Political influence and regulatory policy: the 1984 drug legislation.

Olson, Mark K.

I. INTRODUCTION

In the late 1970s and early 1980s dissatisfaction with the length, complexity and cost of the drug approval process combined with rising prescription drug prices led to Congressional attempts at reform. These focused on two issues: to compensate the developers of new drugs for the increasing costs and delays associated with FDA approval and to increase the availability of generic drugs. Until 1984, these reform attempts failed.

I use the structure-induced equilibrium (SIE) theory of Shepsle and Weingast [1981] to examine why regulatory reforms prior to 1984 were stalemated, and why the 1984 drug legislation was ultimately enacted. My results show that prior to 1984, the preferences of the members of the key congressional committees were such that the proposed bills could not beat the status quo. However, changes in both membership and turnover on the House Subcommittee on Health and the Environment, combined with a change in the majority party in the Senate, led to a situation in which the 1984 drug legislation could defeat the status quo in both the House and the Senate.

The Drug Price Competition Act facilitated the market entry of generic drugs following patent expiration by allowing generic versions of brand-name drugs patented after 1962 to use an abbreviated new drug application (ANDA).(1) The Patent Term Restoration Act extended the patent lives of brand-name drugs for up to five years to compensate for patent life lost during the FDA approval process. Initial, unsuccessful legislative reforms were introduced into Congress in 1978-79 and 1981-82, but no legislative reforms were passed until 1984. These earlier unsuccessful reform efforts raise the following questions. First, why did the status quo prevail until 1984 as the legislative equilibrium? Second, what endogenous changes occurred to produce the new legislative equilibrium in 1984?

While much of the previous literature about the pharmaceutical industry has focused on the efficiency and distributive effects of public policy, I focus on the theory of regulatory policy.(2) The sequence of legislative actions leading to the 1984 drug legislation shows how competing interest groups, representing brand-name and generic drug firms, forced legislators to face trade-offs in accommodating their interests. I look most closely at the members of the House and Senate committees with jurisdiction over pharmaceutical regulation issues. Data representing brand-name and generic firm or consumer interests are used to construct estimates of legislative preferences (ideal points).(3) Then, the SIE theory is used to generate predictions about legislative behavior and outcomes to help explain the initial failure of regulatory reform in 1979 and its ultimate success in 1984.

The results from the analysis explain both why the status quo prevailed in 1979 and why it was overturned in 1984. The analysis also illustrates how the industry and consumer groups represented on the relevant committees can protect their interests. This occurred in both 1979, when the Senate passed legislation favorable to the generic drug industry, and 1981, when legislation supported by the brand-name drug firms was passed. In each case, representatives of the unfavored interest group were able to block legislation in the House. Legislation was possible only when the majorities on the House and Senate committees could agree on a single policy which could defeat the status quo in both committees. Moreover, this policy provided benefits to both sets of industry interests represented by committee members.

The paper is organized as follows. In sections II and III, I describe the theory of political outcomes used in this analysis and provide some background on pharmaceutical regulation prior to the reforms. The estimation of congressional ideal points is discussed in section IV. Sections V and VI examine congressional responses to the 1979 drug reforms and interest group activity in the 1980s. The endogenous changes that occurred to produce the new equilibrium in 1984 are examined in sections VII and VIII, and the results are discussed in the last section.

II. POLITICAL INTERESTS AND POLICY MAKERS

Government regulation generates a distribution of benefits and costs which typically fall unequally on the groups affected. This provides incentives for the groups affected to try to influence regulatory policy makers.(4) Specifically, interest groups try to provide legislators with information and to make them aware of the groups' concerns regarding various policy proposals. Given the numbers and diversity of groups within a constituency, legislators often face trade-offs among their legislative decisions regarding these groups. For example, McCubbins, Noll and Weingast [1987; 1989] illustrate the trade-offs involved in the case of federal clean air policy. In their case, the problem involves a trade-off between the stringency of the regulatory policy and protection for existing firms.(5) In this paper's example, the trade-off lies between generic firms' or consumer interests in the availability of lower-priced generic drugs and brand-name firms' interests in alleviating the adverse effects of regulatory delay on a branded drug's effective patent life.

Legislators differ in their policy preferences, depending on their constituency's interests, their exposure to different interest groups' concerns, and their own personal ideologies. A model that incorporates differences in policy preferences generates predictions about legislative behavior and outcomes, but constructing such a model first requires a theory of how legislative outcomes arise. For this purpose, I use the structure-induced equilibrium theory of Shepsle and Weingast [1981].

The following example provides a simple illustration of the theory. Consider three legislators 1, 2, 3 and two issues: (i) the availability of generic drugs and (ii) incentives for brand-name firms to pursue research and development (R&D). Let the availability of generic drugs be represented on the horizontal axis and let brand-name firms' incentives for R&D be represented on the vertical axis in Figure 1. Each legislator has an ideal point [[Theta].sub.i] which represents the legislator's most preferred policy combination in this two-dimensional issue space. For simplicity, I assume that each legislator has Euclidean preferences over this issue space, which implies that legislators seek to minimize the Euclidean distance between the location of their ideal point [[Theta].sub.i] and the policy outcome [x.sub.k] and that legislators have circular indifference curves. Let [x.sub.o] represent the existing policy or status quo in this issue space. Then, on any given vote, the legislator i votes for [x.sub.k] only if it is closer to his ideal point [[Theta].sub.i] than the status quo [x.sub.o]. If [x.sub.o] is closer to [[Theta].sub.i], legislator i votes against [x.sub.k] A proposed policy defeats the status quo only if a majority of legislators vote for it. Define the winset of [x.sub.o] as the set of policies for which a majority favors the proposed policy over the status quo. In a three-person legislature, a majority consists of any two legislators.

Assume that legislator 1 prefers policies which provide strong incentives for R&D by brand-name firms and only modest generic drug availability. Assume that legislator 2 prefers policies which provide increased generic drug availability and modest incentives for brand-name-firm R&D. Legislator 3 has preferences somewhere in between those of 1 and 2. The ideal points corresponding to such preferences are depicted in Figure 1. Using the configuration of indifference curves for the three legislators and the status quo point, it is possible to characterize the winset. To find the winset, draw each legislator's indifference curve through the status quo. Since all the points inside a legislator's indifference curve are closer to his ideal point, the legislator prefers all points inside this indifference curve to the status quo. Regions in which the indifference curves of any two members intersect represent policies preferred by those two members to the status quo. For example the cross-hatched petal on the left side of Figure 1 represents policies preferred by legislators 1 and 3 to the status quo. The cross-hatched petal on the right of Figure 1 represents policies preferred by legislators 2 and 3 to the status quo. The winset of Figure 1 consists of all policy proposals located in these two petals. Proposed policies which fall outside these two petals will be defeated by the status quo. For example, a bill located at point b is preferred by legislator 2, but legislators 1 and 3 prefer the status quo to b. Notice that a policy which provides increased generic drug availability and increased incentives for R&D (points to the north-east of the status quo) would be defeated in this way.

To illustrate the impact of new membership on the winset, suppose that legislator 3 retires and is replaced by legislator 4. Legislator 4 has an ideal point [[Theta].sub.4] depicted in Figure 2. It is possible to construct the new winset for these three legislators using the same method as in the previous example. The new winset consists of the two cross-hatched petals shown in Figure 2. The top petal represents policies preferred by 1 and 4. The bottom petal represents policies preferred by 2 and 4. Unlike the previous case, there are policies in the winset which provide both increased generic availability and increased incentives for R&D. The presence of legislator 4 enables these policies to be enacted, whereas in the previous example the same policies would have been defeated. This simple illustration highlights the potential impact of new membership on the resulting winset.(6) Such changes occurred in the House and the Senate between 1979 and 1984.

A key element of this theory is the role played by congressional committees. Congressional committees and subcommittees have substantial power over the issues in their jurisdiction as described in Denzau and Mackay [1983] and Shepsle and Weingast [1987].(7) A primary source of the committee's influence arises from its gatekeeping power: the ability to prevent access to the floor of legislation in its policy jurisdiction.(8) Since all bills must originate in a committee, the only bills to reach the floor are those which the committee approves. Committees, in particular committee chairs, may choose to keep the gates closed on bills which they do not support. Weingast and Moran [1983] find that the chair of the subcommittee has a greater impact over subcommittee decisions than any other individual member. I also find that the chair does have significant influence over a subcommittee's policy proposal, but that the power of the chair to implement a proposal can be constrained by an opposing majority on the subcommittee.

The notion of committee power suggests that an examination and measurement of congressional preferences over policy can be restricted to the set of members on the relevant congressional committee or subcommittee. Given the preferences of committee members over a particular policy domain, the structure-induced equilibrium theory then provides a framework to predict legislative outcomes.

Since these outcomes are sensitive to anything affecting either the committee members' preferences or the designation of committee members, there is a role for interest group involvement. Interest groups try to influence congressional preferences, and try to influence the designation of members in Congress through the electoral process as in Welch [1980].

An addition to this theory that is illustrated in the case of the 1984 legislation is inter-committee bargaining between the two chairs of the Senate and House subcommittees over the position of the proposed policy. Successful reforms had to pass in both the House and the Senate.(9) The past experience of two unsuccessful reform efforts demonstrated a need for coordination between the Senate and House subcommittee chairs to produce a policy proposal that would not be vetoed by either subcommittee.(10) The consensus achieved at the subcommittee and committee stages sent a signal to the floor that any partisan differences were resolved in the committee negotiations.(11) Hence, the lack of opposition or controversy over the bill on the floor is not surprising given the responsiveness of the bill's negotiators to the interests involved.

III. PHARMACEUTICAL REGULATORY POLICY

The 1962 Harris-Kefauver Amendments fundamentally changed the way that drugs were regulated in the U.S. and created the basis for current drug regulatory policy. The amendments were largely a response to an international tragedy surrounding the drug Thalidomide. The 1962 Amendments, first, shifted the burden of proof for establishing safety from the government to the individual firms and, second, created an efficacy requirement in which firms had to present substantial clinical evidence that the new drug was effective for its intended purpose. Third, the FDA created a detailed bureaucratic process for firms to follow to obtain new drug approval.

The immediate cost of this regulatory process was borne by firms trying to gain approval for a new drug, but once approved, these drugs were guaranteed monopoly rents over the duration of the drug's patent life. The cost and time required to obtain FDA approval served as a significant barrier to entry for new competition. For consumers, the immediate benefit was a diminished probability of taking an unsafe or ineffective drug for an illness. The costs to consumers entailed higher prices for these prescription drugs. Some consumers also suffered from an increase in the probability of a beneficial drug being delayed in reaching the U.S. market.

Brand-name and generic drugs were treated in a similar manner under the 1962 Amendments. It was not until the introduction of the Abbreviated New Drug Application (ANDA) in 1969 that the FDA began treating generics differently from branded drugs. The purpose of the application was to speed up the introduction of generic substitutes once a branded drug's patent had expired. The new application, which did not require proof of efficacy, decreased the FDA review times for these generic drugs. However, the abbreviated application was only available for generic versions of drugs patented before 1962. At the time of the application's introduction in 1969, no provisions were made for generic versions of drugs patented after 1962.

Generic firms certainly benefitted from the ANDA because it reduced the cost of introducing a generic drug. Consumers also benefitted from the increased availability of cheaper generic drugs. However, beginning in the late-1970s, as the post-1962 patented drugs came off patent, consumers began to complain about the lack of availability of generic versions of these drugs. Given that generic firms could not use the ANDA for these drugs and given the costs associated with alternative approval procedures, many generic firms were not willing to produce these drugs. In fact, several brand-name drugs whose patents had expired faced no generic competition in their respective markets. Consumers were facing higher prescription drug costs and the available supply of generics was stagnating.

Meanwhile, brand-name firms were very concerned about the increasing costs and time associated with the approval process for brand-name drugs. The period required for preclinical and clinical testing increased from 30 months in 1960 to 100 months in 1970 to 120 months in 1980 (as shown by Wardell, May and Trimble [1982]). The period of time over which brand-name drugs could collect monopoly rents was shrinking as the regulatory delays wasted valuable patent life.

To explain why reforms prior to 1984 failed and why the 1984 legislation was adopted requires a closer examination of the congressional response to reform efforts. The SIE theory discussed above generates predictions about legislative behavior and outcomes in 1979 and 1984. However, the application of this theory requires finding a way to measure legislative preferences of the key players.

The next section introduces the proxies used to estimate legislative ideal points. Applying the SIE theory to these legislative ideal points illustrates how the preferences of committee members may have changed between 1979 and 1984 and, more importantly, explains why the drug reforms could not succeed until 1984.

IV. THE ESTIMATION OF IDEAL POINTS

Congressional ideal points over drug reform are located in a two-dimensional issue space that depicts the conflicts between the competing interests, brand-name and generic pharmaceutical firms. The Pharmaceutical Manufacturers Association (PMA), representing the existing prescription pharmaceutical industry, wanted regulation to stimulate incentives for R&D and to provide extended protection for brand-name drugs from the threat of generic competition. Generic drug firms, representing relatively new entrants to the current prescription pharmaceutical market, wanted regulatory reform to ease their entry. Further, the entry of generics meant lower prescription drug costs, which was an issue of significant concern to consumer groups such as the American Association of Retired Persons (AARP). The proxies that are used to estimate ideal points are described below. Although somewhat crude, I believe these proxies correlate with the classes of interests in each dimension.

The generic or consumer interest dimension reflects legislative efforts to ease the restrictions on the approval of generics, specifically for drugs patented after 1962. The benefits from doing so would accrue to both the generic drug firms and consumers. As a proxy for generic interests, the Americans for Democratic Action (ADA) scores for individual congressmen are used. ADA scores, which range from 0 to 100, reflect "conservative/liberal" divisions. The ADA supports policies in favor of consumer benefits and interests.(12) In this context, a high ADA score is correlated with a congressional preference to ease generic firms' entry and to provide consumers with low-price generic substitutes. A low ADA score is correlated with a low preference for regulatory involvement or change in this dimension.(13)

The brand-name interest dimension reflects legislative efforts to reduce the costs associated with the approval of new drugs to firms, to extend patent life, and to otherwise increase incentives to conduct R&D. The most immediate benefits would be increased protection from competition and increased profitability for the brand-name firms. Campaign contributions from the political action committees (PACs) of brand-name pharmaceutical firms to individual members of Congress are used as a proxy for brand-name interests. These contributions measure expected access by these brand-name interests to members. Candidates that receive contributions from a PAC are more likely to be aware of the PAC's interests. By contributing to the campaign of a political candidate, PACs increase their chances of gaining access to the candidate once elected. Although money may not buy votes, it often buys time. With access, PACs can make legislators aware of their positions on key policy issues. The degree to which members accept contributions from these brand-name PACs is assumed to serve as an indicator of their awareness or their responsiveness to the policy preferences of PACs.(14)

As documented in Wright [1985], the direct effects of contributions on voting behavior depend on the processes by which PACs raise and allocate money.(15) If the sources of funding and the allocation decisions are quite separate from the lobbying efforts, then the effect of contributions on specific voting behavior or accessibility may be quite limited. However, in the case of drug regulation, the source of funding and the allocation decisions are closely related to the individual lobbying efforts of the brand-name pharmaceutical firms. Individual firm's PACs represent very well organized and concentrated interests. Further, there is a clear authority or hierarchical structure within a firm which controls and oversees the allocation decisions and the lobbying activities. For such a PAC, we may expect to see coordination between contributions and lobbying activity. Thus, the assumption that PAC contributions serve as a measure of expected access to legislators is a reasonable one in this case.

An examination of the correlations between ADA scores and contributions from brand-name PACs to the different subcommittees reveals that these measures are not proxies for each other.(16) The contribution dimension is included in this analysis because it helps explain why reform efforts prior to 1984 were defeated and why the 1984 legislation ultimately succeeded.

In addition to legislative ideal points, the analysis requires the characterization of the status quo in the issue space.(17) The status quo represents the location of the existing policy in the issue space. The actual placement of the status quo is assumed to be in a location that separates legislators in view of their known preferences on each dimension. For example, the status quo would be located to the left of legislators who preferred more generic drug use (liberal Democrats) and to the right of legislators who preferred less genetic drug use (Republicans and conservative Democrats) on the ADA dimension. On the contribution dimension, the status quo would be located below legislators who preferred more brand-name-firm provisions and above legislators who preferred less brand-name-firm provisions. The coordinates of the status quo are assumed to be (ADA=35, $Contribution=1000) which is consistent with the above description.(18)

Data on the campaign contributions from fourteen major brand-name pharmaceutical PACs to individual members of Congress are from the Federal Election Commission over the periods 1979-80 and 1983-84.(19) Interestingly enough, generic drug firms and the GPIA, their trade association, made no contributions over the period of analysis. Data for ADA scores are from the ADA's Voting Records for 1979-1984.(20)

V. REFORM ATTEMPTS

The first legislative response to consumer groups' concerns over trends in prescription drug costs was the 1978 Drug Reform Bill drafted by Carter administration officials and the commissioner of the FDA. It contained a major provision to increase the availability of generic drugs.(21) In essence, the policy required brand-name firms to publish a descriptive standard, a monograph, for each approved drug which could be utilized by generic firms following the drug's patent expiration.(22) The monograph would allow firms to duplicate the drug without duplicating the original set of tests by the existing brand-name firm.

For brand-name firms, the policy reduced information requirements for firms during the early test stages to speed the approval process. However, because information disclosure during the final stages of testing would increase substantially, large, R&D-intensive brand-name firms opposed the legislation. Although extensive hearings were held in both the House and the Senate on the 1978 proposal, "neither side was able to bring out a bill because of the industry objection and the technical difficulty of some of the issues."(23)

In 1979, Senator Kennedy introduced a bill which simplified and shortened the FDA approval process for new drugs and reduced the informational and disclosure requirements for brand-name firms by allowing them to submit summaries of the clinical test results instead of raw data. These particular provisions appealed to brand-name firms. For consumers and generic firms, the bill allowed generic firms to use these summaries for the ANDA approval procedure for all drugs, including drugs patented after 1962, after the original drug had been on the market for seven years.(24)

Although the PMA favored some of the bill's provisions, it opposed the legislation because it did not believe that approval times would be shortened and because it strongly opposed any measures that would simplify and stimulate the entry of generic drugs into the market. Consumer groups (e.g., the AARP) concerned with increasing the availability of cheaper-priced generics endorsed the bill. President Carter, who was instrumental in the development of the 1978 reforms, also supported the 1979 bill.

The bill was referred to the Labor and Human Resources Committee in the Senate. Each committee member's ideal point is shown in Figure 3.(25) These ideal points consist of each senator's ADA score and the campaign contributions received from pharmaceutical firms in 1979-80.

Figure 3 shows that the Senators' ideal points are distributed along the ADA axis with little dispersion on the contribution dimension. There appears to be two distinct clusters of ideal points. A majority of eight Democrats are located toward the right edge of the ADA scale including Kennedy, the chair of the subcommittee, and Williams (D-NJ), the chair of the full committee. Of these eight Democrats, seven, including Williams, were on the Health and Scientific Research Subcommittee. The other cluster at the lower end of the ADA scale is a minority group of four Republicans, one of whom was not on the subcommittee. The two ideal points falling in between the clusters belonged to members also not on the subcommittee. Using the method described in section II, the set of policies preferred by a majority to the status quo is constructed and the winset of the status quo is depicted in the cross-hatched region in Figure 3. As indicated, points in the circle to the lower right of the status quo represent policies favored by the Democratic majority to the status quo. The points in the smaller cross-hatched petal within the circle would also have the support of the Republican minority on the subcommittee. Since the bill was approved with the support of these Republicans after Kennedy accepted some industry-backed amendments proposed by the senior Republican on the subcommittee, this suggests that the Kennedy bill was located in this leaf. Hence, the Kennedy bill, [b.sub.k] represented a downward shift in brand-name interests and an increase in generic interests. The theory predicts that Kennedy's bill would defeat the status quo in the Senate and it did.

Figure 4 presents the estimated ideal points of the 1979 House Health and Environment Subcommittee. Each legislator's ideal point consists of his or her ADA score and the campaign contributions received from brand-name drug firms in 1979-80. The ideal points are distributed over the ADA dimension and exhibit more general dispersion over the contribution dimension than was present in the Senate committee. Also, unlike in the Senate case, there was greater dispersion among the ideal points of the Democrats on the committee. Such dispersion could make partisan policy agreement on the issue of drug reform difficult to attain. With the presence of such conservative Democrats, such as Satterfield (D-VA), Murphy (D-NY), Gramm (D-TX) and Shelby (D-AL) on the ADA dimension, the possibilities for a coalition of conservative Democrats with the Republicans would be a threat to the more liberal Democrats.

The winset of the status quo is depicted by the two cross-hatched petals in Figure 4. For an eighteen-member subcommittee, a majority consists of at least ten members. The petal on the right-hand side of the figure sloping upward shows the policies preferred by an all-Democrat coalition.(26) This majority includes the most pro-consumer (pro-generic) Democrats aligned with the most pro-business (pro-brandname) Democrats, and hence only policies that provide more benefits to both brand-name and generic interests are supported. The petal on the left-hand side of this figure represents policies preferred by a majority coalition of conservative Democrats and Republicans.(27) Given that this petal contains policies that are preferred by two of the conservative Democrats, Gramm and Shelby, to the ones offered in the petal on the right-hand side, the conservative Democrat and Republican coalition was probably more likely to form.(28)

Since the Kennedy bill was a shift down and to the right of the status quo, it falls outside the winset for the House. Thus, the theory predicts that the Kennedy bill would be defeated in the House. Because the chairs of both the full committee and the subcommittee prefer the status quo to the winset of the conservative Democrat and Republican coalition (left leaf), we might expect to observe gatekeeping activity on this bill. This is consistent with the actual House action on the bill, which was stalled in the subcommittee and led to the bill's death.(29) Thus, the status quo survived as the legislative equilibrium.

VI. INTEREST GROUP ACTIVITY IN THE 1980s

The failure of the 1979 reform simply meant that nothing was done to lessen the problems of regulatory delay, to control sky-rocketing prescription drug costs and to increase the supply of generic drugs. In 1981, brand-name pharmaceutical firms proposed that the patent lives of drugs should be extended to reflect the portion lost during the lengthy approval process.(30) The PMA argued that the decline in effective patent lives reduced firms' incentives for R&D and hence negatively affected the supply of innovative new drugs.

Patent extension accomplished two goals for the PMA. First, it eliminated the complexities associated with changing the regulatory process for drugs. Second, it shifted the jurisdiction in Congress from the committees handling drug regulation to those which addressed patent issues. In both the House and Senate, this meant that the Judiciary Committees would have jurisdiction over legislation to grant a patent extension. The maneuver proved successful in 1981 in the now Republican-con-trolled Senate as legislation which extended patent terms up to seven years was approved in the Judiciary Committee in May and on the floor in July.(31)

Although generic manufacturers did not take an active role in the legislative debate on prior drug reforms, the Senate bill served to rally them in opposition to patent extension. In 1981 they formed the Generic Pharmaceutical Industry Association (GPIA) and immediately began to compile evidence against patent extension. During congressional hearings on the relationship between patent extension and innovation, testimony was heard by representatives of both brand-name and generic interests--the PMA and the GPIA, respectively.

The GPIA argued that subsequent use, process, and other patents extended the patent terms for many brand-name drugs so that these drugs essentially maintained their monopoly markets.(32) The GPIA's evidence showed that many drugs examined enjoyed a period of "post-patent exclusivity" during which these drugs reaped monopolistic rents.(33) The reason why generic firms were not entering these markets immediately after patent expiration was due to the restrictions on ANDA use for generic versions of drugs patented after 1962.

The involvement of the GPIA created both a stumbling block for the proponents of patent-term extension and a renewed interest in changing the regulatory process for generics. Although the patent extension bill was reported by the House Judiciary Committee in August 1982, it met significant opposition from pro-consumer, anti-business advocates on the House floor as well as from Henry Waxman (D-CA).(34) The ultimate outcome was the defeat of the patent extension bill in the House.(35) The status quo was still the equilibrium.

The failure of the 1982 bill in the House was not surprising for two reasons. First, it provided no off-setting benefits for generic drug firms. Second, patent-term extension did serve to redirect the bill to a more receptive committee in the House, but it probably created a jurisdictional dispute between the Judiciary Committee and the Energy and Commerce Subcommittee on Health and the Environment. The chairs of the full Energy and Commerce Committee and the Health and Environment Subcommittee, Dingell and Waxman, each voted against the patent extension bill.

VII. CHANGING MEMBERSHIP AND TURNOVER

The House Health and Environment Subcommittee experienced substantial turnover in the early 1980s. Turnover resulted in a 44 percent change in 1980 committee membership and another 30 percent change in 1982 committee membership. In addition to turnover, Democrats gained an additional seat on the subcommittee while Republicans lost two seats, so that the new ratio of Democrats to Republicans increased to 13:6 from the previous 12:8 margin prior to the 1982 election. One consequence from these changes was that Waxman now possessed a working majority of Democrats on the subcommittee. The threat of a conservative Democrat and Republican coalition, once present in the 1979 subcommittee, was no longer a factor.(36)

In the Senate the key change occurred in 1980 when the Republicans gained majority party control. One consequence of this party turnover was a change in the party of the chairs of all Senate committees and subcommittees. In the Labor and Human Resources Committee, the chair shifted from Harrison Williams (D-NJ) to Orrin Hatch (R-UT). In addition, Republicans gained four seats on the committee while Democrats lost one so that the ratio of Republicans to Democrats increased from 6:9 in 1979 to 10:8 in 1984. With respect to membership, six of the eight Democrats in 1984 were from the 1979 committee. Four Republicans from 1979, including Hatch, were among the 1984 committee members, but six new Republicans also joined this group. The effect of these changes on the legislative equilibrium is illustrated in the next section.

TABLE I
House Subcommittee

TurnoverSize
 Democrats Republicans Total Members

1980 election 5 3 20
1982 election 3 3 19

VIII. THE NEW LEGISLATIVE EQUILIBRIUM

Figure 5 shows the ideal points of the members of the 1984 House Health and Environment Subcommittee and reveals substantial change from Figure 4. The ideal points in 1984 appear to be more polarized than in 1979. The majority, like Waxman, have high ADA scores, but several also have substantial contributions from brand-name PACs. Four senior Democrats, Waxman, Scheuer, Luken and Dingell, the chair of the full committee, have high contributions from brand-names as well as high ADA scores. It is not necessarily the case that the increase in contributions reflected a shift in preferences for these members. The increase in contributions to Waxman and Dingell may reflect the desire by PAC's to increase their access to someone who has a lot of power, e.g., committee chairs. Further, the increase in contributions may simply reflect the fact that PACs increased their contributions over time.(37) In any event, the final legislative outcome does not depend on the extent of the contributions to these four members and hence is not conditioned on a change in preferences along this dimension. The key changes in the House occurred on the ADA dimension largely as a result of a new, more liberal Democratic membership on the subcommittee and the higher ratio of Democrats to Republicans discussed in the previous section.

The winset in Figure 5 consists of all policies in the large leaf to the right of the status quo. The policies in this region are supported by the members of the Democratic majority on the subcommittee. As Figure 4 shows, in 1979 the winset had two petals, one of which (left petal) represented the policies supported by the conservative Democrat and Republican coalition. By 1984, the left petal disappeared leaving only a large petal on the right. It was this Democratic majority that approved a one-page bill introduced by Waxman in August 1983 that would allow generic firms to use the ANDA-expedited approval procedure for post-1962 patented drugs.(38) The bill contained no provisions for brand-name firms and it was sure to meet opposition from these firms if it proceeded to the floor. In the Senate, the bill would encounter opposition from the Labor and Human Resources Committee.

Figure 6 shows a plot of the ideal points of the 1984 Senate Labor and Human Resources Committee, chaired by Hatch. A majority cluster of Democrats and two Republicans is located at the right edge of the ADA scale. This cluster is not very different from the majority cluster on the 1979 Senate committee in Figure 3. The Republicans are more spread over the contribution space in 1984 than in 1979, but few receive significant contributions. The major difference between 1979 and 1984 is the presence of Orrin Hatch as the chairman of the full committee. He is located in the upper left corner of the graph with high contributions and a low ADA score. Hatch was a major proponent of patent-term extension, which is consistent with his location in the figure.

The winset in the Senate is shown in Figure 6 by the petal to the right of the status quo pointing upward. The policies are supported by a majority coalition of Hatch with the majority cluster of members with ADA scores at or above 60. The policies in this winset include the preferred brand-name alternative, patent extension, as well as some measures to ease generic firm entry. Any bill without some benefits for brand-names would not get through the Senate committee given the presence of Hatch as the chair.(39)

Unlike 1979, however, there was an opportunity to implement a successful reform in both the House and the Senate committees because each would support bills which provided benefits to both brand-names and generics. This can be seen by examining each chamber's winset and noting that each contained policies located to the right of and above the status quo. Recognizing such an opportunity, Hatch initiated a series of private negotiations with Waxman and members from the PMA and the GPIA to develop a bill to accommodate both brand-names and generics. The willingness of each side to come to the bargaining table may have been strengthened by the previous two legislative failures in 1979 and 1982.(40)

The outcome from a ten-month period of negotiations was a forty-four-page bill termed the Waxman-Hatch compromise (HR 3606, S 2748). The bill extended the use the ANDA to generic versions of drugs patented after 1962 and granted patent extensions up to five years for the first patent on a brand-name drug.(41) In addition, the bill provided four years exclusive marketing rights for non-patented New Chemical Entities (NCEs) and made it legal for generic firms to begin the required testing in anticipation of expiration of the exclusive marketing date.(42) The bill was supported by the board of the PMA and the GPIA. It was also supported by the AARP, consumer groups and labor unions, largely due to the provision for generic drugs.(43)

This winset depicted in Figure 7 represents a set of preferred policies by Hatch and by the coalition of Democrats, including Waxman, on the House subcommittee.(44) This winset reflects a set of policies which could have passed in both the House subcommittee and the Senate committee and is characterized as providing benefits to both brand-name and generic firms as did the compromise.

Dissent and Renegotiation

The theory predicts that a bill inside the winset in Figure 7 would be supported as a new legislative equilibrium by the House and the Senate committees. The resulting compromise bill, [b.sub.1], from the Waxman-Hatch negotiations was located inside this winset. However, a dissenting group of eight firms, later joined by three additional firms, from the PMA wanted more compensation, in terms of exclusive marketing rights, than the existing compromise provided them.(45) They wanted to shift up the location of the bill in the winset.

The dissenting group attempted to mobilize opposition to the bill outside the committee. The threat of amendments on the floor which would weaken the legislation forced Waxman and Hatch to address, at least in part, the group's demands. The new bill included an extended provision for non-patent exclusive marketing rights.(46) They also included a provision to appease the dissident group which would allow brand-name firms to choose which patent to extend. In addition, Waxman also agreed to include an unrelated textile-labeling amendment to the bill.(47,48)

The dissenting group's opposition to the original compromise played a role in shifting the location of the bill inside the winset in Figure 7. The bill shifted upward in the direction of brand-name interests from [b.sub.1] to [b.sub.2]. The division within the PMA actually worked in favor of all PMA members by providing broader exclusive marketing rights.

The new bill served the purpose of thwarting any expected opposition on the floor. Although three amendments were proposed in the House that would upset the balance of interests achieved in the bill, all three measures were strongly rejected.(49) On final consideration, the bill was unanimously accepted by the House and then subsequently approved on a voice vote in the Senate in September of 1984. No member wanted to vote against a measure that was supported by all the major interests involved in the compromise.

IX. DISCUSSION

This example demonstrates that an understanding of the relevant institutions is useful in understanding the legislative process. In this case, the key institutions are (i) the congressional committees in the House and Senate which preside over drug regulation issues and (ii) the mechanisms which enable these committees to exert influence over such policy. Knowledge of interest group activities alone is not enough to explain why some legislative reforms fail and others succeed. This study provides answers to questions that can not be addressed by theories that focus solely on interest groups. Explaining the failure of reform in 1979 and its success in 1984 requires an understanding of how brand-name and genetic drug interests are represented in the key congressional committees or subcommittees.

As membership and preferences on these committees change over time, the set of policies which can be supported by a majority on the committee will also change. Thus, new membership on a committee corresponds to new legislative opportunities. In addition, these committees can act as gatekeepers and prevent access to the floor of legislation in their policy jurisdiction. This affords them substantial influence over the development of any policy within their jurisdiction. It further implies that successful legislation must have the support of both the relevant House and Senate committees; otherwise, one chamber may block the progression of a bill by keeping it shut up in committee. Thus, we would expect to see such gatekeeping activity if the interests represented on the House committee differ significantly from those of the Senate. This, indeed, was the case regarding the drug reforms prior to 1984.

With respect to the degree of independent influence of the subcommittee chair, the observed behavior of Waxman's subcommittee in 1979 suggests that the power of a chair to pursue his own interests is limited by the subcommittee. However, these limitations vanished as the ideal points of the subcommittee members changed over time and the Democratic majority moved closer to Waxman. This suggests that a subcommittee chair may possess some power by his ability to influence the membership on the subcommittee over time.(50)

In conclusion, this analysis highlights several key factors that economists need to consider to understand the timing of legislation. First, economists need to know the distribution of preferences of committee members because this distribution determines the set of policies that can be supported as an equilibrium outcome. Second, economists should consider the differences in the preferences between the House and Senate committees because successful legislation must have the support of the relevant committee in each chamber. Third, it is important to know the identity of the chair because the chair can prevent bills from reaching the floor. An implication is that successful legislation must be preferred by the committee chair to the status quo. Finally, it is important to understand how the distribution of committee preferences and the winset are altered over time by new committee membership, turnover, or a shift in the pattern of PAC contributions.

1. Prior to this legislation, only generic versions of drugs with patents granted prior to 1962 were eligible for this expedited approval procedure using the ANDA. This implied that generic versions of brand-name drugs patented after 1962, whose patent had expired, had to reproduce a substantial portion of the safety and efficacy data required for FDA approval.

2. Baily [1972], Peltzman [1973], Grabowski, Vernon and Thomas [1978] and Wiggins [1981] are classic articles which have examined the impact of the 1962 Harris-Kefauver Amendments. Comanor [1986] provides an excellent survey of the existing literature.

3. The data represent both an ideological component to legislative behavior as in Kalt and Zupan [1984] and a financial or contribution component as in Chappell [1982].

4. This view is taken by Stigler [1971] and Peltzman [1976]. Wilson [1980] also characterizes different types of regulatory policy by its distribution of costs and benefits.

5. Most regulatory issues are characterized by some kind of trade-off among various interests.

6. A similar phenomena can occur if the preferences of existing members change from one period to another.

7. For more on congressional committees, see Manley [1970], Fenno [1973], Shepsle [1978], Smith and Deering [1984], and Dodd and Oppenheimer [1985].

8. Another source of committee power is the ex post veto because they usually control the conference committee. Krehbiel [1987] suggests that the use of alternative institutions within the House may erode the ex post veto power of the subcommittee.

9. The ideal point of the President could easily be incorporated into the analysis without providing any additional insight.

10. outcomes in which opposing sides are able to realize joint gains from compromise are discussed in Quirk [1989] and Perotti [1990].

11. This seems to be a case in which the relevant action occurred at the subcommittee or committee stage. Consideration of floor votes does not yield any additional insight for this analysis.

12. High scores are given to members who vote in favor of consumer policies, such as jobless benefits, public works programs, regulation of toxic waste, and other regulatory attempts to correct for market failures in which consumers may be adversely affected. From ADA Voting Records, 1979-84.

13. Since there are no recorded votes on legislation involving generic drugs prior to 1984, it is not possible to examine the correlation between voting behavior and ADA scores in this case. However, Weingast and Moran [1983] established a direct relationship between ADA scores and legislative support for a pro-consumer FTC. Efforts to ease generic entry were strongly supported by consumer interests including the AARP, Ralph Nader and various consumer groups concerned about drug pricing.

14. This does not preclude the possibility that PACs also give money to legislators who already agree with them to help them get reelected.

15. This helps explain the mixed conclusions found in the literature regarding the effects of contributions on voting behavior. For example, see Silberman and Durden [1976], Chappell [1981; 1982], Kau and Rubin [1982], and Welch [1982].

16. The correlations are: (i) -.5 in the 1979 House subcommittee; (ii) -.1 in the 1979 Senate committee; (iii) -.6 in the 1984 House subcommittee; and (iv) -.4 in the 1984 Senate committee. Although the two measures exhibit some negative correlation, there appears to be a reasonable amount of unexplained variance in contributions to support this two-dimensional representation. In contrast, the correlation between two different ideological ratings, ADA and ACA, showed a much higher (almost perfect) negative correlation in each case.

17. Given the restrictions placed on ANDA's and the effects of regulatory delay on brand-name drug approvals, the status quo corresponds to a relatively low ADA score and a moderate position on the contribution dimension.

18. The analysis is not dependent on this assumption. Other locations for the status quo in this general region yield similar results.

19. The PACs represent the following firms: Bristol-Myers, Ciba-Geigy, Eli-Lilly, Johnson and Johnson, Merck, Pfizer, SmithKline, Abbott, American Home Products, Hoffman-La Roche, Marion Laboratories, Sandoz, Upjohn, and the PMA. This sample reflects the major brand-name interests and thus should represent the majority of the campaign contributions to Congress from brand-name firms.

20. The use of raw data values in each dimension to estimate legislative ideal points avoids the indeterminacies of some scaling methods.

21. Congressional Hearings before the Subcommittee on Health and Scientific Research on S. 1831 to amend the Food, Drug and Cosmetics Act, U.S. Senate, 26 July 1977.

22. For drugs not eligible for patents, the FDA would grant five years of exclusive marketing privileges in exchange for the monograph.

23. Congressional Quarterly Almanac, 1979, p. 486.

24. Congressional Quarterly Weekly, 20 October 1979, pp. 2349-56.

25. The preferences of the full committee are examined over the period to maintain consistency. Although the Senate Subcommittee on Health and Scientific Research was referred the bill in 1979, this subcommittee was eliminated from the Labor and Human Resources Committee by 1984.

26. This group consists of the liberal Democrats, Waxman, Mikulski, Leland and Walgren, aligned with the more conservative Democrats Preyer, Staggers and Luken, and ultra-conservative Democrats Gramm and Shelby.

27. The Democrats are Satterfield, Murphy, Luken, Gramm and Shelby, along with Republicans Stockman, Carter, Madigan, Dannemeyer, Lee and Broyhill.

28. All other possible majorities that could form have winsets which are subsets of those shown in Figure 4.

29. Congressional Quarterly Weekly, 20 October 1979, pp. 2349-56.

30. A study by Eisman and Wardell [1981] of 168 New Chemical Entities (NCEs) introduced between 1966 and 1979 showed that the average effective patent life declined from 13.6 years in 1966 to 9.5 years in 1979 due to the time required for FDA approval.

31. Congressional Quarterly Almanac, 1982, p. 400.

32. GPIA, "Fact Sheet on Patent Extension," Hearings before the Subcommittee on Investigations and Oversight of the Committee on Science and Technology, U.S. House of Representatives, 97th Congress, 4 February 1982, p. 214.

33. One study cited in the hearing "showed that after patents expired, each of 12 major drugs (including Librium and Darvon) retained more than a 90 percent share of the drugstore market and more than an 80 percent share of the hospital market."

34. E. Clay Shaw (R-FL) thought the legislation would simply protect brand-name drugs from competition for a longer period of time and hence keep prescription drug prices high, which would hurt consumers, especially the elderly. Henry Waxman opposed the legislation because pharmaceutical firms had already been granted a 25 percent R&D credit through the 1981 tax bill.

35. Although the bill's sponsor attempted to get the bill approved under suspension of the rules to ward off amendments that he thought the opposition might make to weaken it, the bill died as the suspension proposal fell five votes short of the required two-thirds majority (250-132). From Congressional Quarterly Almanac, 1982, p. 400.

36. Several conservative Democrats were either defeated or retired. Richardson Preyer, a North Carolina Democrat, who had substantial holdings in a major R&D-intensive pharmaceutical company, Richardson-Merrell, was defeated in the 1980 election. David Satterfield, a senior Virginia Democrat, who was considered too conservative by his own party retired in 1980. Another senior Democrat who retired, Harley Staggers, the chair of the Commerce Committee, was an heir to the P&G fortune. From Michael Barone and Grant Ujifusa, The Almanac of American Politics, 1982.

37. Another explanation could be that these particular members became more concerned with campaign fund-raising or more inclined to take contributions during this period.

38. During the past five years, the FDA had twice attempted to revise its own rules with respect to the generic approval procedure, but lawsuits from brand-name drug companies prevented any procedural changes.

39. Hatch could always keep the gates closed for bills that didn't have such provisions.

40. The failure of the 1982 patent restoration attempt was largely due to the opposition of the GPIA. Similarly, the attempts to increase generic availability in 1978 and 1979 were stifled by the PMA.

41. Total patent life was not to exceed fourteen years for any brand-name drug. Drugs receiving FDA approval between 1982 and the date of enactment of the bill would qualify for the ANDA procedure only after ten years of exclusive marketing. Drugs approved after the enactment of the bill would qualify for the ANDA procedure after the expiration of their patents, including any extensions authorized by the bill.

42. Congressional Quarterly Almanac, 1984, p. 452. 43. During the period of negotiations to develop the compromise bill, the FDA was between commissioners and did not appear to play any role in these negotiations. If anything, the agency favored a more gradual transition for ANDA eligibility for drugs patented after 1962 to allow the FDA time to adjust to the additional workload.

44. Putting both Hatch from the Senate and the House Democrats on the same graph should be interpreted cautiously. The construction of this winset is only meant to be suggestive of the compromise region for the two chairs.

45. The thirty-four member governing board of the PMA agreed to endorse the compromise 22-12. The twelve firms who voted against the endorsement represented several of the largest R&D-intensive pharmaceutical firms with major patents either just expired or about to expire and were generally opposed to the provision for expedited approval of generic drugs. The eleven dissenting firms were from this group. As a result of the controversy, the president and two other PMA negotiators were fired in August 1984. From: John Barry, "CEOs Make the Best Lobbyists," Dunn's Business Monthly, January 1986, p. 36.

46. Non-patented NCEs would receive five years of exclusive marketing and drugs which were not NCEs but which required substantial clinical testing would receive a three-year exclusive marketing period. Non-patented drugs approved between 1982 and the date of enactment would receive a two-year exclusive marketing period.

47. Congressional Quarterly Weekly, 15 September 1984, p. 2241.

48. The inclusion of this amendment ensured further support of the bill by certain members of Congress.

49. The first amendment would have reduced the delay for ANDA approval in the event of litigation from thirty months to eighteen months. This was rejected 66-304. The second amendment would have exempted over-the-counter drugs from revisions in the bill for genetic drug approval. This was rejected 24-347. A final amendment extended the time for compliance with the textile clause and was rejected 36-323.

50. Although the subcommittee assignments are made by the Democratic Steering and Policy Committee, Waxman may have influenced the composition of the subcommittee between 1981 and 1983 by contributing to the campaigns of various Democrats on the subcommittee (with his own PAC) and by obtaining the most favorable margin of Democrats to Republicans possible for his subcommittee. In addition, two conservative, less-senior Democrats on the subcommittee who generally opposed Waxman's interests were replaced in 1983 by two other subcommittee chain, Ottinger and Wirth, whose campaigns had received contributions from Waxman during the election.

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