Fixing the U.S. Food and Drug Administration: More money and power—or more competition?

Objectively measured, the FDA is overfunded and overstaffed. The FDA employs too many people and costs too much. This will only get worse if Congress simply throws yet more money at the agency.

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Of all President Obama's high-profile appointments, Dr. Margaret Hamburg's nomination as U.S. Food and Drug Administration (FDA) commissioner was probably the easiest. Coasting through the Senate Health, Education, Labor and Pensions (HELP) committee to an unqualified chorus of praise, the eminently qualified Hamburg takes over an agency that many people believe is underfunded, understaffed and ill-equipped to face the threats of a world in which food and drugs move across borders and out of laboratories with barely a glance of a regulatory eye passing over them.

At least, that's what the senators confirming Dr. Hamburg's appointment seemed to think, promising to vote more money and power to her office. With respect to prescription drugs, the HELP committee revisited the case of Vioxx, withdrawn under a cloud in 2004, seeking a commitment that such a regulatory failure would never happen again. Unfortunately, harping on the small number of drugs withdrawn due to safety concerns serves politicians' needs to grandstand, but does nothing to improve patients' access to new medicines, because it imposes a huge bias in favor of Type II errors to avoid a few Type 1 errors.

A Type I error occurs if the regulators approve a product that later proves to have such negative consequences that it is pulled from distribution. A Type II error occurs when the regulators deny approval for a medicine that would have net beneficial effects on patients' health. A Type I error brings the wrath of the media and a focused public upon the heads of the government agents. Type II errors, on the other hand, both harm patients in the short run and reduce competition in a given therapeutic area in the long run by squelching research and development. The public is unlikely to be aware of such errors. Only companies and researchers that have been harmed by the error will concentrate on the issue. In the absence of an energetic group of advocates for affected patients, public opinion is unlikely to be inflamed, because nothing has changed from what had existed before. The loss to patients is not nearly as obvious as it is for Type I errors.

Obviously, we cannot know what benefits the abandoned or never-invented drugs might have provided. As Robert B. Helms of the American Enterprise Institute has said, "Those who must rely on hypothetical benefits in the debate about new drugs are at a distinct disadvantage against those who can point to real and dramatic evidence of the harm that drugs occasionally do."

I have recently reviewed the economic literature on FDA regulation, conducted subsequent to the 1962 Kefauver-Harris amendments. It led to the conclusion that even a one-year delay in FDA approval costs about 200,000 patients their lives, because of reduced legal access to new medicines.

Nor are academic papers the only source of information about the harm done by the federal government's automatic ban on new medicines. A number of patient advocacy groups are active in seeking more freedom from the FDA. The Abigail Alliance for Better Access to Experimental Drugs, a charity founded in 2001, leads a number of similar groups in lobbying for legal and regulatory changes to the status quo, among other objectives. Frank Burroughs, the founder of the Abigail Alliance (and the father of Abigail, who died of cancer at age 21), describes the FDA as a "stagnant agency existing in a constant state of institutional worry."

More appropriations are highly unlikely to rectify this error. Objectively measured, the FDA is overfunded and overstaffed. Indeed, PhRMA contributed to this situation a decade and a half ago, when it lobbied for the Prescription Drug User Fee Act (PDUFA).  Since 1996, PDUFA has showered money on the FDA. To be sure, the increased funding has had some positive results, marginally increasing the glacial pace of drug approvals, another FDA difficulty.

The average U.S. review time rose from less than two years to more than three years between 1962 and 1989, while average testing time (before submitting a new application for review) rose from three years to between six and seven years. Studies that demonstrated the growing "drug lag" between the United States and Europe helped to motivate demands for improvement in the United States.

This research was among the influences that led Congress to pass the PDUFA in 1992 and renew it every five years. There is no doubt that PDUFA is associated with faster regulatory approval. According to one academic analysis, mean approval times for all drugs approved between 1984 and 2001 dropped from more than 30 months before PDUFA's passage to 16.8 months subsequently, and other studies reported similar effects. Another scholarly study concluded that time to approval declined between 6 and 7 percent because of PDUFA I (Sept. 1, 1992 to Sept. 30, 1997) and between 3 and 4 percent because of PDUFA II (Oct. 1, 1997 to Sept. 30, 2002). This improvement is also apparent in international comparisons.

Drug lag is no longer an issue for the United States. Since 1996, the U.S. has become the first market for more than half of the new prescription drugs approved by the FDA. By 2007, the time to approval for new, innovative prescription drugs was down to 12.3 months, on average, for 18 new medicines approved by the FDA. Nevertheless, the FDA is still missing its benchmarks, leading many to argue that the agency needs yet more resources, despite PDUFA. This conclusion is understandable but unwarranted. 

PDUFA made the FDA bigger, but not more productive. The number of personnel conducting drug reviews doubled, from 1,300 to 2,600, between 1992 and 2007. The relevant section of the FDA, the Center for Drug Evaluation and Research (CDER), had a budget of about $500 million for 2007, of which about $240 million was from user fees. Since 2004, user fees have accounted for more of the CDER's budget than appropriations. Similarly in 2004, the number of staff for new drug review supported by user fees (1,320) was higher than the number supported by appropriations (1,287) for the first time.

The FDA's user fees are also significantly higher than those of comparable regulators in other countries. In 2001, the FDA charged manufacturers approximately $250,000 for reviewing each new medicine, whereas the European regulatory agencies charged the equivalent of between $90,000 and $100,000. Unfortunately, this has not resulted in increased productivity.

To deal with each New Drug Application (NDA), the FDA employs far more people than other national regulators. In 2000, the FDA employed 1,610 full-time equivalent staff for new drug approval. The country with the next highest number was Canada, with 159 full-time equivalent staff. And yet, each national regulator approved almost the same number of drugs: 28 in the U.S. versus 26 in Canada. The United Kingdom, Sweden, and Australia had even fewer reviewers, but also approved similar numbers of new medicines. Certainly, the FDA's approval process was significantly faster at the time.  The median time to approval was 371 days, versus 431 in Sweden, the next fastest country. But a relative 14 percent superiority in timeliness should not require 35 times more personnel! (Sweden employed only 46 full-time equivalent staff.) If we define "productivity" as the number of full-time equivalent personnel per annual number of new drug applications, divided by the median number of days to review a new medicine, simple arithmetic tells us that Sweden's new-drug approval process is 50 times more productive than the FDA's. The three other countries are also significantly more productive, by this definition.

The FDA employs too many people and costs too much. This will only get worse if Congress simply throws yet more money at the agency. A better solution would be to disrupt the FDA's monopoly, the root cause of bloat. The European Union has a policy of (limited) regulatory competition, where a central regulator and national regulators compete for the user fees they charge manufacturers to approve new drugs. When one regulator has lifted its ban on a new medicine, all the other European countries must generally reciprocate by lifting their bans. Obviously, in such a quasi-competitive environment, user fees are less likely to lead to bloat and more likely to lead to regulatory improvement, as national regulators contend with each other for new drug applications.

One reform that would have immediate effect would be for Congress to force the FDA into this arena by freeing Americans to use a new medicine once a regulator in a comparable jurisdiction, such as the European Union, has approved it. Recent, successful efforts to harmonize the activities of national regulators should facilitate this competition by giving Americans more confidence that regulators in other developed countries, such as Canada or the European Union, have similar standards to the FDA.

The risk of losing user fees to other national regulators is the best way to spur improvements in the FDA's regulatory processes, leading to lower costs and faster access to new medicines.

John R. Graham is director of Health Care Studies at the Pacific Research Institute and the author of Leviathan's Drug Problem: Federal Monopoly of Pharmaceutical Regulation and Its Deadly Cost, from which this viewpoint is adapted.

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