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in the Context
of Accounting
Abigail Brown

I. Introduction
Good decision-making requires reliable information. In medicine, relevant information comes from
clinical trials and other forms of scientific research. In
business, one source is in corporate annual financial
statements. As for-profit, publicly traded companies
whose business is discovering, manufacturing, and
marketing drugs, pharmaceutical companies sit at the
nexus of these two fields. Determining the safety and
efficacy of a pharmaceutical product and determining
the profitability of a complex enterprise are similarly
difficult tasks: each is fraught v^dth deeply ambiguous
information that requires sophisticated judgment to
interpret reasonably.
There are two ways to succeed in such an industry vidth arms-length shareholders: (l) improve true
profitability; or (2) directly target accounting goals
(revenue targets, debt to equity ratios, etc.) and use
the ambiguity inherent in the system strategically to
improve one's appearance of profitability. The harder
it is to tell directly if activities are really profitable, the
easier it is to manipulate metrics to create the appearance of success without actually creating value.
Because the science underlying the products the
pharmaceutical industry sells is inherently highly
ambiguous, it too is vulnerable to manipulation. This
manipulation is in the service of what is essentially
accounting fraud — the omission of material information that affects the valuation of the enterprise.
Other articles in this issue detail specific aspects of
manipulation, including: pressure to market drugs
causes the creation of new "diseases,"' diverts the focus
of patient advocacy groups from a holistic representation of patients' interests,^ encourages the vwdespread
marketing of drugs whose benefit-harm profile would
not be acceptable if vwdely understood,^ and distorts
medical education from a fair representation of what
is understood about human health and sickness.*
This article places these behaviors in the wider
context of information manipulation in the pursuit
of accounting profits; that is, the metrics used to
reward individuals for their corporate performance.
The problems arising when there is both opportunity
and incentive to mislead are better accepted and better studied — though by no means solved — in financial accounting than in medicine. This article explores
what we know about misinformation and fraud in
Abigail Brown, Ph.D., is currently a Senior Economist at
the U.S. Government Accountability Office (GAO). She wrote
this article while a Lab Fellow at the Edmond J. Safra Center
forEthies at Harvard University. She holds a Ph.D. in policy
analysis from the Pardee RAND Graduate School in Santa
Monica, CA.All views expressed in this article are hers and do
not reflect the views ofthe GAO.




accounting and what it tells us about similar information manipulation in the medical sciences.^
This framework helps us consider how best to
improve the quality of medical research and analysis, given the current system of scientific information
production. In particular, I identify three ways to better identify — or prevent — misinformation at three
points in the information production process.

II. Ambiguity in Medical Research
and Accounting
There are parallels between accounting principles
and what the scientific community deems appropriate
evidence. In both fields, while there are guidelines on
how to interpret evidence, there is an extensive role
for judgment that is inherent to the process.

in an attempt to remove as much judgment as possible
from the system. However, these rules have negative
side effects. The "bright line" rules create the opportunity for clever accountants and lawyers to design
transactions that meet their letter while bypassing
their intent. The rules also fail to keep up with financial innovations, ensuring that there are always zones
of lawlessness in accounting. Explicit rules can also
encourage a "checklist" mentality in the auditors,
whereby auditors enforce the letter of the rule while
losing sight of the spirit.
For example, Lehman Brothers developed a class
of trades, called "Repo 105," to take advantage of the
arbitrary and poorly designed accounting rule for a
type of transaction called "repo trade." The bank then
used its Repo 105 trades to hide up to $50 billion in

The problems arising when there is both opportunity and incentive to mislead
are better accepted and better studied — though by no means solved — in
financial accounting than in medicine. This article explores what we know
about misinformation and fraud in accounting and what it tells us about
similar information manipulation in the medical sciences.
It is difficult to determine how safely and efl'ectively
certain molecules address physical or psychological
maladies. While the process of drug development and
clinical trials can provide considerable insight into the
consequences of taking a drug, there is no guarantee
that our knowledge is adequate at the moment of the
drug's release onto the market. It can be years or even
decades before the full risks — or benefits — of a particular molecule are understood.
Similarly, reliable measures of profitability are difficult to establish. The core principle of accrual accounting^ — the method that best refiects economic profitability — is to match revenues with the costs of their
production. Given that the costs and revenues that
flow from an action can also be separated by years or
decades, any meaningful reporting must involve estimates, uncertainty, and challenges in matching cause
with effect. Nevertheless, we have to make decisions,
honor contracts, distribute dividends, and take other
actions that rely on an estimate of a corporation's profitability. Unable to base our decisions on the unknowable "true" profits, we have no choice but to base them
on accounting profits.
Accounting rules have been the subject of far more
intensive regulation for far longer than those of medical research, and, as a consequence, are more codified


debt right up to its collapse. Lehman's auditors had
both the power and the obligation to force the bank to
better account for its Repo 105 trades once it became
apparent that they were being used to deceive the
markets. However, the auditors appear to have missed
the big picture — $50 billion in hidden debt — for the
small picture of ensuring that the trades were composed of the correct type of debt as specified in the
original rules.^
Medical science relies less than accounting does on
codified procedures and traditions to determine what
constitutes acceptable evidence. Nevertheless, peer
reviewers and other judges of evidential quality sometimes do rely on well-established rules of thumb rather
than engaging with difficult scientific judgment calls.
Some of these rules of thumb — such as statistical significance threshold tests — can be readily gamed.
In both domains, then, reform should facilitate
engaged skepticism in the formulation and monitoring of results. To do this, there must be enough information about the elements that went into the assessment for people with different incentives and goals to
evaluate the judgment of the primary actors, be they
scientists interpreting clinical trial results or executives reporting on the profitability of a company. In
addition, skeptics must have a means by which their


Abigail Brown

doubts can be voiced — and heard — with reasonable
protection against retaliation.
III. Profit-Based Incentives to Manipulate
Drug Data
In 2010, the United States spent $307binion on pharmaceuticals.8 To access this market, pharmaceutical
companies need to generate research that leads to
FDA approval and then supports marketing. With that
much money at stake, the payoffs for emphasizing the
positive and obscuring the negative can be enormous.
The origin of the intense pressure to develop drugs,
get them approved by the FDA, and aggressively market them can be seen in pharmaceutical company
proxy statements, the regulatory filings that include
details of top executives' compensation. The major
pharmaceutical firms all have similar compensation
formulas for their top executives, with fixed compensation making up no more than 20 percent of the total
target award.^
For example, Merck's target compensation formula
in 2012 was 18 percent from the base salary, 20 percent
from an annual cash incentive program, and 62 percent in long-term equity incentives.^" The cash incentive program is based on scoring performance against
a Merck Company Scorecard. The drug pipeline and
its regulatory success are critical to accomplishing the
Scorecard's goals: 50 target points are based on financial outcomes, 15 points on customer outcomes, 25
points on internal business drivers, and 10 points on
creating a "high-performance, sustainable culture.""
The long-term equity incentives are composed of
stock grants and stock option awards, both of which
vest over a period of years. The proxy statement argues
that these incentives encourage a 'Tjroader focus on
achieving long-term success."'^ However, the design
of the equity incentives, particularly the stock options
grants, amplify the value to the executive of FDA
approval to unpredictable and potentially destructive
To see the amplification effect, consider the following hypothetical illustrated in Table 1: an executive is
granted stock options to purchase stock at $100 on or

after a vesting date. If a drug is coming through the
FDA approval process when the options vest, we can
calculate the percentage change in value those options
will have if the drug fails to win approval. We can use
the cumulative abnormal returns (CAR) estimated by
Anurag Sharma and Nelson Lacey — a positive CAR of
two percent upon FDA approval and a negative CAR of
21 percent upon FDA rejection — to estimate the effect
of an FDA announcement on the realized value of the
stock option based on the pre-announcement stock
price." Even though the stock price difference between
approval and rejection is always 23 percent, the executives could lose up to 100 percent of their award.
Stock options are also granted to lower-level
employees and similarly amplify the incentive effects
of a stock price change. The strength ofthat amplification is unpredictable at the time of the option grant.
For all employees with equity-based compensation,
the FDA approval/rejection effect on the value of the
equity-based compensation will be at least as large
as its effect on the stock price and potentially much
larger. In addition, post-approval research can have a
similar effect on employee wealth. Even though they
will not cause the overnight market swings of an FDA
approval, post-market research has the potential to
dramatically expand revenues from a particular patent by creating new markets for that drug; the potential for increased revenues in turn reliably drives stock
price increases.
Combine these extraordinary financial pressures
with the inherent ambiguity of medical research and
one creates an incentive to manipulate data. It can
have the effect of putting a thumb on the scales of
everyone's judgment, so that at every step of the way,
people make decisions that obscure bad news and
amplify good news. Each decision on its own may
be reasonable, but the aggregate can create a highly
misleading picture. The responsibility for deception
becomes diffused, often with no individual having a
clear understanding of its extent.^*

Table I

Amplification of Stock Price Changes on Hypothetical Vesting Stock Option Values

Pre-announcement stock price

Stock price after

Stock price after

% loss from
approval to

realized value
after approval

realized value
after rejection

% loss from
approval to


$ 1 12.20























rV. Mechanisms of Distortion and
Pharmaceutical companies rely on two separate armslength validation mechanisms to sell their drugs:
regulatory approval and academic research. Regulatory approval for a designated purpose is a precondition for any drug to enter the market. However, once
a drug is approved for that purpose, doctors can prescribe it for any reason to any patient, a practice called
"off-label" prescribing. A drug approved for a very narrow purpose can reach a much larger population if
doctors believe it helps other conditions. While drug
companies cannot advocate specific off-label uses in
their marketing material, they can ensure that doctors
see the latest published research identifying and supporting new indications for a drug.^^
As a consequence, research conducted both for
regulatory approvals and for medical journals can be
very important to pharmaceutical marketing. While
there are interactions between the two avenues of dissemination, they have very different oversight structures and different mechanisms by which to ensure
quality of information. Pharmaceutical companies use
various types of leverage to try to control the outcomes
of both processes. Countering their leverage are economic forces that help entities resist that pressure.
The first step in research for either academic or
regulatory purposes is a clinical trial, which provides
the empirical data upon which the analyses are based.
The design and conduct of clinical trials often involve
a collaboration between the company and a for-profit
contract research organization (CRO).^^ Even in academic research, if funded by a pharmaceutical company, CROs tend to be heavily involved throughout the
If the research is intended for regulatory approval,
then the pharmaceutical firm will choose reports of
two studies to submit to the FDA; they can conduct
as many studies as they need to generate two studies with positive results. The FDA will review the
research, sometimes in-house and sometimes with ad
hoc external review panels, and will decide whether
the company has made an adequate case for the drug's
safety and efficacy.
For research based in universities, the pharmaceutical company will collaborate with researchers to write
up the results of clinical trials to demonstrate that
the drug is effective for various uses (FDA-approved
or otherwise). The academic researchers then disseminate this work through conference presentations,
which face comparatively low quality filters but reach
fewer practitioners, and through journal articles,
which face more rigorous quality control but can reach


many more practitioners. Most often, the company's
dissemination strategy will involve both channels.
The incentives for actors in the medical research
ecosystem to commit or turn a blind eye to fraud or
paltering can come either from quid pro quo payments, possibly disguised as padded fees or consulting
contracts, or — perhaps more potently — from what
are known as career concerns}''
Career Concerns
The presence of career concerns result in decisions
made with an eye towards ensuring a continuing
relationship with the company, rather than toward
fairly evaluating the evidence. Pharmaceutical company employees, for example, who press too hard for a
truthful representation of a failed trial might be fired
or might find their careers within the company stalled.
Similarly, pharmaceutical firms contract with CROs
to conduct most of the clinical trials used in evaluating the safety and efficacy of drugs. They depend on
renewed contracts from their pharmaceutical clients
for survival. These contracts give the pharmaceutical company complete control over the work product and all forms of research dissemination. If any of
the CRO's scientists break confidentiality and try to
independently report adverse effects or evidence of
inefficacy, the CRO will lose some or all of its clients.
Because the CROs are on the front lines of research,
they may know the most about where the "skeletons"
are hidden, but they have no mechanisms for disseminating their knowledge. Instead, their pharmaceutical
clients control all information releases and can simply
bury a study if they do not want it seen.'^
Academic researchers do have the capacity to see
that their research gets into the public domain by publishing in academic journals. In theory, they generally
retain academic freedom even when they accept corporate grants. However, they may find pharmaceutical
companies unwilling to fund future research projects
if they have a track record of releasing unfavorable
findings. Academic researchers are becoming increasingly vulnerable to pressure from career concerns as
other forms of research funding dry up.
Journals receive advertising dollars — and reprint
fees — from pharmaceutical companies. Those dollars fiow to journals that publish studies that support
the companies' products. If ajournai were to become
much more skeptical of research associated with pharmaceutical companies than it is of other research, it
might lose some of its advertising and reprint income.
If there were no counteracting forces to the costs
of disclosing an inconvenient true finding, medical
research — and other fields that struggle with similar
challenges — would collapse into illegitimacy. LeverJOURNAL OF LAW, MEDICINE & ETHICS

Abigail Brown

aging career concerns to control people's decisions, in
any field, has a cumulative effect. If honest people's
careers are shorter or slower to advance than the
careers of those willing to mislead, the concentration
of less principled people in positions of power would
increase unchecked. But the situation is not quite so
dire, for reasons that parallel those in the business of
auditing. The accounting literature has identified two
major market forces that counter the forces of direct
financial gain and career concerns — reputations^
and legal liability.^" These forces are also at play in
pharmaceutical research. Reputation is a particularly
strong force in the academic publication channel,
whereas the threat of legal liability is more important
in the regulatory approval channel.
Medical practitioners' belief in the published findings of academic researchers is due to the researchers'
credibility, the credibility of their institutions, and the
reputation of the journal. Without credibility, the academic, the institution, and the journal have no productive purpose in society. They would also lose an important source of revenue that results from this credibility,
which is derived via a mechanism termed signaling.''^
In the theory of signaling, companies voluntarily submit themselves to a tough monitoring process to reap
the benefits of having their representations believed by
market participants (in this case, doctors who might
prescribe their medicines). The more credibility monitors can attach to their name, the more they are able
to charge for their services — these excess charges are
known as reputational rents. The risk of losing these
rents is a powerful incentive for reputation-based entities to resist the temptation to allow misrepresentations.
Reputational rents in academia are indirect but
real. Publications can win academics tenure, promotions, and a position at a higher-status university. A
prominent reputation can also win them consulting
contracts or expert witness opportunities. A journal's
reputation is built on its ability to select the best studies from among those submitted and to ensure that the
manuscripts it publishes are based on methodologically sound research. It reaps reputational rents in the
form of increases in circulation, formal rankings, and
demand for advertising space.
However, a concern for reputation in medical
research — like a concern for reputation in financial
reporting — may still fail to constrain harmful behavior. In large part, this is due to the inherent ambiguity
of the measures of quality that go into the formation
of reputation.22 Market participants often have little
capacity to judge directly the quality of these players'
work, so they tend to look at very imperfect proxies in

order to decide what and whom to trust. Reputation
proxies in the academic medical sector include the
numbers and prestige of publications for academics or
impact factors for journals.
These proxies are distorted, however, by the intervention of pharmaceutical companies. Pharmaceutical
financing and infrastructure support can increase an
academic's productivity and the status of the journals
where her work is placed. Pharmaceutical companies
will often sponsor multiple studies of important drugs
in their portfolio. These studies cite each other, and
the journals that publish them will accumulate many
more citations than the journals that publish studies
reporting negative findings. Citation counts are the
major factor in determining impact factor calculations and are therefore highly valued by the journal.
Reputation does not play as important a role in the
market incentives for regulators as it does for academics or journals, but it is not irrelevant. Because the
FDA approval process is mandatory, companies v^all
seek FDA approval regardless of any signaling value
of approval. However, if the FDA loses credibility, it
will face political consequences. Agency leaders will
be called to testify in tough and embarrassing congressional hearings, they may lose their positions, and
the agency might even face reorganization or loss of
Legal Liability
Pharmaceutical companies' behavior is also constrained by legal liability. Drugs discovered to be
harmful after release routinely trigger consumer class
action suits against the manufacturer. Because an
unsafe drug has financial as well as health and safety
consequences, the discovery of an unsafe drug can
sometimes trigger a shareholder lawsuit when a company has failed to disclose known risks. If the liability penalties are high enough, this should, in theory,
motivate full disclosure.^^ However, the penalties may
not always be sufficiently high to prevent wrongdoing.
Companies can also obscure risks while still complying with the letter of the disclosure requirements.^*
There are fewer legal remedies with which to pursue actors outside the pharmaceutical companies.^^
In particular, there are generally no legal remedies
for misleading or incorrect academic research — this
would threaten the foundation of academic freedom.
The main exception to this is research fraud involving federally funded research. The Office of Research
Integrity (ORI) can pursue legal remedies from academics who manipulate research that either goes
into winning federal grants or results from federally
funded studies. This will not constrain academics




working on grants from a pharmaceutical company,
unless the research is partially federally funded.
V, Reforms
We rely on pharmaceutical companies to contribute
significantly to the social goals of scientific advancement and the enhancement of human knowledge.
Positive and negative results in a clinical trial both
advance the process of scientific inquiry. Unfortunately, the financial consequences for pharmaceutical

prevent accounting fraud could therefore help expose
and prevent medical research fraud.
In particular, the Dodd-Frank Act's whistleblower
program27 renders pharmaceutical companies more
vulnerable to whistleblowers. Even before DoddFrank, passed in 2010, pharmaceutical companies
that covered up evidence revealing a drug's safety or
efficacy problems risked legal liability under securities law as well as tort liability for harm to patients.^^
Using the same logic as is used in those securities suits

Reform goals should therefore focus on releasing negative information
in a useful way and on increasing the voice of independent interpretations
of evidence. Three reform steps could improve the quality of information
while retaining the existing medical research ecosystem. A more far-reaching
step would be to unbundle the research from the industrial process
more fully, as explored by other reform advocates.
companies are very different depending on whether
the results are positive or negative. This mismatch is
at the heart of the challenges in the way we approach
medical research.
In our current system, we bundle much of this critical research and development with the industrial process of pharmaceutical production and distribution.
Patent protection provides the funding mechanism
to accomplish both tasks. There is a practical logic
to this arrangement, but it loads all of the rewards of
the system onto positive research findings. As a consequence, publicly available information is heavily
biased towards the positive. Medical science is undermined when failures are neither acknowledged nor
made available to the scientific community.
Reform goals should therefore focus on releasing
negative information in a useful way and on increasing
the voice of independent interpretations of evidence.
Three reform steps could improve the quality of information while retaining the existing medical research
ecosystem. A more far-reaching step would be to
unbundle the research from the industrial process
more fully, as explored by otber reform advocates.^^
Strengthen the Connection between Securities and
Medical Research Fraud Remedies
Fundamentally, actions that distort medical research
findings arise out of the desire to make corporate
assets — patented molecules — appear more valuable than they are. Such actions are therefore closely
related to accounting fraud. Certain tools available to


to establish scientific misconduct as a form of securities fraud, individuals who are aware that a pharmaceutical company is hiding material information
about the safety or efficacy of a drug can now report
the company to the SEC for securities violations under
The Dodd-Frank whistleblower program extends
the opportunities for whistleblowers to recover significant bounties beyond those provided by the False
Claims Acts. There are several relevant aspects that
make it attractive. First, claims are no longer limited
to fraud against the government. Reports of fraudulent actions made before federal payments have
occurred (via Medicare and Medicaid) are now eligible for protection and recovery. Second, the whistleblower can have identified the fraud through unique
analysis of publicly available information; he is not
required to have insider information. Even an academic whose identification of shoddy analysis techniques leads to a successful claim against a pharmaceutical company for misrepresenting the safety or
efficacy of a drug in development could recover an
award — 10 to 30 percent of the penalties recovered
by the SEC.
Many people in a position to report research fraud
may be unaware of these incentives to do so. Providing such information for potential whistleblowers
on the FDA, National Institutes of Health, and ORI
websites could encourage potential whistleblowers to
take advantage of the law's provisions, which would,
in turn, (a) provide another layer of protection for the
public against the most egregious research fraud and

Abigail Brown

(b) make it less worthwhile for pharmaceutical companies to attempt such fraud in the first place.

This scheme has several benefits, which would both
advance academic interest and protect against institutional corruption of the process. It would result in a
reduction of the distortion caused by publication bias.

Change the Journal Acceptance Process
Academic articles play a powerful role in marketing Pharmaceuticals, both for approved
uses and for off-label marketing. Scientific
journals need to recognize that the money at Scientific journals need to recognize that
stake can distort the decisions of the authors the money at stake can distort the decisions
and their backers in ways that peer review is of the authors and their backers in ways
currently not well equipped to detect. Ignoring the problem is undermining both the that peer review is currently not well
authority of the top journals and the scientific equipped to detect. Ignoring the problem
dialogue they exist to promote.
is undermining both the authority of the
Journals could unilaterally increase the
scientific validity of the work they publish by top journals and the scientific dialogue they
changing the acceptance process to a two- exist to promote.
stage review process.^^ The main, first-stage
decision to accept or reject an article reporting
on a clinical trial should be made before the trial is cari.e., the tendency of journals to refuse to publish studried out, based on the trial protocol. Reviewers would
ies that find no effect. It would also help researchers
base their acceptance on such criteria as whether the
avoid the expense of a poorly planned clinical trial.
research question is interesting and well formulated
More importantly, however, this process would make
and whether the clinical endpoints chosen adequately
it much more difficult for authors to get away v^dth
measure the effect of the drug on the illness or medithe kinds of subtle manipulation of results that makes
cal condition. After the trial has been conducted, the
drugs appear much more attractive than they are.^^
reviewers can hold the researchers accountable for
Reviewers and editors would be better able to evaluany deviations from the proposed protocol.^^
ate the judgment applied by the academics over the
There would be three possible outcomes once a procourse of the clinical trial and its interpretation.
tocol has been accepted:
Another advantage of this reform would come from
risk to the researcher of damaging his or her reputa1. The journal would publish the final paper if
tion and career by being associated with a study that
the agreed protocol was faithfully executed
was accepted for publication at the protocol stage but
and if the researchers were deemed to have
rejected for unacceptable follow-through. This risk
demonstrated good judgment when the
would encourage academics to balance their impulse
trial encountered unanticipated problems.
to shade their interpretations with their desire to
Both significant and null results would be
maintain a reputation for excellence, avoiding the
introduction of shoddy analysis or trial design in the
2. If the final paper is deemed unacceptable
first place.
because the study did not follow the agreed
Finally, academics who wish to increase their repprotocol, a précis of the protocol would be
utational value as independent researchers could
published instead, with an explanation that
commit to publishing only in journals that use this
the study, the interpretation, or both did not
two-stage acceptance process. If pharmaceutical comadhere to the protocol or were otherwise
panies wanted to avail themselves of the additional
severely flawed.
signaling value of journals and academics committed
3. If a clinical trial with an accepted protocol is
to independence, they would have to submit to the
not completed by a certain date, the journal
additional constraints on interpretation and the addiwould publish the protocol précis, with an
tional risks of a failed trial becoming public.
explanation that the trial was never completed. At this point, anyone could submit a
Subsidized Clinical Trial Failure Insurance
completed trial based on the protocol for expeIf academic journals improve their ability to publish
dited publication.
null results and to identify research manipulations,
companies might simply avoid publishing in journals
to avoid being forced into reporting a negative result.



Yet society still has an interest in ensuring that all trial
results enter the public domain.
A failed clinical trial, no matter how medically
informative, does not sell drugs. From the pharmaceutical company's perspective, then, a failure is quite
costly and the company reaps little of the social benefit
of an increase in medical knowledge. If, on the other
hand, the company can massage the data enough to
make a failure look like a success, it might reap a huge
benefit — at great social cost. The federal government
could, however, modify this calculus were it to take on
the risk of the research itself by providing subsidized
insurance for the failure of clinical trials undertaken
with the purpose of seeking FDA approval. Subsidizing insurance would provide a mechanism by which
pharmaceutical companies would bindingly commit themselves to transparency and data quality in
exchange for decreased costs associated vñth failed
The federal government already provides a number
of subsidies to the pharmaceutical industry through
the various tax subsidies for R&D and through the
patents granted to new drugs. But tax subsidies apply
regardless of the success or failure of the development
and approval process. Worse, a patent only delivers
profits when a drug is approved. Providing subsidized
insurance to cover the costs of clinical trials that fail
would protect pharmaceuticals against some of the
risks of acknowledging failure. Society could recover
the costs of the subsidy by reducing the duration of
patents, since the justification that they are needed to
cover the costs of failed drugs would no longer apply.
Note that such insurance would never be offered
on the private market because evaluating the risk of
trial failures is not particularly amenable to actuarial
analysis, nor would a private entity be able to offer it
at a price pharmaceutical companies would be interested in paying. The subsidized insurance scheme
would not aim to recover its costs via premiums; the
value that the public would recover would be in the
scientific information gained.^^ If the premiums of the
insurance were sufficiently subsidized, pharmaceutical companies should find the scheme an attractive
tool for managing risk.
In order to collect on the insurance, a pharmaceutical company would have to release all the data associated with the research (except patient identifiers and
other sensitive information). The insurance administration could provide a centralized public clearinghouse of all this data, available for reanalysis by
any interested party from industry or academia. The
administration would also provide a mechanism to
enforce compliance with the trial registry mandates
already in place if registration were a pre-requisite for

a trial to be eligible for claims. Finally, the level of premium subsidy could vary according to the importance
of the drug under developrñent; entirely new classes of
drugs and drugs for diseases that are in urgent need of
better solutions could be more highly subsidized than
trials for the less risky, less valuable minor modification of existing products, the so-called me too drugs.
For a pharmaceutical company, the failure of a drug
has consequences other than the cost of clinical trials.
Nonetheless, reducing the financial risk of these trials
will reduce the pressure pharmaceutical companies
place on the research ecosystem to return a positive
finding every time. The payoff to society comes from
encouraging pharmaceutical companies to comply
voluntarily wdth data-sharing and pre-trial registry
requirements and through using the insurance payouts to help enforce the rules.
VI. Conclusion
Medical research manipulation is often motivated by
a desire to achieve a subtle form of financial reporting
manipulation. We can borrow the framework developed in the accounting literature to understand the
forces acting on the entities that contribute to medical
research. This framework suggests that finding ways
to encourage the release of negative findings and to
encourage truly independent monitoring of research
decisions and analysis would improve the quality of
information in medical research.
1. L. Cosgrove and E. E. Wheeler, "Drug Firms, the Codification of Diagnostic Categories, and Bias in Clinical Guidelines,"
Journal ofLaw, Medicine, Ö Ethics 41, no. 3 (2013): 644-653.
2. S. L. Rose, "Patient Advocacy Organizations: Institutional
Conflicts of Interest, Trust, and Trustworthiness," Journal of
Law, Mediane Ö Ethics 41, no. 3 (2013): 680-679.
3. D. W. Light, J. Lexchin, and J. Darrow, "Institutional Corruption of Pharmaceuticals and the Myth of Safe and Effective
Drugs," Journal of Law, Medicine Ö Ethics 41, no. 3 (2013):
4. S. Sismondo, "Key Opinion Leaders and the Corruption of
Medical Knowledge: What the Sunshine Act Will and Won't
Cast Light On," Journal of Law, Medicine Ö Ethics 41, no. 3
(2013): 635-643; M. Rodwin, "Five Un-Easy Pieces to Pharmaceutical Policy Reform," Journal ofLaw, Medicine & Ethics
41, no. 3 (2013): 581-589.
5. This approach is similar to the one taken by Brown and
Klerman in assessing the problems faced by the government
program evaluation in the light of what we know about how
auditors have grappled with their role. See A. B. Brown and
J. A. Klerman, "Independent Evaluation: Insights from Public
Accounting" Evaluation Review 36, no. 3 (2012): 186-219.
6. There are two main approaches to accounting: accrual and
cash accounting. Cash accounting books revenue and expenses
when cash is exchanged in a system that is simpler and more
concrete than accrual accounting but that does not reflect the
underlying economics of decisions and transactions. Accrual
accounting attempts to reflect the full value of a transaction,
both its costs and its benefits, all at once. This provides more
economically meaningful information but requires far more


Abigail Brown
judgment and estimation, since some of the costs or benefits
may not yet have been incurred.
7. Cuomo V. Ernst & Young Complaint Re Lehman Brothers
Repo 105.
8. U.S. Government Accountability Office, D7Tig-Pna'rag'."iîeAea7'cA
071 Savings from Generic Drug Use GAO-12-371R (2012).
9. Actual awards can vary significantly in either direction,
depending on whether the company and executive met or
exceeded various performance targets.
10. Merck, "Proxy Statement, April 12, 2012," at 29,
available at <http://www.sec.gov/Archives/edgar/
(last visited June 6, 2013).
11. Id., at 31.
12. Id., at 37.
13. Cumulative Abnormal Returns are the standard measure of
stock price changes within a brief window of time that can
be attributed to a specific news event, such as the announcement of FDA approval or rejection of a drug application, as
opposed to changes from more general market movements.
See A. Sharma and N. Lacey, "Linking Product Development
Outcomes to Market Valuation of the Firm: The Case of the
U.S. Pharmaceutical Industry," Journal of Product Innovation Management 21, no. 5 (2004): 297-308. Estimates are
rounded to the closest percentage point.
14. Y. Feldman, R. Gauthier, and T. SchuUer, "Curbing Misconduct
in the Pharmaceutical Industry: Insights from Behavioral Ethics and Behavioral Law and Economics," Journal ofLaw, Medicine & Ethics 41, no. 3 (2013): 620-628.
15. M. A. Rodwin, "Rooting Out Institutional Corruption to Manage Inappropriate Off-Label Drug Use," Journal ofLaw, Medicine & Ethics 41, no. 3 (2013): 654-664.
16. S. Sismondo, "Ghost Management: How Much of the Medical
Literature Is Shaped BeKind the Scenes by the Pharmaceutical
Industry?" PLoS Medicine 4, no. 9 (2007): 1429-1433.
17. D. Acemoglu and M. B. Gietzmann, "Auditor Independence,
Incomplete Contracts and the Role of Legal Liability," European Accounting Review 6, no. 3 (1997): 355-375.
18. The trial registry at clinicaltrials.gov is an attempt to create
consequences for pharmaceutical companies that bury unfavorable trial results. It does not yet appear to have a strong
effect on behavior, in part because compliance with trial registry is spotty. See M. A. Rodwin and J. D. Abramson, "Clinical
Trial Data as a Public Good," J!>lAi>l 308, no. 9 (2012): 871-872.
19. L. E. DeAngélo, "Auditor Size and Quality," Journal of Accounting and Economics 3, no. 3 (1981): 183-199.
20. R. A. Dye, "Auditing Standards, Legal Liability, and Auditor Wealth," Journal of Political Economy 101, no. 5 (1993):
21. G. A. Akerlof, "The Market for 'Lemons': Quality Uncertainty
and the Market Mechanism," Quarterly Journal of Economics
84, no. 3 (1970): 488-500.
22. We saw how reputation failed to constrain credit rating agencies in the financial crisis, even though it is now common
knowledge that their ratings were useless for many of the
mortgage-backed securities that were the trigger for the finan-

cial crisis. Reputation is less straightforward than much of the
literature on the topic assumes. See, for example, F. Partnoy,
"The Siskel and Ebert of Financial Markets?: Two Thumbs
Dovm for the Credit Rating Agencies," Washington University
Law Quarterly 77, no. 3 (1999): 619-712; and A. B. Brown,
"Effect of Market Structure and the Regulatory Franchise in
Reputation-Dependent Industries," paper presented at the
10th Annual International Industrial Organization Conference, Arlington, VA, March 17, 2012.
23. G. S. Becker, "Crime and Punishment: An Economic Approach,"
Journal of Political Economy 76, no. 2 (1968): 169-217; see
also Dye, supra note 16.
24. F. Schauer and R. Zeckhauser, "Paltering," in B. Harrington,
ed.. Deception: From Ancient Empires to Internet Dating
(Stanford: Stanford University Press, 2009): at 38-54.
25. For proposed legal remedies, see V. Swaminathan and M.
Avery, "FDA Enforcement of Criminal Liability for Clinical
Investigator Fraud," Hastings Science Ö Technology Law Journal 4, no. 2 (2012): 325-356; and S. Stern and T. Lemmens,
"Legal Remedies for Medical Ghostwriting: Imposing Fraud
Liability on Guest Authors of Ghostwritten Articles," PLoS
Medicine 8, no. 8 (2011): 1-5.
26. For a comprehensive review of proposals along this spectrum,
see M. A. Rodwin, "Independent Clinical Trials to Test Drugs:
The Neglected Reform," Saint Louis University Journal of
Health Law Ö Policy 6, no. 1 (2013): 113-265. See also, S. Sismondo, supra note 4.
27. H. R. 4173 § 922.
28. Matrixx Initiatives, Inc. v. Siracusano, No. 09-1156, 563 U.S.
- - (decided March 22, 2011) established that adverse information about a pharmaceutical product could constitute a material event requiring disclosure to shareholders. For an example
of current litigation along these lines, see In re Merck Ö Co.,
Inc. Securities Litigation; Id. Pages 90-166 detail the connections between Merck's distortion of the medical research
and materially false and misleading statements relevant to
29. Unaware of each other, Dan Kahàn posted a similar idea
for psychology research on his "Cultural Cognition Project Blog" at the same time as this paper was drafted. See D.
Kahan, "Likelihood ff 1 Journal (LRfñ), The Cultural Cognition Project," available at <http://www.culturalcognition.net/
blog/2013/3/l5/likelihood-ratio-l-journal-lr-lj.html> (last visited April 1, 2013).
30. See Feldman, Gauthier and SchuUer, supra note 14.
31. The second-stage reviewers would hopefully be the same people as in the first stage. If not, the new reviewers should be provided with the protocol and all previous reviewer comments.
32. Insurance could be mandatory or voluntary, as long as patent
protection is equal or longer for the insured trials. If patent
lengths are shortened across the board to cover the cost of the
program, then pharmaceutical companies may be particularly
eager to participate.



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