by Daniel B. Klein, Associate Professor of Economics

Santa Clara University, dklein@scu.edu

July 2000

A sulfa drug called Elixir Sulfanilamide released in 1937 killed 107 Americans, mostly children. A sedative called Thalidomide released in Europe in 1957 and taken by pregnant women caused deformities in 10,000 children. These famous episodes strike us as horrible injustices that must be prevented.

But more deadly are quack platitudes that guide public policy. Platitudes such as "safety," "consumer protection," and "imperfect information" have paved the way for a government stranglehold on the pharmaceutical industry. The Food and Drug Administration decides whether to permit a company to manufacture and sell a drug or medical device, and what the company may say about the product.

In medical matters, expertise and good sense should decide. In policy matters, expertise and good sense should decide – but they do not. The issue is one of economic policy, not medicine. The true "doctors" for drug policy are the political economists. But, as the economist John Calfee says, "the FDA has never sought to accumulate expertise in economics." Quacks make policy against the doctors’ orders.

Many economists have studied the FDA. Their diagnosis is well expressed by the Nobel laureate economist Milton Friedman: "The FDA has done enormous harm to the health of the American public by greatly increasing the costs of pharmaceutical research, thereby reducing the supply of new and effective drugs, and by delaying the approval of such drugs as survive the tortuous FDA process." A compendium "Economists Judgments About the FDA" follows this article. The prescription is uniformly libertarian, ranging in degrees from gradual decontrol to outright abolition of the agency (as Friedman recommends). Although one can occasionally find remarks by economists vaguely favoring government restrictions on health products, those economists are not ones who have published writings on the FDA or provided serious argumentation. I have tried to survey all of economists’ writings on the FDA. I have not been able to find a single instance of an economist defending the contemporary FDA or advocating tighter restrictions. Contrary to the joke about laying all the economists end to end, economists who study the issue do reach a conclusion: Relax restrictions on drugs and devices.

But the good policy doctors are largely ignored. The result has been like that of a plague. Yet the journalists and educators have not explained the plague and its FDA origins. The economists and libertarians are up against a Goliath – the country’s entire quack political culture.

Today men with risk of heart trouble know to take half an aspirin a day. That aspirin greatly reduces one’s risk of myocardial occlusion was well established by 1988. But for years the FDA forbade aspirin makers from advertising the fact at all (still the FDA significantly restricts advertising of the fact). The FDA surely killed tens, and quite possibly hundreds, of thousands of Americans by this restriction alone.

The FDA delays, stifles, and suppresses life-saving drugs and devices. Such drugs and devices as Practolol, Interleukin-2, Taxotere, Vasoseal, Ancrod, Glucophage, Navelbine, Lamictal, Ethyol, Photofrin, Rilutek, Citicoline, Panorex, Femara, Prostar, Omnicath, and Transform have been subject to long delays, killing tens of thousands and causing awful suffering.

The drug delays that we can list, taken together, are just the tip of the iceberg. A 1987 study cataloged 192 generic and 1,535 brand-name tested drugs available abroad but not approved in the United States. Of the drugs approved by the FDA between 1987-93, fully 73 percent had already been approved abroad. And because the FDA process is so expensive, so protracted, and so uncertain, thousands of untold drugs are never discovered or never developed. It is impossible to estimate the suffering and death caused, but surely it greatly exceeds 50,000 premature deaths annually.

Here one might object, "But isn’t your diagnosis one-sided? Doesn’t the FDA screen out unsafe drugs? "

First of all, "safety" is not a yes or no issue. Is chemotherapy safe? Medicine is often poison. The safety of a drug depends on myriad particulars about the patient: age, physical strength and condition, attitude and spirit, activities, allergies, diet, dosage, medical attention and drug regimen. In 1994, adverse reactions to FDA-approved drugs killed 106,000 hospital patients. It is inevitable that many people will suffer and die from unwanted side-effects. (In 1998, about 130 people died while on Viagra; speculation continues over whether these deaths are to be attributed to side-effects of the drug or excitement "under the influence.")

That said, I am prepared to grant that very few FDA-approved drugs are flagrantly unsafe. But here’s the important point: Drug safety would be – and is – certified and assured by a panoply of private-sector, voluntary institutions, and by the tort system. When a company harms consumers with an unsafe drug it suffers devastating losses. Its reputation suffers and it pays hefty damages to victims. In deciding which drugs to use, consumers seek various assurances:

asking the doctor which drug to take

choosing doctors affiliated with health organizations (such as hospitals, clinics, medical groups, and insurers)

buying drugs of brand-name manufacturers (such as Merck, Johnson & Johnson, Upjohn, Eli Lilly)

buying drugs from reputable pharmacies and supermarkets (such as Rite Aid, Long’s Drugs, Safeway)

being an "active patient" by researching therapies in libraries and on the Internet (for encyclopedic drug databases, go to WebMD or onHealth websites)

Meanwhile, our providers and agents seek assurances in more professional ways – mysterious to us, but not to those involved:

drug review by medical insurers (such as Blue Cross, Kaiser Permanente)

seal-of-approval or evaluation reviews by independent organizations (ECRI, American Hospital Formulary Service Drug Information, US Pharmacopoeia)

professional newsletters (Clinica, Health Devices Alert, The Medical Letter)

scientific testing and publishing (The New England Journal of Medicine, etc.)

Ultimately, the whole enterprise of medical science is about safety and efficacy! Malpractice or negligence is a professional scandal for the private organizations involved. They work hard to avoid blights to their reputation, quite apart from the FDA.

Consumers desire not only quality and safety. They desire assurance of quality and safety. Even if the quality of the thing offered would be excellent, if consumers lack confidence of that quality, they abstain from buying. Confidence comes by way of meaningful assurances of quality, so entrepreneurs have incentives to provide assurance. In the ways listed above, individuals and organizations find it rewarding to supply the assurance that consumers desire.

Although some might tell you otherwise, voluntary society (plus the tort system) can provide assurance at least as well as government intervention can. Here are four empirical proofs of the claim.

(1) Assurance in Other Industries: How is safety assured in other industries? In electronics, manufacturers submit products to Underwriters’ Laboratories, a private organization that grants its safety mark to products that pass. The process is voluntary: manufacturers may sell without the UL mark. But retailers and distributors usually prefer the UL mark. Private-sector institutions and the tort system assure safety in electronics.

Suppose someone proposed the following reform for electronics: Introduce a government agency that forbade manufacturers from making any electronic product until it was approved by the new agency. We would think the proposal to be totalitarian and crazy. But that is the system we have in drugs. It is inconsistent to favor the free-enterprise approach to assurance in electronics but the totalitarian approach in drugs. Sometimes people rejoin: "You can’t compare drugs to a toaster! Drugs have much larger effects on our physical well-being." The point, however, cuts both ways. Because drugs are so important the downside of government restrictions is enormous – as we have seen.

(2) Calamity Prior to 1962? The FDA was much less powerful prior to 1962. The historical record – decades of a relatively free market up to 1962 – shows that free-market institutions and the tort system succeeded in keeping unsafe drugs to a minimum. The Elixir Sulfanilamide tragedy (107 killed) was the worst of those decades. (Thalidomide was never approved for sale in the U.S.) The economists Samuel Peltzman and Dale Gieringer have made the grisly comparison: the victims of Sulfanilamide and other small tragedies prior to 1962 are a insignificant compared to the death toll of the post-1962 FDA.

(3) Were They Dropping Like Flies in Europe? Most countries have their own counterpart to the FDA (just as they have mail monopolies and agricultural handouts). But other countries do it quicker. From about 1970 to 1993 the approval times for drugs and devices in the United Kingdom, France, Spain, and Germany was significantly shorter than in the US. As we have noted, delays mean morbidity for patients. Although FDA drug approval times have improved and are now similar to those in Europe, the prior period of US "drug lag" suggests a lesson about drug approval.

The European agencies took less time to approve new drugs, but such laxness did not produce a scourge of unsafe drugs. As researchers of the Tufts Center for the Study of Drug Development write: "the probability that a marketed drug will be removed for safety reasons was not appreciably greater in the United Kingdom than in the United States." Lighter approval requirements did not lead to any noticeable problem. One explanation would be that the European agencies function more effectively (and there is reason to believe this). Yet I am inclined to think that in both Europe and the US the government approval process, as a means of assuring safety, is superfluous.

Even without the government approval systems, voluntary institutions and the tort system would utilize scientific testing and professional certification to screen out unsafe drugs. The government approval process here and abroad is a set of bureaucratic hoops and hurdles often inappropriate or unnecessary for the drug in question.

(4) The Hidden Lesson in Off-Label Prescribing: Proof that we don’t need FDA approval of drug efficacy can even be found within America today. A drug’s FDA-approved uses are called its "on-label" uses. Once a drug is approved for any use, it passes through the FDA stranglehold and may be used in any way doctors and users see fit. Approved drugs are often found to have other beneficial uses, and doctors learn to prescribe drugs for such "off-label" uses. The off-label uses have absolutely no standing with or approval by the FDA but are perfectly legal. Do patients and doctors shrink in fear from uses not certified by the FDA?

Absolutely not! Off-label prescribing is pervasive and vital to the health of millions of Americans. As economist Alexander Tabarrok says, "most hospital patients are given drugs which are not FDA-approved for the prescribed use." Off-label prescriptions are especially common for AIDS, cancer, and pediatric patients, but are common throughout medicine.

Doctors learn of off-label uses from extensive medical research, testing, newsletters, conferences, seminars, Internet sources, and trusted colleagues. Scientists and doctors, working through professional associations and organizations, make official determinations of "best practice" and certify off-label uses in standard reference compendia such as AMA Drug Evaluations, American Hospital Formulary Service Drug Information, and US Pharmacopoeia Drug Information – all without FDA meddling or restriction. Economist J. Howard Beales finds that off-label uses that later became FDA-recognized appeared in the Pharmacopoeia on average 2.5 years earlier. Where voluntary society finds room to stand, its practices lead, not follow, government determinations.

No one would be foolish enough to suggest that the FDA prohibit off-label prescribing. But, as Tabarrok astutely points out, there is a logical inconsistency in allowing off-label uses and requiring proof-of-efficacy for the drug’s initial use. Logical consistency would require that one either (i) oppose off-label prescribing and favor initial proof-of-efficacy, or (ii) favor off-label prescribing and oppose initial proof-of-efficacy. Experience recommends the second option. Efficacy requirements should be dropped altogether!

No proof is really absolute. But anyone who wishes to go on thinking that the FDA is worthwhile ought to answer, at least in his or her own mind, the four challenges just given.

A drug may be developed, tested, and found to save lives. But the FDA prevents Eli Lilly, Rite Aid, and Kaiser Permanente from making the drug available until it has gone through the torturous and expensive approval process. That might take ten years. It might take forever, if the drug is for a rare disease (and hence a small market). Because voluntary society would accomplish anything that the FDA accomplishes, the harms of the FDA are unredeemed.

Some of our most important and most private decisions are overruled by government restrictions. Many of the worst injustices of American society are committed by government edicts that are sold back to the American people with quack platitudes.

Economists from Adam Smith to Milton Friedman have had the unenviable task of pointing out that popular, well-intentioned cures are often worse than the disease. Economists seem nasty when they report that the FDA is bad medicine. People don’t like to hear that they have bought into quackery. In collective decision making, quackery often prevails over sense.

compiled by Daniel B. Klein

Many economists have studied and written on the FDA. It seems that all such economists who pass judgment on the FDA find it to be overly restrictive and favor greater freedom. Some propose specific and piecemeal decontrol, many favor creating a free market by abolishing the agency. I have not been able to find a single economist who defends or supports the contemporary FDA or advocates tighter regulation. Thus, informed economists agree that government should make the drug market freer.

The authorities quoted here are economists (they have received advanced degrees in economics). We do not mean to suggest that only the thoughts of economists are worth paying attention to. We mean to suggest that anyone who studies the issue in a systematic way, as economists are trained to do and to some extent are compelled to do by the standards of their profession, and publish a judgment, invariably favors reform in the libertarian direction.

J. Howard Beales III (1997, 15): "[My study] suggests that there is considerable room for improvement in the existing process. Changes to accelerate approval of new drugs would offer significant health benefits to patients."

John E. Calfee (1996, 318): "[Where an examination of the effects of the FDA’s pharmaceutical advertising policies is possible] the evidence is very strong that the FDA suppresses a great deal of useful information. Experience from related markets in this nation and abroad also strongly indicates that informational competition involving drugs and devices is likely to work well, and that the pharmaceutical market does not pose unique problems that make it unsuitable for traditional competitive dynamics."

Noel D. Campbell (1997, 43): "There is an alternative to reform: abandon the current regulatory process and embrace the free market that has worked so well for so long in other fields. . . . Third-party certification promises safe and effective devices – quickly and efficiently – and gives consumers the freedom to choose the amount of risk that best suits them. The market provides consumers with the full remedies and protections of our legal system, and it frees businesses from the crippling costs of undue regulation."

Milton Friedman (quoted in Pearson and Shaw 1993, 39): "The FDA has already done enormous harm to the health of the American public by greatly increasing the costs of pharmaceutical research, thereby reducing the supply of new and effective drugs, and by delaying the approval of such drugs as survive the tortuous FDA process." When asked, If you could do anything to improve health in America, what would you do?, Friedman replied: "No more licensing of doctors. No more regulation of drugs. Not of any kind. Period."

D. H. Gieringer (1985, 196): "[T]he benefits of FDA regulation relative to that in foreign countries could reasonably be put at some 5,000 casualties [not lives] per decade or 10,000 per decade for worst-case scenarios. In comparison, it has been argued above that the cost of FDA delay can be estimated at anywhere from 21,000 to 120,000 lives per decade . . . Given the uncertainties of the data, these results must be interpreted with caution, although it seems clear that the costs of regulation are substantial when compared to benefits" (italics added).

Henry G. Grabowski and John M. Vernon (1983, 71): "A more fundamental kind of regulatory reform could be accomplished through congressional change in the FDA’s regulatory mandate. It is possible to envision an FDA regulatory structure that would operate more as a certifier and disseminator of information for the vast majority of new products introduced. . . . Manufacturers would have the option to market a new drug even if it failed to be certified by the FDA."

Robert Higgs (1995b, 2): "Americans would be better off with drastic curtailment – ideally the complete abolition – of the current regulatory regime, which imposes major costs while providing little if any genuine protection of the public health."

Alison Keith (1995, 99): "A more widespread consumer understanding of the benefits and risks of routine aspirin use could produce substantial medical benefits. Suppose that most of the 1.5 million Americans expected to have heart attacks in 1994 – and the one-third of those who were expected to die – had taken aspirin routinely. Surely the number of people avoiding heart attacks and staying alive would have been large. On the other side, the medical risk associated with a less restrictive information policy toward consumers is an increase in serious side effects, but for a substantially smaller number of people, since both baseline and aspirin-caused increase in risk of serious side effects are apparently small. The current policy appears to put a much greater weight on the side-effect risk of allowing more information to consumers, relative to the expected benefits."

Sam Peltzman (1973, 207-208): "If the Food, Drug and Cosmetic Act [of 1938] was intended to benefit consumers, the inescapable conclusion to which this study points is that the intent is better served by reversion to the status quo ante 1962. This conclusion follows fairly directly from the size of the ‘problem’ with which the 1962 Amendments sought to cope. Consumer losses from purchases of ineffective drugs or hastily-marketed unsafe drugs appear to have been trivial compared to their gains from innovation. In this context, any perceptible deterrent to innovation was bound to impose net losses on consumers and the Amendments seem clearly to have provided such a deterrent. Indeed, the conclusion can be put more strongly. If our estimates of the gains and losses due to exceptionally beneficial and unsafe drugs respectively are at all reasonable, there was already a bias costly to consumers contained in the pre-1962 proof-of-safety requirement of the [1938] Act. . . . the [1962] Amendments have simply exaggerated this bias."

Paul Rubin (1995, 48): "When we think of the FDA and overregulation, we tend to think of the inexcusable delays in approval of new drugs. Scholars have long been aware that the agency causes unnecessary deaths and suffering by this policy. Nothing in this chapter is to be interpreted as minimizing this cause of needless suffering. But this is only part of the problem with the FDA. . . . FDA’s policies greatly retard the spread of [drug] information. . . . The FDA should allow manufacturers to advertise any claim for which reliable scientific evidence exists, whether or not this claim has been approved for the label, and this advertising should be allowed for both consumers and physicians. No policy requiring prior approval of advertisements whould be mandated, by Congress or by the FDA. With respect to ads to consumers, the requirement of the "brief summary" should be abolished. The FDA should allow free and unrestricted advertising of pharmaceuticals on TV and in print, subject only to regulation for ‘falsity’ but not for ‘deception’ as currently defined. The results will be greatly improved health of consumers and reduced prices of pharmaceuticals."

Meir Statman (1983, 62): "A number of alternatives have been suggested to counter the trend of decreasing incentives for pharmaceutical R&D caused by FDA regulations. The more modest of these alternatives involve increasing the efficiency of the regulatory process, thereby reducing some fo the regulatory costs. More radical alternatives involve the abandonment of the requirement for FDA approval of drugs in favor of a new role for the FDA as a provider of information on drugs. Since consumers can sue for damages the manufacturers of drugs that not safe or effective, there may be sufficient incentives for drug firms to introduce only safe and effective drugs even without FDA regulations."

Alexander Tabarrok (2000, xx): "I find that the largely unregulated system of off-label prescribing has large benefits and few costs. Off-label prescribing speeds medical innovations to patients, increases the number of drugs available to doctors, and lowers the costs of medical innovation. Because of these benefits, off-label prescribing is common in the United States today. The largely unregulated system of off-label prescribing is working well, and it should be extended. [A]n analysis of off-label prescribing strongly suggests that the FDA's authority over new drugs, particularly the requirement that new drugs be tested for efficacy, is detrimental to the public’s health and welfare and therefore should be abolished."

Peter Temin (1980, 206, 213): "Current drug policy ignores [the trade-off between a therapy’s effectiveness and its painfulness]. By denying this choice [a less effective but less painful therapy], the policy restricts people more than it should. I would favor allowing people to choose this intermediate treatment position, although I would try to make sure that their choice was an informed one. But whether or not people are capable of understanding the relevant information, I still would favor giving people more choice for their own well-being than the current system allows. . . . The [program] I have in mind combines less surveillance at the premarket level and more surveillance, of a particular kind, at the prescription level."

Murray Weidenbaum (1993, 89): "The first [lesson of this article] is that while some drugs are very profitable, many more are not. The second is that price controls would be a mistake. The third is that what’s needed is more competition. Warts and all, the competitive marketplace is the best protector of consumers."

Beales, J. Howard III. 1997. "The Health Consequences of Decisions About Drugs." Ms. George Washington University, Department of Strategic Management and Public Policy.

Calfee, John E. 1996. "The Leverage Principle in the FDA’s Regulation of Information," in Competitive Strategies in the Pharmaceutical Industry, ed. R. B. Helms, 306-21. Washington DC: American Enterprise Institute.

Campbell, Noel D. 1997. "Replace FDA Regulation of Medical Devices with Third-Party Certification." Policy Analysis No. 288. Cato Institute, November 12.

Grabowski, Henry G. and John M. Vernon. 1983. The Regulation of Pharmaceuticals: Balancing the Benefits and Risks. Washington D.C.: American Enterprise Institute.

Higgs, Robert. 1995. "How FDA is Causing a Technological Exodus: A Comparative Analysis of Medical Device Regulation – United States, Europe, Canada, and Japan," Competitive Enterprise Institute, March, Washington DC.

Keith, Alison. 1995. "Regulating Information About Aspirin and the Prevention of Heart Attack." American Economic Review 85, May: 96-99.

Pearson, Durk and Sandy Shaw. 1993. Freedom of Informed Choice: FDA Versus Nutrient Supplements. Neptune, New Jersey: Common Sense Press.

Peltzman, Sam. 1973. "The Benefits and Costs of New Drug Regulation," pp. 114-211 in Regulating New Drugs, ed. Richard L. Landau. Chicago: University of Chicago Press.

Rubin, Paul H. 1995. "FDA Advertising Restrictions: Ignorance Is Death." In Hazardous to Our Health? FDA Regulation of Health Care Products, edited by Robert Higgs: 29-53. Oakland: The Independent Institute.

Statman, Meir. 1983. Competition in the Pharmaceutical Industry: The Declining Profitability of Drug Innovation. Washington D.C.: American Enterprise Institute.

Tabarrok, Alexander. 2000. Assessing the FDA Via The Anomaly of Off-Label Drug Prescribing, The Independent Review 5, #1: pp. 25-53.

Temin, Peter. 1980. Taking Your Medicine: Drug Regulation in the United States. Cambridge: Harvard University Press.

Weidenbaum, Murray. 1993. "Are Drug Prices Too High?" The Public Interest, Summer: 84-89.

Endnotes