The past decade has seen a relatively constant rate of newly approved drugs every year. The number has even jumped in the past few years. Yet, despite such encouraging trends, we are actually facing a crisis in drug innovation today. That is because many of these new products do not offer substantial improvements over already available alternatives.

At the same time, novel and effective treatments for many diseases—both rare and common—remain elusive. For example, there is widespread concern over the lack of development of new antibiotics aimed at multidrug-resistant infections. Therapeutic innovation for central nervous system disorders such as dementia and psychoses, which affect almost 100 million Americans, has likewise stagnated.

In this climate, pharmaceutical manufacturers have nonetheless continued to thrive. The top eleven drug manufacturers made $711 billion from 2003 to 2012, including $68 billion in 2012 alone, translating to an industry profit margin on par with the banking sector.

Yet some of these profits have been acquired through illegal marketing practices that lead to unnecessary over-prescribing of their products, including issuing kickbacks to physicians, making false claims about their products, and marketing drugs for unapproved uses for which there is no evidence of efficacy despite important risks potentially leading to adverse patient outcomes. In the past five years alone, pharmaceutical companies have been required to pay over $13 billion for such violations.

Greater Accountability, More Resources

Imagine if we could hold these companies more accountable for their behavior while at the same time improving the resources available for groundbreaking medical research and the training of young scientists? In January 2015, Senators Elizabeth Warren (D-MA), Benjamin Cardin (D-MD), Sherrod Brown (D-OH), and Tammy Baldwin (D-WI) introduced the Medical Innovation Act to do just that.

Under this legislation, drug companies that engage in illegal sales tactics would be required for the next five years to pay an additional fee amounting to 1 percent of their profits multiplied by the number of blockbuster drugs they produce that were developed in part with federal funding. The extra money would be used for promoting advances in regulatory science at the Food and Drug Administration (FDA), highly innovative research on unmet health care conditions at the National Institutes of Health (NIH), or training of young scientists.

The bill, nicknamed the “NIH Swear Jar” legislation, has been criticized by the drug industry as interfering with pharmaceutical innovation. But the industry’s criticisms are based on misconceptions about the true sources of transformative drug innovation. To be sure, large pharmaceutical companies do invest money in research and development (R&D), but it is less than they spend on marketing and administration. It is actually a pretty small percentage (12-18 percent) of revenues, and the majority of that investment in R&D leads only to incremental innovations on already-existing projects.

One study estimated that large drug manufacturers spend less than 3 percent of revenues on truly innovative drug development, a fraction that may be an overestimate going forward as some companies close their research centers. In addition, spending on R&D is deducted from a company’s revenue before profits are calculated. The payments in Senator Warren’s bill would be therefore unlikely to make a substantial dent in industry R&D.

Basic Science

Opponents of the Medical Innovation Act also claim that the proposed recipients of the law’s funds are not involved in drug innovation. NIH is engaged in basic science, they say, too far removed from drug development to make a significant difference and the FDA only serves as a hindrance to innovation. Nothing could be further from the truth. Vital high-risk/high-reward basic science research has traditionally been the sole domain of the NIH. This is the kind of critical investment that corporate interests beholden to shareholders who have little interest in gambling on.

In a recent study published in Health Affairs, our group found that a majority of the most transformative drugs introduced over the past 25 years were directly related to discoveries made in government laboratories or by academic researchers supported by federal grants, including imatinib (Gleevec) for chronic myelogenous leukemia, infliximab (Remicade) for rheumatoid arthritis, bevacizumab (Avastin) for cancer and eye diseases, and epoetin alfa (Epogen) for anemia. It is exactly these sorts of products that should be the goal of investments in innovation. But NIH funding has withered; over the past decade, the agency has seen its purchasing power decline by 25 percent.

Similarly, advances in regulatory science at the FDA have helped make useful drugs rapidly available to patients. For example, the FDA has for decades developed mechanisms for allowing new drugs to be approved on the basis of solid early results or validated biomarkers, leading to development and approval of drugs like zidovudine (AZT) for HIV or imatinib in extremely short time frames. But FDA funding is also limited, leading the agency to become increasingly reliant on outside resources to maintain its regulatory efficiency. By directly aiding the NIH and FDA, funds from the Medical Innovation Act would support the infrastructure for generating and approving the next generation of transformative drugs.

Increasing The Cost Of Illegal Behavior

A final criticism of the Medical Innovation Act is that pharmaceutical industry payments under the law essentially represented an additional penalty for violations that have already been punished. In fact, despite the billions in penalties, the profits that companies in this sector earn from illegal behavior far outweigh the civil and criminal fines they pay when caught.

For example, by the time that Pfizer settled charges of improper marketing of its antiepileptic drug gabapentin (Neurontin) for $430 million, its promotional campaigns had been so successful that an estimated 90 percent of Neurontin sales were for off-label uses, including many indications with little convincing evidence of efficacy. Pfizer’s revenue related to Neurontin in 2004 alone was around $3 billion.

The Medical Innovation Act would make these violations of the law seem just a little bit less like an otherwise minor cost of doing business. By increasing the cost of illegal behavior, the law could help reduce fraud and ultimately save taxpayer dollars by protecting Medicare and Medicaid from waste and abuse.

If enacted, the Medical Innovation Act would be both effective and equitable. Had it been in place over the past five years, the law would have yielded a 20 percent increase in critical funding to the FDA and NIH, channeling misbegotten profits at the expense of patients into groundbreaking research for their benefit.