Can economists justify pre-market exclusion for pharmaceuticals?

by on August 10, 2015 at 1:44 am in Data Source, Economics, Education, Science | Permalink

One recurring problem in economics, and the other social sciences all the more, is that researchers will accept a lot of conventional wisdom on a topic if it suits their preexisting biases, especially if it is not an area which they have researched themselves.  Yet this entire question is — surprise, surprise — largely unstudied.  Social scientists love to talk about themselves, but critical self-scrutiny backed by data is less popular.

Jason Briggeman just wrote a GMU dissertation to investigate these and similar questions, here is his abstract:

In the United States and most other wealthy nations, all drugs are banned unless individually permitted. This policy, called pre-market approval, is controversial among economists; the preponderance of the economics literature that offers a judgment on pre-market approval is critical of the policy, but surveys of U.S. economists show that many, perhaps a majority, support pre-market approval. Here I analyze the results of a recent survey that asked economists who support pre-market approval to justify, with reference to the economic concept of market failure, their support of the policy. I find that, while almost all the economists surveyed could point to a market failure or failures that may plausibly exist and affect the market for pharmaceuticals, none were able to make a well reasoned connection between those market failures and the particular remedy of pre-market approval. None of the economists surveyed cited in support of their position any literature specific to pre-market approval. I supplement the survey findings with a review of relevant reading material assigned in health economics courses at top universities, searching that material for discussions of what may justify pre-market approval. I find a strong argument that the prospect of overt disasters being caused by avoidable mistakes can justify some intervention in pharmaceuticals; however, I find little to justify the other interventions that are part of pre-market approval. I suggest that future inquiry into possibilities for liberalizing reform concentrate on understanding matters such as the informational effects of product bans, the distinction between safety and efficacy, the nature of demand for drugs about which little is known, and the political economy of drug substitutes.

The upshot is that economists hold a lot of views whose justifications they cannot articulate very well.  I think you would find the same when it comes to the Ex-Im Bank (are you sure it fits the model of strategic trade theory?), the mortgage agencies (what was that externalities argument for home ownership again?) or all sorts of random regulations.  The relatively interventionist economists will pull some justification out of a hat, and the relatively pro-market economists will be pretty skeptical.

For the pointer I thank Daniel Klein.

1 Benjamin Cole August 10, 2015 at 2:11 am

It is curious, but according to the US government, no one in the private sector has ever developed a good recreational drug, except for alcohol—and even that was banned for while.

I have heard economists talk about legalizing pot, but not the broader idea that the private sector should be able to develop a cornucopia of legal drugs that induce temporary euphoria, without harmful side effects….

Jeez, for that matter, why is it all but universally accepted in the U.S. that push-cart vendors be outlawed, and that multi-story residential housing construction is criminalized, should it be tried in upper-class single-family detached neighborhoods?

And our agriculture sector is frequently lionized for having the most productive farmers in the world—yet it is a sector heavily subsidized, regulated and protected, at both federal and state levels. I even came across a Los Angeles County ag agent whose job it was to make sure no undersized grapefruit was being sold at the LA wholesale market….

2 chuck martel August 10, 2015 at 6:04 am

At the same time, it’s OK for the government to feed drugs to military personnel so they’re more effective at killing people on the other side of the planet.

3 Starchild Hopelove August 10, 2015 at 2:11 pm

I’m not sure that “this tyrannical government keeps oppressing me by preventing me from destroying your property values” is the best selling point for libertarianism. Maybe stick to the gnarly trips my main man that’s a little more groovy. Righteous.

4 prior_approval August 10, 2015 at 2:56 am

‘Yet this entire question is — surprise, surprise — largely unstudied.’

Know thyself probably sounds better in Greek.

‘Social scientists love to talk about themselves, but critical self-scrutiny backed by data is less popular.’

Best satire site on the web, with a true talent for self-parody.

‘This policy, called pre-market approval, is controversial among economists; the preponderance of the economics literature that offers a judgment on pre-market approval is critical of the policy, but surveys of U.S. economists show that many, perhaps a majority, support pre-market approval.’

Seems like those economists with a bit of historical knowledge, perhaps a majority, just aren’t interested in somebody selling them something merely because it could be profitable for seomone else to do so –

‘But imagine yourself 100 years ago, before many of the first researchers studying radioactivity had died of cancer or other radiation-induced causes. Electricity had been discovered relatively recently, and it turned out to be perfectly safe in moderation, so why not radiation?

In fact, early discoveries made plenty of reasonable people think that radiation could be good for you. Natural hot springs have been used as health spas for thousands of years; even today, vacationers flock to their healing (well, maybe) waters. When scientists went around with radiation detectors, they discovered that the waters from quite a few well-known hot springs were radioactive. (Radon gas produced by the decay of thorium and uranium deep in the earth permeates the water at many natural hot springs.)

Since no one really knew what made them healthful, the springs’ radioactivity was as good a guess as any. Entrepreneurs started bottling the water and selling it as “Radon Water.” But rivals soon pointed out a problem: Radon’s half-life is just 3.82 days. By the time the bottle reached the customer, most of the radiation would be gone.

You might go so far as to say that Radon Water was a rip-off, which is exactly the pitch the Radium Ore Revigator company used to sell its “better,” “more scientific” product: a watercooler lined with a serious amount of carnotite, an ore of uranium and radium that undergoes radioactive decay, yielding radon gas. Storing any water in this cooler overnight would give you fresh, potent, invigorating radon water to drink by morning. Unfortunately for those who used them, Revigators actually worked.’

If only the economists who wrote the ‘preponderance of the economics literature that offers a judgment on pre-market approval’ could learn a bit of history, they would probably avoid making such mistakes as thinking that pre-approval is not based on long term experience gathered over decades, when it did not exist as a concept.

Empiricism seems to be such a hard framework for economists to grasp. Though to be fair, it may be true that applies for ‘the other social sciences all the more.’

5 Jan August 10, 2015 at 7:00 am

You should change your name to prior_exclusion. It sounds more EXTREME, just like unnecessary, heavy-handed government regulation!

6 Cliff August 10, 2015 at 10:30 am

Safety vs. efficacy?

7 msgkings August 10, 2015 at 11:42 am

p_a is really descending into madness now…not sure what his goal is bringing up some of the dumb things people did 90 years ago, but it seems someone so in love with Germany wouldn’t be so quick to tar others with stuff that happened decades ago.

8 Jazi zilber August 10, 2015 at 4:41 am

Loss aversion?

It looks like the prospect of damage looms larger here than the multiple benefits of faster innovation, cheaper drugs etc.

A clear case of loss aversion

9 Jon August 10, 2015 at 6:06 am

There is pre-market approval required to market it as a drug, but not as a “nutritional supplement”. The nutritional supplement industry is filled with products that repeated fail to prove effectiveness in rigorous studies.

There is clear market failure in that consumers aren’t chemist and can’t figure out which drugs work. Furthermore, for typically careful studies are required to determine which drugs work; these are less likely to happen if pre-market approval is not required.

10 FC August 10, 2015 at 6:30 am

Really? Where can I get “nutritional supplement” ciprofloxacin, LSD and dianabol?

11 Jan August 10, 2015 at 9:05 am

Active ingredients that are schedule I drugs or which have been reviewed as drugs (and banned) by the FDA are not classified as dietary supplements.

But the oversight of supplements is crap and finding actual API in them is not uncommon. It just won’t be labeled as such.

12 Jon August 10, 2015 at 6:06 am

This is also a reflection that good economists realize that economic models are just very crude approximations to reality.

13 Jan August 10, 2015 at 6:17 am

Frankly, it would be surprising if economists could talk in great detail about the safety (and effectiveness) issues with drugs that preceded FDA oversight. That was a long time ago! Very few people who have actually evaluated drug premarket approval have concluded it is a good idea to leave the health and safety of hundreds of millions of people up to “the market.”

14 rayward August 10, 2015 at 6:23 am

A world of unregulated pharmaceuticals. Imagine that. Donald Trump could be the pitchman. Imagine that. Of course, the problem with regulation of pharmaceuticals isn’t the FDA, it’s the PTO. Or more specifically, the pharmaceutical companies who abuse the post-issuance process. “The devil made me do it” is the typical excuse of the pharmaceutical companies. Having lost several family members to long bouts with cancer, there is a temptation to believe they would be alive today if only the FDA hadn’t kept some miracle drug from reaching them. Or absent regulation by the FDA the miracle drug that costs over $100,000 per month would be much cheaper. Desperate people want to believe in miracles, and are vulnerable to pitchmen. On the other hand, more than one family member has been over-medicated, prescribed this or that pharmaceutical for this or that real or imagined malady by this or that physician who may or may not have even examined the poor souls, the combination of which nearly killed them. “The only way to thrive, the right insists, is to be nice to the rich and cruel to the poor, while letting corporations do as they please.”

15 Doug August 10, 2015 at 5:43 pm

If only “this or that” pharmaceutical had been governed by the FDA! Surely the FDA would have prevented it!

16 er August 10, 2015 at 6:30 am

does pre-market exclusion benefit or hurt drug companies?

17 er August 10, 2015 at 7:18 am

What is the cost of being born?

18 David K August 10, 2015 at 10:07 am

It’s ironic that this comes out, literally, the day after we were all mourning the passing Frances Kelsey, the woman at the FDA responsible for saving the US from Thalidomide.

19 WT August 10, 2015 at 10:28 am

Yes. Thalidomide would have killed/deformed thousands if it wasn’t for strong pre-market approval. The libertarian view is that Thalidomide should have never attempted to come to market in the first place since consumers could research the drug themselves and/or take the drug producer to court if there’s adverse effects. This was clearly not the case (Thalidomide was eventually found to have caused extensive harm in countries without strong pre-market approval). It turns out consumers can’t run their own RCTs. And taking a drug producer to court isn’t a threat if that company has limited liability/is already bankrupt.

20 Govco August 10, 2015 at 10:56 am

I agree that we should all take moment to savor that one time when the FDA was helpful. We should double their budget.

21 msgkings August 10, 2015 at 11:38 am

This is brilliant, Govco. Obviously Thalidomide is the only harm ever prevented by the FDA.

22 Jan August 10, 2015 at 1:18 pm

Do you know what their budget is? Do you know what it is compared to Medicare, compared to DOD? Do you know what share of it comes from industry user fees?

23 ThomasH August 10, 2015 at 11:47 am

How much of this is just Beysian priors? How many “free market” economists can cite economic literature showing that a minimum wage increase of X will not transfer income to low income workers?

It seems that the more fundamental criticism of the FDA is that it does not apply cost benefit analysis to its decision about how “safe” and how “effective” drugs should be. And “effective” is even trickier as physicians may use out of pocket cost to the patient in deciding to prescribe.

24 qtv August 10, 2015 at 12:06 pm

It is possible to purchase non-FDA approved drugs. Just fly to a country with a weak regulatory system. People do this all the time for recreational drugs (eg Amsterdam, south east Asia), but there’s a reason pfizer isn’t setting up shop on a boat in international waters. It turns out the vast majority of people actually prefer to get their (non-recreational) pharmaceuticals AFTER they’ve been approved by the FDA rather than purchase snake oils in the libertarian utopia that is Somalia. Revealed preference for the win.

25 James August 10, 2015 at 9:59 pm

Great point. We don’t need pre-market exclusion to get the benefits that go along with the FDA approval process. The FDA could allow the sale of unapproved drugs within the US starting tomorrow, just as the sale of unapproved drugs overseas is already allowed today. People who prefer to rely on FDA approval could limit their purchases to just those drugs that have been approved. People who don’t care about FDA approval could ignore it. Absent the legal requirement for approval, competing drug evaluation firms might enter the market and begin catering to different risk tolerances rather than the FDA’s one size fits all approach. And if there were more than one player in the drug approval business, it would be possible to compare the drugs they approve to see if they are really adding value or not. The only people who wouldn’t like this are those who enjoy knowing that their government is frustrating the plans of other people.

26 Mark August 10, 2015 at 3:05 pm

“The relatively interventionist economists will pull some justification out of a hat, and the relatively pro-market economists will be pretty skeptical.”

Why is there no presumption that the pro-market economist would be similarly biased in their skepticism?

27 Mark August 10, 2015 at 3:17 pm

Especially because, for some, the efficient market hypothesis is sufficient to handwave about, well, anything.

28 JCW August 10, 2015 at 7:43 pm


29 JCW August 10, 2015 at 7:56 pm

I’m always amused when someone conducts research aimed at determining whether people they disagree with are wrong and unable to see their wrongness because they are blinded by their biases. The consistent result is that, wow, those guys actually are wrong! And blinded by their biases! Who knew?!? (Spoiler alert: I knew. When they disagreed with me.)

I think it would have been far more interesting, challenging/rigorous, and convincing for the subject to carry out the investigation within his own policy community (here, of course, I reveal my assumptions about which policy community a GMU student belongs to). Probably less fun at the oral defense and around the water cooler, though.*

*Although my experience as a historian is that most academics are humble enough to be amused and at least somewhat self-aware when it comes to this sort of internal critique.

30 Thomas August 13, 2015 at 5:24 pm

Tears, tears, but this is one example from the right in an ocean of examples from the left.

31 James August 10, 2015 at 9:45 pm

There are a lot of comments here (and in most conversations about this topic) arguing in favor of pre-market exclusion with arguments something like:

1. The FDA’s testing and approval process is, all things considered, good for society.
2. Pre-market exclusion is necessary in order to benefit from the FDA’s testing and approval process.
3. Therefore pre-market exclusion is a good policy because it allows society to gain the benefit of the FDA approval process.

Then both sides focus on the empirical evidence for or against 1. Since we don’t really see the counterfactual world without pre-market exclusion, looking for an answer empirically is pretty fruitless. We can compare the medicines available a century ago with those that the FDA approves today, but there is no way to distinguish differences attributable to the FDA and differences attributable to a century of additional medical knowledge.

Fortunately, the difficulty of evaluating claim 1 empirically is a moot point because claim 2 is entirely false. The FDA could continue the testing and approval process that it carries out today and, if a product met standards, allow the manufacturer to put a label of approval on the product. This ought to be be an improvement in almost everyone’s eyes. For those who do not think the FDA approval means much, they could buy whatever drugs they want and ignore the labels. For those who value the opinions of the FDA, they could still refrain from using product that do not receive the FDA’s approval. Since no funds would have to be spent enforcing a ban on sales of unapproved drugs, that would leave the FDA with more money to spend on testing. The only people who would be made worse off (in terms of their own goals) by this are the tiny number of people who derive some mental satisfaction when they know that the government is frustrating other people’s plans.

32 Ben Vernia August 12, 2015 at 12:03 am

I’ve always found that economists give the best advice about medical regulation. Not.

33 Alexander Shortt September 3, 2015 at 8:21 pm

In short, direct evidence of a firm’s profits, margins, or demand elasticities is not likely to provide an accurate or reliable alternative to the traditional approach of first defining the relevant market and then examining market shares and entry conditions when trying to determine whether the firm possesses monopoly power.

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