Tort Liability and the Market for Prescription Drugs

Abstract

Nearly all the empirical literature on tort liability in the healthcare sector focuses on physicians. This paper is among the first to focus on products liability litigation against drug companies. We model and estimate the welfare effects of failure-to-warn suits, the most common type of tort litigation involving drug companies. We find that tort liability – proxied by punitive damage caps – increases drug prices but that it also reduces side effects. Each life saved costs roughly $6.5 million in higher drug expenditures. Moreover, we find that tort liability increases the equilibrium quantity of drug sales. This means that liability must not only increase cost and reduce supply, but also increases safety and thus demand. Together the increase in quantity and reduction in side effects implies that tort liability improves social welfare.