Foxes and Henhouses

Ezra Klein has an interesting post up in which he correctly points out the conflict of interest inherent in having pharmaceutical companies that develop new drugs execute the clinical trials that test for their safety and efficacy.

While literal corruption of the results makes for good movies, and will always be present to some extent as long as money is at stake and humans remain human, it appears to be vanishingly rare. What is clearly one huge problem is publication bias in which positive results are much more likely to be reported than negative results. A second problem that he doesn’t really get into in the post is that subtle decisions about study design – in effect, deciding exactly what question is asked by the research – can be manipulated in a fashion that is in the best interest of the pharmaceutical company, rather than what a truly objective researcher would probably do.

Klein recommends a paper that presents a simple solution: the government should fund contract research directly.

But the obvious point that this misses is that a government bureaucracy has its own conflicts of interest. Most directly, bureaucrats and politicians tend to have enormous career risk from an unsafe drug introduction, but almost none from a rejected drug that would have been effective had it been introduced. Publication and study design bias can be pointed in both directions.

All else equal, Klein’s solution would likely result in fewer new drugs being brought to market. The average new drug would probably be safer, and we would likely have fewer “me-too” drugs. We would also likely not get some new, safe and effective drugs that we would get under the current system. Would this be an improvement? It’s not so obvious. Think of the recent debate over HIV/AIDS treatments. It’s a question that requires fairly careful research.

In fact, research and analysis of exactly this problem is what led to many reforms of our drug approval system over the past couple of decades. The classic work here is Sam Pelzman’s Regulation of Pharmaceutical Innovation from 1974. It kicked off a wave of drug regulation research throughout the late 1970s. A more contemporary popular treatment of the general topic of the trade-off between regulation and innovation is Richard Epstein’s Overdose from 2006.

Any delegated task creates agency problems. Pointing out only those on one side of the see-saw is missing at least half the picture.