I am speaking Thursday at a Cato conference on The Future of U.S. Economic Growth, with a politically diverse group of speakers including Martin Baily, Robert Gordon, Brad DeLong and Erik Brynjolfsson. My panel is entitled”What is to be done?,” and focuses on feasible policy solutions.

In preparation for the conference, I put together an essay on “Hacking the Regulatory State.” Part of the essay covers the need for a Regulatory Improvement Commission, but I also laid out some ways that the FDA can be reformed to speed up economic growth. Here’s an excerpt from the essay:

2. Approval Criteria at the FDA

The FDA is one of the fastest growing agencies in the federal government. In 2000, the FDA employed 12 workers for every 1,000 in the pharmaceutical, biotech, and medical equipment industries.  Now the FDA employs 18 workers for every 1000 private-sector pharmaceutical, biotech, and medtech workers.

Not surprisingly, the intensity of FDA regulation has also increased by 40 percent since 2000, according to a recent paper from the Progressive Policy Institute (Carew, 2014). That’s based on a new measure of regulatory intensity that applies a semantic analysis of written rules, looking for such restrictive words as “shall” and “must” (Al-Ubaydli and McLaughlin, 2014).

The same period has also been notable for an extraordinary amount of public and private spending on biosciences R&D. In 2012, for example, U.S. industry, government, and academic institutions spent roughly $100 billion on biosciences-related research and development, second only to the roughly $125 billion invested in computer and information sciences-related R&D. In recent years biosciences R&D has averaged somewhere between one-third and one-quarter of total civilian R&D.

This R&D spending has propelled tremendous scientific advances over this stretch. Yet so far, too few of these scientific advances have been translated into usable innovation. This problem is well-accepted. NIH set up a new National Center for Advancing Translational Science in fiscal year 2012, specifically to “develop innovations to reduce, remove or bypass costly and time-consuming bottlenecks in the translational research pipeline in an effort to speed the delivery of new drugs, diagnostics and medical devices to patients.”

I will argue here that accelerating commercial innovation in biosciences requires “recoding” the criteria by which the FDA approves new drugs and devices. In particular, the sole focus on “safety and efficacy” has the effect of almost guaranteeing that potential disruptive innovations are not approved. What’s more, the pharmaceutical and device companies have a deep understanding of the FDA’s approval process, and therefore they do not pursue such disruptive innovations. Similarly, venture capitalists shy away from funding innovations that are not approvable.

Here I’m using the disruptive innovation in the classic Clayton Christensen sense — a product or service that starts out with somewhat worse performance than what’s on the market right now, but much better economic or other characteristics. So when mobile phones originally were being widely sold, the quality of calls was lower than using wired handsets. Similarly, the early personal computers were far less powerful than mainframes or minis.

The problem is that the FDA interprets the “safety and efficacy” standard as meaning at least as safe and clinically efficacious as anything on the market currently. That immediately rules out an innovation that is safe, much cheaper, but not as efficacious as best medical practice. So if the FDA had been in charge of the phone or computer markets at the time, early mobile phones and personal computers would have not been approved for sale because they provided inferior quality to existing products.

As a result, the FDA approval criteria systematically screen out disruptive innovations. What’s more, the pharmaceutical and device companies, and even the venture capitalist supporting start-ups, are all too aware of the FDA’s decision-making process,  and are therefore unwilling to fund potential disruptive innovations.

What’s the solution? First, don’t weaken the safety requirement at all. The FDA is a key guardian against harmful products.

Second, separate the efficacy requirement into two parts — clinical efficacy, and economic efficacy. Allow innovating companies to present evidence that their potential new product reduces the amount of labor and other resources needed by the healthcare system, as compared to existing products or treatments. A new product needs to show both clinical efficacy and economic efficacy, but needs to be superior to existing products on just one of those measures.

Such a broadening of the FDA approval criteria won’t be easy to put into place, but could have enormous impacts on the incentives for research and development. If we want medical innovation and lower costs, we need to change the rules of the game.

 

An article in Forbes trumpets a new approach to actually curing cancer using the immune system.  The article itself, entitled “Is This How We’ll Cure Cancer?” is worth reading, though a healthy dose of skepticism is important.

However, from my perspective, what’s important are the  quotes about cost towards the bottom of the story

“You’re going to see these companies that are going to get crushed by this new environment, despite the fact that health care spending is going to almost double,” Jimenez says. He has a team actively exploring new ways of pricing cancer drugs, in which several medicines are sold for the price of one, or health systems or insurers pay based on how many patients are cured.

The real question is not cost, but productivity. And I don’t mean the productivity of cancer patients, but the productivity of the whole economy.

Right now we have a healthcare system where millions of person-hours, many of them highly skilled,  are thrown into treating and providing palliative care for cancer patients. These skilled person-hours are not available for production or research in other parts of the economy.

A drug that cures a major form of cancer will almost certainly boost what we call “gross medical productivity,” defined as the size of the population divided by the number of healthcare workers.  And rising gross medical productivity will free up skilled labor for other forms of non-healthcare production, which will in turn boost non-health GDP.

So even if a cure for a particular type of cancer seems expensive measured in dollars,  it may seem imminently reasonable when measured in terms of its impact on the nation’s productivity and total output.

I’ve been critical of the FDA in the past. But now that the FDA has released its long-awaited guidance for “Mobile Medical Applications,”  I’m pleasantly surprised at the stance the agency has taken. Basically, the FDA has done exactly what it should do–gotten out of the way of innovation, while reserving the right to jump back in if circumstances warrant.

To put it a different way,  rather than being annoyingly ambiguous, the FDA has marked a big section of the beach and said “go play in the water, kiddies! Have fun, and we’ll be watching to make sure that no one drowns.” This is the right approach to maximizing both progress and safety. In fact, other regulators should follow the same path.

The issue when it came to mobile medical apps was in some sense simple. Clearly some mobile apps worked just like regulated devices, and therefore needed to come under the same scrutiny. No one disagreed with that. But then there was a whole set of other apps–including ones that provide simple coaching and prompting to diabetics and other people who needed to follow regular schedules–which could have been regulated as medical devices under a strict interpretation of the rules.

But in the guidance, the FDA was extremely clear that it would exercise “enforcement discretion” for these sorts of medical apps. The agency was even kind enough to give a long list of such apps, opening up a clear pathway for innovators. Some examples:

• “Apps that provide simple tools for patients with specific conditions or chronic disease (e.g., obesity, anorexia, arthritis, diabetes, heart disease) to log, track, or trend their events or measurements (e.g., blood pressure measurements, drug intake times, diet, daily routine or emotional state) and share this information with their health care provider as part of a disease-management plan.”
• “Apps specifically intended for medical uses that utilize the mobile device’s builtin camera or a connected camera for purposes of documenting or transmitting pictures (e.g., photos of a patient’s skin lesions or wounds) to supplement or augment what would otherwise be a verbal description in a consultation between healthcare providers or between healthcare providers and patients/caregivers.”
• “Mobile apps that help asthmatics track inhaler usage, asthma episodes experienced, location of user at the time of an attack, or environmental triggers of asthma attacks;”

And so forth and so on. You get the idea.

Other regulatory agencies should adopt the same tack. In a world of rapid innovation, regulators cannot and should not engage in pre-emptive regulation. Instead, they should stand back and watch closely, stepping in as necessary. That’s the best way to insure the

Back in 1996, I wrote a book called The High-Risk Society. The book was based on the vision that Americans had to embrace risk and innovation in order to achieve faster growth and long-term prosperity.

An essential part of that vision, however, is the creation of a much stronger safety net.  If we are going to ask Americans to take risks for growth, to accept disruption in return for innovation, they have to be protected from the worst consequences of failure.

In particular, it becomes much harder to take a chance on growth if it means you might lose your healthcare. That’s why Obamacare, despite being ungainly and awkward, is an essential step towards a high-growth economy. People who want to start a new company or join an innovative new enterprise shouldn’t have to worry about whether they will be able to get healthcare. People who want to work halftime and go back to school shouldn’t have to worry about whether a sudden medical problem will throw them in the poorhouse.

Obamacare is a step towards unleashing the creative juices of Americans.  There are lots of problems, of course. We need to ensure that the new Obamacare bureaucracies don’t strangle innovative company. But now that the basic mechanisms are in place, we can move onto the more important task of empowering innovative and hardworking Americans.

This piece was cross-posted from Innovation and Growth.