Working Paper: NBER ID: w13561
Authors: 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.
Keywords: FDA; drug safety; product liability; regulation; consumer welfare
JEL Codes: I01; I11; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| joint regulation of drug safety by the FDA and product liability (K13) | inefficiency (D61) |
| FDA mandates binding level of safety investment (G28) | product liability does not affect safety investment (K13) |
| product liability does not incentivize firms to invest in safety (D18) | increases costs (J32) |
| increases costs (J32) | raises drug prices (H51) |
| raises drug prices (H51) | negative impact on consumer welfare (F61) |
| product liability exemption for FDA-regulated activities (K13) | increase consumer welfare (D69) |
| product liability exemption for FDA-regulated activities (K13) | increase producer welfare (D69) |
| faster review times mandated by PDUFA (C41) | increased social surplus (D69) |
| increased social surplus (D69) | reduced drug safety (D18) |