The Medical Innovation Act: Addressing the Shrinking NIH Budget

By Rachel Sachs

Senator Elizabeth Warren (D-MA) recently introduced a new bill, the Medical Innovation Act, which would require pharmaceutical companies who settle with the government after committing certain illegal activities to reinvest additional money into the NIH.  Senator Warren views the bill as a “swear jar” for drug companies, seeking to target those who commit certain types of wrongdoing, including violating the anti-kickback statutes or defrauding Medicare and Medicaid, in order to increase government support for research at a time when the NIH’s budget has been falling.  Scholars and researchers who have lamented the shrinking of the NIH’s budget will find much to love in the bill, and they may even wish it had gone farther.

The Medical Innovation Act would be triggered under the following set of circumstances: drug companies (1) who sell at least one drug whose annual net sales exceed $1 billion, (2) where that drug can be traced at least in part to federally funded research (the Act refers to such products as “covered blockbuster drug[s]”), and (3) who enter into a settlement agreement of at least $1 million with the government after committing certain types of wrongdoing, would pay an additional penalty.  As a threshold matter, the Act will not affect companies unless they appear to have broken the law.  But even where companies have committed various forms of wrongdoing, the Act would not affect smaller drug companies, those who developed their drugs without the aid of the federal government, those who engaged in minor wrongdoing (and therefore only have small settlements), or those who take the government to trial rather than settling.

Affected companies would be required to pay an additional fine on top of the value of their settlement, paying 1% of the company’s profits multiplied by the number of covered blockbuster drugs sold by that company each year for five years.  Because the annual profits attributable to these companies are typically very high, even with the Act’s various carve-outs, Senator Warren estimates that if the Act had existed for the past five years, it would’ve provided an additional $6 billion every year to the NIH, a full 20% increase in its budget.  Going forward, this number might be smaller, if some companies respond to the Act’s incentives by committing less wrongdoing (a positive development in itself) or taking the government to trial (a relatively unlikely outcome, but possible in some cases), but the total amount is still likely to be substantial.

The Act also takes a thoughtful approach to allocating the funds it accumulates, sending some funds to the FDA to advance its goals in regulatory science, and earmarking the rest for the NIH.  Those funds are prioritized for research in a host of neglected areas, such as diseases for which there are unmet medical needs and research “related to diseases that disproportionately account for Federal health care spending.”  The Act also envisions the possibility that Congress will seek to use its funds to replace, rather than supplement, the NIH’s budget, including a provision designed to prevent such gamesmanship.

The Act has received a lot of support in the media, and the Massachusetts Medical Society recently expressed its support for the bill as well.  But PhRMA has come out against the bill, saying that it will in fact stifle innovation and implying that it will cause companies to reduce their investment into R&D activities.  I would hypothesize that Senator Warren thinks such a threat is unlikely to materialize, especially since the fine is assessed as a portion of the company’s profits rather than revenue.  As such, the more a company spends on R&D, the less it will pay in fines.  More interesting, I think, are liberal arguments criticizing the bill, such as arguments that the Act would ultimately be profitable for drug companies, and therefore arguing that the Act should’ve included stronger controls on NIH-produced research.

Notably, the Act takes a narrow approach to the concept of a “swear jar,” which could conceivably be expanded in various ways.  Allegations of “product hopping” in violation of the antitrust laws, such as those brought recently by the New York Attorney General, might eventually fall into this category.  Companies whose products lead to numerous adverse events (such as the 2012–2013 meningitis outbreak attributable to the New England Compounding Center or the recent outbreak of carbapenam-resistant Enterobacteriaceae at UCLA as a result of contaminated medical devices, written about here on this blog by Emily Largent) might similarly be targeted.  Relatedly, the idea could be expanded to other industries — it doesn’t appear that the statute would cover compounding pharmacies or medical device manufacturers.  A further extension would enable the FDA to take additional types of action against drug companies experiencing drug shortages that threaten patient safety.

For those who want to learn more, the (brief) text of the Act is available here, and Senator Warren’s office also has a one-page fact sheet explaining the Act.  The prospects of any bill passing in the current Congressional climate are extremely slim, but it would be a mistake to write off this bill entirely, not only as a serious legislative proposal but also as an expression of popular discontent with both pharmaceutical company wrongdoing and the shrinking NIH budget.