Is the Food and Drug Administration Safe and Effective?

33 Pages Posted: 31 Oct 2007 Last revised: 20 Apr 2015

See all articles by Tomas Philipson

Tomas Philipson

University of Chicago; National Bureau of Economic Research (NBER)

Eric C. Sun

University of Chicago

Date Written: October 2007

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.

Suggested Citation

Philipson, Tomas J. and Sun, Eric C., Is the Food and Drug Administration Safe and Effective? (October 2007). NBER Working Paper No. w13561. Available at SSRN: https://ssrn.com/abstract=1024975

Tomas J. Philipson (Contact Author)

University of Chicago ( email )

Graduate School of Business
1101 East 58th Street
Chicago, 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Eric C. Sun

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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