Safety and Effectiveness: The FDA's Approach to Risk in Prescription Medication

The FDA ensures that prescription drugs in America are generally "safe and effective" for the uses for which they are prescribed. Given the inherent tradeoff between rigorously vetting drugs and delaying alternative treatments for patients, however, there are areas in which prescription risks are left unregulated or are unable to be precisely quantified. In these areas where drug risks can be heterogeneous, physicians' ability to assess, and the market's ability to price, risk is particularly important. This dissertation focuses on the legal framework surrounding consumer drug choice.;Chapter 1 begins by measuring consumers' preferences with respect to ambiguity in the risk that a drug is safe or ineffective in the presence of framing effects. It uses an incentivized experiment on Vanderbilt undergraduates to understand consumers' preferences if they were given explicit information about drug risks. These deviations from ambiguity neutrality depend on context: the Chapter finds that framing effects result in ambiguity-seeking behavior in the "loss domain" and ambiguity-averse behavior in the "gains domain." The results suggest that alleviating some ambiguity through uniform recommendations or physician intermediaries might actually lead to patients choosing better treatment options.;Chapter 2 empirically examines the consumption of narrow therapeutic index (NTI) drugs, an area in which there was a perceived but unregulated risk. The Chapter tests whether third-party payers contributions are consistent with patients' preferences against risky drugs, particularly drugs in which switching is costly. The results support this idea, as there is evidence of a price penalty for NTI status in all first- and third-party payers' contributions. The gap between brand-name and generic drugs is also smaller for NTI drugs than for non-NTI drugs, consistent with costly switching. Finally, the Chapter examines consumption behavior and finds evidence of version loyalty, consistent with costly switching. The Chapter concludes that third-party payers might be adequate agents of patients in taking risk preferences into account in their pricing decisions even absent direct government regulation.;Chapter 3 measures the effect of a False Claims Act settlement on relinquishment of inappropriate off-label uses. It finds a significant average drop in off-label prescriptions after an FCA suit is settled. It further utilizes a case study of neurontin to disentangle the response of different payers to both scientific and legal information shocks. It finds heterogeneity in relative relinquishment by payer and finds evidence consistent with the relinquishment being spurred by the litigation process.;This dissertation seeks to understand the relationship between risk preferences and regulation in the context of pharmaceutical drugs. Chapter 1 discusses the underlying issue of ambiguity in pharmaceutical drug risks. Chapters 2 and 3 examine two contexts in which drug risks were uncertain or not well-quantified and discuss whether explicit regulation is necessary. Chapter 2 finds that the market seems sensitive to risk even in the absence of government regulation. Chapter 3 finds that the False Claims Act can provide industry signals as to the appropriateness of off-label uses but cautions that this function may be undermined by further expansion of the FCA. The results provide an insight into how the legal framework surrounding pharmaceutical regulation interacts with consumer risk preferences and where explicit regulation is necessary and where the market might be well-equipped to compensate risk.