Drug Safety: FDA Approval vs. Product Liability

Before a drug can come to market, it must receive FDA approval.  This involves 3 phases of testing with Phase I having 20-80 volunteers and Phase III often testing more than 1,000 people.  Despite the FDA approval, patients can sue drug companies if they are injured by a drug.  Patients can generally sue manufacturers under one of three theories of legal liability:

• defective design (design of a drug or device was inherently unsafe)
• defective manufacturing
• defective warnings, the firm failed to provide sufficient warning of the possibility of an adverse event if it knew or shown have known about the risks.

Is it efficient to maintain a system of product liability in addition to government licensing or does this legal framework simply drive up the costs of pharmaceuticals?

A paper by Philipson, Sun, and Goldman (2009) argues that when FDA approval is binding, the removing the drugs product liability increases efficiency.  This is because the product liability “has no additional effect on the level of safety firms choose to provide, but raises prices and thus restricts access.”   I believe, this is the system adopted by the UK where drugs that are approved by NICE are not liable for lawsuits.  If the drug turns out to perform poorly in practice, NICE will pull it off the market (readers, can you confirms this is correct?).

The authors use American policy on vaccine liability to elucidate their point. “The National Vaccine Injury Compensation Program (NVICP) provides a useful case study. This program shielded vaccine makers from liability in exchange for a special compensation program funded by an excise tax on vaccines. This program therefore essentially mimicked pre-emption by lowering the cost of liability dramatically.”

However, the problem with the paper is knowing whether the FDA safety procedures are binding in practice.  For some drugs, the FDA approval provides firms with more than enough incentive to produce evidence of the safety of their projects.  On the other hand, for other cases FDA approval may not provide sufficient incentives to make the drugs safe.

In the larger view, if the FDA approval does a good job of monitoring safety, then product liability could be abandoned to increase safety.  However, if the FDA approval does not induce firms to make their drugs safe, the product liability acts as a costly but effective backup to insure the firms manufacture products that are safe for consumers.

• Tomas J. Philipson, Eric C. Sun, Dana Goldman (2009) “The Effects of Product Liability Exemption in the Presence of the FDA” NBER working paper 15603.