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Is the Food and Drug Administration Safe and Effective?

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  • Tomas J. Philipson
  • Eric Sun

Abstract

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.

Suggested Citation

  • Tomas J. Philipson & Eric Sun, 2007. "Is the Food and Drug Administration Safe and Effective?," NBER Working Papers 13561, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13561
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    1. Immordino, Giovanni & Pagano, Marco & Polo, Michele, 2011. "Incentives to innovate and social harm: Laissez-faire, authorization or penalties?," Journal of Public Economics, Elsevier, vol. 95(7), pages 864-876.
    2. Eric Langlais & Andreea Cosnita-Langlais & Tim Friehe, 2024. "Product Liability Influences Incentives for Horizontal Mergers," EconomiX Working Papers 2024-10, University of Paris Nanterre, EconomiX.
    3. Raymond J. March, 2021. "The FDA and the COVID‐19: A political economy perspective," Southern Economic Journal, John Wiley & Sons, vol. 87(4), pages 1210-1228, April.
    4. Giovanni Immordino & Michele Polo, 2014. "Public Policies in Investment-Intensive Industries," World Scientific Book Chapters, in: Martin Peitz & Yossi Spiegel (ed.), THE ANALYSIS OF COMPETITION POLICY AND SECTORAL REGULATION, chapter 13, pages 365-388, World Scientific Publishing Co. Pte. Ltd..
    5. Casey B. Mulligan, 2021. "Peltzman Revisited: Quantifying 21st Century Opportunity Costs of FDA Regulation," NBER Working Papers 29574, National Bureau of Economic Research, Inc.
    6. Tomas J. Philipson & Eric Sun & Dana Goldman, 2010. "The Effects of Product Liability Exemption in the Presence of the FDA," NBER Chapters, in: Regulation vs. Litigation: Perspectives from Economics and Law, pages 137-163, National Bureau of Economic Research, Inc.
    7. Apostolos Tsiachristas† & Ren頇oudriaan & Wim Groot, 2013. "The welfare effects of innovative pharmaceuticals: an international perspective from the Dutch experience," Applied Economics, Taylor & Francis Journals, vol. 45(9), pages 1219-1226, March.
    8. John Romley & Tiffany Shih, 2017. "Product safety spillovers and market viability for biologic drugs," International Journal of Health Economics and Management, Springer, vol. 17(2), pages 135-158, June.
    9. Mary Olson, 2013. "Eliminating the U.S. drug lag: Implications for drug safety," Journal of Risk and Uncertainty, Springer, vol. 47(1), pages 1-30, August.
    10. Tomas J. Philipson & George Zanjani, 2013. "Economic Analysis of Risk and Uncertainty induced by Health Shocks: A Review and Extension," NBER Working Papers 19005, National Bureau of Economic Research, Inc.
    11. Sebastian Calónico & Rafael Di Tella & Juan Cruz Lopez del Valle, 2023. "The Political Economy of a “Miracle Cure”: The Case of Nebulized Ibuprofen and its Diffusion in Argentina," NBER Working Papers 31781, National Bureau of Economic Research, Inc.
    12. Hu, Mei-Ying & Lu, You-Xun & Lai, Ching-chong, 2023. "Patent term extensions and commercialization lags in the pharmaceutical industry: A growth-theoretic analysis," Journal of Macroeconomics, Elsevier, vol. 76(C).
    13. Clifford Winston, 2008. "The Efficacy of Information Policy: A Review of Archon Fung, Mary Graham, and David Weil's Full Disclosure: The Perils and Promise of Transparency," Journal of Economic Literature, American Economic Association, vol. 46(3), pages 704-717, September.
    14. Gayle DeLong, 2018. "Is “Delitigation” Associated with a Change in Product Safety? The Case of Vaccines," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 1-53, February.

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    JEL classification:

    • I0 - Health, Education, and Welfare - - General
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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