11/16/2016 change of mind notice
I am no longer confident that the FDA harms more lives than it saves, and thus I no longer endorse setting fire to it, pending further investigation. What changed my mind was not the commenters disparaging me as a “101 economist” in the comments. What changed my mind was my mom, a long-time professional in the pharmaceutics industry, explaining in detail the rules the FDA plays by and the exact procedures and standards they follow.
I still think that the GDA is a cool idea that should be explored, and there’s a good chance that it will do better than the FDA (measured by number of lives saved) when properly set up.
0 – Escaping the mind kill
My political-economic philosophy is best described as Bowmanite-Neoliberalism, but the word “neoliberal” is too loaded. Most people will call me a consequentialist-libertarian instead. Also, it’s no secret that Slate Star Codex is my favorite blog. So of course, when SSC published a sharp consequentialist-libertarian rant about the EpiPen price controversy, I had a lot of fun reading it.
Too much fun, in fact. The kind of fun you have when you’re landing a cracking punch on the enemy, not when you’re mindfully thinking about complex policy.
So much fun that I neglected to actually read the original Vox piece that Scott railed against. It turns out that the original piece (and the follow-up) was penned by Sarah Kliff. She’s no idiot and no socialist, a couple weeks ago I gave high praise to her article on the gender wage gap. So what’s going on?
In particular:
- Who’s right, Scott or Sarah?
- What’s wrong with the FDA?
1 – Buyer, seller or regulator?
Scott is talking about the US Government making EpiPens expensive by blocking the entry of competitors, thus ensuring that “the pharmaceutical industry is part of a highly-regulated cronyist system that works completely differently from chairs and mugs”. Sarah blames the US Government for not making Mylan charge a lower price for EpiPens. But “the US Government” isn’t really a single actor in this case. It’s a terrifying hydra with many heads, and each head has its own deal with EpiPens.
In a normal world, there are two types of actors in each market. There are sellers, who set the prices. There are buyers, who decide whether to take the price or not. When left to themselves, buyers and sellers have a remarkable tendency to converge on a price that makes everyone happy. That tendency is the main reason why we get to have good stuff.
Occasionally, there’s a third type of actor: regulators. They sometimes do useful things, like protecting third parties harmed by buyers and sellers. They sometimes do appalling things, like arbitrarily constraining prices and causing terrible tragedies.
It’s important not to confuse sellers (who make the prices), buyers (who take the prices) and regulators (who fuck with the prices).
Back to Sarah and Scott. Scott says that in the case of EpiPens, regulation is causing massive harm. Here’s the quote from Sarah that makes it seems like she’s saying regulation is good and we need more of it:
The story of Mylan’s giant EpiPen price increase is, more fundamentally, a story about America’s unique drug pricing policies. We are the only developed nation that lets drugmakers set their own prices, maximizing profits the same way sellers of chairs, mugs, shoes, or any other manufactured goods would.
This paragraph is so maddening (oh no, God save us from profits!) that I wonder if Scott just threw something heavy at his monitor before he had the chance to read past it. The most unfortunate thing about this paragraph is that it has nothing to do with the rest of Sarah’s article, which doesn’t actually talk about drug pricing but about drug buying, and the harms caused by the regulation thereof.
America doesn’t have a problem with drug pricing policies because America doesn’t price EpiPens, Mylan does. America runs Medicare, which is a buyer of EpiPens. And if it were a buyer free like all buyers to take prices or leave them, it would tell Mylan that at any price above $100 it would switch to Adrenaclicks and that’s that. The next day EpiPens would cost $99.99.
In countries like the UK, there is just one allowed buyer of medicine (aka “single payer”) so the sole buyer is de facto the regulator. But the US Government has been clever enough to create a regulator (FDA), a separate buyer (Medicare) and, astoundingly, a separate federal regulation of Medicare itself. From Sarah again:
In the United States, there’s no such negotiation process to speak of. Federal law bars Medicare, the country’s largest insurance plan, from even trying to negotiate bulk discounts with drugmakers. Once a pharmaceutical company sets its price, the government-run plan that insures 49 million seniors is required to accept it.
Negotiating discounts isn’t “regulation”, and it’s not “pricing policy”. It’s what consumers do. The problem is with the ludicrous law that prevents Medicare from being a free buyer and drags all other smaller consumers along with it. If Mylan can charge $500 to Medicare and they have to charge everyone the same price, they’ll charge $500 even if they lose some other customers to cheaper alternatives.
I’m honestly dumbfounded how that law could even exist. It’s opposed by 83% of Americans, including both Trump and Hillary. Even that 83% surprisingly low: I didn’t know that a whole 17% of Americans were employed by pharmaceutical lobbying companies, and I can’t think of any other reason to think it’s a good idea.
The Medicare non-negotiation policy is like if I walked into the only bar in town and announced that I will buy all their whiskey at whatever price they charge. The bartender quickly raises the price of Jack from $20 per glass to $20,000, and the other customers in the bar are forced to leave in disgust, cursing my name. I spend half a million dollars getting drunk on overpriced whiskey and fall under the table, shitfaced and broke. Just before I pass out, I call the cops to complain angrily about the evil, price gauging, bartender.
2 – The Good Drug Administration
Q: You didn’t really talk about the FDA in the previous section, is Scott wrong to blame them?
A: No. If anything, Scott is underselling the harm done by the FDA.
Q: But the FDA saves people from bad drugs!
A: It does, on occasion. Compared to other developed countries, the FDA saves about 1,000 people per year by preventing them from getting bad drugs. In the two centuries of US history before the FDA got expanded powers in 1962, the worst drug-related disaster killed a mere 107 people. Every death is a tragedy, but 107 people is a small enough number to be on the same scale as casualties due to under-regulation of chairs.
In contrast to the 1,000 saved, the FDA kills 10,000 people each year by delaying their access to good drugs. These numbers are from a large scale collaborative academic report, and the 1:10 estimate is from 1985. It has gotten much worse since 1985. Today it takes a new generic drug four years just to get to the review stage due to back-log.
Q: That’s horrible! So everyone in the FDA is an evil murderous villain?
A: NO! I’m pretty sure that not a single one of the FDA’s 14,824 employees is there trying to kill people. The reason why the FDA is a tragedy is simply: bad incentives plus the power to coerce. In fact, I think that “bad incentives plus the power to coerce” explain the majority of historical tragedies, from the slave trade to Stalin. The FDA is punished when they approve a bad drug, but not when they delay a life saving one, so their incentives are screwed. And since they have the coercive power to prohibit the sale of any drug in the country, their bad incentives kill people.
Q: I get it, we need to reform the FDA! We’ll align their policies with Europe, give them enough budget to clear the back-blog…
A: The problem with the FDA isn’t the back-log or the policies, these are mere symptoms. The only problem with the FDA is that it has the power to coerce the market and block people from buying and selling drugs. All the other problems stem from that.
Q: So what should we do with the FDA?
A: Burn it to the ground.
Q: But you just said that the FDA’s employees aren’t bad people!
A: That’s right, they’re excellent people. I’ll make sure they stand at a safe distance while the FDA burns and I’ll give them marshmallow to roast on the embers. Then, I’ll hire them to work for my new start up: the Good Drug Administration, or GDA.
Q: So you’re saying that if the FDA didn’t exist, we would need to invent it? How Voltairean!
A: The GDA will not have the power to coerce, that’s the difference. And be thankful that I didn’t name it Good Overseer of Drugs.
Here’s how the GDA will work:
I’ll go to all the pharma companies and tell them that I charge 2% of the price of each drug to put the GDA stamp of approval on the package. I employ the experts who know how to test drugs, so consumers will prefer to buy drugs with the GDA seal of approval. Pharma companies want to sell more drugs, so they’ll happily pay the 2% if they know their drug is safe and effective enough to pass my test. If even half of them agree, the 2% charge will earn the FDA’s old budget of $4 billion in revenue.
Some manufacturers will sell drugs without the GDA stamp, but consumers will be wary of those and the manufacturers will have to lower their prices. The only people buying non-GDA drugs will be the poor (those who can’t afford alternatives) and the desperate (those who don’t have alternatives). But these people weren’t buying FDA drugs anyway since there weren’t FDA drugs that could help them at a price they could afford!
Everybody who was buying FDA approved drugs before will now be buying GDA approved drugs. Pharma innovation will skyrocket, since manufacturers know that even if their new drug doesn’t get GDA approval right away (or at all) they can still make some money of it. And since the GDA only makes money when the drugs are sold, it has every incentive to test the drugs quickly. Can you imagine a private company with a four year back-log on innovation review?
The GDA’s main asset is its reputation among consumers. Its reputation will suffer both if it approves a bad drug, and if people buy non-GDA drugs that turn out to be safe and helpful. Without the power of coercion, the GDA would have to find the perfect balance between scrutiny and approval just to maximize its profits, its only incentive is to do what the FDA is supposed to do today, but better. If it doesn’t, someone will create the Better Drug Administration and will eat my lunch.
That’s literally what we do for every great product we have, from chairs to mugs to t-shirts. Usually it’s retailers who are the approving intermediary. Bloomingdales checks the clothes they sell for quality, because the reputation hit to Bloomingdales from selling a single bad shirt is much bigger than their profit from a shirt. Clothing chains that have lower standards of quality control sell to people who want cheaper stuff that isn’t tested as rigorously.
Somebody can create the Strict Drug Administration that will adhere to the FDA’s old standard and only sell and high-end retailers, and the Loose DA that will do minimal testing on cheap drugs. Customers will decide.
Here’s a similar proposal to my GDA idea, with some more detail.
Q: But if the GDA makes money on every drug sold, they have the incentive to sell Americans too many drugs!
A: Well, it is called the good drug administration, administering drugs is what it’s about.
Jokes aside, the job of the GDA (or FDA) isn’t to control the quantity of medicine Americans use, it’s to control the quality. Asking someone to do both is as silly as asking your central bank to manage both inflation and employment at the same time.
Look, Apple puts its stamp on approval on every app in its App Store. They control the quality. Of course, they also want you to buy a lot of iPhone apps, but you’re not forced to buy them. You know that Apple’s incentives are selling apps, so even when they advertise to you, you don’t spend all your money on iPhone apps. The GDA’s job is providing Americans with a way to acquire great, safe medicine at a mere 2% price increase. The job of preventing Americans from using all this medicine to live long and healthy lives falls to the homeopaths.
Q: Who is against your system?
A: All people who suck at their jobs.
The good FDA employees will be happy to get a pay raise to work for the GDA, and the GDA will have to pay them because it competes with all the other DAs. The employees who suck at their job (of testing drugs) will not be. The good pharmaceutical companies who know they can invent profitable drugs will be happy with the GDA, but the ones who suck at their job (of making new drugs) will lose the existing profits from their FDA-protected market capture. Seriously, the only ones benefitting under the current system are the incompetent.
Q: So why are we stuck with the FDA instead of switching to the much better GDA?
A: Because unfortunately, the set of people who suck at their jobs includes 99% of American politicians.
