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Commentary

Drug Dilemma
John Calfee, AEI-Brookings Joint Center for Regulatory Studies, 10-10-06

Calfee reviews Overdose: How Excessive Government Regulation Stifles Pharmaceutical Innovation, a new book by Richard Epstein, who teaches at the University of Chicago Law School.

Epstein hits just about every issue in today's intense debate over the pharmaceutical industry: patent rights, prices and price controls, drug importation at bargain–level foreign prices, R&D incentives and the role of government, FDA regulation (including drug–safety oversight), drug marketing and its many critics and tort liability.

Many of his arguments arise directly from the huge wedge between manufacturing costs and the prices paid for drugs. The wedge is inevitable, and has to be defended, because drugs enter the market only after years of research, testing and rigorous FDA deliberations, often after numerous expensive failures. Unless manufacturers know they can charge prices far above manufacturing costs, they won't make the mammoth investments necessary to create the rare success amid all those failures.

Epstein is especially trenchant in his subtle analysis of drug marketing, arguably the most popular target of industry critics. In the tricky economics of pharmaceuticals, Epstein sees marketing as an enormously beneficial cure rather than a problem, at least as long as deception is held in check. Vigorous marketing is what ensures that drugs will actually reach the patients who need them, and it cuts the average cost of drugs by allowing R&D costs to be spread over a larger base of users.

Finally, the author arrives at tort liability—one of his specialties—as applied to pharmaceuticals. And Epstein's conclusion is simple: With all its problems, the FDA is vastly superior to the liability system as a way to regulate drugs and allocate risks.



Project FDA.
  
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