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Cambridge v. Chicago:
An Answer To Dr. Arnold Relman's New Republic Review of Overdose

August 22, 2007


In a recent issue of the New Republic, Arnold Relman, a former Editor—in—Chief of the New England Journal of Medicine, offered a most unflattering review of my recent book, Overdose: How Excessive Government Regulation Stifles Pharmaceutical Innovation (Yale University Press, 2006). The Editors of the New Republic have decided not to publish any reply from me. I am therefore grateful that the Manhattan Institute has stepped forward to publish my reply, with—I should add—an open invitation to Dr. Relman to respond if he so chooses.

In dealing with a longish review, the usual approach of the aggrieved author is to take on only one or two points of the critic, and let the reader draw whatever inferences he or she chooses about those points that were not addressed. The Relman review, however, makes so many instructive errors that a different course seems preferable. Let me first start with a few general observations and then turn to a point by point rebuttal of his argument.

The most obvious difference between us is that we inhabit two different intellectual universes. He dwells from the more liberal and more complacent medical culture of Cambridge, Massachusetts, and I come from the less fashionable and more driven legal precincts of the University of Chicago. Thus two great divides separate Relman from myself.

Start with the professional training. I am a lawyer by training, with an extensive, if informal, background in economics. I have worked extensively and actively in the health field area on a wide range of topics on health care, ethics, law and medicine for the past 30 years, much of it spent in the company of health care professionals with medical training. Relman is a doctor by training who fancies himself an expert in "social medicine," who has as best I can tell no formal training in any of the collateral disciplines that bear on the comprehensive analysis of health care. In his view, mere lawyers are always out of their depth in dealing with the kinds of issues raised by the provision of health care, including of course the development, testing, and marketing of pharmaceutical products. My view is that the technical matters of medical treatment can easily be bracketed in dealing with the larger institutional issues. I do not wish to decide which drugs should be tested in what clinical trials, but, even in the absence of that information, can comment intelligently on the use of these clinical trials in dealing with FDA approvals for new drugs or with their role in litigation. Indeed, in my work as a torts scholar, I am constantly forced to examine detailed medical information that involves such hotly litigated questions as whether Bendectin causes child defects or thimerosal causes autism. In my view, there is nothing whatsoever in Relman's traditional medical background that offers him any comparative advantage in dealing with the full range of property rights, regulatory, marketing, patent, and tort issues that are examined in Overdose, which should be evident to anyone who has worked his or her way through Relman's review.

The second deep cleavage between us has to do with world views. Relman is a generation older than I, being born in 1923, while I was born a generation later in 1943. The difference in age matters, because he takes the New Deal critique of markets as a verity from which all other truths flow. Indeed, for a man so insistent on field expertise, he shows no hesitation to take on Milton Friedman for his heretical views of the role and organization of market institutions. Those sentiments are quite evident in his searing conclusion that insists that markets "do not do a good job of protecting the public interest. If we want a pharmaceutical industry and a health care system that put patients' welfare and society's needs ahead of profits, we will need more regulation, not less."

I of course am very much in the camp of Milton Friedman, which is evidenced by our parallel lives at the University of Chicago and the Hoover Institution. And I was deeply honored to speak at his memorial service held at the Hoover Institution this past January. All that does not mean that I slavishly agree with all that Friedman says-a pose that Friedman himself would have found most distasteful. It does mean, however, that I take strong issue with the simple–minded portrait that Relman paints of my views. The proper question is not whether we put society's interest ahead of profits. That formulation of the question gives no guidance as to what should be done. Clearly if we are to have pharmaceutical companies, then we must allow them to have some profits in order to attract and retain capital. Relman is not subtle enough to distinguish between a risk-adjusted competitive rate or return and monopoly profits, or to recognize that the former advances social welfare and the latter retards it. Indeed, Relman's gripe is not only with Friedman but with every neoclassical economist from Adam Smith to the present

That said, the right question to ask is how we maximize a system of overall social welfare, which cannot be done if the industry is driven out of business. On that structural question I am happy to align myself with both Smith and Friedman on a number of key points: that voluntary transactions are preferable to coerced ones, that subsidies and taxes can easily distort the choices of private actors, that state officials often have private agendas to advance even when in public office, and that the state which concentrates its effort on the control of force and fraud, the provision of public infrastructure and the control of monopoly-which means refusing to create state monopolies-will do better than the big New Deal government that sees in every market a looming imperfection, which only the wise hand of government can correct. The system of government control that Relman proposes is ruinous to the ends of patient welfare and social prosperity that he supports.

His fundamentally unsound world view does create a huge professional and philosophical chasm between us. Worse still, it infects every portion of his New Republic review. Here it is convenient to break down his arguments by into two areas. I will first treat his general critique of the economic issues raised on matters of drug, pricing, patenting and marketing. Thereafter I shall turn to health and safety, with special reference to the FDA, clinical trials and tort liability.


Corporate responsibility. Relman begins his attack by quoting Pfizer CEO Jeffrey Kindler, a lawyer by training no less, who says: "We will transform virtually every aspect of how we do business, focusing on actions that create and sustain value for our shareholders." That statement, made by the CEO of a company whose stock has been under constant pressure should be regarded as good news to shareholders, and to anyone else who is concerned with Pfizer's recent lag in performance. But not to Relman, who sees in this benign pronouncement the spread of Friedman's dreaded influence into the sacred precincts of the pharmaceutical industry. Indeed Friedman said, famously, in words that wave a red flag before Relman's eyes: "Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible." Relman hears in these words not "we shall do our best by our shareholders." Rather, to him the words say: "the public be damned."

Now it turns out that Friedman (who was not a lawyer) did overclaim in this sentence. The proper analysis says that the corporation is (or is formed by) an agreement among its shareholders, so that any gifts that it chooses to make should be in accordance with the conditions of its charter, which in some cases may allow for such giving. Indeed, I know of no case where a corporate gift has been successfully attacked in court. Relman can breathe easily on this point. But that is a mere detail. Friedman's central point is that shareholders can agree on any program that maximizes share value. Once that is done then the shareholders as individuals can make whatever charitable gifts they see fit with the dividends and gains that they make from their investment. Friedman's argument, which Relman does not understand, is that private giving at the shareholder level is preferable because avoids the real conflict of interests that arises when corporations make gifts to some charities but not to other. And needless to say, Relman shows no evidence of the major corporate law qualification to this rule, namely, that "gifts" to charitable or other institutions that work to promote the good will of the corporation are consistent with the operation of a profit-making institution, as countless cases have held.

We can ignore the fine points of the analysis, because Relman is after bigger game. His view is that Kindler is engaged in some massive hypocrisy when Pfizer makes all these high-sounding statements that it is "working for a healthier world," or "putting its patients first." Pharmaceutical firms are not unique in making these remarks; Ronald Reagan remarked as the spokesman for General Electric, "Progress is our most important product." But Relman is thoroughly confused about how corporations work. The management owes duties of loyalty and care to the shareholders; after all shareholders have put their money in with the firm, and it would hardly do to allow the management to misappropriate the funds so that the shareholders go home empty-handed. But the customers of the firm are not investors, and they can walk away and buy somewhere else if they do not like what they get. The key challenge to any firm is to figure out how to secure their repeated loyalty and that can only be done by offering them goods and services that they value at more than they pay, which the corporation can produce at a cost lower than the prices they can command. Therein lies the critical concordance of interest between buyer and seller that Kindler grasps. Kindler knows that unless he can preserve the good will of his customer base, Pfizer will have to close up shop. The firm has to walk a tightrope, and in that regard it is no different from any other company in any other industry. Indeed, one major problem for any firm in a large industry is that its reputation really matters, such that a single infraction can produce losses in future sales that far dwarf any direct fine or tort judgment that could be imposed. These are good features, because we now know that large companies bind themselves to good behavior by their brand and reputation. One of the first things that Kindler has to do is to make sure that his firm does not acquire a reputation that matches that of the tobacco industry (for which, years ago, I consulted). It is very hard to do in the face of uninformed critics who see a large target that finds it difficult, even with the money it spends, to mount an effective public relations campaign. Like many corporations, pharmaceutical companies are only omnipotent in the fevered imagination of their most severe critics. In reality, a single bad headline or court ruling can erase billions in shareholder value and leave CEOs like Kindler trembling.

After his initial foray, Relman then turns to my view that regulation has hurt the industry in ways that do not help the public. Relying on the judgment of unnamed experts on the drug industry, he concludes that the industry's greatest enemy is itself, not regulation. But, put the word "greatest" to one side, and there is no either/or there. I made it quite clear in Overdose that the industry blockbuster model has not worked well, and that some of the fault lies in the management of the major companies-a point that Pfizer's Kindler obviously accepts. But one cause does not operate to the exclusion of all others, and Relman must be blind to think that the endless efforts to undermine patent protection, to increase the length of clinical trials, to impose price controls, to allow for multi-billion dollar consumer refunds and tort actions has no impact on the day-to-day operations of any pharmaceutical firm, and its long-term prospects. Any change in costs can produce negative results, and it is just unsupported allegation to say that the drug companies have a deep obsession with "financial ambitions and marketing considerations," so-his italics-"that is the root of their current problems." His argument might have some tenuous credibility if deemed to explain why some firms succeed and others do not. But if there is an industry-wide risk of stagnation, it is just wrong to assume that the management of every firm falls prey to these biases. The more plausible diagnosis for a systemwide failure is the systemwide effects of expanded regulation and liability.

Competition and Monopoly. Relman will have none of this equivocation. So that is where I come in, as an industry "apologist" who can put his lawyerly skills to defend the indefensible, which in this case is acting as handmaiden for the industry's monopolistic ambitions while preaching the virtues of free competition. He notes my consulting connections, fully disclosed, to the pharmaceutical industry, and then attacks my general view on health care, as developed in Mortal Peril: Our Inalienable Right to Health Care?, which is deeply opposed to universal health care. Oddly enough, Relman thinks that it is some kind of indictment of my position to say that excessive health expenditures through Medicare and Medicaid "has had negative, although unintended, consequences." But rather than explaining why I am wrong to his committed New Republic audience he just makes the comfortable leap: the man who cannot be trusted on health care is the man who cannot trust on pharmaceutical issues either. The nub of his argument: "prescription drugs are different from most other commercial products-so different that they warrant government regulation of their development, their manufacture, and their sale." At no point does he stop to ask where the libertarian position might call for regulation, which would surely include cases where impure drugs are sold as real, or where drugs are misrepresented as to their uses or side effects. By implication he confuses the libertarian position of small government and free competition with the anarchist position of no government at all.

Nor does he see any reason to do so because he takes the view that I will abandon my principles at the drop of the hat by arguing "for stronger government support of the industry's monopoly rights and for government protection against price competition from abroad. He wants handouts from the public without public oversight." Here, Relman has lost his intellectual compass. On the first point, "industry monopoly rights" refer to patents, which grant exclusive rights to sell particular products to individual inventors. By putting the proposition in this inflammatory way he makes it appear that I wish to block new entry by other firms to compete with firms that have already received patents on drugs already in the marketplace. In fact, in Overdose I am at pains to attack large claims that would give any firm a patent over entire areas of treatment, including my extensive defense of the judicial decision University of Rochester v. G. D. Searle & Co. 358 F.3d 916 (Fed. Cir. 2004) (a case on which I briefly worked for Searle), which refused to allow the University of Rochester to obtain a patent over all drugs that relied on any Cox-II method of inhibition. The patent system, rightly used, gives people exclusive control over their own products, which is a monopoly of sorts. But so long as there are multiple substitutes subject to different patents, then no firm in the industry exercises monopoly power. There can be, and with sound policies, should be effective competition among holders of different patents of drugs that are in the same class.

Relman's statement about "government protection from price competition from abroad" also reflects either economic ignorance or conscious deceit. The last thing that I favor is allowing any firm to induce the government to place tariff or tax barriers to entry on products from overseas. But the programs to which he refers are not efforts by pharmaceutical companies to block competition by other firms hawking their own products. Rather it has to do with the issue of parallel importation, where goods from the United States are sold to, say, Canadian firms at prices dictated by the Canadian government for internal Canadian use, with the knowledge that they will be reimported into the United States for sale at lower prices than those available domestically.

For Relman, who knows nothing about the fine print of this initiative, to call this program "free trade" is a bad joke. The defenders of parallel importation make it clear that American firms should be under a statutory duty to sell as much of any good as any buyer wants to buy at a price that is determined by the state monopolist (more precisely, monopsonist) on pain of losing their privileges to sell in the United States. Then once these goods are sold, the research pharmaceutical firms are barred from asserting their patent rights against a rival firm that wants to sell the products that it has commandeered courtesy of the United States Congress. This looks more like involuntary servitude than free trade. But then again perhaps Relman is in favor of those provisions that hold that doctors, as a condition for being able to work in the voluntary market, have to devote as much of their time to government service for the poor as the state asks, for fees that it determines.

Later on in his essay, Relman again then criticizes the industry for the "extraordinary steps that a Republican-controlled Congress took to ensure that Medicare would not be permitted to influence market prices by directly purchasing prescription drugs for beneficiaries who enroll in Part D under the so-called Medicare Modernization Act of 2003." I did not discuss this issue in the book, but it is worth noting why Relman is in such error on the point, for which the work of the Manhattan Institute's Ben Zycher is so instructive. See his The Human Cost of Federal Price Negotiations: The Medicare Prescription Drug Benefit and Pharmaceutical Innovation, Medical Progress Report, No. 3, November 2006. The first point here is that letting the government into the market on the buy-side does not advance competition, but creates a huge monopsony position capable of forcing down drug prices, which of course the industry does not like. But on this point its position and the public interest correspond. Just as monopolies set prices too high, so monopsonies set them too low. The huge fraction of the market under Medicare will lower rates of return that will reduce the funds available for funding new drugs, which will impair innovation, just as Overdose claims, and Zycher documents. No matter whether one looks at reduction in funds for research ($10 billion per annum), or new medicines delayed (107 to 220, depending on assumptions), the result is the same. In Relman's world regulation is a free good. In the world we live in, it is not.

Nor should we think that the only adverse consequences of government control lie in the future. It is worth noting that even before Relman wrote the Democratic effort to insert the government into the purchasing process started to falter. It is not that the current plan participants were worried all that much about the future. They were worried about the present. The Veteran's Administration is treated as the ideal for Medicare Part D, for its ability to control costs. But how? By limiting choice. Yet many people will prefer to pay more to get more, and the insertion of government into the purchasing process promises to bring in its wake the same restrictions on formulary that are found, say, in England and Japan, which delay the use of new drugs until it is too late for some people. There are, in a word, all sorts of principled reasons to be opposed to any expansion of the government role on the buy-side of the market.

The Cost of New Drugs. Relman then continues his critique of the industry by noting that I am wrong to make too much of the high costs and risky investments needed to bring pharmaceutical products to market. His first point is that the exact cost is a "mystery" because the company data is not public, even though it was given to a team of researchers led by Joseph DiMasi, director of economic analysis at the Tufts Center for the Study of Drug Development, in forming an estimate of the costs of drug development. See Joseph A. DiMasi et al., The Price of Innovation: New Estimates of Drug Development Costs, 22 J. Health Econ. 151-85 (2003) (available here). But this is not an insuperable obstacle. There are certainly crude measures that are publicly available that point to the high, and ever higher, cost of new drug innovation. If research budgets total around $35 billion for the industry, and we produce about that number of new products, then we have something of a rough first approximation of a billion dollars, which can to be corrected to take into account other factors. But don't count on Relman to make the right adjustments. He first notes the standard figure of $800 million, developed by DiMasi's team several years ago doubled today, only to comment: "Yet both these figures include the so-called time-cost of the money spent, a theoretical and much-disputed quantity that contributed about half of the $800 million figure." So now we have it: the "so-called" cost of capital is not a cost of production because, at least to one untutored physician, a dollar spent today is precisely offset by a dollar earned eleven years from now.

There is still the nasty question of how to recoup these costs, which present a difficult problem in any high-fixed, low-marginal cost business. Relman notes that I assert that high prices are needed "to recoup the high cost of their initial R&D, but that implication is denied by at least some of the leaders in the industry," but notes thereafter that Raymond Gilmartin, past Merck CEO, has "publicly stated that it was the 'value' of the drug to the patient that was the prime determination of price, not what it cost to bring the drug to market."

Relman's brief foray into pharmaceutical pricing reflects his total ignorance of the subject. As I explained in Overdose, high-fixed, low-marginal cost products present special challenges in market settings, because there is little tendency of the price of drugs to fall to the marginal cost of their production, which is all that Gilmartin wanted to say. The argument here depends on a variety of second-best considerations. So long as a company could recoup all its costs and normal profits in the first patented pill produced, marginal-cost pricing would be a great boon for all consumers that purchased the second to nth pills. After all, it is only that first pill that costs $800 million. But there's the rub: Who pays for that first pill? Clearly, no one consumer can cover its full marginal cost, so that if the company is to make back its costs plus a reasonable profit, it has to charge users two through ten million some figure above the marginal cost to make back something of what it lost on that first pill. But how much, and to whom?

Here is where the rubber hits the road. There is no unique algorithm which explains how much gets charged to any customer. The "value" issue arises because you cannot charge anyone more for a drug than it is worth to them, or indeed more than they can afford to pay, taking insurance into account. What makes matters more complicated is that every buyer understands the situation and hopes to negotiate a deal that allows it to pay as little above marginal cost as possible. This leads to price discrimination in these markets, where some customers who can move elsewhere pay less than those who do not. Relman notes that prices remain high at retail pharmacies, but misses the point when he treats that segment of the market as representative of the whole, when in fact they are not. Retail pharmacists and independent drugstores have to carry all lines. HMOs and other provider groups do not and can play off one supplier against another, leading to lower prices for them. Hence, one has to look at the whole market, to see how it all works. It is in this world wholly incomplete to make his observation that "the listed wholesale price of a prescription drug almost never goes down, no matter how much its sales increase." Listed prices are not where the action is. What you have to know is the number of side deals and rebates and special programs that constitute the full market, about whose structure Relman does not have a clue. And through it all, we do know this much: we should expect in general prices to rise as costs for production rise, because companies will not produce goods when they do not think that cost recovery is attainable over its useful life. The distribution of these increases is hard to predict because of the complex dynamics of market pricing, but connection between costs and prices, however hard to measure, is to this extent real.

Relman of course touches none of these issues. He notes that cancer therapies can run $50,000 per annum, but does not examine either the cost or benefit side for these drugs, or how deregulation might lower prices. He notes that the industry runs high profits, but scoffs at the notion of risk-related return, even in the face of the industry's mediocre performance in the stock market. To him the "the industry" (and never the firm) just "dictates" prices. And what does he propose? In his New Republic review, nothing. But his sympathies, like those of Marcia Angell, lie with a system of price controls that is sure to be a disaster, given the number of products, the shifts in prices, the number of different distribution paths and the like. Maybe Relman doesn't think that pharmaceutical companies should behave like ordinary firms. But he surely gives us no inkling here of what pricing regimes follow from his own enlightened view of the industry.

Advertising. Relman is equally uninformed when it comes to advertising, which in his inimitable authoritarian style he would like to limit or ban. But there are two sides to this story as well. Start with the consumer side. On many conditions, people are undermedicated because they are unaware of the risks they face or the conditions that available drugs can treat. Getting this information out is critical and can save lives. And once a patient gets to a physician, he may well take a different drug for the condition than the one for which he saw the ads. The key point is to get patients into the system, which only advertisement can do.

Next Relman does not appear to believe that advertisements lower average costs because of his excessive reliance on list price as evidence of market prices. But of course they do, for why else would a firm advertise if it could not recoup those costs and then some? The increases in total costs are offset by the increase in volume so that greater penetration takes place in the market. Of course, we have to worry about fraud, and he is not the first to observe that the line between truthful and false advertisement is filled with grey, which is what makes this so difficult a field to regulate even for a libertarian who has to balance the risk of too much against the risk of too little regulation. Relman is oblivious to the need for trade-offs at the margin-here and everywhere else.

Next there is drug promotion to the profession. Here it is quite remarkable the number of institutions-like Penn, Yale or Stanford—that have taken the position that any drug sponsorship of a program is so tainted that it should not be allowed in university medical centers. This position is wholly misguided. The question here is: what is the alternative? Let us assume for the sake of argument that there is some bias in each drug company-sponsored program. Funny, the doctors should know this as well. But there are also benefits. The sponsorships are competitive, and overstatements by one sponsor are inevitably caught by another. Nor are these presentations the only source of information. Doctors can generate their own information sources to supplement and correct what the companies say. Unfortunately, the dominant attitude today is that drug company sponsorship is not a cost to be traded off against other costs, but an evil, to be banned.

And what is put in its place? Well, there is the rub. Troyen Brennan and colleagues (see Brennan et al., Health Industry Practices That Create Conflicts of Interest, 295 JAMA 429 (January 2006)), came up with the dreamy proposal of asking drug companies to contribute money to educational funds that anti-drug company doctors could spend on their own spiel. Talk about aiding and abetting your opponents. As fiduciaries to shareholders, no company would sponsor education on fields in which it does not do research. Their proposal is a total nonstarter. So where will the medical schools and learned societies come up with the money? Don't ask such nettlesome questions, for good intentions cures all practical ills. Just assume that the lesser amounts information gathered from these sources will be more reliable. But don't count on it. Individual physicians do not have reputations the size of drug companies, and many will not speak for free anyhow, at least many times. So the likely upshot of the ban is less information with greater bias, albeit in a different direction. This is not progress, but a dangerous cutting of ties between industry and universities and learned societies that should be fostered, with due care and attention to conflicts of interest. Fruitful partnerships should not be bludgeoned to death on the strength of some idle idealistic assumptions.

Patents. Relman is equally fearless when he takes on the patent issues. He references the interesting work of Adam Jaffe and Josh Lerner, Innovation and Its Discontents (2004), who think that the standards for patents are too lax, and thinks that it supports the charges that Marcia Angell makes in her book (which I have reviewed unfavorably) that too many patents are given for me-too drugs that do not represent real product advances. But Jaffe and Lerner are talking about a different problem. Me-too drugs are not double-click patents. No one doubts that the spate of me-too drugs on the marketplace meet whatever patent standards Jaffe and Lerner would propose; and they surely meet the recent Supreme Court standards of nonobviousness in KSR International v.. Teleflex (2006), which dealt with the positioning of sensors in gas pedals. How could these me-too drugs not be nonobvious extensions of existing molecules when the FDA requires that they go through separate testing. Two molecules may look similar but their behaviors could be quite different, so the hard matter never concerns patentability, which is a given, but regulatory approval.

On this point, Relman and Angell are the defenders of the single worst idea of regulatory policy to come along in a long time. Recall that Relman thought that I was too soft on monopolies. So their new suggestion is that the FDA ratchet up its standard so that a new drug should be let into the market only if it outperforms the existing drug. The problems with this proposal are legion. Most obviously, separate companies work on parallel tracks so that the FDA approval of the first now freezes out all the others: talk about the monopolist's best friends, Relman and Arnold? And think about the effect on research expenditures. There are fewer winners in this world, but the lucky winners get much more in the new winner-take-all game, so there will be redoubled research efforts to patent early just to preclude others, and for what? To make sure that consumers pay higher prices, which will happen if there is only a single seller in the market, with its own super high initial cost. Or maybe it is to deny options that arise for patients that do better on one therapy than other? Relman and Angell's repeated defense of their position remains a mystery. Ruinous and foolish, from a social point of view, are apt words to describe so misguided a social policy.

Safety and health issues. Even though Relman makes an utter hash of the economic issues, one might think that he would do a bit better in talking about the health and safety issues, which are more up his alley. But again he misfires on all cylinders.

In dealing with this issue, it is useful to break the topic down into three different questions. The first of these deals with purity and contamination. The second deals with drug safety, i.e., whether the product when properly formulated has adverse side effects that outweigh the benefits of its use, and the third topic is effectiveness: even if a particular drug does not kill, will it at least help?

In my view, the most important of these by far is the contamination and purity issue, which was the exclusive target of the original Pure Food Drug and Cosmetic Act. We now have a clear set of reminders as to why that is so, as we think about the contaminated products that have come in from China, which at great public expense have to be confiscated and destroyed. It is only because of the relative success in dealing with this issue that we tend to forget its dominant importance.

The issue has, regrettably, resurfaced with drugs. The reports of world wide drug counterfeiting with disastrous results are too numerous to count. And yet what is Relman's reaction to one portion of the problem? Simple denial. More concretely, one set of objections to the parallel importation scheme from Canada and elsewhere is that there are real health risks that have to be watched. There is no question that the history of protectionism in the United States and elsewhere is replete with cases where disappointed competitors raise deliberate health scares to keep out superior products with lower price tags. But this is not one of them. Relman, however, dismisses the matter with a wave of the hand, calling the entire concern "spurious," without ever bothering to say why. He does not explain why the huge return from selling bogus goods gives no incentive for unscrupulous people to break into a porous system. He does not explain why long supply lines through foreign territory increase the opportunities to distribute counterfeit drugs into the market. He has no explanation as to why private companies spend small fortunes to label and track goods in an effort to thwart counterfeiting. He gives no explanation as to why every FDA official who has looked at this issue, in both Democratic and Republican administrations, will not give their blessing to parallel importation or why Congress, after its usual bluster, always backs down on the issue. Perhaps he will buy these drugs, but not I, at least if I can figure out which ones they are.

The real front on this issue, however, deals with the role of the FDA as a good government agency that is designed to deal with the safety and efficacy of new drugs. Relman starts by charging me with the "incredible assertion" that pharmaceutical goods are "ordinary products." His refutation: we have the full system of regulation that is now in place to deal with them. Clinical trials, prescription requirements and lots more. And so he is right descriptively. Drugs are not treated as an ordinary good, but neither are lots of things, from wheat, which is subject to all sorts of odd subsidies, to rental units in New York City, to gasoline, telephone lines, to land. And lo, for each, when special restrictions are imposed, rational actors' antisocial behavior in response to such imposed incentives occurs. Medical care is not immune to these dangers. No one over sixty-five will admit to the overconsumption of medical care, but when three-fourths the cost of Medicare comes out of public funds contributed by others, the overconsumption should be taken as a given, as a cost to be taken into account along with the real and supposed benefits of the program.

In response it could, and should, be said that health care raises real problems with information, but so do lots of other goods, including complex financial services and retirement plans, computer programs and the like. There are differences in all these goods, but one mistake that Relman makes is to think that only former editors of the New England Journal of Medicine understand just how difficult it is for ordinary people to understand medical services. But again, that problem is not unique to health care, but arises in other markets as well, like real estate and life insurance. And so in some instances people hire brokers, and in others they hire doctors. It is one thing not to know much about drugs, but it is far more dangerous not to know that you do not know anything about drugs. The point here is that knowledge of deficiency is sufficient to get one to hire professional help, which is an ordinary response in some but not all sorts of markets. There are of course lots of ways to compensate for information deficits without giving the FDA the power to regulate which drugs get on the market and, increasingly, what kinds of warnings they provide.

Relman is dismissive of any critique of FDA policy, in large measure because of the touching faith that he places in clinical trials. "Does Epstein really not understand that properly designed and conducted clinical trials are now universally accepted as the most reliable means of determining the effectiveness of a drug?" Or elsewhere that "clinical trials . . . changed the basis for the use of drugs from something akin to hearsay and witchcraft to something much closer to science." Well, yes I do understand his point, but at the same time wish to place it in perspective. The first rejoinder; "reliable" does not mean "quickest". And for people who do not have the luxury to wait years until a well run clinical trial is done, the rational thing to do is to make the best guess of future treatment on the strength of information that is available to them here and now. And for these people the fetish over clinical trials is a death sentence. In the usual case, as rational agents guided by rational physicians, they will typically try those treatments that do meet the heightened standards of clinical trials. But when those options fail, and the choice is high risk or certain death, people are willing to roll the dice because they have a higher expected utility taking the chance than they have by sitting passively by waiting to die.

The point here is not some nasty pharmaceutical propaganda. Indeed the most vocal attackers against clinical trials, without exception, are not pharmaceutical companies (who fear the liability implications of allowing people to use their drugs), but the ordinary patient who knows how to make the simple expected utility calculations that elude Relman and, more importantly, the FDA. No where in his review did Relman mention the efforts of Abigail Alliance-that's Abigail as in Abigail Borroughs, whose family sought vainly to get her access to Eribtux or Iressa, not on the advice of Richard Epstein, but on the advice of her own Johns Hopkins oncologist. See There are no pharmaceutical companies on its board of directors- just ordinary people who wonder why the FDA stands in the path of their last best hope because it knows that clinical trials are the most reliable form of information. And then there is the litigation, as Abigail Alliance tried and failed to assert a constitutional right to obtain treatment of any drug that has made it through Phase I clinical trials, so that its toxicity was within measurable levels. See Abigail Alliance v. von Eschenbach, 2007 U.S. App., Lexis 18688. Perhaps that exotic argument should have lost, but if so it was before a judiciary that takes far too sanguine a view of the Congress and the FDA to protect us from serious danger. Whether correct as a matter of constitutional law or not, the impulse for the attacks on the FDA come from the people who want to take the drugs. And Arnold Relman knows so much about medicine that he is prepared to turn them away at the gate. What a way to put people before profits. For shame!

The beat does not stop there. Relman does not mention at all the pressing issue of off-label uses, because again it does not fit in with the tidy story that makes clinical trials the indispensable gold standard of American medicine. But there is in the United States a peculiar bifurcation of authority over the practice of medicine. The FDA may be able to keep a drug off the market, but it cannot regulate the practice of medicine. So once the drug is out there, then physicians can use it not only for its stated implications but also for off-label uses. And they do. Sandra Johnson (See Polluting Medical Judgment? False Assumptions in the Pursuit of False Claims Relating to Off-Label Prescribing, Marketing and Research, Minn. J. L. Science & Technology (forthcoming)) has put together figures that suggest that for many oncogenic drugs, the off-label uses dominate the permitted uses by large margins.

Consider the drug thalidomide, devastating when taken in early pregnancy, but is now sold as the renamed Thalomid. In the earlier version of this article, I had written that Thalomid "is licensed for use in treating leprosy. But its booming sales are a function of its success in cancer treatment." The fuller and more accurate story has turns out to be more instructive than my earlier cryptic reference. Thalomid was originally licensed by the FDA for use in treatment of leprosy in July, 1998. In May, 2006 it received approval from the FDA for the treatment of multiple myeloma, after accelerated clinical trials which were, as is wholly proper, directed to determining the adverse side effects of the drug when put to its intended use in combination dexamethasone (Dex), where the both gains and the adverse side effects were higher with the combined treatment than with Dex alone. The FDA approval (see took place on an accelerated basis, based in part on a randomized clinical trial of 207 patients recently diagnosed with multiple myeloma. The approval requires additional clinical trials to demonstrate the clinical benefit of the drug. Since the distribution of Thalomid is tightly controlled, the off-label use of the drug today is likely to be smaller than with other drugs.

Here are some troublesome questions about this history. First, what was the frequency of Thalomid use for multiple myeloma in the 1998 to 2006 period? Second, how many deaths could have been averted if the drug could have been used on an interim basis for all cases of multiple myeloma for which it is indicated? Third, how was the information accumulated that made it attractive to run the clinical trial on this drug, as opposed to the many others where it has not taken place? Fourth, to what extent does the accelerated treatment meet the standards that Relman would require before letting dangerous drugs on the market? And fifth, does it tell us anything about the current get-tough policy on various cancer treatments that are used typically in last-ditch circumstances? Interestingly, there is a voluntary organization, the National Comprehensive Cancer Network ( , composed of 21 leading cancer research institutes. The key question is whether this network is better able through conversation and suasion to deal with these new therapies than the FDA? And if it is, is its work hampered by the grey market status of off-label uses? Taken as a whole, there is nothing in this somewhat unusual success story That strengthens Relman's case for a strong FDA control over the use of drugs for the treatment of deadly cancers.

Thalomid is of course only one of many potent cancer drugs, and its own history seems to account for the exceptionally tight controls that are placed on its distribution. But the general picture seems to be that many anticancer drugs do not have clinical trials to back them up, but none of Dr. Relman's peers will sit by to watch patients die if they think that the drugs could shorten the odds. It would be nice to collect data on the effectiveness of these uses, but the FDA will not allow drug companies to promote off-label uses, or to warn about their side effects, so that one obvious avenue of information collection is blocked. But even if it did, time still is of the essence, and there is little if any systematic evidence that suggests that physicians who take a drug licensed for breast cancer do their patients a disservice if they try using it on otherwise incurable colo-rectal cancer. There is a bit of theory that suggests the tumors may respond the same, an anecdote here or there which says that it might have worked, and the utter absence of anything better. Would Relman want to shut down this entire mode of doing business because there are lots of doctors out there who don't know the meaning of a "gold standard"?

Perhaps not. Perhaps we should have clinical trials for those additional uses. A nice idea, but with strings attached. Those trials take time. The company that has the patent on the drug will not spend millions to get it approved for a new indication just before it turns generic. Patients will not wait for a clinical trial that will take years to deal with an illness that leaves them with an expected life of six months. Who is kidding whom with respect to gold standards?

And last, much science, including medical science, does not take place with gold standards anyhow. Surgery is a business that is done in decentralized fashion without the blessed oversight of the FDA. The progress in its many fields is palpable. Hip surgery forty years ago left foot-long scars and required extended hospitalizations and exhaustive physical therapy. But it was better than a wheelchair. Now there is minimally invasive surgery that can have a patient in at dawn and out on crutches at dusk. Yet, last I looked, no FDA-clone that guided this progress. It was the same decentralized system of knowledge acquisition that has worked so well everywhere else, and which could work again with drugs if we dropped the fixation with clinical trials.

Does this mean that I think that these trials are useless? Of course not. But there are clinical trials and clinical trials. Relman only glorifies the practice, and he makes the odd assertion that things have gotten better because of the more rapid deployment of drugs since the passage of PDUFA (for Prescription Drug User Fee Act) in 1993, which did use drug company user fees to speed the process along. Relman says optimistically that "for many drugs" the FDA requires "only one or two good clinical trials." But PDUFA is only part of the story, and the shortened periods of patent lives make it clear that the path to drugs has become longer, even with PDUFA in place.

A most instructive study, dating from November 2003, makes the point. See Jim Gilbert et al., Rebuilding Big Pharma's Business Model, 21 Business Med. Rpt. (available here). From 1995 to 2000, the authors estimate total costs of bringing a new drug to market at around $1.18 billion dollars, of which about $550 million were spent in the discovery phase, and about the same amount in clinical trials. Move on to 2000-2002, and the total figure by their estimates runs to $1.78 billion. The discovery phase costs moved up slightly but the huge expansion in costs comes in clinical trials, distributed over all phases, which now run about $1 billion, give or take. The expedited procedures of which Relman speaks lie only in his imagination.

The recent trends are no better. Richard Miller, for example, in a recent Wall Street Journal op-ed "Cancer Regression," (August 1, 2001), lamented how the FDA has backtracked on its fast track programs for cancer drugs. Perhaps Dr. Relman thinks that the rejection of five new cancer treatments by the FDA is a sign of speedy progress. But the deluge of angry letters to the FDA when it refused to follow the positive recommendations on the promising new vaccine for advanced prostate cancer, Provenge, for example, was mounted by patients who saw in it the only refuge from advanced prostate cancer. Yet at no point does Relman address any of the mountain of evidence against him. Nor does he turn his scientific eye to each new FDA protocol that requires additional trials on smaller populations, starting from the premise that expedited FDA approval is solely a source of agency embarrassment. There is a lot that can and should be done to rationalize clinical trials, even if the FDA were kept in place. And there is a lot that accurate review of post-marketing data can do on extended populations to pick up safety risks that matter.

Indeed, one important use of good clinical trials is to throw out of court the various law suits in tort litigation, but you would not know this from Relman's screed, because he does not mention a single word about tort litigation, even though he well understands the risk that medical malpractice litigation poses to medical progress. It would have been nice for him to say that the lawsuits against Bendectin did no earthly good, even if they made it next to impossible for any firm to market ever again an antinausea drug for treatment in early pregnancy. And the same perverse saga is taking place right now with thimerosal, with its asserted but dubious connection to autism. On these cases the FDA has done the retrospective studies that have confirmed the safety of the drug or preservative. Legally, the FDA has taken the position that its licensing procedures should block any attack on FDA-approved drugs. The legal arguments are tough on both sides, but in the midst of his attack on my position, why doesn't Relman at least defend the FDA against the use of junk science by (some) plaintiffs' lawyers? Perhaps he believes that the agency is in the pocket of the drug companies, when the greater pressures come from an irate Congress and vehement critics like himself who constantly harp that the FDA offers too little "protection," and not too much.

Well, then, what about the use of warnings as a substitute for bans? Such an approach is an improvement because the FDA cannot have a monopoly over warnings, which anyone can issue, and which are found in great abundance in the Physician's Desk Reference and other services. But don't think that warnings are harmless either. There has been a long question of whether Prozac causes or prevents teen suicide. Over the objection of most psychiatrists who prescribe the drug, the FDA put a black box warning on it, which accomplishes three things. First it frightens-an official warning, you know-patients and physicians off the drug. Second it makes it easier to win a malpractice suit against a prescribing physician for any subsequent adverse outcome. And third it increases the number of suicides because of the lower rates of drug use in the at-risk teen age population. Just what the doctor ordered.

CONCLUSION. There is a common theme to all the points contained in Relman's ill-tempered broadside. Relman's belief about the operation of pharmaceutical markets was the attitude that my grandmother took to flea markets. If the other guy wants to sell at a given price, don't buy, because he is there to rip you off. Today, Relman's view is that if the company makes a profit, then we have to be suspicious about its motive and its performance. He utterly fails to grasp that most markets in ordinary goods-pharmaceuticals included-survive because they generate win/win transactions, just as Smith and Friedman said. His third party interventionism acts as a tax or a ban on the transactions, and thus creates smaller wins or real losses. Then again, anyone who thinks that Milton Friedman was talking through his hat when he spoke about the efficiency of markets will take a jaundiced view of private profits and public health, thinking that the will mix no better than oil and water. I can't comment on his medical skills, but as a professor of social medicine, even at Harvard, it would help if Dr. Relman took, for the first time, Economics 101.

Richard Epstein is the James Parker Hall Distinguished Service Professor of Law at The University of Chicago and the Peter and Kirsten Bedford Senior Fellow at The Hoover Institution.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.