Elizabeth Warren's 'swear jar' might even playing field for pharmaceutical fraud

Evan SweeneySince she assumed office in 2013, Sen. Elizabeth Warren (D-Mass.) has developed a reputation as an emboldened Senator who is more than willing to be the face of resistance against multibillion dollar corporations. In the past, her most frequent (and easiest) target has been the banking industry, but a recent bill sponsored by Warren shows her willingness to go after another multibillion dollar industry: Pharmaceuticals.

In her remarks at the Families USA Health Action Conference in the District of Columbia last week, Warren announced her plans to introduce the Medical Innovation Act as a means to increase funding for the National Institutes of Health (NIH). The funding, Warren said, would "come from blockbuster drug companies whenever they break the law and enter into major settlement agreements with the government."

The guts of the bill look like this: When large drug companies reach settlements with the government on charges of violating anti-kickback statutes, marketing drugs for unapproved uses or defrauding Medicare or Medicaid, they would be required to pay 1 percent of their annual profits towards NIH to help fund additional research.

"It's like a swear jar: Whenever a huge drug company that is generating enormous profits as a result of federal research investments gets caught breaking the law--and wants off the hook--it has to put some money in the jar to help fund the next generation of medical research," Warren said.

Let's use Daiichi Sankyo Inc. as Exhibit A. The company recently paid $39 million to settle claims it paid kickbacks to doctors to prescribe certain drugs. Daiichi Sanko's annual reported income for fiscal year 2013 was $514.4 million. If they were required to deposit one percent of their annual earnings into the "swear jar," NIH would collect $5.1 million. Under Warren's plan, that penalty would continue over the course of the next five years.

This bill only applies to "the biggest and most successful pharmaceutical companies," according to Warren. It would only apply to settlements, meaning companies that lose a court battle related to fraud or kickbacks will not face the same penalty. Even so, Warren said that, had the policy been in place for the last five years, NIH would have approximately $6 billion in additional funding. That's a 20 percent bump in its current budget. 

"It's a swear jar--but it's also a simple form of accountability," she said. "Instead of letting companies that break the law get off with a slap on the wrist, the Medical Innovation Act will make sure that they pay up in a way that really makes a difference--a difference to the health of all Americans, and a difference to all of the company's competitors who are playing by the rules."

Punishing providers and companies that commit fraud has always been an uneven playing field that heavily favors the pharmaceutical industry. As Warren pointed out, physician practices are routinely expelled from Medicare if they are convicted of wrongdoing, but pharmaceutical companies sign a check and walk away with hardly a scratch.

Although the world's largest drug companies paid more than $13 billion in fines and settlements between 2007 and 2012, when you match those penalties up against their profit margins, it hardly registers a sound. FiercePharma reported that pharmaceutical companies paid out $3.75 billion in 2013. The top three pharmaceutical companies in the U.S. (Johnson & Johnson, Pfizer and Merck) combined to earn more than $40 billion in 2013 alone. It's like emptying a pool with an eyedropper at one end while a fire house pumps in water at the other.

As you might imagine, pharmaceutical companies are none too pleased with this bill, claiming it will limit the amount of money they have for their own research. A spokesperson for the Pharmaceutical Research & Manufacturers of America (PhRMA) told the Wall Street Journal that the legislation would have "devastating consequences for patients and society." While it's true that large pharmaceutical companies do spend large sums of money on research and development, the 1 percent penalty would apply to profits only, after accounting for R&D funding.

What's interesting is that PhRMA laughably ignores the very simple solution to these perceived problems: Don't do it. Don't offer kickbacks, don't defraud Medicare and Medicaid, and don't illegally market drugs. In short, don't break the law, and any concerns surrounding the one percent penalty suddenly and miraculously vanish.

Admittedly, the bill has some holes. First and foremost, it's a creative way to direct funding to NIH without raising taxes or ripping money from other programs. The fraud prevention angle offers an easy way to rally against a common enemy, but it's still a fairly small penalty.

Despite their braying, I'm not sure the pharmaceutical industry is quaking in its boots over a 1 percent bite into their profits. But let's assume for a moment that the penalty terrifies them enough to get a better handle on fraudulent activity. If the fear of an additional penalty scares them straight and curbs fraud, NIH funding takes a hit. In a weird way, Warren's model relies on perpetuating fraud in order to continue funding drug research.

I suppose, as with any legislation, progress relies on small victories. Warren probably realizes that she has an innovative way to fund medical research without raising taxes--something that would theoretically appeal to both sides of the aisle--while bringing at least some measure of accountability to the most prolific drug manufacturers when they break the law.

The question is: Will the swear jar help break bad habits, or will pharmaceutical companies just start carrying around more loose change? - Evan (@HealthPayer)

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