The sky is not falling: FDA proposes common-sense treatment of generic drugs

There must be a global template for business complaints about regulation, located on some secret right-wing server. Just type in the industry and the name of the regulation: Billions of dollars are at stake, companies will be driven out of the industry and consumers will lose access to low-priced products, if the government dares to impose an ordinary, common-sense rule. Such as, making drug companies responsible for the safety of their products?

Aren’t pharmaceutical companies already responsible for warning their customers of known adverse effects? If you answered “yes, of course,” then you missed the Supreme Court’s 2011 ruling in Pliva v. Mensing. Currently, generic drug companies are required by the Food and Drug Administration (FDA) to use exactly the same labels and warnings as the corresponding brand-name drugs. Therefore, the Court ruled in Mensing, the producer of a generic drug cannot be held responsible for failure to warn customers of known hazards that are not mentioned on the brand-name drug label. This is particularly problematic in the frequent cases where generic drugs drive the brand-name producer out of the market, so that no one is updating the label to reflect new information.

The FDA has proposed a rule change that would allow generic companies to update their own labels – and would make them responsible for warning their customers of all known hazards, just like the brand-name producers. In response the Generic Pharmaceutical Association hired consultant Alex Brill (now at the American Enterprise Institute) to do an economic analysis of the proposal. Brill claimed that consumers would have to pay an extra $4 billion, companies might be forced to leave the industry, etc.

At the request of the American Association for Justice, I critiqued the Brill report and presented the results last week at a Capitol Hill briefing and an FDA public hearing. The full critique is available here. There are three fundamental flaws in Brill’s analysis.

First, the $4 billion cost estimate represents the estimated costs of additional product liability insurance to the generic drug companies. Insurance premiums, however, are transfer payments, not net costs to society. After a hurricane, coastal property owners are very interested in the details of insurance coverage – but insurance does not change the amount of storm damage, it just transfers responsibility for those damages. The same is true of the damages caused by adverse effects of pharmaceutical products. Liability insurance determines whether the costs of these damages are borne by patients and their health insurance providers, or by the drug companies; it does not change the magnitude of the health damages. Thus insurance premiums do not belong in an analysis of costs and benefits to society.

Second, the calculation of the $4 billion cost is enough to give guesswork a bad name. Brill starts with one scrap of ancient data: a 1993 article coauthored by Kip Viscusi reported that in 1980-84, American industry in general (not pharmaceuticals in specific) had product liability costs averaging 0.67% of sales. Brill then assumes that exactly this number applies to brand-name drug companies today, but that generics pay the same amount per prescription. Since generic prices are lower, this is a much larger percentage increase, but it is a mere $1.16 per prescription. There is no reason to believe this calculation – but if it were true, is it big enough to matter?

The sky is falling, in Brill’s analysis, because he imagines an increase of $1.16 per prescription is an intolerable burden. It would drive companies out of the industry only if consumers refuse to buy prescriptions when the price rises by $1.16. No one believes that, including the drug companies.

Finally, drug companies, like other companies, are required to file 10-K forms with the Securities and Exchange Commission (or equivalent 20-F forms for foreign companies), listing any factors that they expect will have a material effect on their business in the near future. On these forms, only one of the top generic companies mentioned the Mensing decision; that firm mentioned it in passing, merely saying that it would have an uncertain effect on the firm. None of the top generic companies mentioned the FDA’s proposal to undo the effects of Mensing. Many other issues, including many liability cases and disputes were mentioned, but Brill’s disaster fantasy didn’t make the cut.

At the FDA hearing the drug companies were pushing an alternative proposal, which would make FDA responsible for initiating all changes in labels and warnings for all drugs, brand-name and generic. Company responsibility would be limited to following FDA’s instructions. There was no accompanying proposal to provide the FDA with the vastly expanded staff resources required to implement this new scheme. The industry’s new plan would undoubtedly accomplish the goal of reducing product liability lawsuits – but so would a focus on producing safe drugs and warning customers promptly whenever new adverse effects are discovered.