Cost benefit analysis and the FDA: measuring the costs and benefits of drug approval under the PDUFA I-II, 1998–2005

Abstract

This paper examines the Food and Drug Administration’s regulation of drug safety. In one of the most sophisticated cost-benefit analyses to date, (Cost-benefit analysis of the FDA: The case of the prescription drug user fee acts, The Journal of Public Economics, 92, 1306–1325.) argue that between 1998 and 2005 the FDA’s drug submission process under the Prescription Drug User Fee Act (PDUFA) increased social surplus by $14–31 billion. However, this conclusion is based upon inappropriate data that underestimate the welfare costs of drugs that were withdrawn from the market due to their harmful side effects. Once appropriate epidemiological data are used to calculate the welfare costs of a single drug, Vioxx, which was withdrawn from the market after it was found to cause heart attacks, PDUFA I-II are found to have caused a net reduction in social welfare of between $1-201 billion. This indicates that statistically infrequent regulatory mistakes may have large social welfare implications that can counteract the benefits of years of accurate regulatory decisions. Thanks to Sarah Bernhardt, Romit Bhattacharya, Stephen DeCanio, Marco Giani, Colin Jennings, John Meadowcroft, and Tariq Thachil for helpful comments and suggestions. Special thanks to the helpful comments offered by two anonymous referees.