Daniel B. Klein

Drug-Approval Denationalization

Daniel B. Klein*
"We can't point concretely to the drugs kept from becoming concrete realities. But the suppression is no less real."
Over many decades, but notably in 1938 and 1962, Congress banned all new drugs and assigned the Food and Drug Administration the task of deciding whether to permit each new drug. Drugs are banned until individually permitted by the FDA—a system called pre-market approval.

New drugs cure illness and save lives, but drug development has become controlled and regimented. Of course people want to know that drugs are good before they take them. But due to pre-market approval, drug makers face extreme costs, delays, and uncertainties that suppress the development of new therapies.

The System Suppresses Health Remedies

A 2008 article in Wall Street Journal noted that "[s]everal big new drugs that entered the European market within the past two years have hit regulatory roadblocks in the U.S." and named three: the diabetes drug Galvus, the cervical cancer "vaccine" Cervarix, and the obesity drug Rimonobant.1 Famous studies of the introduction of beta-blockers showed that many tens of thousands of American deaths could be attributed to the delay between approval in Britain and in the United States.2

But even if the FDA had not taken longer than other governments to approve drugs, the problem remains: The FDA delays drugs, and these delays often cause needless deaths. The Competitive Enterprise Institute has noted that thousands of patients have died because the FDA has delayed the arrival of new drugs and devices, including Interleukin-2, Taxotere, Vasoseal, Ancrod, Glucophage, Navelbine, Lamictal, Ethyol, Photofrin, Rilutek, Citicoline, Panorex, Femara, Prostar, Omnicath, and Transform.

A 2007 Wall Street Journal article identified five promising cancer drugs rejected for approval by the FDA in 2007: Satraplatin, Provenge, Junovan, orBec, and Xcytrin.3 Each showed robust results in tumor shrinkage or other indicators of improvement, though none showed statistically significant prolonged survival beyond a few additional months. Nevertheless, many participants in the clinical trials for those drugs are in long-term remission, and, in any case, the drugs would be last-resort choices of the terminally ill.

Drugs that Would Have Existed

Pointing concretely to drugs that have been delayed points abstractly to a much larger problem. FDA regulations prevent many drugs from existing. In 1973, when economist Sam Peltzman testified before a U.S. Senate committee, he made the point that heavy FDA regulation discouraged development of new drugs. Senator Gaylord Nelson asked Professor Peltzman to name some drugs that didn't exist because of regulation. Peltzman answered, "'doesn't exist' means what it says, Senator." We can't point concretely to the drugs kept from becoming concrete realities. But the suppression is no less real.

Drug companies have to decide whether a chemical entity is worth pursuing. Charles Hooper, who advises drug companies about research and development, calls himself a "drug killer." He writes:

A lot of new medicines are tossed into the trash for reasons that have nothing to do with safety and efficacy. We have helped kill drugs for brain cancer, ovarian cancer, melanoma, hemophilia and other debilitating conditions. It breaks my heart. But we would never recommend that a company knowingly lose money unless some other crucial, nonfinancial objective was being achieved.4

Why did Hooper recommend killing drugs? Because the cost of developing them was too high, and much of this cost is due to FDA regulation. In an article in the prestigious Journal of Health Economics, researchers estimated that in 2000 dollars the cost of drug development works out to $802 million per approved drug.5 In 2007 dollars, that is $960 million per approved drug.6 Many drugs that would otherwise have come into existence do not. But if we could reduce the costs, delays, and uncertainties of drug development, drug makers would develop more drugs.

Regulatory Overkill

Most sensitive drugs require a prescription. You must go to the doctor and get a prescription to get prescription-only medications. If the system already requires a doctor's prescription, do we really think that doctors will prescribe bad drugs if approval is freed up?

Also, the risk of product liability and malpractice lawsuits discourages bad outcomes. Big Pharma deals with that threat, as well. So in addition to pre-market approval and prescription requirements, we have a third kind of control: court punishment.

Freeing up approval would give the individual patient and her healthcare providers greater control of the medical decisions they need to make. They are the ones with local knowledge of the particular circumstances of that patient.

A Consensus among Economists

For a podcast on the effects of consensus in economics, see Klein on Truth, Bias, and Disagreement with host Russ Roberts on EconTalk. March 16, 2009. For an additional perspective on the FDA, see "FDA Walls Do Not Encircle," by Charles L. Hooper. Library of Economics and Liberty, July 7, 2008.

In a recent article, I quoted 35 economists who favor liberalization of pre-market approval.7 Many of the 35 economists, including Sam Peltzman, Robert Higgs, Gary Becker, Kip Viscusi, Paul Rubin, Alex Tabarrok, and the late Milton Friedman, are quite prominent and favor dramatic liberalization. On the other side, we find just three economists who seem to oppose liberalization—Patricia Danzon, Paul Krugman, and Jerome Rothenberg. At 35 to three, we may say that economists preponderantly conclude that we suffer from regulatory overkill.

Drug-Approval Denationalization

Drug patents are usually for 20 years. After the patent expires, the drug goes generic, becomes cheap, and serves humanity worldwide. Wouldn't it have been nice if, for the last 40 years, the system had been freer, allowing many vital drugs now unknown to come into existence? How can we improve our prospects for the next 40 years?

One idea is to recognize the drug approvals of, say, 15 other governments. That is, we reform the U.S. system so that if the drug-approval agency of even one of those 15 countries approves a drug for that country, then the drug is automatically approved in the United States.

So, for example, if Health Canada, that country's counterpart to the FDA, approves a drug for Canada, then the drug would automatically gain approval in the United States. This 15 countries recognized would be, say, Britain, France, Sweden, Germany, Australia, New Zealand, Japan, South Korea, Switzerland, Spain, the Netherlands, Norway, Finland, Denmark, and Austria.

Under this system, drug makers such as Pfizer, Lilly, or Merck could then go to the national agency that is most likely to be efficient, friendly, and swift. If Health Canada is approval-friendly, then drug companies might tend to go there. Maybe the agencies will specialize by type of drugs.

The drug companies would, then, no longer be captive to a monopoly permitter. Now, in the United States, the FDA has a monopoly in giving permission. Under the proposal, the FDA would have to compete in giving permission.

For example, in 2007, the FDA rejected Merck's application for Arcoxia, a new inhibitor of an enzyme (COX-2) responsible for pain and inflammation. So, Americans do not have access to Arcoxia, while people in Germany and England do.

If American patients and their doctors decide that Arcoxia is the therapy that best meets the patients' need, and the doctor is ready to provide a prescription, which would surely be required, should the United States government stand in their way? Under our proposal for drug-approval denationalization, the permission in Germany or England would work as permission in the United States.8

Race to the Bottom?

Some will raise concerns about a "race to the bottom"—that drug approval will become too lax. But do we really think that the agency in Canada is going to be too lax in approving drugs for the Canadian market?

Remember the strong consensus of opinion among economists who write on the FDA: The system is already biased against liberalization. The reform would counteract the existing bias.

Economists find many mechanisms protecting us—in particular, medicine itself. People often think that assurance in health products must take the form of a single, monolithic agency, like the FDA. But that is not how medicine really works. Every manufacturer is acting as a certifier; every pharmacy is acting as a certifier; and every doctor, by prescribing, is acting as a certifier of the drug prescribed. Doctors draw on the knowledge and expertise of their field. They consult findings published in scholarly journals, attend scholarly conferences and workshops, and consult their colleagues. They keep their ear out for news of malpractice suits! If they don't keep up with the norms of best care, they might pay heavy damages.

Every serious ailment is the basis for special professional circles, patient communities, journals, and websites. Much of the knowledge becomes certified, if only in an informal sense, by listing in U.S. Pharmacopia, Physicians' Desk Reference, the formularies of HMOs and health insurers, and so on. Indeed, there is a vast world of off-label prescribing—proving that FDA efficacy certification is not necessary.

Never has medicine worked from a monolithic certifier. Never should it.

On top of a vast array of non-governmental assurances and certifications, and people's own demand for assurance, there are prescription requirements and product liability. These mechanisms lead economists to favor a much freer market in providing new drugs.

If the patient and her doctors don't believe that the drug will help, its maker won't be able to sell it. That's why firms pay researchers to do science. That's why doctors, insurers, pharmacies, etc. generate assurances of quality and safety. A recent news item illustrated the voluntary demand and supply of assurance: Wal-Mart recently introduced its own quality standards and reporting requirements on milk products from China.9

It is not plausible that drug-approval denationalization would result in too much freedom. There would still be prescription requirements and the natural demand for and supply of assurance. A moderate counterweight to existing biases can be achieved in drug-approval denationalization.

Competition in Giving Permission

If this reform were enacted in the United States, drug companies would tend to go to the national agency that offers speed and cooperation. If the agencies charged fees, as the FDA does, they would be especially likely to want the business. They would compete in being efficient, reasonable, and generous with approval. The reform would change the way the agencies function.

Medically speaking, people are pretty much alike the world over. Canadians are basically like Americans. Ditto all around the world. If making a drug available is useful in another country, it will be useful in America, too. It doesn't make sense to exclude drugs that have become available in Canada, Britain, and other countries.

Would Big Pharma Win?

You might suspect that I'm a shill for Big Pharma. Actually, I'm not. I've never had any links with Big Pharma—except as a willing beneficiary of their products. The reform would be a big win for humanity. If Big Pharma also wins, then good for them. Big Pharma should not be viewed as a bad guy in this.

But it is not clear that Big Pharma would win from this. If competition in drug approval got agencies to cater better to small, diverse drug makers around the world, then Big Pharma might lose its position as a sort of broker for dealing with the FDA—an interpretation discussed long ago by Sam Peltzman.10 There would be more competition in pharmaceutical supply. There would be more drugs available and lower prices.

Patent Life

For a video on drug approval denationalization, see The Davos Question, by Professor Daniel Klein. October 11, 2008.

A lot of people think that patent lives should be shorter, and I lean that way, too. As long as drug development is so costly, protracted, and uncertain, however, it is hard to see a shortening of patent life. But if we freed up drug approval, the drug companies would have an easier time developing new drugs, and we could push more effectively for shortening patent life.


Drug-approval denationalization is a way to make the agencies more responsive to the needs of humanity. If the government of the United States makes this one simple change, 40 years from now our children—and children of those throughout the world—will be much healthier than they otherwise would have been.


Associated Press. 2008. "Wal-Mart Sets New Rules for China Suppliers." Oct. 22.

DiMasi, Joseph A., Ronald W. Hansen, and Henry G. Grabowski. 2003. The Price of Innovation: New Estimates of Drug Development Costs. Journal of Health Economics May; 22(2):151-85.

David R. Henderson and Charles L. Hooper, "Our Lawless FDA,"Wall Street Journal, May 17, 2007.

Charles L. Hooper. 2008. "Pharmaceuticals: Economics and Regulation."The Concise Encyclopedia of Economics, edited by David R. Henderson. Indianapolis: Liberty Fund, Inc.: 81-83.

Daniel B. Klein. 2008a. "Colleagues, Where Is the Market Failure? Economists on the FDA."Econ Journal Watch 5(3): 316-348.

Daniel B. Klein. 2008b. "Consumer Protection."The Concise Encyclopedia of Economics, edited by David R. Henderson. Indianapolis: Liberty Fund, Inc.: 81-83.

Daniel B. Klein and Alex Tabarrok. Is the FDA Safe and Effective? A sophisticated 35,000 word website on the U.S. Food and Drug Administration; a project of the Independent Institute. Online at www.FDAReview.org.

Miller, Henry. 2000. To America's Health: A Proposal to Reform the Food and Drug Administration. Stanford, Calif.: Hoover Institution Press.

Miller, Richard. 2008. Cancer Regression. Wall Street Journal, Aug. 1: A15.

Peltzman, Sam. 1974. Regulation of Pharmaceutical Innovation: The 1962 Amendments. Washington, D.C.: American Enterprise Institute for Public Policy Research.

Wardell, W. M. 1973. Introduction of New Therapeutic Drugs in the United States and Great Britain: An International Comparison. Clinical Pharmacology and Therapeutics 14, no. 5: 773-90.

Whalen, Jeanne. 2008. Overseas Drugs Hit U.S. Regulatory Snags. Wall Street Journal, March 26: B4.


Whalen (2008).


Wardell (1973).


Miller (2007).


Charles Hooper, "Obama and the 'Drug Killer'". Forbes, Oct. 30, 2008.


DiMasi et al (2003).


This adjustment to 2007 dollars was provided to me by Peg Hewitt of the Tufts Center for the Study of Development.


Klein (2008a).


On the FDA's rejection of Arcoxia and a case for letting bottom-up medical decisions sort out what is right for individual patients, see Henderson and Hooper 2007.


Associated Press (2008).


Peltzman (1974).

*Daniel Klein is professor of economics at George Mason University and chief editor of Econ Journal Watch.

Acknowledgment: The author thanks Greg Conko of the Competitive Enterprise Institute for valuable comments.

For more articles by Daniel Klein, see the Archive.
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