Elizabeth Warren’s bill to deter pharma wrongdoing may be a flawed fix

In the early fall of 2014, the Ebola epidemic that had been brewing in West Africa throughout the summer finally reached American soil. On Sept. 30 in a Dallas hospital Thomas Eric Duncan, a traveler from Liberia, was diagnosed with Ebola. Ten days later, a health care worker at the hospital also tested positive for the often fatal disease, and five days after that, so did a second.

Americans immediately demanded to know why the U.S. seemed so ill prepared for what in retrospect appeared inevitable. Why, they asked, didn’t health authorities catch the Texas case before it spread? And why didn’t the Centers for Disease Control and Prevention have a vaccine at the ready to distribute en masse and keep Americans safe from this foreign viral threat?

By now, it’s common knowledge that the pharmaceutical industry isn’t perfect. In recent years, drug companies have been caught defrauding Medicaid and Medicare by lying about their drug prices, promoting their drugs to doctors for off-label use and paying kickbacks to doctors to prescribe their drugs over competitors’, among other wrongdoings. The drug companies typically agree to settlements with the Department of Justice to avoid going to trial; a 2014 ProPublica investigation found that from 2009 to 2013, pharmaceutical companies paid more than $13 billion in settlement fees.

Warren’s bill, if passed, would force pharmaceutical companies that settle charges of wrongdoing to pay an additional fine: 1 percent of their annual profits for each drug they make that can be traced to NIH-funded research, for five years. All the money collected from this fine would go directly to the NIH’s coffers; on the basis of estimates made by Warren’s policy team, if the bill had been in place for the last five years, it would have brought the NIH an additional $6 billion per year in funding.

The bill is built around the notion that pharma wrongdoing “is a harm to sick patients, so we are targeting the money in some sort of diffuse way towards improving their lives,” said Jill Horwitz, a legal scholar and health policy expert at the University of California at Los Angeles. In theory, this creates a seamless win-win situation: Pharmaceutical companies will be deterred by the fine from defrauding the public and harming the sick, but if they do, they will be forced to give money back in the form of additional funding for public biomedical research. And as a cherry on top, the fines will be assessed in part on the basis of how much that drug manufacturer has benefited from NIH-funded research — which, many have argued, is undervalued in the marketplace. 

“NIH funds research that pharma is not going to do,” said Allison Hoffman, a UCLA health care law and policy expert. “NIH funds things that meet social needs, things that might not be valuable in terms of profitability. You see gaps in important areas of research.”

For example, nearly $6.9 billion of NIH spending in 2014 was categorized by the agency as prevention — an area of research that in many ways runs directly counter to the work of pharmaceutical companies, whose bread and butter is in sales of drugs meant to treat illnesses after they are diagnosed. The NIH also funds a lot of the early science that leads to drug developments down the road; an oft-cited 2000 congressional report found that “of the 21 most important drugs introduced between 1965 and 1992, 15 were developed using knowledge and techniques from federally funded research.” Critics of the pharmaceutical industry, including Warren, have suggested that the industry unfairly profits off the back of publicly funded research.

But some experts don’t believe that the swear jar is the right model to help fund this type of research.

“While I have a lot of respect for the senator, I am not convinced that this is a brilliant policy,” said Frank Lichtenberg, an economist at Columbia University and the National Bureau of Economic Research. “It seems that this would make NIH funding contingent on the vagaries of the judicial and legal process, and I don't know whether that’s really sound economic policy.” In addition, said Lichtenberg, who has done extensive research on the longitudinal value of publicly funded research, “the linkages from NIH research to downstream [results] can be pretty hard to trace.”

After Warren announced the plan last week, the industry lobbying group Pharmaceutical Research and Manufacturers of America (PhRMA) released a statement that read, “Pursuing misguided policies that siphon funding from the groundbreaking medical research happening in the biopharmaceutical industry will have devastating consequences for patients and society.”

Lichtenberg doesn’t think this is entirely hyperbolic. “Imposing what amounts to a tax on pharmaceutical profits could lead to a reduction in private research and development investment, and that could have a long term impact,” he said. 

On the other hand, the recent rise in lawsuits brought against pharmaceutical companies and the resulting billion-dollar settlements haven’t had a noticeable impact on investment into research and development. According to PhRMA’s own documentation, after you adjust for inflation, there has been no change in R&D spending since 2005. Meanwhile, drug sales continue to grow every year; in 2013 sales in the U.S. totaled $329.2 billion — almost 10 times the NIH’s budget.

The 1 percent fine would create an additional (and ongoing) financial burden, but it’s not clear that it would be enough to deter pharmaceutical wrongdoing. “It strikes me that there’s certainly a part of the market that would just absorb these costs,” said Horowitz. Drug companies are already hit with huge fines every year for these types of criminal activities, and they just keep on chugging by building these fines into their budgets; it’s part of their cost of doing business. (Warren's office did not respond to requests for comment in time for publication of this article).

Patrick Burns of the nonprofit advocacy group Taxpayers Against Fraud said that if lawmakers really want to deter illegal behavior, they should pass legislation that aims to punish individual bad actors, not companies. “At the end of the day, we also need to make the pain personal,” he said. That might mean targeting the fines at CEOs rather than companies. Or it might mean, as Frances Miller, a health care law and policy expert at Boston University, suggested, sending pharmaceutical bigwigs to jail. “When the general counsel for GlaxoSmithKline was indicted a few years back,” she said, “the in-house counsel bar got very serious about corporate compliance.”

Of course, putting people in jail won’t help fund the NIH. But then, it’s not clear whether Warren’s primary aim is to fight fraud or to fund the NIH. If it’s the latter, said Lichtenberg, “it comes under the heading of infrastructure. It should be something the general federal budget out to be supporting and not coming out of pharmaceutical industry profits.”

Warren’s ambitious “swear jar” plan has few precedents. One commonly cited example is the Tobacco Master Settlement Agreement, in which proceeds from a 48-state lawsuit filed against the major tobacco companies were used to fund the American Legacy Foundation, a public anti-tobacco education organization. But that was a one-time collection and distribution of money, not a permanent piece of legislation. Other examples, such as the Regional Greenhouse Gas Initiative — which creates financial penalties for greenhouse gas emissions and then earmarks a certain percentage of those penalties for use toward clean energy initiatives — are relatively tiny compared with Warren’s proposal.

Ultimately, what may be more important than the Medical Innovation Act itself is the light Warren is shining on the issues the bill is designed to address. “I think it’s great that Warren continues to bring attention to important issues that Congress isn’t focusing on,” said Hoffman, despite her doubts that the bill will pass.

Then again, perhaps this will end up becoming a rare bipartisan issue in the new Congress, which has Republican majorities in the House and the Senate. “America wants increased penalties heaped on companies that lie, steal and cheat,” said Burns. “This sentiment cuts across party lines. Tea party conservatives are just as frustrated with corporate kleptocracy as progressive liberals.” 

Editor's note: This version of the article corrects the spelling of Jill Horwitz's name.