This week, we will have a five-part series highlighting the legal issues presented by blockchain applications in a number of different industries. Today, we’re looking into the legal considerations of implementing the blockchain in the pharmaceutical industry.  Among other benefits, distributed ledger technology can help reduce sales of counterfeit drugs and improve supply chain management, increase the security of digital patient records, improve processing of health insurance claims, and enhance the reliability and accuracy of clinical trials.

One of the biggest problems in the pharmaceutical industry is the proliferation of counterfeit drugs, which are increasingly difficult to detect and regulate.  Sales of counterfeit pharmaceuticals are a billion-dollar business, and pharmaceutical companies invest enormous resources in sophisticated efforts to prevent and investigate counterfeiting of their products all over the globe.  But the impact of this problem goes far beyond dollars and cents – because it places consumers’ lives directly at risk.

When I served on the Attorney General’s Intellectual Property Task Force, we developed a list of priority areas for federal IP enforcement.  Perhaps it’s no surprise that IP crime impacting consumer health and safety was at the top of that list, and within that category, the sale of counterfeit pharmaceuticals was perhaps the most common, the most lucrative for criminals, and the most dangerous for consumers.

Together with a number of US and foreign law enforcement partners and the National IP Rights Coordination Center, DOJ brought significant cases against people in the US and abroad who were selling counterfeit drugs, including – believe it or not – medications for diseases like diabetes and even cancer.  And the US helped lead global enforcement efforts like Operation Pangea, an annual worldwide operation to target online sales of pharmaceuticals and medical devices that, in 2016 alone, resulted in nearly 400 arrests, the seizure of approximately $53 million worth of potentially dangerous medicines and approximately 12.2 million fake and illicit medicines.

But this is not the type of problem that the government can arrest its way out of, and private sector investigative resources can only go so far.  Industry needs a better way to detect counterfeits and stop them from reaching pharmacy shelves, and technology has a big role to play in that effort.

At the same time, the pharmaceutical industry faces significant supply chain management problems, with serious consequences and enormous regulatory pressures.

Enter the blockchain.  A blockchain-based system would enable manufacturers to track and trace every ingredient throughout its life via an immutable digital record of each transaction in the supply chain, and to track and verify the authenticity of the finished product as it moves to markets around the world.  Just as the food industry looks to track products from “field to fork,” the blockchain would allow pharmaceutical companies to track products from source to provider to patient.  This would revolutionize anti-counterfeiting efforts and the overall effort to ensure supply chain integrity.  Pharma is no stranger to using technology to detect frauds and counterfeits – scratch-off labels and radio frequency identification tags are just two examples – and blockchain technology is the next evolution of these efforts.

Using blockchain technology to manage the supply chain and detect counterfeits would help address the economic, the reputational – and, more importantly, the public safety – impact of fraud and counterfeiting.  But there are legal and compliance benefits as well.  Supply chain management is not just a business imperative – it’s also a regulatory issue.  The blockchain would make compliance more effective, more transparent, more efficient, and, at the same time, less expensive.

But the benefits of the blockchain don’t stop there.  Distributed ledger technology also offers the potential to revolutionize the security and management of patient identity and medical records.  Anyone who has ever been to a doctor’s office, let alone run one, knows that patient medical data is rigorously protected under HIPAA and the Hitech Act.  Compliance with the rules governing the protection of electronic patient information is challenging, and HHS has been extremely aggressive in pursuing sanctions for data security compromises. The blockchain offers a more reliable and secure way of maintaining this most private and sensitive data, with much greater resistance to attack.  The blockchain also would allow greater patient control over information, which is especially important as we enter the era of the Internet of Things, with a whole range of Internet-enabled devices – from wearable fitness devices to scales to blood pressure monitors – that can collect and transmit health-related data.  A blockchain-based system of maintaining medical records would allow patients to control and track access to their medical information by doctors and other providers.

Blockchain technology will also transform the insurance industry. For healthcare in particular, the blockchain would allow for more efficient and lower-cost administration of health plans and health insurance claims through smart contracts.  And the blockchain could increase the transparency of and accountability within clinical trials, which impacts both the speed with which new drugs get to the marketplace and the costs of those drugs once they get there.

Of course, with these exciting applications come challenging legal issues.  Some issues – like those surrounding the creation, execution, and enforcement of smart contracts – are common to blockchain applications in many industries.  Others are more specific to pharma and healthcare.  Particularly in industries that are so heavily regulated, the legal and regulatory impact of this revolutionary technology has to be carefully assessed.  A legal strategy is a critical part of any overall strategy for adopting blockchain technology.

But with that strategy in place, pharmaceutical and other healthcare firms will be poised to unleash the power of the blockchain for the benefit of their customers and their companies.