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Public Health and the Placebo: The Legacy of the 1906 Pure Food and Drugs Act
By Russell S. Sobel
Introduction
The current literature regarding Food and Drug Administration (FDA) regulation of drugs generally focuses on measuring the costs and benefits of the rather long drug approval process that was created by the Kefauver-Harris Amendments of 1962. Peltzman (1973), for example, concludes that the high compliance cost of the amendments reduces R&D productivity and thus reduces new drug innovation. He also finds that the opportunity cost of forgone new drugs that are not approved (or the lost value of the benefits in the years they are undergoing approval) exceeds the benefit of the ineffective drugs that are avoided as a result of the law by a wide margin. Over the past 30 years, the average approval time of new drugs by the FDA has risen by more than 10 years. Gieringer (1985) estimates that a one-year delay in new drug benefits costs between 37,000 and 76,000 lives per decade in the U.S. population. Relative to the number of lives saved by the avoidance of unsafe drugs, he finds that the cost of the policy outweighs the benefit by a margin of at least 4 to 1. Gieringer concludes that the FDA's approval system itself is neither safe nor effective. As Klein (2000) discusses, the body of economic research on the FDA points unanimously toward relaxing FDA restrictions on the introduction of new drugs. Perhaps most economists' opinion on this issue is summarized in Milton Friedman's statement that the "FDA has done enormous harm to the health of the American public."
Perhaps more directly related to the issues raised here are previous papers that explore whether there is a market failure to begin with, and whether there are possible free market alternatives to the current bureaucratic FDA regulatory system for pharmaceuticals. To make a legitimate economic case for government intervention in the market requires demonstrating some type of market failure in the industry. One commonly cited potential failure is that drug makers might not internalize or account for the full cost to society from the introduction of a dangerous drug. This issue has been addressed by Jarrell and Peltzman (1985), who find that drug manufacturers suffer major reductions in market value in the event of a drug recall, giving them a strong incentive to internalize the costs of manufacturing dangerous or ineffective drugs.
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