Drug development is time consuming and expensive. Pharmaceutical companies often spend over $100 billion during the development process and it can take more than a decade for drugs to reach the market. In the United States, the Food and Drug Administration (FDA) oversees the drug approval process and therefore must balance the speed of drug approval against consumer safety.

Compared to other regulatory agencies, little economic research exists on the FDA and the trade-offs required to achieve its twin goals: a fast approval process and the safety of newly approved drugs.

In a recent paper published in the Journal of Economic Perspectives, Professor Tomas J. Philipson (with Eric Sun of RAND and the University of Chicago) attempts to determine if the FDA’s policies effectively allow the agency to meet its goals. In their evaluation, the authors focus on the two issues of drug safety regulation systems currently in place and the balance of safety with speed to market.

How Much Oversight Is Too Much?

The FDA regulates a range of products in the United States, including foods, cosmetics, drugs, and medical devices. The agency must determine whether drugs are safe and effective both before and after reaching the consumer market.

“This lengthy process suggests that the FDA favors safety over speed,” said Philipson. “The drugs the FDA approves tend to be quite safe, in the sense that the agency or private firms seldom withdraw drugs from the market.”

But the FDA is not the sole player in drug safety regulation. Through product liability laws, patients can sue manufacturers for unsafe drugs. The authors examine what inefficiencies come with two oversight systems.

Because the FDA mandates higher standards in certain areas—such as the extent of product warnings or intensity of clinical testing—than pharmaceutical companies would be willing to provide on their own, product liability duplicates the agency’s safety measures without creating any additional disincentives for faulty drug manufacturing. Therefore, Philipson and Sun ultimately determine that these two oversight systems provide no real gain in safety to society. Product liability raises manufacturers’ expenses and drug prices because companies must be prepared to pay damages to consumers. Using a sample of drugs on the market between 1988 and 2002, the authors calculate that eliminating product liability costs (even if it accounts for only a small portion of a drug’s manufacturing costs) could lower consumer prices and production costs by tens of billions of dollars over a drug’s lifetime.

But the authors agree that product liability may be useful for areas outside the FDA’s purview—such as manufacturer actions after the drug reaches the market—which are harder to monitor and enforce. Although with two systems consumers ultimately suffer with higher price tags, Philipson and Sun conclude that more research is needed on the portion of overall costs pharmaceutical companies dedicate to legal expenses.

How Long Should It Take: Getting New Drugs to Market

“Over time the optimal choice of safety or efficacy must balance the gains from increased safety against the losses from delayed introduction of the drug,” the authors write. “Because the value of new medical technologies may be very high, delays in their introduction are often particularly costly.”

This trade-off between safety and speed to market is the second issue Philipson and Sun address. In their analysis, they examine costs in terms of monetary expenses to manufacturers and as well as loss of patient life years to determine what impact—if any—speed has on safety.

First, the authors look at the Prescription Drug User Fee Acts (PDUFA), which allowed pharmaceutical companies to pay a fee to the FDA to ensure a faster review time. This law increased the pace of the agency’s regulatory process starting in 1992, with the law extended in 1998 and 2003. Because drugs were awaiting approval when the law went into effect, Philipson and Sun are able monitor FDA review times before and after FDUFA’s passage. They find that approval times fell by about 2 percent per year between 1979 and 1992, by 9 to 10 percent per year after the passage of PDUFA, and, after the legislation was reauthorized, by about 5 percent per year from 1997 to 2002.

These faster approval times mean that any consumer benefits and increased profit—also termed social surplus—happened sooner. The authors value the present day social surplus between $18 billion and $31 billion, equaling about 1.6 to 2.7 percent of total sales. But Philipson and Sun argue that these monetary surpluses must be weighed against patients’ life lost to conclude if the benefits of faster approval processes truly outweigh the costs.

To determine the complete costs of faster approval times, the authors calculated the years of life lost due to less safe drugs. Examining data from the Adverse Event Reporting System, an FDA-maintained database of patient deaths from drug reactions, Philipson and Sun find that about 55,600 years of life were lost from drugs withdrawn from the market after initial approval under PDUFA. Using a range of $100,000 to $300,000 as the value of a year of life, the monetary losses from reduced drug safety range from $5.6 billion to $16.8 billion, much less than the $18 billion to $31 billion of social surplus.

They admit that this is an imperfect estimate—only counting the cost of death, not illness, and not considering that some of the withdrawn drugs may have actually benefited other patients—but conclude that the benefits from faster approvals “more than offset” any risks of less-safe drugs. “Taking these factors together, it seems plausible to us that before the enactment of the Prescription Drug User Fee Act of 1992, safety was overprovided at the expense of getting new medical products to consumers in a timely manner,” the authors write.

Further Investigation

Philipson and Sun’s research suggests several areas for future research, including how product liability may be made more efficient and continuing research on the tradeoff of safety versus speed as well as off-label drug use. “Explicit analysis of the efficiency effects of the policies of the Food and Drug Administration is not as well developed as it is for many other regulatory agencies. However, it bears great promise,” the authors write. “In an agency dominated by the thinking of doctors and lawyers, economic analysis offers useful methods by which to produce more explicit and evidence-based evaluation of agency policies.”