The Value of Inferior Products

There’s no shortage of lessons for us to learn from the unfolding Mylan scandal. It’s practically a study in the consequences of an uncompetitive market and bureaucratic cynicism. Among all the take-aways from this episode, there’s one thing that stands out as particularly interesting: the value inferior products offer consumers.

That sounds a bit counterintuitive. We typically think of inferiorities as something to be eliminated. But in many cases the presence of inferior goods–economically defined as goods for which demand increases when a consumer’s income drops–is actually beneficial, relative to their absence.

Before I talk about how this applies to the EpiPen, I have a confession to make:

I don’t have the latest iPhone.

I don’t even have the oldest iPhone. I have a Samsung Galaxy Light.

It overheats easily, has abysmal battery life, and sends snapchats that look like flipbooks. It hangs up during calls and will never catch a single Pokémon. I once tried to purge my text archive and it took over 12 hours.

Why do I own a device that’s so pathetic by modern standards? It’s a question of personal priorities and resources. I don’t care enough about the add-ons to spend $400 on a phone: a decision surely influenced by the fact that I don’t make that much money.

And yet, even though my phone is undeniably of poorer quality than the phones of my peers, I am much better for it. If I were to disappear tomorrow, say, because someone outlawed suboptimal cell phones, I’d be upset. I would probably end up buying an iPhone, but if I didn’t have the money, I might end up without a cell phone altogether.

So what’s the scrappy alternative (the Galaxy Light, if you will) to the EpiPen? Well, we don’t know–it’s not allowed to exist.

The FDA has the power of deciding what products consumers can and can’t access. In the case of EpiPen substitutes, as well as others, it’s imposed onerous hurdles to market entry that have severely limited anyone’s ability to compete with Mylan. The Wall Street Journal writes:

But no company has been able to do so to the FDA’s satisfaction. Last year Sanofi withdrew an EpiPen rival called Auvi-Q that was introduced in 2013, after merely 26 cases in which the device malfunctioned and delivered an inaccurate dose. Though the recall was voluntary and the FDA process is not transparent, such extraordinary actions are never done without agency involvement. This suggests a regulatory motive other than patient safety.

Then in February the FDA rejected Teva’s generic EpiPen application. In June the FDA required a San Diego-based company called Adamis to expand patient trials and reliability studies for still another auto-injector rival.

Let’s be charitable and ignore that Mylan spent over $2 million lobbying in Washington in 2015. FDA risk aversion, noble or otherwise, is still hurting consumers by leaving them with fewer options and higher prices.

While the FDA has a preference (and every political incentive) for extreme vetting, it may be that some consumers of epinephrine prefer a less expensive, if less tested, model of injector.

Assuming that consumers have the same priorities as their legislators is a mistake of arrogance, and a costly one. A study by Tufts University in 2014 put the cost of getting a drug through to market at $2.56 billion–$1.4 in out-of-pocket expenses and $1.16 in time costs (the forgone ROI of that $1.4 billion over the time the approval process took).

There are reasons people buy lower-quality products. Sometimes it’s a question of personal priorities, sometimes one of finance. The reluctance to acknowledge that this is as true in healthcare as any other marketplace is wrongheaded, though understandable given human emotion and that people’s health is at stake.

But the rules governing price and availability aren’t swayed by emotion. If we want EpiPens to be less expensive, we need to let more people try to make them, even if that involves some measure of risk. Excessive caution carries risk as well: by implementing such harsh standards, the FDA has ensured that the only product remaining is not only highly effective, but also highly expensive.

Rather than accept that there exists a continuum of quality in healthcare products, as with everything, epinephrine users are forced by regulation to use the best or nothing. Because of the diffuse nature of healthcare expenses, this kind of action raises prices across the board and inhibits the development of more efficient products.

Cell phones, even smartphones, are ubiquitous today and generally affordable. When they first came out, they were strictly the province of the wealthy. The same goes for cars, HD televisions, and most other technology.

Someone like me can afford those things today because lots of different producers were able to compete against each other and figure out how to give people more for less. If, when the iPhone came out, all following smartphones were to be held to the same standards, it’s almost certain that there would have been less people making smartphones, fewer models to choose from, and that the ones that did exist would be markedly more expensive and less innovative, due to reduced competition.

Yes, it makes sense to worry about the quality of medical devices that people are using, and yes, the FDA (or something like it) can be useful in that regard. But it also makes sense to concern ourselves with the availability of those same devices. Climbing healthcare costs are dangerous, too.

This Essay is Not FDA Approved

Last Thursday, Nicholas Kristof penned an article for the New York Times entitled “Drugs, Greed and a Dead Boy.” The piece provides a dismal account of an industry rife with predatory marketing schemes, ineffective treatments, and captained by covetous sociopaths who care more about making money than they do about public health and are prepared to circumvent FDA regulations in order to do so. Whatever your convictions, Kristof makes a compelling case for regulation based on historical evidence. It’s not until the last paragraph that he writes something that makes me pause:

So if you agree with today’s politicians thundering against regulation, or if you think that pharmaceutical companies should enjoy a free speech right to peddle drugs, then talk to a family fighting opiate addiction. Or a parent of a thalidomide child. Or consult the grieving family of Andrew Francesco.

I certainly have no problem admitting that the pharmaceutical industry, much like any industry, doesn’t always act in the best interest of the public. Nor do I have a problem accepting that parents are probably over-medicating their children (and likely themselves) in today’s hypersensitive world. What I take issue with is his thoughtless, implicit dismissal of regulation reform advocates who are seeking to improve a poorly designed system.

I make a point of not agreeing with any thundering politicians, however, as someone who finds fault with the regulatory structure of the FDA, I feel that the argument for reform warrants some defense. The following argument isn’t exactly original–I’ve heard it made by others before, probably better than I am going to make it now–but it is a concept worth defending.

The first thing to realize is that nobody is arguing against regulation (well, some might be, but I’m not) or a vetting process for new drugs. I would find it hard to believe that anyone seriously believes drugs should be less safe for consumers and would fight to craft policies that reflect such a notion. The real point of contention here is who should be doing the regulating, and how.

Kristof appears to be falling victim to a false syllogism: The FDA is a regulator; people want to get rid of the FDA; therefore, people want to get rid of regulation. Not so. What those who challenge the FDA process are protesting is a monopoly on regulation that invariably leads to an inefficient process by which drugs are taken to market, and thus eliminates less human suffering than would otherwise be possible.

To understand why this happens, you have to understand the unique predicament of an organization like the FDA and what kinds of incentives that predicament creates.

There are basically two ways in which the FDA can be said to be performing its function optimally (granted, this is probably an oversimplification). Scenario number one–it takes a good drug to market quickly and efficiently after ensuring that the product is safe for consumption. Scenario number two–it stops a bad drug from making it to market after determining that it is not fit for human consumption. When either of these scenarios are realized, that’s great, and we are all better off for it.

Similarly, there are two ways in which the FDA can be said to be underperforming. In the first, it takes a bad drug to market and risks the lives of consumers. In the second, it engages in an unduly lengthy regulatory process that delays the emergence of new drugs, also risking consumers’ lives. This is where things get tricky. While both outcomes result in human loss and are undesirable, one of these is far less appealing to the FDA.

Moving bad drugs to market is a sure way to shake faith in the regulatory body and create a panic. More importantly, the negative effects of such a screw-up are overt and blame is easily assigned to the organization responsible.

Delaying good drugs due to overly cautious behaviour, although potentially just as deadly, is not nearly as conspicuous. It’s much harder to measure the patients that hypothetically would not have died had the regulatory process been more efficient than the patients that did die due to bad drugs, but that doesn’t mean the effects are any less real. For example, if drug x saves 1,000 lives per year, and spends 4 years tied up in the regulatory process when it could have passed in 2, one could very easily make the argument that 2,000 lives were lost to this inefficiency.

Given the choice between the two, it’s not hard to understand why the FDA would opt to take the path that obfuscates the negative consequences of their decision making. At least in some cases, this must lead to an overly stringent approval process for good drugs. Because they have a monopoly on the regulatory process, there is no one to pressure the system to be more efficient.

A little competition might go a long way in solving these problems. Private regulatory companies might sound strange, but the idea is actually quite logical. This might work something like this:

  1. Drug companies develop drugs and submit them to a regulatory company for quality assurance: a service for which they pay.
  2. The regulatory company tests the drug to its standards by its processes. If it doesn’t pass, the story ends here.
  3. If it does pass, however, the regulatory company approves it and affixes their logo to the medication, much like the FDA does now.
  4. The drug goes to market where consumers use the logos as signals of quality. The more they trust the logo, the more they trust the drug. Logos gain trust by screening accurately and lose clout by rushing drugs to market with bad consequences.
  5. The most trusted logos are in higher demand by people making (and consuming) good drugs, because they want consumers to trust that they’re safe. This in turn re-enforces the incentive to provide strict testing.
  6. Furthermore, drug companies would be willing to pay a premium to have their testing done quickly as well as accurately. This remedies the inherent flaw in the FDA’s design: the zero-sum game between accuracy and timeliness. From the consumer side of things, that means more lives saved/improved.

This solution would do a lot to align incentives within the process of getting safe drugs on shelves, so to speak. If the point of the FDA is ultimately to save lives and improve the quality of medicine–and we should presume it to be such–then why not create a system which could save and improve more lives? If it can be done by private companies, so much the better. All this is not to say that the FDA should be dismantled, but if we are able to admit that allowing for a competitive space can improve services to consumers, then what might be the benefit of having the FDA remain in such a position?

Perhaps it could serve in some overseer capacity–ensuring that no fraud or collusion occurs. Again, the point is not to eliminate the FDA or regulation; the point is to improve the regulatory process and save lives.

There is a semantic problem with Kristof’s (and many others’) understanding of regulation in that he understands it to be inherently and exclusively a purview of the government. Evidently, he has never paused while using Yelp, Uber, or Rotten Tomatoes to consider that these too are forms of regulation that let us know when something is fit for consumption.

Kristof and other “pro-regulators” usually understand the negative impacts of monopolies–inefficiency, unresponsiveness to consumers–and call for regulations to break them up. Competition is the way things get better–no industry is immune to this reality. Ironically, people who want to reform drug regulation for the same reason are met with staunch criticism by regulatory enthusiasts.

Once again, semantics plays a part in obscuring the fact that having a singular body in an industry is a monopoly, even if that body is a government entity. Monopolies are for private corporations; regulations are for governments. Again, not so.