Is the Food and Drug Administration Safe and Effective?
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.
We are thankful to Steven Garber at RAND and seminar participants at The University of Chicago, RAND and the 2007 IHEA Meetings in Copenhagen for comments. Philipson served as Senior Economic Advisor to the Commissioner of the FDA from 2003-2004, but all views expressed in this paper represent the views of the authors and do not necessarily reflect the views of the FDA. We are grateful to the Bing Center for Health Economics and the Institute for Civil Justice at the RAND Corporation, as well as the Chicago Center for Excellence in Health Promotion Economics and the George J. Stigler Center for Study of Economy and the State at the University of Chicago, for financial support. Sun also thanks the Medical Scientist Training Program at the University of Chicago Pritzker School of Medicine for financial support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
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