About FDA
Economic Analyses of FDA Regulations
As part of its mission to supply economic analysis to decision makers, the Economics Staff in the Office of Planning conducts economic analyses of all important proposed and final regulations issued by the Food and Drug Administration. Each economic analysis includes an assessment of the costs, benefits, and cost-effectiveness of the action, as well as assessments of the costs, benefits and cost-effectiveness of the most promising alternative actions. To compare the effects of proposed regulations with the effects of promising alternatives, we estimate both the incremental benefits and costs associated with increasing the stringency of regulation and the incremental foregone benefits and cost savings associated with decreasing the stringency of regulation. The information on incremental costs and benefits helps FDA management choose which controls to include and which to exclude when presented with the usual smorgasbord of ways to deal with a public health problem. The economic analysis may also point out ways to increase the cost-effectiveness of regulation. For example, the economic analysis may demonstrate that the incremental costs associated with a particular provision are very high, with little or no incremental public health effects. Identifying such provisions enables the FDA to revise proposed regulations in ways that substantially decrease costs without appreciably reducing public health benefits.
The role of economics in the FDA rulemaking is likely to increase in the coming years. Recent Presidents and Congresses have steadily increased the amount of economics required to develop regulations, and are likely to continue to do so. Moreover, economics becomes more important for decision makers as regulatory choices get more difficult. In the early years of the Food and Drug Administration, many actions were easy to take. Many hazards were obvious and the trade-offs not subtle. As regulation progresses, however, the public health choices (safety versus efficacy, for example) become more difficult. With increasingly difficult choices for policy makers, the need for economics will increase.
The following examples of economic analyses of recent regulations show the types of regulation we analyze, the challenges we face, and the information our analyses supply to decision makers.
Substances Prohibited From Use in Animal Food or Feed.
Final Rule (Federal Register, April 25, 2008)
Also available as PDF (281 KB)
Bovine spongiform encephalitis (BSE or mad cow disease) is transmitted through cattle feed. In 1997, the FDA issued a regulation prohibiting the feeding of ruminant-derived products to other ruminants. To further reduce the risk of BSE, the 2008 final rule prohibited the use of certain cattle-derived risk materials in all animal feeds.
The benefits of the final rule include the elimination of the vast majority of the risk not addressed by the 1997 ruminant feed ban. The principal risks reduced by the final rule include spreading BSE to other cattle from intentional or unintentional use of non-ruminant feed for ruminants and cross-contamination of ruminant feed with non-ruminant feed or ingredients intended for non-ruminant feed. The final rule effectively removes from use in non-ruminant feeds those cattle tissues that account for approximately 90 percent of potential BSE infectivity. Although the animal and human health benefits associated with the additional BSE risk reduction justified the regulation, the U.S. economy may also benefit from regained market access in countries that remain fully or partially closed to U.S. beef and beef products if the final rule helps persuade foreign governments that U.S. beef products are safe to import. Although we were unable to quantify the effects of this final rule on removing restrictions to foreign markets, the benefits are potentially large because the economy as a whole loses an annual surplus equal to about $105 million from the remaining restrictions.
The costs of the final rule are also substantial. We found that prohibiting the use of these materials in animal food or feed imposes four types of costs: disposal costs, the opportunity cost of the meat and bone-meal products and tallow not produced, the direct costs of new equipment and re-allocated labor, and costs for feed substitution. Increased disposal costs account for the largest part of total costs because the regulation leads to a substantial reduction in the number of dead cattle rendered into other products, which in turn leads to an increase in the costs of disposal. We estimated the total costs of the final rule to range from $64 to $81 million per year, annualized over 10 years.
Notification of Consignees and Transfusion Recipients Receiving Blood and Blood Components at Increased Risk of Transmitting Hepatitis C Virus Infection (“Lookback”).
Final Rule (Federal Register, August 24, 2007)
Also available as PDF (53.76 KB)
Past recipients of blood transfusions are at some risk of having received blood contaminated with hepatitis C without being aware of their exposure to the virus. The risk exists because, despite the best practices of blood establishments, a person may donate blood and blood components early in an infection, during the period when the testable marker is not detectable by a screening test but the infectious agent is present in the donor’s blood (a “window” period). Such products have an increased risk of transmitting infection The FDA considered many strategies to help ensure that information is provided to recipients of blood and blood components possibly donated during a “window” period. The strategy embedded in the final rule is a targeted “lookback”, which requires facilities to provide information to consignees and recipients of blood and blood components who may be at increased risk of transmitting hepatitis C virus infection.
We projected that one-time costs would be approximately $73.5 million and recurring annual costs would be approximately $1.7 million. The one-time costs are mostly the cost of the retrospective “lookback” based on review of historical records; the recurring costs are for record keeping and prospective lookbacks. If we combine these costs and annualize them with a 3 percent discount over 10 years, we find the present value of costs to be $87.6 million, with annualized costs of $10.3 million per year.
The biggest challenge we faced in analyzing this rule was to estimate the benefits of the information provided by lookback to recipients of blood transfusions. Because we wanted to measure the public health effects as directly as possible, we measured benefits not for the information provided but for the likely actions taken in response to that information. The benefits measure we selected was the gains in quality-adjusted life years for blood transfusion recipients who receive treatment for newly-identified post-transfusion hepatitis C virus infections that, in the absence of “lookback”, would otherwise go untreated. We estimated that the lookback might save over 2,640 quality-adjusted life years, for a cost-effectiveness ratio of $33,000 per quality-adjusted life year. The present value of this potential gain in quality-adjusted life years ranged from $264 million to $1,228 million, depending on the societal value of a quality-adjusted life year. When annualized over 10 years with a 3 percent discount rate the benefits ranged from $31 million to $144 million per year.
Requirements on Content and Format of Labeling for Human Prescription Drug and Biological Products.
Final Rule (Federal Register, January 24, 2006)
Also available as PDF (772 KB)
Preventable in-hospital and outpatient adverse drug reactions have been a major public health problem. This final rule amended the requirements for the format and content of prescription drug labeling intended for professional use; the intent was to make it easier for health care practitioners to find and read information important for the safe and effective use of prescription drugs. We measured the benefits of this improved risk communication as sum of the value of averted adverse drug reactions and the value of the time saving for prescribers who use the label. Each year hospital costs due to preventable in-hospital and outpatient adverse drug reactions range from $4.0 billion to $4.8 billion. If the new labeling requirements reduced these avoidable hospital costs by 1 percent, the savings would be between $40 million and $48 million per year. Over 10 years, discounting at 7 percent, the present value of averted adverse reactions would be $240 million to $290 million. The new requirements on content and format of labeling are also critical to a number of FDA electronic labeling initiatives designed to speed access to labeling. Although there is considerable uncertainty surrounding the estimate, we found the possible present value of savings in search time for healthcare practitioners and pharmacists to be $90 million over 10 years. We projected that the summed present value of the quantifiable benefits of the final rule over 10 years would range from $330 million to $380 million at a 7 percent discount rate and from $420 million to $480 million at a 3 percent discount rate.
We concluded that the only costs of the rule were the direct costs of changing prescription drug labels. Furthermore, to minimize costs, the agency limited the scope of affected products to recently approved and future prescription drug applications. We also developed a staggered implementation plan for conducting drug labeling changes so that industry could plan and manage labeling changes over 7 years. We projected these labeling costs to range from approximately $7 million to $17 million in any one year, with a present value over 10 years of approximately $90 million at a 7 percent discount rate and $120 million at a 3 percent discount rate.
Use of Ozone-Depleting Substances; Removal of Essential-Use Designations.
Final Rule (Federal Register, April 4, 2005)
Also available as PDF (214 KB)
Chlorofluorocarbons destroy ozone, so their use is discouraged by international environmental treaty. The final rule set a December 31, 2008 date for removing albuterol metered dose inhalers with chlorofluorocarbons from the market. The price of albuterol inhalers will rise because this rule will effectively remove less expensive generic versions of albuterol metered dose inhalers from the market. The social costs of this final rule include the health benefits lost by consumers who would have bought albuterol metered dose inhalers at the current price but are unwilling or unable to buy them at a higher price. Patients and third-party payers, including Federal and State Governments, will spend more for albuterol inhalers as a result of the price increase. But this increased spending is not part of social cost as conventionally defined, because it represents resources that are transferred from drug buyers (consumers and third-party payers) to drug sellers (drug manufacturers, wholesalers, pharmacies, etc.). The social benefits of this regulation include the value of improvements in the environment and public health that may result from reduced emissions of chlorofluorocarbons (for example, the reduced future incidence of skin cancers and cataracts).
The challenge for the economic analysis was to supply useful information to decision makers in the absence of monetary estimates of social benefits and costs. For benefits, we focused on the cumulative number of albuterol metered dose inhalers that might not be sold and the resulting changes in chlorofluorocarbon emissions. As a result of the regulation, approximately 96 million to 430 million albuterol chlorofluorocarbon metered dose inhalers will be removed from the market, depending on whether generic albuterol metered dose inhalers become available in 2010 or 2017. For costs, we estimated the increased the costs borne patients and third-party payers. Assuming generic albuterol hydrofluoroalkane metered dose inhalers enter the market at the end of 2010, the removal of albuterol chlorofluorocarbon inhalers will eliminate competition from low-cost generic drugs during the period between December 2008 and December 2010, thereby increasing the present value of spending on albuterol inhalers by about $2.1 billion with a 3 percent discount rate, or $1.7 billion with a 7 percent discount rate (present value in 2005). Assuming generic albuterol metered dose inhalers do not enter the market until the end of 2017, the removal of albuterol chlorofluorocarbon metered dose inhalers will eliminate competition from low-cost generic drugs during the period between December 2008 and December 2017, thereby increasing the present value of spending on albuterol inhalers by about $8.3 billion with a 3 percent discount rate, or $6.2 billion with a 7 percent discount rate (present value in 2005).
Taking into account free samples and coupons, we estimate that higher prices due to the elimination of generic competition will reduce the number of albuterol metered dose inhalers sold by between 300,000 and 900,000 per year, which will cause consumers either to use between 600,000 and 1.8 million fewer albuterol inhalers between December 31, 2008, and December 2010, or to use 2.7 million and 8.1 million fewer albuterol inhalers between December 31, 2008, and December 2017.
Bar Code Label Requirements for Human Drug and Biological Products.
Final Rule (Federal Register, February 26, 2004)
Also available as PDF (320 KB)
Research showed that medication error in hospitals and other health care settings leads to 373,000 preventable adverse drug events per year and that these events would increase to 478,000 within 20 years in the absence of additional preventive measures. The goal of this regulation was to help reduce the number of medication errors by allowing health care professionals to use bar code scanning equipment to verify that the right drug (in the right dose and right route of administration) is being given to the right patient at the right time. Evidence showed that machine readable technology in the dispensing and administration of drugs could intercept errors and thus avoid adverse drug reactions. Hospitals with bar code scanners used in treatment reported fewer adverse drug reactions per admission than those who did not use the technology. Each hospital, however, assigned and applied unique bar codes, which increased operating costs and represented an impediment to this technology. FDA’s labeling authority provided an opportunity to ensure uniform bar code information, thus removing an impediment and accelerating investment in technology to reduce adverse drug reactions.
Working with experts in drug safety, the FDA identified information that would, if available, result in fewer adverse drug events. Although including additional information such as lot numbers and expiration dates would be desirable, the costs of requiring this information on bar codes would be high (over $59 million per year annualized at 7 percent over 20 years) with no public health benefit. We found that information on drug identification and dosage was sufficient to avert adverse drug reactions and could be added to the label with two-dimensional bar codes at a relatively low annualized cost to manufacturers ($8 million). The challenge, both for the regulation and for our economic analysis was that in order for bar codes to lead to public health benefits, hospitals would have to make significant investments in bar code technology. We modeled the costs of acquiring and installing bar code systems in average-sized hospitals, including changes in nursing behavior within treatment wards, and found that a bar code system would cost an average-sized hospital about $550,000 per year in increased operating costs, although some efficiencies in distribution, reduced malpractice claims, insurance premiums, and potential uses in non-hospital settings somewhat mitigated this cost.
Despite the costs, there has been a trend toward hospital use of bar code technology. We used a probit model of adoption, and after discussions with hospital administrators and technological experts forecast industry-wide adoption within 20 years without FDA action. By requiring universal bar codes and thus removing an impediment to adoption, we expected adoption to be accelerated and the industry to have bar code readers within 10 years. By making investments earlier, hospitals will incur annualized costs of over $650 million, discounted over 20 years at 7 percent.
Hospitals that currently use bar code systems avoided 50 percent of the adverse drug events caused by errors in the distribution and administration of prescriptions. Further research indicated that about 45 percent of all adverse drug events were caused by errors in those stages of treatment. We therefore estimated that bar codes would have prevented about 84,000 adverse drug events per year (373,000 current adverse drug events x 45 percent x 50 percent), or 16.7 per hospital per year. To estimate the value of averting these events, we needed to estimate their severity and duration. Adverse drug events are distributed as serious, significant, life-threatening, and fatal based on historical reports; we collected data on the durations of each type of event from reports in the literature. We assigned preference scores from reported preferences in order to weight each type of event and then used social willingness-to-pay to assign a value to each potentially avoided event. We estimated the weighted average willingness-to-pay to avoid an adverse drug event to be over $185,000. If the regulation will indeed accelerate use of bar code technology in hospitals, and thus avert over 500,000 adverse drug events within 20 years, the annualized benefit of the regulation will be over $5 billion. We estimated the cost effectiveness to be about $15,000 per quality-adjusted life year gained due to the regulation.