Want Lower Drug Prices? Start by Fixing the FDA

Want Lower Drug Prices? Start by Fixing the FDA

© Srdjan Zivulovic / Reuters

In the early 1960s, pictures of babies with tragic birth defects, including shortened or missing limbs, caused an international scare. The malformations were quickly linked to the drug thalidomide, an over-the-counter sedative that had recently been developed in Germany and was being used by pregnant women to alleviate morning sickness.

One result of the thalidomide crisis was the passage of a new law, the Kefauver Harris Amendment, that gave the U.S. Food and Drug Administration most of the power it now exerts in regulating drugs.

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Today, we face a drug crisis of a much different sort. Recent drug pricing scandals are leading to calls for government action. But the prices causing so much outrage today are often then unintended result of that 1962 law and others that gave the FDA its current power. By limiting the number of drugs and other treatments available, the FDA reduces the options available to patients and gives pharmaceutical firms excessive pricing power.

Some have responded to soaring drug prices by calling for government price controls. That’s a risky option, as we can see in Venezuela, where residents are struggling to find daily necessities because of government price restrictions. In our country, gas lines, common during the 1970s owed their origins to price controls imposed by Richard Nixon. The problem with price controls is that the government entity imposing them lacks the information on supply and demand necessary to set them optimally. Thus, price ceilings will most likely be set either too high to have an impact or so low that they trigger a shortage.

A better alternative is to rely on competition to drive prices down. As many of us learned in our introductory economics classes, price equals the marginal cost of production in a perfectly competitive market. While this may not happen in the real world of imperfect competition, prices well above production costs represent an invitation to new firms to enter the market.

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But FDA regulations restrict market entry. Often, the FDA gives only one company the right to produce a generic drug, creating an artificial monopoly not justified by the usual intellectual property arguments. In some cases, under an FDA program launched ten years ago, drugmakers have been granted exclusive rights to market medications that have been commonly used for decades or longer — typically at increased prices.

A drug whose patent has expired has already financially rewarded its inventor. Once patent protection lapses, any company that manufacture the drug safely and inexpensively should be free to do so. Yet in a number of cases, pharmaceutical companies have been able to raise prices on older drugs that no longer enjoy patent protection because of a lack of competition. Before the recent outrage over Mylan’s EpiPen price hike, Turing Pharmaceuticals raised the price of Daraprim, used to treat parasitic infections, from $13.50 to $750 per pill and Valeant Pharmaceuticals jacked up the price of Isuprel, a heart medication, by 525 percent.

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The FDA has also imposed an expensive and onerous new drug approval process that is preventing patients from accessing many life-saving and life-enhancing tests and treatments. Among the examples that Richard Williams, Ariel Slonim and I report in a new Mercatus Center study are a treatment for diabetic foot ulcers, cultured stem-cell therapies for orthopedic conditions, genetic tests and anti-aging treatments.

This last category is particularly telling. Because the FDA has not considered aging to be a disease, it is not clear what criteria the agency might apply to anti-aging treatments or whether it would consider them at all. Much the same is the case with treatments that increase our physical capacity: They don’t treat a specific disease, so they lack a clear path to approval.

In other cases, FDA restrictions prevent terminally ill patients from taking new medications that are under review. Since these patients may not survive through the clinical trial period, they should have the opportunity to try new medications before it’s too late. The FDA provides exceptions to some terminal patients under its expanded use program, but qualifying for expanded use involves a lengthy bureaucratic process of its own. A more promising alternative is “right to try” laws enacted at the state level, which allow patients to take investigational new drugs without FDA approval.

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The justification for the FDA’s drug approval process is that it protects patients from dangerous or ineffective drugs. But the FDA cannot guarantee safety: Approved drugs used individually or in tandem can have unexpected, and sometimes fatal, side effects. Meanwhile, overly restrictive regulations can kill patients by preventing them from accessing new medications.

Even thalidomide, the widely vilified sedative, ultimately proved to be a useful treatment. In 1964, an Israeli doctor gave thalidomide tablets to a leprosy patient suffering extreme pain. The medication not only allowed the patient to sleep, but reversed his symptoms. Eventually, thalidomide became a common treatment for leprosy and was later found to be effective against AIDS and cancer. None of these indications would have been possible had thalidomide not been approved in Germany (and elsewhere) in what proponents of the Kefauver Harris Amendment regarded as an overly lax regulatory regime.

Congress is considering legislation that would expedite FDA approvals for new drugs. But even if this legislation is enacted, securing new drug approvals will continue to be an expensive and onerous process for pharmaceutical companies, with many choosing not to undertake the effort at all. The result will be continued monopoly pricing of off-patent drugs and delays in the availability of new medical innovations.

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Some more fundamental reforms would be more effective. One would be to allow multiple organizations to approve drugs, providing competition to the FDA. A private drug adjudication industry would have to be carefully structured and regulated to ensure that approving organizations do not have perverse incentives. Another option is to rely on the courts: Let pharmaceutical companies sell whichever medications they believe to be safe and effective — with the understanding that patients can win large judgments if the companies fail to produce and market their treatments responsibly.

The American people deserve access to the widest variety of affordable treatments. Rather than demanding that the government do more to achieve this goal, perhaps it is time that we ask one government agency — the FDA — to do less.