PUBLIC HEALTH AND THE PLACEBO :T HE LEGACY OF THE 1906 PURE FOOD AND DRUGS ACT

The current literature regarding Food and Drug Administration (FDA) regulation of drugs generally focuses on measuring the costs and benefits of the rather long drug approval process that was created by the Kefauver-Harris Amendments of 1962. (1) Peltzman (1973), for example, concludes that the high compliance cost of the amendments reduces R&D productivity and thus reduces new drug innovation. He also finds that the opportunity cost of forgone new drugs that are not approved (or the lost value of the benefits in the years they are undergoing approval) exceeds the benefit of the ineffective drugs that are avoided as a result of the law by a wide margin. (2) Over the past 30 years, the average approval time of new drugs by the FDA has risen by more than 10 years. (3) Gieringer (1985) estimates that a one-year delay in new drug benefits costs between 37,000 and 76,000 lives per decade in the U.S. population. Relative to the number of lives saved by the avoidance of unsafe drugs, he finds that the cost of the policy outweighs the benefit by a margin of at least 4 to 1. Gieringer concludes that the FDA's approval system itself is neither safe nor effective. As Klein (2000) discusses, the body of economic research on the FDA points unanimously toward relaxing FDA restrictions on the introduction of new drugs. Perhaps most economists' opinion on this issue is summarized in Milton Friedman's statement that the "FDA has clone enormous harm to the health of the American public." (4) Perhaps more directly related to the issues raised here are previous papers that explore whether there is a market failure to begin with, and whether there are possible free market alternatives to the current bureaucratic FDA regulatory system for pharmaceuticals. To make a legitimate economic case for government intervention in the market requires demonstrating some type of market failure in the industry. (5) One commonly cited potential failure is that drug makers might not internalize or account for the full cost to society from the introduction of a dangerous drug. This issue has been addressed by Jarrell and Peltzman (1985), who find that drug manufacturers suffer major reductions in market value in the event of a drug recall, giving them a strong incentive to internalize the costs of manufacturing dangerous or ineffective drugs. A second potential failure in the market might be an asymmetric information problem if consumers do not have the appropriate information to evaluate the potential benefits, effectiveness, or risk associated with a drug. Within this context it may be important to require that product labels be truthful (which was the main thrust of the original 1906 legislation), but it does not necessarily imply that the government should intervene in the market to the current extent of deciding which levels of effectiveness, and what tradeoffs with risk, well-informed consumers should be permitted to have available (as it does today). This issue is directly addressed in Gieringer (1985:198), who proposes a type of consumer drug warning system and concludes that "the risk of new drug accidents could be controlled as well by informational warnings as by strict premarket approval standards." The widespread use of off-label drug prescribing by medical doctors discussed by Tabarrok (2000) is evidence that doctors have and employ information about drug effectiveness for treatments not yet approved by the FDA. The extent of any information problem will depend on how frequently consumers purchase the product and on how well product reputation (through brand names, for example) can be passed among consumers and relied upon as signals of product quality. The markets for repeat purchase items such as cold or cough medications, which consumers purchase repeatedly, are much less prone to informational failures than markets for one-time, or infrequent, purchase items. …