CHAPTER III
THEORETICAL CONSIDERATIONS
Introduction
Public administration activities, agencies, and programs are carried out for a variety of bureaucratic purposes related to protecting individual and societal rights under the tenets of the U.S. Constitution. Public administration theorists, economists, politicians, big business leaders, and individuals all hold different opinions regarding the role of government in this society, the services to be provided by government, and how to pay the price for the needed government services.
From a public administration theoretical standpoint, this chapter examines the implications of the FDA acquiring substantial budgetary funding from the pharmaceutical manufacturers. Thus, the underlying question becomes: What public administration theory explains how private entities would be given Congressional support to create a fiduciary relationship to pay for and receive special privileges from its overseeing public regulatory agency? This chapter also looks at the ethical and potential for conflicts of interest due to the principal-agent shift within the FDA.
FDA General Information
The FDA is one of this nation's oldest consumer protection agencies. First and foremost, the FDA is a public health agency charged with protecting American consumers by enforcing the Federal Food, Drug and Cosmetic Act and several other public health related laws. It is the FDA's job to see that the food Americans eat is safe and wholesome, the cosmetics are safe, and the medicines and medical devices are both safe and effective.
The FDA uses scientific methods to provide the oversight that individuals could not possibly provide for themselves. The FDA provides protective regulatory and inspection services on behalf of society as a whole. Until the early 1990s, the FDA, similar to the overwhelming majority of regulatory based public agencies, was 100% funded by taxpayer dollars. As one of the first governmental consumer protection agencies, the agency had high social value, consumer respect, and trust (Hilts, 2003).
There are no easy solutions or simple answers to the economic, social, and societal problems inherent in American life. Most public administration related problems are wicked problems, and the 1992 funding solution of charging the pharmaceutical manufacturers "user fees," devised by Congress to cover a shortfall in the FDA's budget, is no different. Illustrated by Lewin's force field analysis theory, there are always two sides to every issue.
When an overseeing public agency receives substantial financial support from the organizations it oversees, there is a potential for a conflict of interest where the agency must choose between two masters: the taxpayers who pay a portion of the budget and the organizations which fund another portion of the budget. Whether real or imagined, the very existence of the potential for having a financial conflict of interest makes the FDA's motives suspect and calls into question the agency's allegiance and legitimacy.
Theoretical Considerations to Explain Changes Within the FDA Since User Fees
· Principal-agent theory. With the passage of PDUFA in 1992, Congress authorized the FDA to start collecting user fees from the pharmaceutical manufacturers. The addition of user fees altered the traditional principal-agent relationship between citizens and the FDA. With the addition of user fees, pharmaceutical manufacturers were able to take a principal position over FDA personnel throughout the agency.
· Capture theory. The capture theory shows how, overtime, the changes and associated influences brought about by the new principal-agent relationship will cause a stronger association with the new principal in lieu of maintaining the former relationship.
Altering Principal-Agent Relationship
Economic-based approaches have offered both a diagnosis of these problems and a theory to solve them. Beginning with the Nobel laureate Ronald Coase in 1937 and continuing through the work of theorists like Oliver Williamson in 1975, the economic-based approach began with a different premise (as cited in Kettl, 2000). Instead of seeing workers within a bureaucracy in an instrumental sense (e.g., people hired for the skills and controlled through hierarchal authority), economic-based theories view workers as self-interested individuals. This view of bureaucratic organizations has been labeled "principal-agent" theory (see Figure 1).
Figure 1. Principal-agent
relationship
Principal-agent theory views organizational interactions as relationships between a principal, who has a job to be done, and an agent, who agrees to do the job in exchange for compensation. In such relationships, principals and agents both work toward their own self-interests. In the case of the FDA, prior to the Prescription Drug User Fee Act of 1992 (PDUFA), the principal was the taxpayers and the agents were the public administrators. Once user fees were initiated, there was a shift in the principal-agent relationships.
Capture Theory
Capture theory is an outgrowth of the public choice theory genre. Public choice theory is a branch of economics that developed from the study and public spending. It emerged in the 1950s and received widespread public attention in 1986, when James Buchanan, one of its leading advocates was awarded the Nobel Prize in economics. Public choice takes the same principles that economists use to analyze people's actions in the marketplace and apples them to people's actions in collective decision making. Economists who study behavior in the private marketplace assume that people are motivated mainly by self-interest. Although most people base some of their actions on the concern for other, the dominant motive for people's actions is a concern for themselves (Shaw, 2004).
In addition to voters and politicians, public choice analyzes the role of bureaucrats in government. Their incentives explain why many regulatory agencies appear to be "captured" by special interests. The capture theory was introduced by the late George Stigler, a Nobel laureate. Capture occurs when bureaucrats need the power of special interest groups to lobby Congress for additional funds and/or when the outside special interest groups provide the additional budgetary funding directly to the agency and/or agency personnel (Shaw, 2004).
Traditional principal-agent theory asserts that because the bulk of the FDA's budget comes from taxpayers, the overall FDA is inoculated by any potential financial pressure exerted by the pharmaceutical manufacturers. The user fees are concentrated in one section of the FDA: NDA approvals. Thus, according to the capture theory the concentration of funds increases the power and influence of the pharmaceutical manufacturers within the department(s) where the funds are concentrated.
Some assertions, particularly "capture theory" challenge traditional principal-agent theory entirely. Under capture theory, regulatory agencies and personnel can be swayed by substantial financial incentives or "captured" by those they are supposed to regulate. Bernstein (1955) argues that regulatory agencies begin their mission with enthusiasm but evolve to become at best the protectors of the status quo or at worst captives of those they are supposed to regulate. According to Humboldt University Economics Department, the capture theory explains why private firms would be interested in "capturing" the regulatory process:
The Capture Theory of Regulation
Humboldt University – Economics Department
· Private firms capture the regulatory process because they have a lot at stake.
· While the public as a whole has a lot at stake, any one person has only a very small stake and has little incentive to invest resources in affecting the regulatory process.
· There are few firms relative to the overall public so there is a perceived concentration of wealth and influence by the regulators.
· It is in their best interests to do so. Therefore, private firms have the incentive and the opportunity to successfully invest resources to receive favorable regulation. (Humboldt, 2004, p. 1)
There is mounting evidence that the principal-agent within the FDA has shifted. In fact, on March 31, 2004, a headline in the San Francisco Chronicle stated the following: "Lawmakers open probe of FDA. Agency accused of barring safety data on antidepressants." According to the story the House and Senate have started an investigation to determine whether officials of the FDA prevented an FDA medical officer from presenting a safety review on anti-depressants and suicidal behavior by children. Senator Grassley (R-Iowa) said, "We are talking about kids here and public safety. Vera Sherav, president of a patients' advocacy group, said, "The FDA has been party to a cover up" (Waters 2004, p. 1).
Unmasking Administrative Evil
The principal-agent relationship has shifted, and the capture theory illustrates how a partnership is being created between the pharmaceutical companies and the FDA. Due to user fees, the pharmaceutical manufacturers now have more access and control over the FDA's employees, and thousands of FDA employees know that without drug industry money their jobs would be in jeopardy. Government workers are supposed to act in ways that are in the best interest of the citizens, but with the shift in the principal-agent, it is possible that FDA employees will also do what is in the best interests of the drug companies. Due to user fees, some of the FDA employees' actions and decisions may no longer be in the best interests of the citizens. So the question is the following: Is it possible for "good people" to do "bad things"?
Unmasking Administrative Evil is the first American study to take up the question of the Holocaust and how it pertains to the problem of public administration and public policy (Adams & Balfour, 1998). Unmasking administrative evil as well as a thesis put out by the Catholic church entitled the "Appropriation of Evil" helps to explain why "good and dedicated" public administration personnel on every level would knowingly put U.S. citizens at risk in favor of securing the prices and profits of the pharmaceutical manufacturers.
Unmasking Administrative Evil is the first American study to take up the question of the Holocaust and the problem of public administration and public policy (Adams & Balfour, 1998). Adams and Balfour argue that public administration personnel can inflict harm on others without knowing that their actions are evil. Perpetrators working within public agencies can act immorally or unethically because it is their job, because it is the law, or because they have been instructed to do so for the greater good.
Two key arguments of Adams and Balfour's book include the following: (a) the problems of the technical-rational mind-set as an approach to social and political problems enables a new and frightening form of evil—administrative evil—which is of special concern in that it is masked, making it easy for ordinary people to engage in it without intending to do so; and (b) the masked nature of administrative evil allows for those so engaged to redefine the evil act as something good and worthy. Adams and Balfour (1998) describe this as a "moral inversion."
In the same context as the Adams and Balfour book that tries to understand and explain how good people can participate in doing bad things, there is an article written for the Catholic Church entitled "Appropriation of Evil," which states that people will use self-deception techniques to cooperate with what they may consider to be morally or ethically objectionable (Kaveny, 2000).
Self-deception occurs when the cooperator becomes self-deluded about the nature of his or her own intentions in acting. Particularly if working in very close quarters with the principal agent, it is very difficult for a cooperator not to get swept up into the principal agent's project in such a way that he or she wills its success. Rather than candidly acknowledging a sea-change or a gradual shift in his or her moral stance, the cooperator might simply develop an elaborate scheme of self-deceiving rationalization (Kaveny, 2000).
Ethics
The shifting of the principal-agent and receiving fees from the pharmaceutical manufacturers crosses public administration's ethical barriers. There are hundreds of codes of ethics that could be cited in this section. However, public administration, public agencies, bureaucracies, and civil servants are held to a higher ethical standard (ASPA, 2004). Unlike the average American who is innocent until proven guilty, government personnel cannot have even the slightest appearance of wrong doing. Within public administration, even the smallest possibility of the potential for having a conflict of interest is unethical and, in many cases, it is illegal. The drug companies directly paying the FDA appears to be a conflict of interest for the FDA. The appearance of the conflict of interest alone makes it unethical.
Conflict of Interest General Information
Conflict of interest is a situation in which the self-interest of the individual and/or agency is in conflict with an obligation (Khushf & Gifford, 1998). The concept, as defined in this section, is over half a century old. In the 1960s, lawyers began using the term in the restricted sense of contrary influences affecting judgment. The term began to appear in codes of ethics in the 1970s (Davis, 2001). The term conflict of interest implies a professional fiduciary relationship, the need to exercise objective judgment, and a special interest that may interfere with that judgment. Conflicts of interest should not be limited to conflicts that alter judgment and behavior. It is also important to recognize that a conflict of interest exists when there is an incentive for biased judgment, whether or not there is evidence that judgment and/or behavior have been affected. In public administration, the perceived potential for conflict of interest, whether real or imagined, is equally as damaging to maintaining the public trust.
Adam Smith (1777), the 18th century free-market economist, argued that the rational pursuit of interests for gain not only kept the more destructive passions in check, but through the guidance of the "invisible hand" each individual's pursuit of his interests frequently promoted the overall interests of society.
Although it had been used in earlier cases, the term conflict of interest gained prominence from a court case that was decided in 1949. The case was prominent because it involved a complex bankruptcy reorganization of one of the world's most valuable office properties. There were many attorneys involved, some of whom took steps to avoid potential "conflicts of interests." However, one attorney was denied compensation for his work by the judge because he did not disclose that a corporation fully owned by his mother-in-law joined in the underwriting of the reorganization. The judge determined that this situation represented a conflict of interest (Foster, 2003).
In the 1960s, the legal profession began to use the term conflict of interest as it affected judgment. The meaning of conflicts of interests began to be restricted to conflicts that affected judgments in fiduciary relationships. In the 1970s, the term conflict of interest began to appear in professional codes of ethics (Foster, 2003).
Conflict of Interest Legislation
Shifting the principal-agent from taxpayers to both taxpayers and the pharmaceutical manufacturers creates an opportunity for the FDA to have a conflict of interest. The phrase "conflict of interest legislation" describes the volumes of legislation Congress has passed, in the post-Watergate era, to prevent and punish corruption of public officials. A few fundamental issues addressed in these legislative initiatives include: (a) bribery; (b) illegal gratuities; (c) unauthorized compensation; (d) acts involving financial interest; (e) postemployment lobbying and representation; and (f) outside salary of federal employees. These provisions impose sanctions on public officials and private citizens making criminal use of a public office for private gain. Congress continues to demonstrate its support for imposing criminal sanctions for conflict of interest violations (Romano, 1995).
Bribery
Bribery has been part of the criminal conflict of interest statute since 1961. The bribery charge consists of the following five elements: (a) a corrupt intent; (b) a public official; (c) a benefit, anything of value, accruing to a public official; (d) a relationship between the thing of value and some official act; and (e) an intent to influence the public official, or to be influenced if the defendant is the official, in carrying out an official act (Romano, 1995).
Illegal Gratuities
The primary difference between bribery and illegal gratuities is that bribery requires a corrupt intent, while an illegal gratuity does not. They are also different in that for an illegal gratuity "there need be no intent that the official act be influenced by the benefit," which is required for a bribery charge. Due to the similarity of these two offenses, defendants frequently are charged with both. Additionally, a defendant might plead the offering of an illegal gratuity as a defense to a bribery charge, claiming lack of requisite corrupt intent (Romano, 1995).
Unauthorized Compensation
The public official bribery provision is similar to unauthorized compensation because like the bribery provision, it criminalizes the use of a public office for private gain whether it is by the officeholder/employee or by an outside individual attempting to influence the government official (Romano, 1995).
Acts Affecting Financial Interest
Section 208 generally prohibits officers and employees of the executive branch from personally and substantially participating in any particular matter in which, to his or her knowledge, the officer, his or her spouse, partner, or organization with which he or she is involved, has a financial interest. The purpose of section 208 is to insure honesty in the Government's business dealings by preventing federal agents who have interests adverse to those of the Government from advancing their own interests at the expense of the public welfare (Romano, 1995).
Post-employment Activities
Section 207 attempts to control lobbying on the part of individuals after they leave government service. The Ethics Reform Act of 1989 expanded section 207 by extending its reach to legislative branch employees, including members of Congress (Romano, 1995).
On January 28, 2004, the House's top Democrat, Nancy Pelosi of California strongly criticized Rep. W. J. Tauzin, R-Louisiana, for considering a more than $1 million per year job offer from the Pharmaceutical Research and Manufacturing Association. As chairman of the House Energy and Commerce Committee, Tauzin oversees the Food and Drug Administration and the pharmaceutical industry. He was one of a handful of lawmakers who hammered out an agreement on the new Medicare legislation (Barrett, 2004). Pelosi also noted that former Center for Medicare and Medicaid Service Chief Tom Scully, the White House point person on the Medicare bill recently left his post to work for law firms that represent pharmaceutical and other health-care interests.
Outside Salary of Federal Employees
Section 209 prohibits the receipt or payment of salary, from any source other than the United States government, as compensation for government services provided by an individual while acting as an officer of the executive branch or an agency (Romano, 1995). According to a recent USA Today article, the FDA issued more than 800 conflict-of-interest waivers to people working with the FDA to approve new medications while having financial ties to one or more drug companies (Cauchon, 2000).
Research Model Based on Theory
Proponents of user fees would argue that the FDA has changed for the better. Opponents of user fees would argue that the FDA has advanced its own interests at the expense of the public welfare. This chapter made some theoretical and explanatory assumptions about what happened to the FDA since the introduction of user fees. Words and theories are interesting for debate and conversation, but empirically there has to be a numeric "footprint" that will objectively illustrate how the FDA has changed since the introduction of user fees. Figure 2 is a research model that takes a more objective statistical approach to answer the question of the FDA receiving user fees (see chapter IV, Research Methodology for more information).
Conclusion
The undeniable financial conflict of interest introduced with the passage of drug industry paid user fee legislation (i.e., PDUFA/FDAMA/PDUFA III) is an indicator that prodrug industry and antiregulatory political interests are now driving the decisions in Congress as compared to the more objective scientific and public health interests traditionally championed by the FDA.
In this research there are two major theories genres that explain what is happening within and to the FDA since the addition of user fees: (a) principal-agent theory and (b) public choice theory, which includes the capture theory.
The need to insulate and inoculate public administrators, civil servants, and public employees from establishing and/or maintaining fiduciary relationships with the organizations they oversee seems to be a public administration theory imperative. In fact, protecting public administrators from even the appearance of having a conflict of interest is as important as if a conflict of interest actually existed.
Figure
2. Research design concept map
Principal-agent theory views organizational interactions as relationships between a principal, who has a job to be done, and an agent, who agrees to do the job in exchange for compensation. In such relationships, principals and agents both work toward their own self-interests. In the case of the FDA, prior to PDUFA, the principal was the taxpayers, and the agents were the public administrators. Once user fees were initiated, there was a shift in the principal-agent relationships and the FDA shifted to become an agent of both the taxpayers and the pharmaceutical manufacturers. Capture theory suggests that if there is no shift in the principal-agent position of the pharmaceutical manufacturers, over time the FDA will become closer to meeting the needs of the pharmaceutical manufacturers and less responsive to its mission of protecting the citizenry.
This economic principal-agent shift is a glaring example of new economic public administration theories that have gone too far. Congress and the White House have given the drug industry an opportunity to pay for and receive special considerations from the FDA. The concept of creating a fiduciary alliance between a public regulatory agency and the rich and powerful businesses they regulate needs to come into the light of day where the U.S. citizens can make the ultimate determination of the continued value of this practice.
Main Findings From the Theoretical Review
· In 2002, the Food and Drug Administration Modernization Act (FDAMA) authorized user fees for another 5 years. From 2002-2007, the FDA is projected to receive well over a billion dollars from the pharmaceutical industry. To maintain its legitimacy as a public agency, the public must perceive the FDA as objectively operating independently from the pharmaceutical manufacturers under appropriate standards of integrity.
· To maintain the public trust, the FDA must prove that it values its primary responsibility to protect U.S. citizens more than fulfilling their budgetary needs provided by outside entities.
· The FDA should adopt formal policies and procedures for dealing with potential conflicts of interest. To be effective, these policies will need to consist of much more than mere disclosure of financial conflicts.
· The FDA should document the specific steps that will be undertaken by the institution to eliminate or substantially reduce financial conflicts of interests.
· Congress should establish a duly constituted independent review organization that is sufficiently autonomous from the FDA to act reliably and to ensure FDA integrity.