How Much Should New Drugs Be Regulated?

Authored By 
Rebecca McKibbin
Blog contributor 
Policy Fellow
June 4, 2015

In the past year, eighteen states have passed Right to Try laws and many more have legislation pending. Right to try laws allow the terminally ill to access experimental drugs, rather than having to wait until they are available on the market, which for many would be too late. The FDA regulates access to pharmaceuticals in the US at the federal level.  What is surprising about these laws is that this attempt by states to bypass the federal regulator has been met with very little public discussion. This is interesting because at the core of such a policy is the much deeper issue: how much should we regulate new drugs?

The current regulatory system requires that pharmaceutical companies demonstrate the safety and efficacy of new drugs before they can be sold on the market. To do this, they undertake many clinical trials, the results of which are reviewed by the FDA. If the FDA grants approval then the drug can be released to the market. The testing process takes a long time – it is estimated that it takes at least 7 years to bring a drug to market.  Without all this testing, many extra people could have had access to these drugs sooner, which might save their life.

There is often focus only on the delay in access caused by regulation of new drugs. However, there are two clear economic rationales for requiring testing of new drugs. This first that the information collected in clinical trials is a public good. Since it is not possible to exclude people from reaping the benefits of their doctor having information on how different drugs work and what the risks are, the market will under provide this information relative to what patients would like.

The second reason is that there is asymmetric information in the market, which means that one party has more information that the other. In this case, the drug company knows more about how well the drug works than the doctor does. It might be possible for the doctor to work this out by prescribing it to his patients and observing the outcomes. However, for many drugs this is difficult because of the placebo effect and because outcomes such as extra months lived are hard to determine without some baseline.

When the seller has more information about the product than the buyer, there is a chance that the market will collapse into what economist call a market for lemons. In a market for lemons low quality products push out the high quality products because without credible information on quality, buyers are not willing to compensate sellers for the additional quality they provide. If buyers won’t pay for additional quality, sellers will not provide it. While it may seem extreme to think that without regulation there would be no drugs that actually work, reigning in sellers of dubious elixirs and snake oils was the reason that regulation was first brought in.  

All this is not to say that the specific setup of the current regulation is how it should be. Rather, that there is a clear economic reasoning behind having regulation. What we have here then is a trade-off between collecting information and making drugs available more quickly. Alternatively, we could think of this as a trade-off between the currently sick and those who will be sick in the future (who would benefit from the information). We have to decide as a society how this trade-off is to be made and set the level of regulation accordingly.

When we create loopholes in the regulatory process, such as Right to Try Laws, we are weakening the impact of the regulation or rather changing how we make the trade-off. The more sales that can be generated without going through the approval process, the less incentive for drug companies to undertake clinical trials. Instead, for example, they might choose to draw out the experimentation period, which would particularly disadvantage the poor since experimental drugs are typically not covered by insurance. However, many other people will find a way to access the drug during the experimental period, which could make them much better off.

An important issue with policies like Right to Try Laws is that they are presented as a costless solution to the problem of delayed access when in fact they are not a solution but a change in stance on regulation. This is not necessarily a bad thing. However, we need to acknowledge that in drug regulation we are indeed trading-off the rights of different groups and how we should do this is an important social question that warrants deeper discussion.

Rebecca McKibbin is a Graduate Policy Fellow at ISPS and is pursuing her PhD in Economics at Yale.

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