Is the Food and Drug Administration Safe and Effective?
NBER Working Paper No. 13561
Issued in October 2007
NBER Program(s):Health Care, Health Economics, Law and Economics
In the United States, drug safety and efficacy are primarily regulated by the Food and Drug Administration (FDA) and the legal system, which gives manufacturers large incentives to produce safe drugs and provide proper warnings for side effects, since patients can sue manufacturers that provide unsafe drugs and/or insufficient warnings.
In this paper, we begin by examining the efficiency implications of this joint regulation of drug safety. We find that joint regulation of drug safety can be inefficient when the regulatory authority mandates a binding and well enforced level of safety investment. In this case, product liability has no effect on a firm's safety investment, but affects welfare by raising a firm's costs and therefore prices. Using these results, we calibrate a model of the pharmaceutical market and find that, depending on the share of liability costs in marginal costs, a product liability exemption for activities that are well regulated by the FDA could increase consumer welfare by $47.8-$754.7 billion annually (4-66 percent of sales) and producer welfare by $11.9-$173.9 billion annually (1-15 percent of sales).
In addition, we summarize the welfare effects of recent legislation, the Prescription Drug User Fee Acts (PDUFA), which mandated faster FDA review times in exchange for user fees levied on the pharmaceutical industry. Overall, we find that the faster review times mandated by PDUFA raised social surplus by $18-31 billion, and that at most, the concomitant cost of reduced drug safety was $5.6-$16.6 billion.
Machine-readable bibliographic record -
Document Object Identifier (DOI): 10.3386/w13561
Published: Tomas J. Philipson & Eric Sun, 2008. "Is the Food And Drug Administration Safe And Effective?," Journal of Economic Perspectives, American Economic Association, vol. 22(1), pages 85-102, Winter. citation courtesy of
Users who downloaded this paper also downloaded* these:
|Philipson, Berndt, Gottschalk, and Strobeck
||w11724 Assessing the Safety and Efficacy of the FDA: The Case of the Prescription Drug User Fee Acts
|Begosh, Goldsmith, Hass, Lutter, Nardinelli, and Vernon
||w12803 Black Box Warnings and Drug Safety: Examining the Determinants and Timing of FDA Warning Labels
|Law and Libecap
||w10984 The Determinants of Progressive Era Reform: The Pure Food and Drugs Act of 1906
|Philipson, Sun, and Goldman
||w15603 The Effects of Product Liability Exemption in the Presence of the FDA
|Bundorf, Chun, Goda, and Kessler
||w13888 Do Markets Respond to Quality Information? The Case of Fertility Clinics