Quantifying 21st-Century Opportunity Costs of FDA Regulation

That is the title of a very interesting paper by Casey Mulligan (2023) [NBER WP version]. The full title includes the phrase “Peltzman revisited”. This refers to a paper by Peltzman (1973).When speaking of the 1962 “Drug Efficacy Amendment” (EA) to the Federal Food, Drug, and Cosmetic Act a key piece of research was Peltzman (1973) who:

…pioneered cost-benefit analysis of the EA by estimating the consumer benefit (if
any) of curtailing the sale of ineffective drugs and comparing it to the opportunity cost of
effective drugs that were not introduced into the U.S. market due to the additional approval costs created by the EA. Peltzman concluded that the EA imposed a net cost on consumers of
magnitude similar to a “5-10 percent excise tax on all prescriptions sold.”

The Mulligan (2023) [NBER WP version] paper investigates some of the implication of drug regulation. He notes that there are 3 main impacts of reduced barriers to entry for generic drugs:

Reduced barriers to entry will increase the supply of generic drugs and decrease pricesReduced barriers to entry reduce drug application costs for generic manufactuerers related to the ANDA processReduced barriers to entry for generics may decrease innovation as brand manufacturer revenue may fall more quickly from faster generic entry [In the extreme case, generic entry costs that
are high enough to prevent all generic entry, and thereby not paid in equilibrium, would be the
economic equivalent of an infinite patent life.]

The paper also examines the impact of FDA regulation during a pandemic with a focus on the COVID-19 pandemic.

The COVID-19 pandemic also shows how FDA approval barriers can, in some instances,
have the opposite of the effect intended since the 1962 EA, which is to reduce the number of
unsafe and ineffective treatments used by consumers. The demand for treatments during a
pandemic is high enough that many treatments are supplied outside FDA jurisdiction, especially
while treatments under FDA jurisdiction are delayed by its approval process

This is particularly important as the FDA must balance efficacy and safety. During a pandemic in particular, more stringent regulation may insure vaccines are safe, but may also lead to more deaths if effective vaccines take longer to get to market. In fact, the Council of Economic Advisors (CEA) concluded that:

“…improving the speed of vaccine production is more important for decreasing the number of
infections than improving vaccine efficacy” and emphasized the need for large-scale
manufacturing and the possible advantages of “public-private partnerships.”

COVID-19 vaccine approval delays were predicted to be extensive (12-18 months) but in fact approval took only 10 months (a relatively short time for FDA).

One interesting point made by the Mulligan paper is that delay in vaccine approvals may shift individuals to use less effective preventive measures, particularly ones not covered by FDA regulation. For instance, many cities closed schools to in-person learning. School closures are outside FDA’s regulatory purview. Closure of other forms of economic activity was also problematic:

During the pandemic, 20 percent of adults skipped and delayed medical appointments for serious health problems in order to avoid infection. Because these choices had other health consequences and already by April 2020 medical facilities proved to be more effective at slowing the spread than the wider community, this seems to be another instance in which vaccine delay encouraged unsafe and ineffective substitutes.

The authors also provide another example where well-intentioned regulation pushed individuals into using suboptimal treatment solutions:

In 2010, the FDA pursued a “reformulation” policy in which OxyContin, a leading prescription opioid, would be removed from the market and replaced with a new “abuse-deterrent formulation” that would not be crushed or dissolved as easily (a common recreational practice, contrary to the prescribed method). Several studies have concluded that this change pushed many consumers from opioid prescriptions to heroin and then illicit fentanyl, both of which are manufactured and sold illegally without FDA oversight. Any reduction in OxyContin overdose deaths was dwarfed by the increase in deaths from fentanyl overdose, which were enough to reduce nationwide life expectancy two years consecutively for the first time in at least 50 years.

Mulligan summarizes his findings as follows:

Decades ago, Peltzman concluded that the FDA was not stopping enough ineffective
drugs to justify the consumer costs of its barriers to valuable medical innovation. Recent drug
market events reinforce his conclusion. Drug prices are greater, and quantities less, because
FDA approval barriers limit competition. Generic-entry policy changes initiated in 2012 began
to alleviate some of those costs, but had little effect on entry and social surplus until after 2016
when FDA approvals accelerated and prioritized second and third generics…The pandemic vaccine approval process, although surprisingly accelerated during COVID-19, still has large and obvious opportunity costs on the order of a trillion dollars in the U.S. for just a half-year delay, and even more costs worldwide