Question

1. There is an implicit tradeoff in allowing the FDA to regulate pharmaceutical markets.

a. Explain the difference between a Type I error and a Type II error

b. Compare and contrast the regulations and tradeoffs implicit in FDA regulation to the AMA’s regulation of doctors.

Answer 1

(a)

Type I Error

Type I error is defined as an error that occurs when the sample results cause the rejection of the null hypothesis, in spite of the fact that it is true.

Type II Error

When on the basis of data, the null hypothesis is accepted, when it is actually false, then this kind of error is known as Type II Error.

(b) The persistence of off-label drug use should caution people about allowing the FDA to exert extensive control over the drug licensing process. It could be that the thousands of physicians, hospitals, and patients that use drugs off-label have, time after time, all made some major mistake. Or it could just be possible that the accumulated level of institutional knowledge post-release demonstrates that the FDA has been too restrictive in its decisions as to whether a new drug should be allowed into the marketplace in the first instance. The FDA is heavily incentivized to be tough in its approval process lest it take heavy criticism for the all-too-visible injuries that may be caused by approved drugs. But in the social calculus, the individual losses that occur to people who are denied treatment by the heavy-handed actions of the FDA count every bit as much. Yet these diffuse losses, often undocumented, bring much less heat to the FDA, which accordingly is prepared to shrug them off as a cost of supplying people the “protection” that is so central to the FDA mandate.

Given this mismatch in incentives, it is especially worrying that the FDA has now taken, with some success, an aggressive position on its ability to regulate what most people would think to be a standard type of medical procedure: a type of stem-cell treatment whereby a patient’s own cells are removed from his or her body, cleansed and grown, and then reinjected in the joints where they have healing properties. The FDA treats these procedures as the creation of a new drug because “the cells or tissues are minimally, or more-than-minimally, manipulated,” a distinction that appears nowhere in the statutory framework. The use of the stem cells on the person from whom they were removed in so-called “autologous” transfers is always of a different order than the so-called “allogenic” transfers, which involve injection of the stem cells into a different person, with a different immunological profile.

Under the Federal Food Drug and Cosmetic Act, the FDA has the power to intervene when any dangerous “adulterated or misbranded” article has moved in interstate commerce. Importantly, however, that provision is narrower than Congress’s power to regulate interstate commerce, which is not limited to articles that at some point in their life have moved into interstate commerce.

It is a sad commentary that the FDA should be able to ignore the explicit textual limitations on the scope of its own statutory powers. But it is even more troubling that it should be able to do so when the social consequences of its actions are to throttle medical innovation. The practice of surgery is largely unregulated today, and the advances within the field have been little short of amazing over the past 50 years since, to pick a date not quite at random, the passage of the 1962 Kefauver-Harris expanded the FDA’s power. Innovations in stem-cell therapy are derived from small, physician-driven activities, which do not generate huge amounts of revenue as with mass-produced pharmaceutical products. More specifically, the marginal cost of the production of an additional pill is very low, such that some portions of the fixed costs can be dropped on it. In contrast, the marginal cost of the next procedure is quite high, so that physicians have little opportunity over the useful life of a technique to recover the high costs needed of initial clinical trials.

Put otherwise, the business model of medical innovation for stem cell procedures is labor intensive from start to finish, so it is as not as though once any procedure is developed or perfected it is as cheap to replicate as it is to make the next pill or some mass-produced drug. The FDA has not had a good track record in the regulation of new pharmaceutical products, where its costs are too high and the number of new products effectively constrained. But the extension of these requirements, even in modified form, are so costly in the stem cell context that it will drive this form of medical innovation off-shore to other places. It is hard to imagine any reason to tolerate these consequences. There are, at the very least, powerful market forces that govern the use of these treatments. Nor is there any regulatory vacuum in this case, given the risk of both medical malpractice liability, on the one hand, and direct regulation by state departments of health.