How the opioid crisis impacts business

The opioid crisis has had a ripple effect on the production of corporate information, specifically business forecasts and their accuracy

In December 2023, consulting firm McKinsey and Company agreed to pay US$78 million to settle claims from insurers and health care funds that its work with drug companies has helped fuel the opioid addiction crisis in the US.

It was reported that McKinsey collaborated with Purdue Pharma, the manufacturer of OxyContin, to devise and implement marketing and sales strategies aimed at overcoming doctors' reservations about the highly addictive nature of the drug. The insurers claimed they were compelled to cover the costs of prescription opioids instead of opting for safer, non-addictive, and more economical alternatives, including over-the-counter pain medications. Additionally, they were burdened with the financial responsibility for opioid addiction treatments.

This settlement isn’t the first time McKinsey has been held accountable for its role in the opioid epidemic, and it’s likely not the last. Over a quarter of a million people in the US have succumbed to prescription opioid overdoses in the past 20 years, according to data from the US Centers for Disease Control. A total of 645,000 people have died from an overdose involving any opioid, including prescription and illicit opioids, during this time.

Given the sharp rise in opioid-related use, the effects on society and the economy are significant. And it’s not an issue specific to the US. The cost of opioid use in Australia was last estimated to be $15.7 billion, and 2203 deaths annually.

The economic costs are high. But aside from the obvious cost, there are other insidious ways that opioids are impacting society. The opioid crisis can have adverse effects on employers in various ways, including lower employee productivity and increased healthcare costs. However, it also affects businesses in a less obvious way.

Research co-authored by UNSW Business School’s Dr Leonard Leye Li, Senior Lecturer in the School of Accounting, Auditing & Taxation, has revealed a concerning trend: businesses in counties with high opioid prescription rates produce lower-quality financial information. 

Specifically, his study, The Opioid Crisis, Employee Health Capital, and Corporate Information Production, finds that these firms produce less accurate management earnings forecasts. In addition, managers in high opioid areas delay earnings announcements and reduce forecast precision. At the same time, market reactions to forecasts from firms in such areas are also lower, indicating investors’ awareness of the potential negative impact of opioid abuse on information production within the company.

Alongside his co-authors, Dr Li set out to investigate the impact of employee health, as measured by exposure to opioid abuse, on corporate information production. The researchers analysed 50,314 annual management earnings forecasts from 2006 to 2019. They found that local opioid abuse is associated with significantly lower management earnings forecast accuracy.

Read more: When workers catch a flu, corporate disclosure catches a cold

Corporate information production and opioid: the impact on business

Corporate information production is a key mechanism firms employ to inform the market, reduce information asymmetry, and lower information uncertainty. Among a variety of information provided by a public company, management forecasts represent an important source of corporate insight for investors. Prior literature shows that management forecasts outperform other financial sources with respect to informing equity investors.

We highlight the potential cost of the opioid crisis on local businesses. We show that firms’ commitment to employee health may help alleviate the negative effect of opioid abuse on corporate information production. Our findings suggest that firms should place greater emphasis on employee health when managing human resources.

Our findings (local opioid abuses reduce management forecast quality) are not driven by other human capital factors such as education level and age or by other local demographic factors such as local legislation and local economic development level.

How can the impact on businesses be mitigated?

Our results show that the effect of the opioid crisis on management forecast is mitigated in firms with easier access to opioid treatment, for firms with superior employee welfare policies, and firms with a corporate social responsibility (CSR) committee. The impact can be mitigated by firms’ investment in employee health capital.

In our study, we measure employee welfare policy using the workforce score reported by Thomson Reuters ASSET4 database. The database surveys many public firms to capture their effectiveness in providing employee job satisfaction and a healthy and safe workplace. Superior employee welfare policies may include comprehensive health insurance coverage, wellness programs, and preventive care services.

In addition, the presence of a corporate social responsibility (CSR) committee can help to address this issue. The CSR committee plays a pivotal role in making and implementing the employee welfare policies mentioned above. Companies with CSR committees are more likely to be aware of their employees affected by the opioid crisis and take timely actions to help their employees address the issues.

Read more: ESG standards are changing. What’s the impact on business?

ESG reporting and improving commitments to employee health

We show that firms’ commitment to ESG (especially in the dimension of employee health) can help alleviate the adverse effect of opioid abuse on corporate information production.

The effect of mandatory ESG reporting is still under debate in the literature. On the one hand, mandatory ESG reporting may incentivise firms to be more responsible for their employees’ health as the firms’ ESG practices are under more transparent scrutiny. And better employees’ health has a positive impact on future earnings forecast quality.

On the other hand, some researchers argue that mandatory ESG reporting may have little effect on real ESG activities but foster greenwashing and a waste of corporate resources. In this case, it may not affect the quality of earnings forecasts.

The opioid epidemic's insidious reach extends beyond the immediate economic costs, affecting the quality of financial information from businesses in high opioid areas. Our study emphasises the crucial role of employee health in mitigating these effects, urging firms to invest in comprehensive employee welfare policies and consider the establishment of CSR committees. 

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As businesses grapple with the ripple effects, our findings underscore the potential positive influence of a commitment to ESG, especially in the realm of employee wellbeing. The debate over mandatory ESG reporting continues, with potential implications for fostering responsible practices or risking greenwashing and resource misallocation. 

The imperative remains clear: addressing the opioid crisis involves not just legal consequences but a fundamental reevaluation of corporate responsibility and its impact on information production and societal wellbeing.