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Big Pharma Is a Pointless Target for Warren

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Senator Elizabeth Warren has a modest proposal for pharmaceutical companies that get fined by the Food and Drug Administration for rule violations: a sort of "swear jar" that will require them to give money to the National Institutes of Health every time they break the FDA's rules. Peter Sullivan at the Hill reports:

Warren's bill, the Medical Innovation Act, would require large drug companies that reach a settlement with the government for breaking the law to pay a "small portion" of their profits over five years into a fund for research at the National Institutes of Health, and the Food and Drug Administration.

... "Fines for big drug companies have increasingly just become another cost of doing business," she said.

The provisions in her bill would only apply to companies that reach a settlement with the federal government for breaking the law and that sell "blockbuster drugs" with more than $1 billion in annual sales.

She claims that this would result in roughly a $6 billion increase in the NIH's annual funding, or about 20 percent.

What's not to like about sticking it to big, rich pharmaceutical firms in order to fund more of the government research that makes them rich? Who could be against that?

So glad you asked.

There are a few problems with Warren's proposal, starting with the fact that it seems to assume that the NIH is the ultimate source of all those Big Pharma profits, which is why some of those profits should be transferred to the NIH to fund "the next generation of medical research." In fact, academic research -- most of it presumably NIH-funded -- accounts for only about a quarter of new drugs. The majority are discovered by pharma or biotech firms.

However, there are also technical problems with Warren's proposal:

  1. A highly variable funding source is not the best way to go about paying for basic research. You don't want the dollar value of grants to swing wildly every few years, which could end up choking useful products just as they're starting to bear fruit.
  2. It's not all that likely that Congress would let that money stay with the NIH. A more likely outcome is that it will simply reduce NIH appropriations to offset the new fines.
  3. If fines should be higher on pharma violations -- and maybe they should be -- then we already have two very good ways of achieving that: Congress can mandate them, or regulators can impose them. A percentage-of-profits surcharge is not a good alternative. For one thing, you're going to end up fining companies based on how profitable they are, not how serious a violation was -- you could easily have a situation in which an unprofitable company that committed grave violations ends up paying nothing, while a profitable one that's guilty of less serious offenses contributes a great deal to the NIH coffers. This is neither just nor efficient.
  4. If you make pharmaceutical companies pay a hefty surcharge in exchange for settling with the government, then fewer companies are going to settle with the government. Cases will drag out, costing the government money, and the government may ultimately lose some of them. You have to net this out of any gain you project for the NIH.
  5. Why just big companies with blockbuster drugs? Are rule violations somehow less upsetting at generics manufacturers or ones that make specialty drugs?

This strikes me as less of a serious proposal and more of a populist gesture aimed at tickling the fancy of people who think that large corporations are all leeches and that all good things come out of government-sponsored research. It's hard to blame a politician for playing to her base. But we shouldn't join the performance, either.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net