The case for creating excess capacity at the US Food and Drug Administration

Lauren Cohen, Umit Gurun, Danielle Li 14 March 2021

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The public and political pressure on vaccine developers and global regulatory approval agencies has never been higher. The world has been eagerly awaiting any – and all – developments regarding vaccines and therapeutics required to fight the current Covid-19 pandemic. While the demand side is willing to pay almost any price for an effective and fast solution, unfortunately neither the drug development nor the drug approval process is designed to deliver speed and safety free of trade-offs. 

The dilemma faced by the regulators is simple. If regulators rush their review, they may end up approving a drug without adequately understanding its efficacy and safety, leaving room for unforeseen side-effects. These include safety issues around the drug itself, along with treatment dangers such as unsafe dosages and failing to highlight potentially dangerous drug interactions. Yet if regulators endeavour to understand all possible scenarios, it may take an exorbitantly long time to obtain approval on drugs that turn out to be safe, resulting in complications and lives lost from extended delays. 

To encourage regulators to evaluate drug candidates quickly and efficiently, both politicians and bureaucratic superiors impose deadlines upon agencies and other government actors. These deadlines could be formal deadlines, such as the ones set by the US Prescription Drug User Fee Act (PDUFA) of 1992. According to this Act, US Food and Drug Administration (FDA) regulators were to be evaluated on the percentage of priority and regular applications that were reviewed within six and ten months. Carpenter et al. (2008) and Carpenter et al. (2012) documented that these formal deadlines matter – more drugs are approved prior to their review deadlines, but drugs approved during these periods are more likely to face post-marketing safety problems in the US.1

In our work (Cohen et al. 2021), we investigate the effects of informal deadlines – i.e.  those that are not explicitly set by the organisations or law but are instead based on psychological benchmarks – on drug approvals and associated drug safety. First, we show that regulators across the globe (in the US, the UK, the EU, China, South Korea, and Japan) appear to respond strongly to common informal deadlines based on psychological benchmarks that are independent of externally imposed administrative deadlines. Pharmaceutical regulators around the world tend to speed through drug applications in December, in the last days of each month, and before major national holidays (e.g. Thanksgiving in the US or Chinese New Year in China). This ‘desk-clearing’ behaviour is economically large: 19% of all drugs approved worldwide are approved in December, twice the percentage of a typical month. Second, we find that drugs that received the thumbs-up before an informal deadline, such as right before a major holiday, are more likely to cause serious adverse effects, including more hospitalisations, life-threatening incidents, and deaths. These results provide evidence that informal deadlines can distort drug approvals just as much as formal deadlines.

The drug development process is extremely risky. Less than 12% of the drugs entering clinical development are approved for marketing (DiMasi et al. 2016). And the cost to develop a new prescription medicine that gains marketing approval has been gradually increasing over time. In 2016, drug-makers spent on average $2.6 billion to develop a new prescription medicine. The same figure was less than half this much ($1 billion) in 2013, and $802 million in 2003 (DiMasi et al. 2016). 

In a world where global economies make it increasingly difficult to contain health crises spread by personal interaction, we believe that one of the best ways to prepare for the post-Covid-19 world is to proactively improve review policies at regulatory approval agencies. We need to think about how to design policies to deal with both policy and non-policy-induced inefficiencies such as the impact of formal and informal deadlines – alongside ‘crisis-induced’ resource-absorbing in the drug approval process. While there are ways to deal with bunching before formal (and perhaps even informal) deadlines, such as using deliberately scheduled audit-timing and deadline grace-periods (Liebman and Mahoney 2017, Oyer 1998), it is less clear how to deal with unpredictable and extreme resource-shocks on the methodical regulatory approval process. 

To that end, we believe the best solution is to create persistent excess capacity in regulatory bodies to deal with the complexities introduced by the increasing probability of flash-crises such as Covid-19. In particular, the FDA could add this as part of its existing emergency response framework, in much the same way that the Federal Emergency Management Agency (FEMA) has built this into its National Response Framework (NRF 2019). This persistent ‘slack-capacity’ is a central element of optimal capacity planning (Van Mieghem 2003), including being a driver of precautionary savings across organisations (Baumol 1952, Miller and Orr 1966). 

Such excess capacity would help reduce the approval resource-surges surrounding crisis events, while, critically, also keeping the non-emergency operations of the organisation intact during the crisis. If we are giving regulatory bodies the high burden of assuring the safety of the drugs, along with vaccines to treat the ‘unknown unknowns’ of future health crises in a fast, efficient, and sound manner, we should dedicate ample resources to increase their ability to perform this increasingly important dual-mission.

References 

Baumol, W (1952), “The transactions demand for cash: An inventory theoretic approach”, Quarterly Journal of Economics 66: 545–556.

Carpenter, D, E J Zucker and J Avorn (2008), “Drug Review Deadlines and Safety Problems”, New England Journal of Medicine 358(13): 1354–1361. 

Carpenter, D, J Chattopadhyay, S Mott and C Nall (2012), “The Complications of Controlling Agency Time Discretion: FDA Review Deadlines and Postmarket Drug Safety”, American Journal of Political Science 56(1): 98–114.

Clemens, M A and T Ginn (2020), “Global Mobility and the Threat of Pandemics: Evidence from Three Centuries”, Center for Global Development, Working Paper 560.

Cohen, L, U Gurun and D Li (2021), “Internal Deadlines, Drug Approvals, and Safety Problems”, American Economic Review: Insights 3(1): 67-82.

Darrow, J J and A S Kesselheim (2014), “Drug Development and FDA Approval, 1938–2013”, New England Journal of Medicine 370(26): e39. 

Darrow, J J, J Avorn and A S Kesselheim (2017), “Speed, Safety, and Industry Funding – From PDUFA I to PDUFA VI”, New England Journal of Medicine 377(23): 2278–2286. 

DiMasi J A, H G Grabowski and R W Hansen (2016), “Innovation in the pharmaceutical industry: New estimates of R&D costs”, Journal of Health Economics 47: 20 -33. 

Kesselheim, A S, B Wang, J Franklin and J Darrow (2015), “Trends in Utilization of FDA Expedited Drug Development and Approval Programs, 1987-2014: Cohort Study”, British Medical Journal 351(26): h4633. 

Liebman, J B and N Mahoney (2017), “Do Expiring Budgets Lead to Wasteful Year-End Spending? Evidence from Federal Procurement”, American Economic Review 107(11): 3510-3549. 

Miller, M and D Orr (1966), “A model of the demand for money by firms”, Quarterly Journal of Economics 80: 413-435.

Nardinelli, C, M Lanthier and R Temple (2008), “Drug Review Deadlines and Safety Problems”, The New England Journal of Medicine 359(1): 95.

National Response Framework (2019), “National Response Framework”, Homeland Security.

Oyer, P (1998), “Fiscal year ends and nonlinear incentive contracts: The effect on business seasonality”, The Quarterly Journal of Economics 113(1): 149-185. 

Schick, A, K L Miller, M Lanthier, Ge Dal Pan and C Nardinelli (2017), “Evaluation of Pre-marketing Factors to Predict Post-marketing Boxed Warnings and Safety Withdrawals”, Drug Safety 40(6): 497–503. 

Van Mieghem, J A (2003), “Capacity management, investment, and hedging: Review and recent developments”, Manufacturing Service Operations Management 5(4): 269-302.

Endnotes

1 See also Nardinelli et al. (2008) and Schick et al. (2017) on further discussion of these findings. More generally, also see Darrow et al. (2017) for a review of the interplay between incentives, user fees, and the timeliness and safety of FDA approvals, and Darrow and Kesselheim (2014) for a list of important legislative and regulatory events related to the FDA’s new drug approval process, along with Kesselheim et al. (2015) for recent trends in expedited approval program.

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Topics:  Covid-19 Health economics Productivity and Innovation

Tags:  COVID-19, health economics, regulation, US, UK, EU, innovation

L.E. Simmons Professor, Finance & Entrepreneurial Management Units, Harvard Business School

Ashbel Smith Chaired Professor of Finance and Accounting, University of Texas at Dallas

Class of 1922 Career Development Professor and Associate Professor, MIT Sloan School of Management

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