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It's interesting that they tried the tactic of micro-regulating every aspect of the ship captain's business and that didn't work as well as broad incentives. T

It's interesting that they tried the tactic of micro-regulating every aspect of the ship captain's business and that didn't work as well as broad incentives. Today, this micro-regulation is politically popular as voters can more easily comprehend the direct effects of regulation as opposed to the indirect effects of broad incentives. For example, we force drug companies to perform very extensive clinical trials for new drugs and this makes us feel safe. But simply increasing the liability drug companies face for producing harmful drugs may be more effective and would certainly be a lot cheaper (as much as 90% of the cost of a new drug is meeting FDA requirements). But I doubt voters would feel as safe in a regime of broad incentives even if it worked better.

protomyth 16y ago
I'm not terribly certain of that one. I don't disagree on the principle in the general sense, but (having been in clinical trials at one point) it seems every new drug will kill / have adverse effects on someone. Its the nature of the thing, drugs do not react the same for everyone and sometimes it is adverse. No amount of testing will fix that.
_delirium 16y ago
It's also driven partly by a preference for that kind of regulation from the companies themselves (though they would prefer less regulation overall). Having to follow a bunch of rules on FDA trials is a manageable, mostly predictable expense; large, nearly unlimited potential liability if a drug turns out to have significant negative effects 10 years down the line is much scarier to managers and stockholders. That's one reason the health industry is currently lobbying to move it in exactly the opposite direction of what you propose: they want less broad liability, and are willing to accept more FDA micromanagement in return if that's what it takes. The proposed bargain is something like: the FDA should tell us what to do, and if we follow their rules, we should be shielded from all liability.
- T_S_ 16y ago
  Regulation = Barriers-to-Entry. Businesses accept (and secretly cheer on regulators.) People get this connection, even though it is non-intuitive on the face of it. What is less studied are the regulators themselves. They rarely impose the kind of regulation that opens industry actions to sunshine and converts them to common knowledge. There is a substantial body of theory that shows that the price system breaks down in the face of informational asymmetry. But regulators don't go for it since it does not make them more powerful. That's human nature. And it's fine with businesses, who would prefer to answer to the One rather than the Many. Preserves barriers to entry.
- RyanMcGreal 16y ago
  Not only that: expensive regulation also protects those companies big enough to absorb the costs from disruptive competition by startups.
wisty 16y ago
> as much as 90% of the cost of a new drug is meeting FDA requirements Really? I'll take it that you're not including marketing (which is where most of the money goes), as that doesn't kick in until the new drug is going to be approved. Does that 90% include things like clinical trial, which should be done anyway?
- Symmetry 16y ago
  You only have to pay for marketing for the drugs that make it through FDA trials, not the 9 others that didn't.
- anamax 16y ago
  > I'll take it that you're not including marketing (which is where most of the money goes), Marketing includes discount/free drugs for low-income folk, samples (which many doctors use the same way), and telling doctors what the drug does. Which of those do you want to reduce?
  - deleted 16y ago
    [deleted]
  - CapitalistCartr 16y ago
    Marketing may include those things, but isn't limited to them, and much of the marketing money is spent elsewhere. It's easy to tell the drug companies are awash in money dealing with them. Not that I blame them.
    - anamax 16y ago
      > Marketing may include those things, but isn't limited to them, and much of the marketing money is spent elsewhere. And you know this how? And where exactly? I'll assume that you're referring to ads. > It's easy to tell the drug companies are awash in money dealing with them. Oh really? I see significant ad campaigns for 4-8 drugs. Even 20 would be a small fraction of the total drug portfolio of a single company, and there are multiple companies.
mukyu 16y ago
The only downside is in the other case people die before they pay.
- jacoblyles 16y ago
  Lots of people die from not getting life-saving drugs because they are held up by the FDA too, including drugs which are already available and shown to be effective in other countries with less strict regulatory regimes. The net lives-saved statistic of FDA regulation is really hard to calculate. But assuming that you have some number of lives-saved in mind, you have to ask yourself if that number is worth delaying pharmaceutical research. Maybe your counter-factual world is downright apocalyptic - I don't think that's likely. But if so it makes sense to have strict regulation. There are some scholars of the issue that think the lives-saved number of FDA regulation is negative, in which case of course the cost is not worth it. edit: I removed an illogical claim that may make follow up comments make less sense.
  - krschultz 16y ago
    You've thrown around the number 90% for both the amount of money the FDA delays drugs and the amount of time it delays it. Which says to me you are just pulling numbers out of thin air here.
    - jacoblyles 16y ago
      I read a few places before that 90% of the cost of developing a drug occurs after clinical trials begin but I have things to do other than write HN comments so I didn't look it up again. I will be happy if someone else finds a reference to support or deny that and will happily admit I am wrong if I am. Of course I'm totally wrong about the 90% delay I put in this last comment, I was thinking about this on the way to the office. If we're thinking about the added cost of regulation we have to compare the cost of regulation to what drug companies would spend on clinical trials in an alternative regime, and that number is not $0.
anatari 16y ago
Disagree that having a broad incentive is good enough for this case. This is an example of how hard it is to create an effective broad incentive. Since drugs can be created under the shelter of limited liability of corporations, people will just find a way around it. Shell corporations would be much more likely to risk other human lives than the FDA would. In addition to that, if the expected value of a risky drug is still positive, then many corporations may still rationally opt to proceed with the drug.
- hugh3 16y ago
  Agreed. Bring in that sort of incentive-based deregulation and suddenly every new drug would be made and manufactured by an entirely new company (which just happens to be 100% owned by an existing big pharma company). Incentives aren't the solution to everything, sometimes regulation works better. For instance, you're liable for all the damage you cause while on the road, and yet we still need road rules to stop people from behaving like dicks (and even then, it barely works).
  - jacoblyles 16y ago
    If a smaller company is 100% owned by a larger company then people suing the smaller company would have access to the large company's assets (there is some sort of equity cut-off here, in banking I believe it's as low as 9.9%). Corporate law thought of this.
    - hugh3 16y ago
      OK, so you set up a wholly independent company owned by a few employees. This company licenses the patent for NewDrug from BigCompany. Heck, you don't even have to do it with shelf companies. Hi there, I'm BigCompany, and I'm willing to license this drug which I think might work to any startup that feels like selling it! Or if that would expose me to liabiilty, I'm willing to license this substance which I developed which may or may not be useful as a drug. That would still be a win-win situation.
      - 16y ago
JabavuAdams 16y ago
> as much as 90% of the cost of a new drug is meeting FDA requirements It's easy (and convenient) to blame this on the government. I'm somewhat familiar with the pharma industry (payed for my house), and I can tell you that at least some of these "regulatory" costs are things like flying doctors to expensive shindigs, to coordinate the research they're doing for you. On this note, if a govt. agency throws a multi-thousand dollar party, it's a scandal, but those kinds of costs are built into the way (privatized) pharma operates. It's easy to waste millions when you're making billions, and you don't have to answer to taxpayers. This "government is wasteful" meme ignores the fact that there are powerful non-government actors milking the government.
- CWuestefeld 16y ago
  It's easy to waste millions when you're making billions, and you don't have to answer to taxpayers. Quite the opposite. The taxpayers only wake up once every 4 years, and even then they buy the crap that's shoveled at them, and the fearmongering ("OK, we may have made a few mistakes, but you still have to vote for us because the other side is evil"). Anything that happens between now and the next election will be largely forgotten, and anyone who tries to remind the electorate will be shouted down for "negative campaigning". On the other hand, the shareholders are watching the actions of the corporations every day of the year. I'm not personally doing so, but I pay a variety of mutual fund managers to do it. If they can't maximize my return by steering clear of corporations that are flushing money away, I'm going to fire the fund manager and put my money elsewhere. And that's why you'll never see a private organization as poorly run as a government agency, at least for any period of time. The quality of education we get is absurd for the money thrown at it. The amount of time it takes for a highway construction project to be completed (not to mention the number of workers I see loafing around when the town is filling potholes) would never be tolerated in industry. I could go on all day... This "government is wasteful" meme ignores the fact that there are powerful non-government actors milking the government. This is certainly true. But it doesn't absolve government of its responsibility as stewards of our money. The fact that government is just so huge that this is impossible is just another symptom of the root problems.
  - 16y ago
krschultz 16y ago
Do you see the obvious hole to that theory? Each drug gets passed through to a holding company that funds R&D and assumes liability. How do you hold Pfizer or Novartis resonsible for a drug they don't "own"?
- CWuestefeld 16y ago
  It's a fair question, and I personally don't see a good way around the legalities of this. However, the moral questions are quite obvious, and it seems obvious to me that there would be consumer watchdog groups (like Consumer Reports) that would keep us abreast of these antics. Even if the law can't pierce the corporation, crowdsourcing and reputation certainly can.
- jacoblyles 16y ago
  How do they earn any profits if they don't hold the equity? If they hold the equity, then they also are on hook for the liability. I used to work in banking and a lot of our clients would have loved to sell all their bad loans to a fully owned subsidiary, but the law simply doesn't let you do that. I'm not a corporate lawyer but in my experience in the financial markets it is simply impossible to avoid liability while holding equity. Maybe there are some loopholes but it is not nearly as easy as you suggest.
  - sokoloff 16y ago
    IANAL either, but I could imagine many structures that would allow for the effect the holding company would want. Pay a company for distribution and logistics expertise and make that transfer-pricing arrangement profitable for the logistics company. Then, what profit remains goes to the company owning the patent on the drug (and the liability). The parent company could hold limited partnership stakes, convertible bond and/or options with a fixed term (which might be conveniently the same length as the patent term). If the drug "survives" 17 or 20 years without significant lawsuits, call in the options and claim your equity. If the drug explodes and tanks the discovering company, the parent company holds options, bonds or LP shares that are now worthless. Still, they're in business.
frankus 16y ago
Another example is reducing fuel use: Any economist will tell you that if you want to reduce fuel use you can simply tax fuel (or tax it more heavily). Instead we get things like CAFE standards, which are both less effective (more efficient cars = cheaper driving = some amount of additional driving) and probably more expensive for everyone involved (i.e. someone that doesn't drive much might be better off with a cheaper, less efficient car). But no politician is willing to buck up and propose a higher gas tax (in fact recently members of both parties in the US proposed a gas-tax holiday). (Note: there are other reasons why CAFE-type standards might be a good idea, but they are far from the most effective way to reduce fuel use).
- wtallis 16y ago
  Fuel taxes are a great way to reduce fuel use, but they aren't a very direct incentive to reduce fuel waste. Since there's no viable replacement for fossil fuels for cars (and public transportation in America generally sucks and can't be fixed quickly), it's fuel waste that needs to be attacked more than aggregate fuel use.
  - andylei 16y ago
    whats the difference between fuel use and fuel waste
    - nitrogen 16y ago
      Fuel waste is that fuel that enters the engine but is not converted to momentum, because it either didn't burn or the energy was lost.

protomyth 16y ago

I'm not terribly certain of that one. I don't disagree on the principle in the general sense, but (having been in clinical trials at one point) it seems every new drug will kill / have adverse effects on someone. Its the nature of the thing, drugs do not react the same for everyone and sometimes it is adverse. No amount of testing will fix that.

_delirium 16y ago

It's also driven partly by a preference for that kind of regulation from the companies themselves (though they would prefer less regulation overall). Having to follow a bunch of rules on FDA trials is a manageable, mostly predictable expense; large, nearly unlimited potential liability if a drug turns out to have significant negative effects 10 years down the line is much scarier to managers and stockholders. That's one reason the health industry is currently lobbying to move it in exactly the opposite direction of what you propose: they want less broad liability, and are willing to accept more FDA micromanagement in return if that's what it takes. The proposed bargain is something like: the FDA should tell us what to do, and if we follow their rules, we should be shielded from all liability.

T_S_ 16y ago
Regulation = Barriers-to-Entry. Businesses accept (and secretly cheer on regulators.) People get this connection, even though it is non-intuitive on the face of it. What is less studied are the regulators themselves. They rarely impose the kind of regulation that opens industry actions to sunshine and converts them to common knowledge. There is a substantial body of theory that shows that the price system breaks down in the face of informational asymmetry. But regulators don't go for it since it does not make them more powerful. That's human nature. And it's fine with businesses, who would prefer to answer to the One rather than the Many. Preserves barriers to entry.
RyanMcGreal 16y ago
Not only that: expensive regulation also protects those companies big enough to absorb the costs from disruptive competition by startups.

wisty 16y ago

> as much as 90% of the cost of a new drug is meeting FDA requirements Really? I'll take it that you're not including marketing (which is where most of the money goes), as that doesn't kick in until the new drug is going to be approved. Does that 90% include things like clinical trial, which should be done anyway?

Symmetry 16y ago
You only have to pay for marketing for the drugs that make it through FDA trials, not the 9 others that didn't.
anamax 16y ago
> I'll take it that you're not including marketing (which is where most of the money goes), Marketing includes discount/free drugs for low-income folk, samples (which many doctors use the same way), and telling doctors what the drug does. Which of those do you want to reduce?
- deleted 16y ago
  [deleted]
- CapitalistCartr 16y ago
  Marketing may include those things, but isn't limited to them, and much of the marketing money is spent elsewhere. It's easy to tell the drug companies are awash in money dealing with them. Not that I blame them.
  - anamax 16y ago
    > Marketing may include those things, but isn't limited to them, and much of the marketing money is spent elsewhere. And you know this how? And where exactly? I'll assume that you're referring to ads. > It's easy to tell the drug companies are awash in money dealing with them. Oh really? I see significant ad campaigns for 4-8 drugs. Even 20 would be a small fraction of the total drug portfolio of a single company, and there are multiple companies.

mukyu 16y ago

The only downside is in the other case people die before they pay.

jacoblyles 16y ago
Lots of people die from not getting life-saving drugs because they are held up by the FDA too, including drugs which are already available and shown to be effective in other countries with less strict regulatory regimes. The net lives-saved statistic of FDA regulation is really hard to calculate. But assuming that you have some number of lives-saved in mind, you have to ask yourself if that number is worth delaying pharmaceutical research. Maybe your counter-factual world is downright apocalyptic - I don't think that's likely. But if so it makes sense to have strict regulation. There are some scholars of the issue that think the lives-saved number of FDA regulation is negative, in which case of course the cost is not worth it. edit: I removed an illogical claim that may make follow up comments make less sense.
- krschultz 16y ago
  You've thrown around the number 90% for both the amount of money the FDA delays drugs and the amount of time it delays it. Which says to me you are just pulling numbers out of thin air here.
  - jacoblyles 16y ago
    I read a few places before that 90% of the cost of developing a drug occurs after clinical trials begin but I have things to do other than write HN comments so I didn't look it up again. I will be happy if someone else finds a reference to support or deny that and will happily admit I am wrong if I am. Of course I'm totally wrong about the 90% delay I put in this last comment, I was thinking about this on the way to the office. If we're thinking about the added cost of regulation we have to compare the cost of regulation to what drug companies would spend on clinical trials in an alternative regime, and that number is not $0.

anatari 16y ago

Disagree that having a broad incentive is good enough for this case. This is an example of how hard it is to create an effective broad incentive. Since drugs can be created under the shelter of limited liability of corporations, people will just find a way around it. Shell corporations would be much more likely to risk other human lives than the FDA would. In addition to that, if the expected value of a risky drug is still positive, then many corporations may still rationally opt to proceed with the drug.

hugh3 16y ago
Agreed. Bring in that sort of incentive-based deregulation and suddenly every new drug would be made and manufactured by an entirely new company (which just happens to be 100% owned by an existing big pharma company). Incentives aren't the solution to everything, sometimes regulation works better. For instance, you're liable for all the damage you cause while on the road, and yet we still need road rules to stop people from behaving like dicks (and even then, it barely works).
- jacoblyles 16y ago
  If a smaller company is 100% owned by a larger company then people suing the smaller company would have access to the large company's assets (there is some sort of equity cut-off here, in banking I believe it's as low as 9.9%). Corporate law thought of this.
  - hugh3 16y ago
    OK, so you set up a wholly independent company owned by a few employees. This company licenses the patent for NewDrug from BigCompany. Heck, you don't even have to do it with shelf companies. Hi there, I'm BigCompany, and I'm willing to license this drug which I think might work to any startup that feels like selling it! Or if that would expose me to liabiilty, I'm willing to license this substance which I developed which may or may not be useful as a drug. That would still be a win-win situation.
    - 16y ago

JabavuAdams 16y ago

> as much as 90% of the cost of a new drug is meeting FDA requirements It's easy (and convenient) to blame this on the government. I'm somewhat familiar with the pharma industry (payed for my house), and I can tell you that at least some of these "regulatory" costs are things like flying doctors to expensive shindigs, to coordinate the research they're doing for you. On this note, if a govt. agency throws a multi-thousand dollar party, it's a scandal, but those kinds of costs are built into the way (privatized) pharma operates. It's easy to waste millions when you're making billions, and you don't have to answer to taxpayers. This "government is wasteful" meme ignores the fact that there are powerful non-government actors milking the government.

CWuestefeld 16y ago
It's easy to waste millions when you're making billions, and you don't have to answer to taxpayers. Quite the opposite. The taxpayers only wake up once every 4 years, and even then they buy the crap that's shoveled at them, and the fearmongering ("OK, we may have made a few mistakes, but you still have to vote for us because the other side is evil"). Anything that happens between now and the next election will be largely forgotten, and anyone who tries to remind the electorate will be shouted down for "negative campaigning". On the other hand, the shareholders are watching the actions of the corporations every day of the year. I'm not personally doing so, but I pay a variety of mutual fund managers to do it. If they can't maximize my return by steering clear of corporations that are flushing money away, I'm going to fire the fund manager and put my money elsewhere. And that's why you'll never see a private organization as poorly run as a government agency, at least for any period of time. The quality of education we get is absurd for the money thrown at it. The amount of time it takes for a highway construction project to be completed (not to mention the number of workers I see loafing around when the town is filling potholes) would never be tolerated in industry. I could go on all day... This "government is wasteful" meme ignores the fact that there are powerful non-government actors milking the government. This is certainly true. But it doesn't absolve government of its responsibility as stewards of our money. The fact that government is just so huge that this is impossible is just another symptom of the root problems.
- 16y ago

krschultz 16y ago

Do you see the obvious hole to that theory? Each drug gets passed through to a holding company that funds R&D and assumes liability. How do you hold Pfizer or Novartis resonsible for a drug they don't "own"?

CWuestefeld 16y ago
It's a fair question, and I personally don't see a good way around the legalities of this. However, the moral questions are quite obvious, and it seems obvious to me that there would be consumer watchdog groups (like Consumer Reports) that would keep us abreast of these antics. Even if the law can't pierce the corporation, crowdsourcing and reputation certainly can.
jacoblyles 16y ago
How do they earn any profits if they don't hold the equity? If they hold the equity, then they also are on hook for the liability. I used to work in banking and a lot of our clients would have loved to sell all their bad loans to a fully owned subsidiary, but the law simply doesn't let you do that. I'm not a corporate lawyer but in my experience in the financial markets it is simply impossible to avoid liability while holding equity. Maybe there are some loopholes but it is not nearly as easy as you suggest.
- sokoloff 16y ago
  IANAL either, but I could imagine many structures that would allow for the effect the holding company would want. Pay a company for distribution and logistics expertise and make that transfer-pricing arrangement profitable for the logistics company. Then, what profit remains goes to the company owning the patent on the drug (and the liability). The parent company could hold limited partnership stakes, convertible bond and/or options with a fixed term (which might be conveniently the same length as the patent term). If the drug "survives" 17 or 20 years without significant lawsuits, call in the options and claim your equity. If the drug explodes and tanks the discovering company, the parent company holds options, bonds or LP shares that are now worthless. Still, they're in business.

frankus 16y ago

Another example is reducing fuel use: Any economist will tell you that if you want to reduce fuel use you can simply tax fuel (or tax it more heavily). Instead we get things like CAFE standards, which are both less effective (more efficient cars = cheaper driving = some amount of additional driving) and probably more expensive for everyone involved (i.e. someone that doesn't drive much might be better off with a cheaper, less efficient car). But no politician is willing to buck up and propose a higher gas tax (in fact recently members of both parties in the US proposed a gas-tax holiday). (Note: there are other reasons why CAFE-type standards might be a good idea, but they are far from the most effective way to reduce fuel use).

wtallis 16y ago
Fuel taxes are a great way to reduce fuel use, but they aren't a very direct incentive to reduce fuel waste. Since there's no viable replacement for fossil fuels for cars (and public transportation in America generally sucks and can't be fixed quickly), it's fuel waste that needs to be attacked more than aggregate fuel use.
- andylei 16y ago
  whats the difference between fuel use and fuel waste
  - nitrogen 16y ago
    Fuel waste is that fuel that enters the engine but is not converted to momentum, because it either didn't burn or the energy was lost.