Study: Use Markets, Not Regulations, To Increase Pharmaceutical Information

UNIVERSITY PARK, PA (April 27, 2006)—Creating market-based incentives through targeted tort reform is the best way to increase the quality and quantity of pharmaceutical information available to the public, according to a new article from Penn State's Smeal College of Business.

Its author argues that drug companies will be encouraged to conduct more tests and more fully disclose the results if by doing so their potential for legal liability is reduced.

Daniel Cahoy, assistant professor of business law, argues in "Medical Product Information Incentives and the Transparency Paradox" that requiring medical product manufacturers to fully disclose trial results without also limiting tort liability may actually lead to less information reaching the public.

In the wake of the lawsuits claiming that Vioxx manufacturer Merck hid the results of trials showing the drug may contribute to heart attacks, many consumer groups and politicians are pressuring the Food and Drug Administration and drug companies to release all clinical trial results. Cahoy argues that these efforts may cause drug manufacturers to complete fewer voluntary drug trials and result in less being known about drugs.

To solve this "transparency paradox," Cahoy argues for the use of economic incentives to encourage drug manufacturers to test their products more thoroughly. Under Cahoy's proposal, a drug company could be protected from the type of litigation facing Merck if it continually tests its products and openly discloses both good and bad results.

A "very narrow legal revision must be adopted that specifically links the desired information with a liability limitation," Cahoy writes. "The limitation need not go beyond ensuring that a manufacturer that acts in a manner that benefits society will not face liability as a result."

Should a pharmaceutical be found to contribute to heart attack risk, for example, its manufacturer would be protected from liability if it discovered this risk on its own and released the new revelation expeditiously. This protection from liability will encourage a company to take the risk of seeking new information.

Cahoy favors such a market-based incentive structure over the FDA's recent attempt to eliminate or "preempt" state product liability litigation if a company merely complies with the relevant regulations. The latter would likely result in less than the desired amount of information because "a firm derives no benefit from acting beyond the regulatory rules because it will face no liability costs," he argues. "Since tort liability is important to induce a company to internalize the costs of future harm by producing information, complete immunity is not a reasonable option."

These market-based incentives are also likely to be more desirable than increased federal regulatory powers, given the recent criticisms of the FDA as highlighted in Monday's report from the Government Accountability Office. "The FDA is often accused of acting in an overly industry-friendly manner, and given the powerful incentives of tort immunity for regulatory compliance, the benefits in exerting undue influence on the agency only increase," Cahoy writes.

Further, he warns that bureaucratic and political pressures within the FDA may hinder the agency's ability to enforce new regulations and get more prescription drug information to the public. Cahoy concludes that giving the FDA more authority is a second-best option to providing market-based incentives to drug manufacturers. And given the life-and-death nature of this kind of information, second best isn't good enough.

Cahoy is a patent attorney licensed to practice before the U.S. Patent and Trademark Office and is admitted to the New York State Bar and several federal courts. He has published numerous articles in academic law journals on topics such as pharmaceutical importation and the optimal policy for reforming the U.S. patent system, among others. At Smeal, Cahoy specializes in the teaching and study of intellectual property law, as well as related issues in technology law and general business law concepts.

"Medical Product Information Incentives and the Transparency Paradox" will be published in a forthcoming edition of the Indiana Law Journal. The paper is available online at ssrn.com/abstract=895501.