Red Tape and Pink Slips: Obama’s Imaginary Regulatory Reform

By Henry I. Miller 

Government regulation is one of the nation’s few growth industries, making a mockery of the assertions and predictions of the Obama administration.

During his recent State of the Union speech, President Obama once again tried to assure Americans that he is committed to regulatory reform. But no student of federal regulation could possibly be convinced, because the facts clearly tell a different story.


The president isn’t alone in peddling the myth of regulatory reform. His regulatory czar, Cass Sunstein, has been at it for months. He announced last August that rule changes would "save U.S. businesses billions of dollars in regulatory burdens." But, contrary to his assertions, the regulatory review that led to these changes was neither "unprecedentedly ambitious" nor likely to improve the nation’s current economic stagnation.
Sunstein claimed that regulatory relief will save businesses $10 billion over five years. To put these savings in context, the most recent analysis by the Small Business Administration estimated the cost of compliance with federal regulation (as of 2008) to be a staggering $1.75 trillion annually.
Stung by criticism that his administration's policies are anti-business, Obama has tried various ploys to deny it. In January 2010, he announced a government-wide review of federal regulations to restore "balance" by eliminating those "that stifle job creation and make our economy less competitive." He emphasized that concept again in his 2011 State of the Union speech, referring to "rules that put an unnecessary burden on businesses."

Facing regulatory uncertainty or obstructionism, companies are simply abandoning projects that in a more positive regulatory environment might have yielded medically useful, profitable products.

But Obama and Sunstein are offering little more than political posturing about regulatory reform. For one thing, the president’s directive to review regulations merely reinforces an executive order President Clinton signed in 1993 that is applicable to—but has been largely ignored by—the Obama administration since it assumed office. According to economist Susan Dudley, who held Sunstein’s job during the previous administration, "Over the first two years of [Obama's] term, the federal government issued 132 economically significant regulations (defined as having impacts of $100 million or more per year). That averages out to 66 major regulations per year, which is dramatically higher than the averages issued by President Clinton (47 per year) or President Bush (48 per year)."
Moreover, Dudley notes that the Obama administration's most recent agenda of upcoming regulations, which was issued last July, does not indicate a slowing of activity. Quite the contrary; government regulation is one of the nation’s few growth industries.
The impacts of the Obama administration's regulatory excesses have been disastrous to some of the nation's most innovative and productive industries. For example, a recent survey of venture capital firms revealed that they have begun to avoid investment in early-stage pharmaceutical and medical device companies, which are therefore increasingly moving overseas. Thirty-six percent of respondents said they plan to increase investments in life science companies in Europe, while only 13 percent plan to increase investment in U.S. companies; and 31 percent said they plan to decrease investment in life science companies in the United States, compared to 7 percent that plan to decrease investment in Europe. Sixty-one percent of the investors cited regulatory challenges as the primary reason; more specifically, they alluded to dysfunction, unpredictability, and risk aversion at the Food and Drug Administration.
Regulation of the Pharmaceuticals Industry
Many of us who follow drug and medical device development and their regulation have seen this coming. Bringing a new drug to market now requires 12 to 15 years and costs more than $1.4 billion, and the number of drugs approved by the FDA annually is trending downward (in spite of years of significant increases in the agency's budget). Consider the numbers of approvals during recent five-year intervals. From 2007 to 2011, the FDA approved 123 new drugs; from 2002 to 2006, 129 drugs; and from 1997 to 2001, 178 drugs. That trend is destined to continue because in 2010 the number of applications for approval of new drugs was the lowest in decades.

The Small Business Administration estimated the cost of compliance with federal regulation (as of 2008) to be a staggering $1.75 trillion annually.

Another metric that reflects what the drug companies are experiencing is the plummeting success rate of Phase 2 clinical trials, in which the efficacy of a new drug candidate begins to be assessed; from 28 percent in 2006-2007, it fell to 18 percent in 2008-2010, according to an analysis published in the journal Nature Reviews Drug Discovery last May. Facing regulatory uncertainty or obstructionism, companies are simply abandoning projects that in a more positive regulatory environment might have yielded medically useful, profitable products. This lowers the probability that an American research-intensive company will come up with The Next Big Thing, for either its initial indication or subsequent ones.
But perhaps the most ominous statistic of all is that drug manufacturers recoup their R&D costs for only one in five approved drugs, a deterioration from one in four about a decade ago. Is it any surprise that potential investors are disenchanted?
The current sorry state of pharmaceutical development reflects the FDA's excessive risk aversion, unchecked by congressional oversight, which has forced companies to perform ever-larger, longer, more complex, and more expensive clinical trials. Expressing industry's frustration at the FDA's capriciousness and intransigence, Fred Hassan, then CEO of drug company Schering-Plough, said of the regulatory climate: "What will it take to get new drugs approved? The point is, we don't know." Kenneth Kaitin, director of the Tufts Center for the Study of Drug Development, described the obstructionist culture at the FDA as having caused it to become viewed as "an agency that is supposed to keep unsafe drugs off the market, not to speed access to life-saving drugs."
Illustrating the kind of policy-making that has frustrated corporate innovators, regulators have concocted additional criteria for granting marketing approval of a drug. The new criteria are above and beyond the statutory requirement for the demonstration of safety and efficacy and could inflict significant damage on both patients and pharmaceutical companies: Seemingly arbitrarily, the FDA sometimes requires that new drugs be not merely effective but actually superior to existing therapies, a new standard that is often difficult and extremely costly to meet. For example, although the law requires that to be marketed a drug must simply be shown to be safe and effective, the agency denied approval of Merck's Arcoxia, a COX-2 enzyme inhibitor for the relief of arthritis pain, because the drug needed to be shown to be superior to existing drugs. Robert Meyer, director of the FDA office that oversees arthritis drugs, claimed that the agency's advisory committee had sent a clear message that "simply having another drug on the market . . . didn't seem to be sufficient reason" for approval. But whether or not the advisory committee meant to convey that (and in any case, advisory committee recommendations are not binding), it is specious reasoning—and it epitomizes the flawed, anti-innovation decision-making that prevails at FDA and other regulatory agencies.

A recent survey of venture capital firms revealed that they have begun to avoid investment in early-stage pharmaceutical and medical device companies, which are therefore increasingly moving overseas.

For several reasons, it may be important to have “another drug on the market" even if it appears from clinical trials data to be no better than the alternatives. First, there are often critical differences between drugs that act through similar mechanisms: Different COX-2 inhibitors and statins, for example, were shown long after the initial approvals to have distinct advantages and disadvantages; depending on a variety of factors, physicians can select one over another.
Second, if two drugs are each effective for 40 percent of patients with a given symptom or disease, it may not be clear whether they work for the same 40 percent. Thus, if the drugs are effective in different patient populations, the failure of regulators to approve the second drug could deprive a large number of patients of access to an efficacious drug. At best, practitioners and patients would have fewer choices.
Third, a 2006 study by M.I.T. economist Ernst Berndt and his collaborators found that "supplemental," or secondary, approvals of drugs—which include new dosages, formulations, and indications—accounted for substantial use and public health benefits of the drugs. If the drug is not approved because the initial studies do not show superiority to comparators, these later benefits are lost.
Finally, in a study published last year, Joseph DiMasi and Laura Faden of the Tufts Center for the Study of Drug Development persuasively debunked the myth that drug companies purposely produce duplicative me-too drugs. They carefully examined drug development patterns and timing and found that the process is best viewed as "a race in which several firms pursue investigational drugs with similar chemical structures or with the same mechanism of action before any drug in the class obtains regulatory marketing approval." In other words, companies are not starting out to develop a me-too product any more than a marathon runner starts a race intending to be an also-ran. DiMasi and Faden concluded that "the distinctions that are often drawn between the relative innovative value of the development of the first-in-class and the me-too drugs in the same class may be misguided."
Other Regulatory Overkill
Regulatory excesses harm more than just industries and individual companies. The diversion of resources to comply with regulation (useful or not) exerts an “income effect” that shows a correlation between wealth and health, an issue popularized by the late political scientist Aaron Wildavsky. It is no coincidence, he argued, that richer societies have lower mortality rates than poorer ones. To deprive communities of wealth, therefore, is to enhance their health risks.
Wildavsky's argument is correct: Wealthier individuals are able to purchase better healthcare, enjoy more nutritious diets, and lead generally less stressful lives. Conversely, the deprivation of income itself has adverse health effects—for example, an increased incidence of stress-related problems including ulcers, hypertension, heart attacks, depression, and suicides.

The number of drugs approved by the FDA annually is trending downward.

It is difficult to quantify precisely the relationship between mortality and the deprivation of income, but academic studies suggest as a conservative estimate that every $7.25 million of regulatory costs will induce one additional fatality through this “income effect.” The excess costs in the tens of billions of dollars required annually by excessively precautionary regulation for various classes of consumer products would, therefore, be expected to cause thousands of deaths per year. These are the real costs of regulators running amok in the guise of “erring on the side of safety.” The expression “regulatory overkill” is not merely a figure of speech.
Not only have we experienced several years of slow economic growth and job creation but for the third year in a row, the United States has slipped in the World Economic Forum's (WEF) annual competitiveness survey.
Obama has too often advanced policies that inhibit innovation, discourage R&D, blunt wealth creation, and kill jobs. If the president were serious about regulatory reform to boost the economic recovery, he would clean house and replace political appointees at the gatekeeper agencies which approve products such as pharmaceuticals, pesticides, and genetically engineered plant varieties.
Henry I. Miller, a physician and molecular biologist, is the Robert Wesson Fellow in Scientific Philosophy and Public Policy at Stanford University’s Hoover Institution and a fellow at the Competitive Enterprise Institute. He was the founding director of the Office of Biotechnology at the FDA from 1989 to 1993.