembled by Baxter.
The cause was not evident until a quality engineer in Althin’s Ronneby, Sweden facility noticed something unusual about one of the recalled filters. At one end of the device, there were a few bubbles that weren’t supposed to be there. Investigation found that in manufacturing, about 10% of filters leaked when tested. These filters were injected with a solution to locate the problem for repair. That solution was supposed to be vacuumed and evaporated from the filters. But the bubbles were evidence that trace amounts of the liquid remained. The solution, made by 3M, had been labeled as non-toxic—and chemically it was. But when heated to body temperature in a patient’s bloodstream, it turned into a gas, causing a fatal pulmonary embolism.
Baxter could have ducked the blame. It could have quietly pulled the filters from the market, and it is likely that few would have noticed. It could have blamed Althin’s former owner, since Baxter had only recently taken over the business. It could have blamed 3M, which made the solution. But Baxter CEO Kraemer told Heller, “Let’s make sure we do the right thing.”
Do the right thing. “We have this situation,” says Kraemer about the filter crisis. “The financial people will assess the potential financial impact. The legal people will do the same. But at the end of the day, if we think it’s a problem that a Baxter product was involved in the deaths of 50 people, then those other issues become pretty easy. If we don’t do the right thing, then we won’t be around to address those other issues.”
In November 2001, Baxter announced that it had identified the probable cause of the dialysis patient deaths and shut down Althin for good. It closed the factories and took a one-time accounting charge to earnings of $189 million to cover the costs of the closure. Baxter also reported the problems with the dialysis filters to rival manufacturers it knew or suspected were using the same process.
On the news of the charge to earnings, the company’s stock dropped slightly but soon recovered. “In the short run,” Heller says, “our results are probably worse for the way we handled things. But in the long run, they’ll be better. Bad ethics and bad judgment ultimately come back to burn you.”
Kraemer recommended that the compensation committee of Baxter’s board of directors reduce his performance bonus by at least 40% and suggested that his top executives take a 20% cut. [i]
discussion questions for BONUS case 4-5
1.Should Baxter have recalled all the filters after the Spanish deaths? Discuss.
2.What is Baxter’s ethical responsibility to customers in this situation? To stockholders?
3.Should Baxter be held responsible for the defective filters, given that they owned the filter company for less than a year? Explain.
4.Who is most responsible for the deaths—Baxter’s Althin filter subsidiary or 3M, who provided the implicated cleaning solution?
answers to discussion questions for BONUS case 4-5
1.Should Baxter have recalled all the filters after the Spanish deaths? Discuss.
It would have been wise to pull the filters immediately and then begin testing them. If the tests proved negative, the filters could have been reintroduced. Since most of the patients were near death, this is a closer call than it may seem on the surface. People die after operations all the time, and all the devices involved can’t be pulled each time. Nonetheless, it is better to err on the side of caution.
2.What is Baxter’s ethical responsibility to customers in this situation? To stockholders?
Baxter’s duty is to inform customers of its errors and responsibility. It did the right thing, albeit maybe a little too slowly. Stockholders should be informed as well. After all, they are the owners of the firm and need to know what risks they are facing.
3.Should Baxter be held responsible for the defective filters, given that they owned the filter company for less than a year? Explain.
Yes, if you buy something from someone that injures someone else, you are responsible—not the person who sold it to you. None of the injuries were intentional, nor could they have been anticipated. Everything had been done to assure safety of the filters. This was a mechanical, cleaning error. Lack of intent does not take away responsibility, however. Or the need for retribution.
4.Who is most responsible for the deaths—Baxter’s Althin filter subsidiary or 3M, who provided the implicated cleaning solution?
Trying to place blame in such a case is a futile exercise. Everyone involved has to assume some of the blame. It is the role of the courts to determine the financial obligations that are incurred.
[i]Sources: Kenneth H. Hammonds, “Harry Kraemer’s Moment of Truth,”Fast Company, November 2002, page 93; Michael Arndt, “How Does Baxter’s Harry Kraemer Do It?”BusinessWeek Online, July 22, 2002; “Baxter Announces Harry Kraemer to Resign as Chairman and CEO,”PR Newswire; Keith Hammonds, “Moment of Truth?”Fast Company, April 2004; Bruce Japsen, “Baxter International Works To Resolve Drug-Delivery Pump Issues,”Chicago Tribune, October 21, 2005.