What Kennedy Must Do To Defeat Regulatory Capture

Authored by Bretigne Shaffer via The Brownstone Institute,

President-Elect Donald Trump’s nomination of Robert F. Kennedy, Jr. to head the Department of Health and Human Services is cause for celebration for anyone who cares about the pharmaceutical industry’s influence over regulatory agencies, and the deleterious effect it has had on the health of Americans. 

It is nearly impossible to express just how remarkable and potentially world-changing this is. Only a few years ago, it would have been beyond the imagination of any serious political commentator. Those of us who believe in the freedom of medical choice – and especially those who have been personally harmed by the industry – have every reason to be ecstatic.

But even if Kennedy is confirmed, and even if he manages to implement his ideas, will they be enough to bring about real, lasting, change?

One of Kennedy’s primary targets will be the regulatory capture that practically defines the pharmaceutical industry and the agencies tasked with overseeing it. He has spent decades tirelessly battling this particular beast, and has recently articulated a number of specific policy ideas aimed at rooting out the “corruption” that characterizes the regulatory agencies as well as the world of medical research. But is that even possible?

In order to answer this question, we need to examine the nature of the regulatory state itself.

The Regulatory State

There is nothing new about private commercial interests seeking to use government force to subvert the free market to their advantage – and to the disadvantage of everyone else. The medical and pharmaceutical industries are hardly unique in this regard. Generally, interest groups, or individual corporations, do this by convincing politicians to erect barriers – in the form of laws and regulations – to those who would compete with them.

Much has been written about the extent to which the regulation of business sprang, not from a desire to protect consumers, but rather from the desire on the part of a few businesses to secure for themselves an environment in which they are insulated from competition. In their 1993 paper, “The Protectionist Roots of Antitrust,” for example, Don Boudreaux and Tom DiLorenzo look at some specific examples of business interests lobbying government to enact antitrust legislation that would stifle their competition.

They write:

“(F)or over a century the antitrust laws have routinely been used to thwart competition by providing a vehicle for uncompetitive businesses to sue their competitors for cutting prices, innovating new products and processes, and expanding output. This paper has argued that, moreover, antitrust was a protectionist institution from the very beginning; there never was a ‘golden age of antitrust’ besieged by rampant cartelization, as the standard account of the origins of antitrust attests.“

The world of health care as we know it today in America is the result of similar efforts by some practitioners and professional associations to defeat their competitors, not by outperforming them in the marketplace, but by enacting laws to limit their ability to practice.

Most notorious among these efforts was the 1910 Flexner Report. Commissioned by the Carnegie Foundation, the Report recommended closing down the vast majority of medical schools; streamlining medical education to exclude non-allopathic modalities (and mostly eliminating medical schools for women and African Americans); giving state governments the power to approve medical schools; and dramatically tightening medical licensing restrictions.

In fact, the Flexner Report was, for the most part, an unpublished 1906 report written by the American Medical Association (AMA). At the time, the AMA made no secret about its motives in seeking the reforms to which Abraham Flexner lent his name. It sought to reduce the supply of physicians in order to further enrich its own members. In 1847, the Association’s committee on educational standards reported that:

“The very large number of physicians in the United States…has frequently been the subject of remark. To relieve the diseases of something more than twenty millions of people, we have an army of Doctors amounting by a recent computation to forty thousand, which allows one to about every five hundred inhabitants…No wonder, then, that the profession of medicine has measurably ceased to occupy the elevated position which once it did; no wonder that the merest pittance in the way of remuneration is scantily doled out even to the most industrious in our ranks…”

The very history of the regulatory state informs us that it was not implemented for the purpose of protecting consumers from powerful corporate interests, but to protect the interests of certain powerful corporations and groups of professionals. It is important to remember this when we hear critics bemoan the “corruption” in the regulatory agencies, and insist that this can be remedied if we just put the right people in charge of them.

No. “Corruption” is the primordial swamp from which these agencies emerged. It is in their DNA. It is, in fact, their very reason for being. There is no “reforming” that which is operating precisely as it was designed to operate.

Moreover, even if these agencies had been designed with the interests of the public in mind (and never mind that “the public” is not a single entity with uniform interests to begin with), the reality remains that there is no mechanism by which they can be made accountable to us.

Accountability between two parties can only come when each party has choice regarding whether or not they interact with the other. This is not the case with regulatory agencies. These are imposed upon us. We are forced to use their “services” whether we are happy with them or not; whether they do a good job or not; whether they make our lives more dangerous than they otherwise would be or not. No matter how badly regulatory agencies perform, we are not free to take our business elsewhere.

The FDA

What this means is that – just as with all other political actors – the leaders of these agencies are removed from the consequences that their actions have on others. In the case of the US Food and Drug Administration (FDA), this has led to decades of malfeasance and error that have cost many, many, lives.

Perhaps the most infamous example in recent times is the FDA’s complete failure to protect the public from the painkiller Vioxx. The agency approved the drug in 1999, following which it is believed to have killed as many as 55,000 Americans before being withdrawn in 2004. Significantly, the FDA did not withdraw Vioxx from the market, Merck did that itself. In fact, it appears that the regulatory agency worked to suppress information about the known risks of the drug:

“A Merck memo uncovered in November showed that Merck scientists were aware in 1996 that the drug might contribute to heart problems. Then in 2000, a Merck study found that patients taking Vioxx were twice as likely to suffer heart attacks as patients taking older painkillers. Meanwhile, mid-level FDA officials who warned of these dangers were shunned by the agency. In FDA parlance, those with a “point of view” on Vioxx were unwelcome in certain meetings concerning the drug.’”

To believe that the Vioxx scandal was an isolated event would be a mistake. 

Indeed, the history of the agency is littered with similar stories. Worse, it also uses its power to prevent people from having access to treatments that may help them, but that would not be very profitable, or which might otherwise go against the interests of the agency’s industry benefactors. We witnessed this in the extreme during the past few years, when the FDA and the rest of the regulatory establishment waged a war on Covid-19 treatments such as hydroxychloroquine, Ivermectin, and even Vitamins C and D.

The FDA does not fail to protect the public because it happens to have bad people in its leadership, or because they are “incompetent.” It fails to protect us because it has no incentive to do so. We are captive “customers.” We cannot take our money elsewhere. The leadership at the FDA has no tangible reason to care about our interests. And there is no amount of “draining the swamp” that can change this.

What Can Be Done?

The only hope, within this kind of system, is to defy the odds – and not insignificantly, to defy the vast sums of industry lobbying money – and get someone into a position of power over the regulatory agencies who has the will to force them to act contrary to their own incentives within the system. That person right now is undoubtedly Robert F. Kennedy, Jr., and, should he be confirmed as Secretary of HHS, he will undoubtedly do some good things.

But what happens after he is gone? The system itself will not have been changed. The incentives that are in place now will still be in place then. What happens when there is no longer a good person, with good intentions, in a position of some power over these agencies? Should our right to informed consent, for example, rely on our being fortunate enough to have “good people” in charge of fundamentally unaccountable agencies? Agencies that have the power to withhold potentially life-saving products from the marketplace, while at the same time providing a false sense of security about the dangerous ones they allow?

One of the proposals Kennedy has put forward is to reform the Prescription Drug User Fee Act. He writes: 

“Pharmaceutical companies pay a fee every time they apply for a new drug approval, and this money makes up about 75% of the budget of the Food and Drug Administration’s drug division. That creates a barrier to entry to smaller firms and puts bureaucrats’ purse strings in the hands of the pharmaceutical industry.”

Reforming, or better yet, eliminating, this fee would be a step in the right direction. But it would not change the fundamental nature of the FDA. It would not magically make that agency accountable to the public, nor would it remove the ability of those in the pharmaceutical industry to make other forms of payments to the agency.

Even now, the industry has other ways of exerting its influence, including the infamous “revolving door,” whereby agency officials who do well by a particular drug company while working for the FDA are later rewarded with lucrative positions in that company. And according to an investigative report by Science, post-approval payments in varying forms are also common. 

Science examined payment records between 2013-2016, and found that:

“Of the more than $24 million in personal payments or research support from industry to the 16 top-earning advisers—who received more than $300,000 each—93% came from the makers of drugs those advisers previously reviewed or from competitors.”

Critics of this kind of industry capture have long called for “getting money out” of the regulatory structure. But it remains unclear how this might be achieved. Certainly, specific payment channels, such as the Prescription Drug User Fees, can be eliminated or banned. But to imagine that those in the industry would not contrive of other ways to buy influence is not realistic. 

Just as critically though, even if pharmaceutical companies were somehow prevented from being able to pay off the agencies that regulate them, this would still not render those agencies accountable to the public, or to anyone other than themselves. 

The only way to “get money out” of the regulatory state is to stop giving that state favors to sell. It is to eliminate the state’s power to restrict market entry and market participation. These are the political favors that powerful industry interests bid for. If we want to stop that from happening, we need to eliminate those favors.

But We Need the Regulatory State to Keep Us Safe!

Astonishingly, even after the past four years, there are still a great many people who believe that the regulatory state exists to keep us safe. That it withheld potentially life-saving therapeutics from us, not out of malice or the interests of its corporate cronies, but for our protection. That it worked hard to censor information about these therapeutics, and about the dangers of the experimental product it was promoting, for the same reason. That maybe some mistakes were made during this time, but that really, truly, these agencies are designed to protect us and if we just get the right people in charge, and maybe do a little tinkering with the machinery, they will work as they are supposed to.

Again, no. They are working precisely as they are supposed to. 

But for those who remain unconvinced, for anyone who still believes that existing laws against fraud, malpractice, and other torts are not enough, that we need some sort of government oversight over the medical industry, let’s look a little closer.

Economist Milton Friedman famously recommended abolishing both medical licensing and the FDA. He wrote: 

“The FDA has done enormous harm to the health of the American public by greatly increasing the costs of pharmaceutical research, thereby reducing the supply of new and effective drugs, and by delaying the approval of such drugs as survive the tortuous FDA process.”

Others who have examined the agency’s track record concur that the agency does more harm than good.

Nobel laureate George Hitchings, for instance, estimated that the FDA’s five-year delay in introducing the antibiotic Septra to the market resulted in 80,000 deaths in the US.

Drug regulation expert Dale Gieringer says that the death toll resulting from the FDA forcibly keeping new medications from the market far outweighs any benefits it may have produced. He writes:

“The benefits of FDA regulation relative to that in foreign countries could reasonably be put at some 5,000 casualties per decade or 10,000 per decade for worst-case scenarios. In comparison…the cost of FDA delay can be estimated at anywhere from 21,000 to 120,000 lives per decade.”

Economist Daniel Klein notes that, prior to the FDA’s powers being expanded in 1962, existing tort law did a good job of protecting consumers:

“The FDA was much less powerful before 1962. The historical record—decades of a relatively free market up to 1962—shows that free-market institutions and the tort system succeeded in keeping unsafe drugs to a minimum. The Elixir Sulfanilamide tragedy (107 killed) was the worst in those decades. (Thalidomide was never approved for sale in the United States.) The economists Sam Peltzman and Dale Gieringer have made the grisly comparison: the victims of Sulfanilamide and other small tragedies prior to 1962 are insignificant compared to the death toll of the post-1962 FDA.”

He goes on to compare medical regulation to safety regulation in other industries:

“How is safety assured in other industries? In electronics, manufacturers submit products to Underwriters’ Laboratories, a private organization that grants its safety mark to products that pass its inspection. The process is voluntary: manufacturers may sell without the UL mark. But retailers and distributors usually prefer the products with it.

“Suppose someone proposed a new government agency that forbade manufacturers from making any electronic product until approved by the agency. We would think the proposal to be totalitarian and crazy. But that is the system we have in drugs…”

Conclusion

As long as regulatory powers exist that allow state entities to restrict entry into markets, and to dictate how producers may participate in those markets, there will always be those who are incentivized to gain access to the levers of that power and use it to further their own ends. Those who have the means to pay for this power will always find ways to do so.

What many call “corruption” is rather the predictable and inevitable outcome of institutions that are, by their very nature, unaccountable to those they purport to serve. The solution is not to get “better people” in charge of these institutions, nor is it to engage in a never-ending battle to stop participants from following the incentives the system has created for them. The solution is to remove those incentives. The solution is to remove the powers of the regulatory state itself.

If Robert F. Kennedy, Jr. is confirmed as Secretary of the Department of Health and Human Services, he will undoubtedly strike some blows against regulatory capture. Whatever he does in this position can only be an improvement over what we have now, and it is possible that some of his reforms may even endure beyond his own tenure. But he has the chance to do much more.

The regulatory state is a Gordian knot, and it is not enough to work at untangling its various components. It needs to be sliced through once and for all. The way to do this is simple: Abolish the FDA, abolish the NIH, abolish the CDC. End all medical licensing and accreditation. Get the government out of health care everywhere. 

Perhaps this sounds like a political impossibility. And perhaps it is. But until very recently, RFK, Jr. as Secretary of Health and Human Services was a political impossibility. I submit that we do not know what is possible and what is not.

Kennedy has an unprecedented opportunity to strike at the root of what makes our healthcare system so dysfunctional: to dismantle the institutions that stifle the production of medicine, distort information about its safety, and suppress alternatives. He has an opportunity to make a profound difference not only for the next four years but for generations to come. We should all hope that he does not waste it.