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This paper argues for the removal of the FDA's proof-of-effectiveness requirements for pharmaceuticals based on public choice theory and Austrian economics. the history of the FDA's role in drug regulation, the debates surrounding the definition of drug effectiveness, and the consequences of the FDA's effectiveness requirements. It suggests that market mechanisms could be a more effective way to determine which drugs are effective.
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The opinions expressed in this Graduate Policy Essay are theofficial positions of the Mercatus Center or George Mason University. author’s and do not represent
No. 23 SUMMER 2015
by Anna Mills
Abstract The Kefauver-Harris Drug Amendments of 1962 gave the Food and Drug Administration (FDA)the power to require that new pharmaceuticals be proven effective before they are released. The proof-of-efficacy requirement for new drugs is a large and unnecessary barrier to innovation in the healthcare market. There is evidence that adding this requirement reduced innovation and increased costs to both producers and consumers. Using public choice theory and Austrian economics, this paper argues that the FDA is not the best mechanism for ensuring effectiveness,and it recommends that the FDA remove proof-of-efficacy requirements, allowing market mechanisms to determine which pharmaceuticals are effective.
Author Bio Anna Mills is an alumna of the Mercatus Center MA Fellowship at George Mason University.Anna graduated from the University of Florida with her BSBA in economics. Anna was previously a program coordinator at the Mercatus Center, worked as a research assistant for the Public Utility Research Center at UF, and interned at the National Breast Cancer Coalition. Anna is currently a Program Manager at Stand Together.
Committee Members Robert Graboyes, senior research fellow, Mercatus Center at George Mason University Matthew Mitchell, senior research fellow, Mercatus Center at George Mason University Richard Williams, senior research fellow, Mercatus Center at George Mason University Mercatus MA Fellows may select the Mercatus Graduate Policy Essay option in fulfillment of their requirement to conduct a significant research project. Mercatus Graduate Policy Essays offer a novel application of a well-defined economic theoretical framework to an underexplored topic in policy. Essays offer an in-depth literature review of the theoretical frame being employed, present original findings and/or analysis and conclude with policy recommendations.The views expressed here are not necessarily the views of the Mercatus Center or Mercatus Center Academic and Student Programs.
1. Introduction
The FDA currently regulates both the safety and effectiveness of new pharmaceutical products and medical devices. Before 1962, the FDA was purely a safety-regulating agency; it did not regulate for effectiveness until the passage of the Kefauver-Harris Drug Amendments.i Passage of the new effectiveness amendments came on the heels of the thalidomide tragedy. The drug thalidomide was sold in Europe in the 1950s as a tranquilizer, but it was prescribed by some doctors to pregnant women for help with morning sickness.ii^ In the late 1950s and early 1960s, it became known that women who had taken thalidomide during their pregnancies were giving birth to babies with severe deformities.iii^ Because thalidomide had not been tested on pregnant animals, its adverse effects on pregnant women were not known.
In the United States, thalidomide had yet to come to market; however, as a result of the tragic stories from Europe regarding thalidomide there was public outcry for raising the standards of the drug approval process.iv^ The Kefauver-Harris Drug Amendments of 1962 were the result of public demands. Senator Estes Kefauver began hearings on increasing the scope and power of the FDA in 1959 because he was concerned about high drug prices and believed that people were being misled by pharmaceutical manufacturers about their products.v^ Because of the public outcry in the early 1960s after the information on the effects of thalidomide was made public, Kefauver’s bill was amended to address these concerns, and the bill passed quickly.vi
The thalidomide tragedy was not one of ineffectiveness, but rather of safety. It is interesting that the reaction to this tragedy was to increase regulations on a different aspect of pharmaceuticals rather than focus on what went wrong in the case of thalidomide. The Kefauver- Harris Amendments did not even address the problem that is supposed to have prompted this expansion in regulatory power. Thalidomide was effective as a sedative. The tragedy should
consist of volunteers or patients who have given consent.xii^ There are some preliminary tests of the effectiveness of the drug, but this phase is mostly used to determine if the interaction between the drug and the human body is safe.
Phases II and III are when the FDA requires the clinical trial to begin testing the effectiveness of the new drug. Phase II is used to evaluate the effectiveness of the drug and to determine the common short-term side effects and risks associated with the drug.xiiiThis evaluation is usually conducted by comparing the patient’s reaction to the new drug with either a placebo or a different drug.xiv^ The sample size in Phase II can be anywhere from 12 to 300 individuals. Once Phase II has enough preliminary data to determine the drug’s effectiveness, the testing moves onto Phase III.
Phase III is simply a larger trial of the drug’s effectiveness. The sample size is increased to anywhere from a few hundred to a few thousand participants, allowing the FDA to see if the drug is effective on different populations and in modified doses.xv^ Phase III gives the FDA a larger set of data in order to conduct a benefit-risk analysis and decide if the drug is effective enough to be put on the market.xvi
The 1962 amendments state that pharmaceutical manufacturers must provide “substantial evidence” of the effectiveness of new drugs.xvii^ Substantial evidence is defined as
Evidence consisting of adequate and well-controlled investigations, including clinical investigations, by experts qualified by scientific training and experience to evaluate the effectiveness of the drug involved, on the basis of which it could fairly and responsibly be concluded by such experts that the drug will have the
effect it purports or is represented to have under the conditions of use prescribed, recommended, or suggested in the labeling or proposed labeling thereof.”xviii
Although there has been debate over how exactly to obtain this substantial evidence, the FDA has been operating under the direction that two adequate and well-controlled studies (Phase II and III) will fulfill this requirement.xix
The reason that the FDA has been using two studies as sufficient evidence is because of the need for independent substantiation of the results.xx^ A single clinical study that determines effectiveness is not considered adequate scientific support. Single studies can be subject to bias, variability in the human biological system, specific factors of where the investigation took place, and occasionally fraud.xxi^ Because of these potential problems, it is deemed necessary by the FDA for there to be at least two independent verifications of effectiveness.
The FDA has issued guidance about the quantity of evidence necessary in three different possible drug-creation situations. The first situation is when the effectiveness of a new drug can be extrapolated from existing studies. The second situation is when effectiveness can be determined by a single well-controlled study, by supplementing that study with evidence from other studies of the same disease or studies of similar diseases. The last situation is when just a single multicenter study can provide sufficient evidence of effectiveness. The FDA acknowledges that this set of three cannot cover all possible scenarios; however, the agency offers these situations as examples, and explains how to determine what amount of data is sufficient to determine effectiveness in each of them.xxii
Overall, what amount of evidence is considered sufficient is still somewhat unclear to pharmaceutical manufacturers. Although the FDA has tried to provide some guidance and
market. In a given year, if the market for drugs was large, a company would be likely to invest in the creation of a new drug. Then two years later, the new drug would appear on the market. In essence the lagged variable predicts the level of investment in new pharmaceuticals based on the previous size of the market. So as the market for new drugs shrank, there was even less investment in the creation of new drugs.
Figure 1
The estimates that the Peltzman model produces for the number of new drugs introduced before 1962 track very close to the actual data, as is shown in figure 1. Therefore, it is reasonable to assume that the model would have continued to fairly accurately predict the market in the absence of the new effectiveness amendments. But we can see that, after the new regulations in
1962, the number of new drugs dropped considerably below what we would estimate from the lagged size of the market.xxv
Peltzman also analyzes whether the new amendments were truly reducing the number of ineffective drugs that were on the market. Even though the amendments were costly in that they decreased the number of new drugs introduced, if they were accomplishing the goal of reducing the number of ineffective drugs released then perhaps the amendments were helpfully correcting a market failure. But Peltzman finds little evidence to support the claim that the amendments were truly causing a decline in the number of ineffective drugs released to the market.xxvi^ Based on Peltzman’s paper, the amendments seem to impose a heavy cost on innovation without producing any benefit.
In another study, Steven Wiggins uses a slightly longer span of data, but finds results similar to Peltzman’s. The model that Wiggins uses indicates that the regulations imposed by the 1962 amendments reduced the rate of introduction of new drugs by about 60 percent.xxvii^ The results of Wiggins’s study again show that there is a tradeoff between allowing the FDA to regulate effectiveness and the rate of drug introductions.xxviii
Another study, which surveys the literature concerning the 1962 amendments, finds that the decline in the introduction of new drugs was not concentrated in the reduction of ineffective drugs.xxix^ This suggests that increasing the scope of the FDA resulted in fewer total drugs reaching the market, but not necessarily more effective drugs reaching the market.
Increased Costs
A second effect that the 1962 effectiveness amendments had was that they dramatically increased the time and cost of bringing a drug to market. Before the implementation of the
Importantly, this process is not only costly to firms, but each delay of the release of a drug means that more lives are being lost while the drugs are held up in effectiveness testing. Although it is difficult to estimate how many lives are being lost as a result of these restrictions, it is obvious that there are lives at stake.
The FDA has an expanded-access, or “compassionate use” pathway for patients to have access to experimental drugs, but many feel this pathway is not enough.xxxvi^ States have been working on creating “Right to Try” legislation in order to circumvent the FDA approval process and allow terminally ill patients access to experimental drugs.xxxvii^ Seventeen states have passed Right to Try legislation and 22 states have legislation pending, but these laws do not automatically secure patients access to potentially life-saving care. Many pharmaceutical companies are still reluctant to allow these terminally ill patients to try their experimental treatments for fear of how it may affect their FDA approval process.xxxviii
Right to Try policies are an attempt by the states to increase access, but they have not been able to create a widespread increase in access. The addition of user fees, which are fees paid by pharmaceutical companies seeking drug approval, has helped to speed up the process some through increased FDA funding, but effectiveness testing is still an extremely long process.xxxix^ The next question that needs to be asked is whether there is evidence that drugs can be as effective on average without the FDA’s approval.
4. Economic Theory behind Removal of FDA Effectiveness Standards
Would the market be better able to determine effectiveness standards for drugs than the FDA is? This is a difficult question to answer in absolute terms. There is evidence from pre- data to show that the market was operating and determining effectiveness without the FDA. But
there is no way to know for sure what would happen today if the FDA removed itself from this process. However, economic theory can provide insight into the efficiency of FDA regulation of effectiveness and the efficiency of a possible market alternative.
Public-Choice Analysis of the FDA
It is important to note that the FDA is a large bureaucracy, and is subject to the same pitfalls as any bureaucracy. Public choice theory can help us understand the incentives facing a bureaucratic agency and the problems with bureaucratic management systems. In particular, bureaucracies are incentivized to maximize budgets, engage in expansion both in size and responsibility, and resist technological innovation.
Maximizing Budgets
Government agencies are naturally budget-maximizing entities.xl^ If an agency fails to use all of the funds allotted to it in the federal budget, then the following year its budget could potentially be smaller. An agency would not want to have fewer resources for the following fiscal year, and so it will seek to maximize its use of its budget each year. The FDA is no exception to this rule. In the recent budget proposal for FY 2016 the FDA estimates a need of $4.9 billion, a 9 percent increase from FY 2015.xli^ For medical product safety specifically, the FDA has asked for a 3 percent increase in its budget.xlii^ If the FDA is always seeking to maximize its budget, then where is the incentive to control costs?
An agency often has the upper hand over Congress in negotiating budgets. Because the agency is a monopoly, it can make “take-it-or-leave-it” proposals.xliii^ In particular, the public views the FDA as the only thing standing between them and unsafe pharmaceuticals. If Congress chose not to fulfill the budgetary requirements proposed by a high-profile agency such as the
Introducing new technologies into the pipeline of communication in a bureaucracy can reduce miscommunication and therefore waste. But the introduction of technology could also remove individuals from jobs in the bureaucracy. As number of employees supervised and job creation are important in the public sector, adding new information technology would be contrary to the incentives facing bureaucrats. Gordon Tullock believes that this implies that bureaucracies are as efficient as they can be, because they will reject technology that can increase efficiency at the expense of jobs.xlvii
Bureaucracy’s output is not a specific product or unit, but rather an activity. Because of this, it is very difficult to monitor whether or not a given bureaucracy is efficiently and effectively accomplishing its responsibilities. So those attempting to analyze bureaucracies create proxy measures to help track the agencies’ performance. In the case of the FDA, which is tasked with keeping the public safe from harmful pharmaceuticals and determining their effectiveness, the output measured is the number of drugs approved, the number of drugs recalled, and the time in the approval process. Although these proxies can give an idea about how efficient the agency is being, using them does not guarantee accurate monitoring.
Bureaucracies, Monopolies, and Information
Bureaucracies are monopolistic, which means that they are not subject to the competitive pressures that make profit-seeking entities efficient. Another outcome of the FDA being a monopoly is that it denies the public and Congress any alternative source of information, meaning that there is no way to gauge if the methods or information being released are as accurate as possible. This monitoring problem happens in all bureaucracies, but is especially problematic when the bureau is a monopoly such as the FDA.xlviii
Are there some tasks that are just too complex for a large bureaucracy to handle?xlix Tullock uses Hayek’s concept of the knowledge problem to shed light on how impossible it would be for an agency to possess all the knowledge required to make a regulatory decision. The problem being pointed out here is that the amount of external knowledge and internal coordination necessary to accomplish the task may be larger than is possible to achieve in an agency. The task given to the FDA is to determine the safety and effectiveness of every drug, medical device, and medical innovation being used. Is it possible that this is too large a task to be undertaken by just one agency? Would it be better if many different entities were able to determine effectiveness on a more individual basis?
Michael Polanyi’s theory of polycentricity can provide insight into whether or not the current FDA structure can accomplish its stated goal. Polycentricity is a social system where there are many decision centers all operating under an overarching set of rules.l^ Polanyi believed that science is so successful because individual researchers have the freedom to make individual contributions to their profession and structure their research in the way that they believe will yield the best results.li^ If an authority figure attempts to impose a structure that does not allow for this trial-and-error style, then the research will fail because it will no longer evolve with the best practices.
The FDA structure is exactly what Polanyi warned against. The FDA has the power to set regulations for the research and creation of new pharmaceuticals. There is a specified set of rules to create a clinical study, and this set of rules does not allow room for individual researchers and producers to add anything that may improve the process. Pharmaceutical research is incredibly centralized, in the sense that there is no room for individual decision-making on what should be
rationally ignorant because they had a regulatory body working on this issue for them. While this solution came at the cost of lost innovation and rising drug prices, individuals at that time were facing a level of asymmetric information that seemed insurmountable.
Asymmetric information is a problem that is faced all the time in market interactions, and the question becomes whether government should intervene to solve this problem or whether private mechanisms should be allowed to work to overcome asymmetric information.liv^ In the pharmaceutical industry, companies have much more information about the uses and side effects of the drugs they are creating than consumers can know and even understand. This fact alone is reason enough for many for the FDA to exist—to help eliminate some of this gap in knowledge.
Israel Kirzner observed that the lack of equilibrium created through asymmetric information allows for a profit opportunity.lv^ Knowledge about the pharmaceutical industry and experimental drugs is difficult for consumers to understand on their own, which presents an opportunity for entrepreneurs to fill the knowledge gap. A private, or nonprofit, organization that could help people determine the effectiveness of drugs would be highly valuable to consumers. However, Peter Boettke and Mark Steckbeck explain that regulators are often blind to “the dynamism of markets and the incentive mechanism driving entrepreneurs to discover ways to ameliorate problems associated with market exchange.”lvi
It is costly to gather all of the information necessary to decide on a drug. One individual consumer could seek to gather all of the information required to determine whether or not a drug will be effective for them, but this would be incredibly time-consuming and difficult. This is where Internet tools can help to solve medical asymmetric information problems. The Internet is able to communicate more information to consumers about products and services than could ever be conveyed before.lvii^ There are a variety of search engines and monitoring tools that could help
educate consumers about any and all pharmaceuticals. Health choices have high costs and benefits associated with them, meaning individuals have a much higher incentive, higher than in many other markets, to conduct research to be sure they are choosing the correct product. And search engines or other Internet knowledge bases that provide useful information to consumers will gain a positive reputation and thus reap the financial rewards in user fees or advertising dollars.
This approach has been used for many other industries with asymmetric information problems. Consumer Reports , Angie’s List, and Yelp, just to name a few, gather the relevant information on products and services. The information gathered by many of these third-party sites relies heavily on reputational feedback mechanisms. When a consumer has a bad experience with a product or service, that information is available instantaneously to consumers all across the world. Reputation mechanisms used to function only on word of mouth and the centralized media; now, any consumer can openly discuss his or her bad experiences.lviii^ Especially in health care, where a mistake can have enormous repercussions, the reputation-feedback mechanism would work swiftly to reward good pharmaceutical companies and punish bad ones.
Consumers, though, do not have to be left completely on their own in interpreting the information they learn on the Internet. Doctors and pharmacists would be able to help consumers digest and understand much of the information. Today more and more people are doing research on their ailments prior to going to see a doctor, so it is not a stretch to think people could research their drug options.lix^ If people review and research restaurants before they go to them, why would they not do the same for pharmaceuticals? The Internet opens up new and exciting ways to provide information, and the FDA does not need to be a part of this process.
