A Lose-Lose Proposition

Tuesday, March 17, 2020
Matthew D. Mitchell

Occupational licensing generally raises costs for consumers and barriers for job seekers. Read more at Discourse

FDA Drug Review Reforms

January 9, 2020

The High Cost of Current FDA Drug Review Policies

On average, it takes 466 days for a new drug to be approved for marketing by the US Food and Drug Administration (FDA). Pharmaceutical companies respond to the regulatory delay by bringing fewer new drugs to the market. A three-month delay in drug marketing is associated with one fewer drug in development for that disease category. This phenomenon means not only that the public receives potentially life-saving treatments later, but also that, under current policies, some drugs are never going to be developed.

While the FDA performs an important social function of assessing new drugs’ safety and efficacy, its lengthy review process is costing patient lives. This is only part of the story, though. It is not even clear that FDA review is a high-level guarantee of safety.

We outline these issues in more detail and present two politically feasible solutions: improving drug review transparency and implementing postlaunch monitoring.

Drug Approval Process: Background and Changes

The modern era of pharmaceutical R&D regulation began in 1962 with the Kefauver-Harris Amendment to the Federal Food, Drug, and Cosmetic Act. The amendment required premarket approval of all drugs by the FDA, which was intended to ensure that new drugs met safety and efficacy standards. The direct outcomes of the amendment were longer approval times and higher premarketing costs of drug development.

The drug development process is a costly endeavor. After discovering a new drug, the investor proceeds with required preclinical trials (animal testing that lasts up to six years). Following promising results from these trials, the manufacturer may submit an Investigational New Drug Application (INDA) to the FDA. Upon approval, the next phase of R&D involves clinical trials on humans, adding on average another decade to the process. After human trials, the drug producer may apply for approval by the FDA to sell the drug; even after more than a decade of R&D, the FDA takes on average more than a year to complete this approval process. Aside from the significant time costs associated with this process, it also involves over $1.1 billion in monetary costs and the dynamic cost of fewer drugs being developed in the future owing to these obstacles.

Facing Tradeoffs

Balancing public health and safety with timely access to the benefits of innovation and R&D activity is a delicate task. If the FDA takes a strict stance on standards for approving new drugs, patients may be unnecessarily deprived of helpful treatments in the short run and receive fewer novel drugs in the future. On the other hand, if the FDA is not stringent enough, unsafe or ineffective drugs may enter the market and result in fatalities.

One only has to consider the lifespan of the drug Vioxx to understand the serious ramifications of the FDA drug approval process. Introduced in 1999 as a treatment for osteoarthritis pain, Vioxx was approved by the FDA. However, the drug was later found to significantly increase the risk for cardiovascular disease. Vioxx has since caused over 100,000 heart attacks and strokes in Americans. The prelaunch studies by Merck, the drug’s producer, did little to evaluate the cardiovascular effects of the drug despite certain researchers’ concerns over the issue. The magnitude of Vioxx’s impact has led to it being described as the “single greatest drug safety catastrophe in the history of this country” by Dr. David Graham of the FDA. Merck eventually withdrew Vioxx from the market in 2004 and has since settled the 30,000 lawsuits it faced for $4.85 billion. This issue demonstrates that FDA approval of new drugs does not automatically equate to safety, regardless of how long the review takes.

The FDA Regulatory Process Reduces Welfare and Drives Up Costs

Over time, policies have changed. Studies have found that increased review time is costly and welfare reducing, while reductions in review time benefit consumers, producers, and society as a whole.

Specifically, the Kefauver-Harris Amendment’s efficacy standard reduced pharmaceutical innovation, and its cost to consumers is greater than the benefit they receive from FDA efforts to prevent ineffective drugs from entering the market. By contrast, the Prescription Drug User Fee Act (PDUFA) decreased review time. The benefits of decreased FDA review time are widespread. Studies find that net benefits to consumers increases. Patients have access to beneficial drugs sooner. Since pharmaceutical companies also benefit, future R&D will be encouraged, leading to the production of even more new drugs, which then further increases benefits to consumers.

Proposed Policy Solutions: Postlaunch Monitoring and Improved Transparency

The FDA approval process requires a significant investment by pharmaceutical companies to bring new drugs to market. The negative relationship between R&D by these companies and FDA approval time implies that firms are sensitive to the regulatory delay. It is important for the efficiency of the FDA approval process to be considered in policy discussions. Since 2009, FDA drug approval times have steadily decreased, but this decrease varies by drug category. Correspondingly, the number of new drugs submitted to the FDA has increased: in 2013, 5,400 new products were submitted, while 6,300 new products were submitted in 2016.

Shortening FDA review does not imply less review overall. Instead, an alternate approach to the current process would involve postlaunch monitoring, allowing the FDA to continue to monitor safety after approving new drugs. Preclinical trials are limited in that they necessarily involve relatively smaller populations, so postlaunch monitoring can reveal better information. In the age of big data, one could use a variety of medical records to detect even minor side effects promptly. This monitoring thus appears to be a crucial step to verify that safety and efficacy standards are met by all new drugs. It can also serve the purpose of enabling the FDA to reduce its premarket review time, leading to increased innovation by manufacturers and an increase in overall social welfare. This reduced premarket review time also results in people receiving potentially lifesaving treatment more quickly.

The recent shortening of review time can in part be attributed to an increased use of postlaunch monitoring by the FDA. There are already multiple postlaunch programs in use, such as the Sentinel Initiative, which has monitored “the safety of its regulated products” since 2008, and MedWatch, which allows for users of FDA-approved products to report adverse effects to the FDA. Additionally, the FDA has postlaunch monitoring of drugs’ efficacy as well, such as through the Therapeutic Inequivalence Action Coordinating Committee (TIACC), which reviews reports of “drug products that fail to work in patients because the product simply has no effect or is toxic.” Products such as Vioxx reveal that postlaunch review is crucial in monitoring drug safety and efficacy, so why not incorporate this further into the review process?

In addition to using postlaunch monitoring to reduce review time, the FDA should improve transparency to the public. Specifically, the FDA should provide information on drugs that were not approved, instead of releasing information on only approved drugs. This is important because, although the agency is held accountable for approving drugs’ safety to prevent direct harm or death, it receives little public scrutiny for the indirect harm or death that occurs from patients having to wait too long during the lengthy review process. This lack of transparency prevents both drug manufacturers and the public from truly understanding the dynamics behind closed doors.

West Virginia Occupational Licensing

December 16, 2019

In many fields, aspiring workers must obtain a government license in order to legally enter the workforce. Various amounts of training, testing, and experience are usually required to obtain a license, and the process can be costly and time consuming. The common justification for licensure is that consumers of services cannot adequately judge for themselves whether service providers are qualified, so they need these providers to be licensed to ensure they’ll receive only safe, high-quality service.

Unfortunately, licensing schemes tend to act as barriers to employment, especially for certain populations. Moreover, because they undermine competition and limit the supply of valued services, the evidence that they actually increase public safety or the quality of services is rather thin. There is abundant evidence, however, that licensing schemes increase the prices that consumers pay.

Economists Morris Kleiner and Evgeny Vorotnikov estimate that each year licensure may cost the nation between 1.8 and 1.9 million jobs, result in between $6.2 billion and $7.2 billion in lost output, and create a misallocation of resources costing the economy between $183.9 billion and $197.3 billion. The good news? There are some ways to help fix this.

In this brief, we will discuss the problems in the current occupational licensing system in one state, West Virginia, and illustrate how these laws could be improved going forward.

Licensure Is a Substantial Barrier to Employment, Especially for Certain Populations

Licensing affects a growing number of US workers, increasing more than fourfold in the past 70 years. Including federal and local licenses, almost one in three Americans needs a license to work. Over a quarter of West Virginians (about 26 percent of the state’s workforce) were required to be licensed as of 2015. According to the Institute for Justice, among the 50 states, West Virginia has the highest percentage of certified workers (12.3 percent) and is the 17th most broadly and onerously licensed state in the United States. (Unlike a license, a certification is not mandatory.) The state also licenses a number of rarely licensed professions. For example, the state is 1 of only 10 to require a license for upholsterers, 1 of only 22 to require a license for paint contractors, and 1 of only 24 to require a license for commercial door repairmen.

It can take months and hundreds of dollars in fees to become licensed in the state of West Virginia. These costs are significant barriers for many potential new workers. Among 49 low- to moderate-income jobs in West Virginia, licensure requires an average of $132 in fees and 247 days in training. Importantly, these fees do not include the additional costs workers face for the necessary education, nor do they include the income that people miss out on when they spend significant amounts of time in often-unnecessary training.

While licensing is justified in the name of protecting the public from unqualified professionals, its requirements are often arbitrary. There is often a mismatch between the risk posed to the public from an insufficiently trained professional in the field and the licensing requirements for the field’s workers. For example, emergency medical technicians in West Virginia must undergo less than a month of training to receive their license. But West Virginia auctioneers must complete more than 20 times this amount of training; barbers must complete more than 15 times this amount of training; and security alarm installers must complete more than 25 times this amount of training.

Though ostensibly designed to protect consumers, one of licensure’s main effects seems to be to protect incumbent workers from competition. Accounting for differences in education, training, and experience, estimates suggest that licensure results in 10 to 15 percent higher wages for licensed professionals. These gains come at the expense of consumers and unlicensed workers. Licensing boards are able to protect incumbent workers because they are dominated by these workers. It is estimated that in West Virginia, 81 percent of licensing boards are dominated by members of the profession they are supposed to oversee.

All potential workers entering a licensed profession face the same restrictions, but occupational licensing tends to impact certain populations more than others. These barriers to employment are particularly steep for lower-skilled, lower-educated populations; for immigrants; for non-English speakers; for those with criminal records; and for those who move frequently, such as military spouses. In fact, as shown in figure 1, 80 percent of studies reviewed by scholars at the Mercatus Center at George Mason University find that licensure harms minorities. Researchers also find that measured income inequality is greater in countries with more barriers to entry. And in those states in which licensure of low- to moderate-income occupations has grown the most, individuals raised in relatively low-income households are less likely to move up the income distribution.

Because they are more likely to work in licensed professions and because they are 10 times more likely to move compared with the general population, military spouses face particularly steep employment barriers owing to licensing laws. When asked to name their biggest challenges to employment, 22 percent of military spouses identified the fact that they can’t transfer their professional licenses from one state to another.

Those with criminal histories are also particularly likely to be stymied by these laws. The Council of State Governments Justice Center estimates that nationally there are about 15,000 laws and regulations that limit the ability of those with prior convictions to obtain state occupational licenses. Among these, 6,000 are blanket or mandatory restrictions.

Licensure Does Not Seem to Increase Quality or Safety, but It Does Raise Prices

As we’ve noted, the most common justification for occupational licensing is that it is necessary to ensure quality and safety. Unfortunately, it seems to fall short in attaining this goal. In theory, licensure could increase the quality and safety of services if it were to successfully screen out low-quality workers or equip workers with the right skills to perform their jobs safely. On the other hand, theory also suggests that licensure could decrease quality and safety. This could happen in two ways: First, licensure may insulate service providers from market competition, and quality tends to be enhanced by market competition. Second, by raising prices and limiting the quantity of providers, licensure may reduce the availability of needed services. In some cases, this can lead to tragedy. For example, when there are fewer electricians in an area, homeowners are more inclined to perform their own electrical work, leading to more injuries.

Because the economic theory is ambiguous, one must turn to the data. In figure 2 we present a survey of the empirical work on licensure and quality. Most studies find that licensure has mixed, unclear, or neutral effects on quality. Interestingly, however, more studies find a negative effect of licensure on quality than find a positive effect.

Basic economic theory suggests that a supply restriction will tend to raise prices. And consistent with this theory, there is abundant evidence that this does happen with licensure. One assessment of 19 studies found support for this proposition in all 19 studies. In separate research conducted by Obama administration officials, the authors conclude that “the evidence on licensing’s effect on prices is unequivocal.”

In sum, licensure is likely doing little to ensure the quality of service providers, while it is clear that it raises consumer costs and limits employment opportunities for certain populations.

Reform Is Difficult, but Not Impossible

It will not be easy to address this problem. Consumers and aspiring workers are the ones harmed by licensure, and they form a large but unorganized group. On the other hand, industry insiders who benefit from licensing laws tend to be well organized because they are fewer in number and they have more to gain by restricting competition. This dynamic has made, and will continue to make, the reform of occupational licensure a struggle even though the benefits of reform exceed the costs.

Despite the potential uphill battle in this arena, there are some opportunities for reform. The best of these will permit policymakers to cast conspicuous votes for the general interest while limiting the ability of special interests to dominate the process:

  1. Task an independent commission with identifying and eliminating anticompetitive licensing laws. Members of the commission should not benefit from the laws currently in place.
  2. Require less restrictive methods of regulation. Nebraska has recently mandated a review of licensure, requiring policymakers to adopt the least restrictive approach necessary to ensure public safety.
  3. Reverse the burden of proof by making state agencies demonstrate that regulations are actually fulfilling a public health or safety concern while ensuring that citizens have a fundamental civil right to earn a living. Arizona has adopted this approach, creating accountability for regulators.
  4. Ease restrictions for those with criminal histories. This reform is especially warranted when an aspiring worker’s past offenses are unrelated to the profession he or she seeks to enter.
  5. Recognize out-of-state licenses for active-duty military and their spouses. As we’ve discussed, licensure is particularly problematic for this group. This change would help alleviate that burden. This reform, however, has the downside of alleviating the barrier only for this particular population.
  6. Recognize licenses universally. Arizona now allows any state resident who is currently licensed by another state, has been licensed in that state for at least a year, and is in good standing with that state to obtain an Arizona license. The worker may have to pay an Arizona license fee and, in some cases, pass a background check and take a test. With this, the worker is able to skip months or even years of unnecessary and expensive duplicative training.

None of these reforms are mutually exclusive. Indeed, they reinforce one another. Reforming the current occupational licensing structure in the United States should be a goal of anyone who values consumer protection, lower prices, and greater employment opportunities for all.