Paying for permissionless innovation
We’re big fans of permissionless innovation—the concept and Adam Thierer’s excellent book. The biggest, most consequential enemy of permissionless innovation in the United States is undoubtedly the Food and Drug Administration. Its long, expensive approval process delays access to life-saving drugs and other innovations for years, dramatically increases the price of such things once they reach the market, and skews the investment incentives for the health industry. Many economists would like to see the FDA radically reformed, some would like to abolish it entirely. In the spirit of the sort of political compromises that Milton Friedman was famous for proposing, I’d like to suggest an intermediate solution: a permissionless premium.
Here’s how it would work: there would be some specified amount (either an absolute amount per unit or a percentage of the revenue) that patients would have to pay in order to get a given drug or access to a medical device before it was FDA approved. The patient should be made well aware that the risks are at this point unknown (not that they’re thoroughly understood just after FDA approval anyway). The revenue would bolster the FDA’s budget, thus in theory helping to investigate the risks associated with the drug and drugs like it in the future.
Moreover, this would allow pharmaceutical companies to start getting revenue before FDA approval, lowering the burden of their overhead. As things currently stand, they spend billions on drug development and by the time the FDA process is complete, they have a very short window before their patent expires. As Alex Tabarrok documents well, the result is that pharma companies have almost no incentive to develop drugs that treat diseases that are anything other than very broadly experienced. The pharma dream in this scenario is not to find an effective treatment for rare but aggressive cancers, but to find the next Lipitor.
However, if they could develop experimental new drugs for rare diseases that could be bring in revenue immediately, that might just change the cost-benefit analysis sufficiently to see some real progress on that front. The premium will act as a Pigovian tax rather than an outright ban on the consumption of such still largely untested drugs, and will help fund both pharmaceutical companies and the FDA’s efforts to increase our stock of medical knowledge. It seems, from a number of perspectives, to be a win-win.
