ZHANG Hao, WU Zhi-ang

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The Cost-Benefit Analysis of Government Supervision of Post-Market Drug Risks

ZHANG Hao, WU Zhi-ang

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Objective To explore the equilibrium of post-market drug risk supervision from the view of cost-benefit analysis, and to provide suggestions for post-market drug risk management in China. Methods Cost and benefit of government supervision of post-market drug risks were analyzed on the basis of cost-benefit theory of economics. Results and Conclusion Government supervision of post-market drug risk has its equilibrium, but the equilibrium is not fixed.Penalties should be applied to the violations of post-market drug risk supervision of the enterprises, and the incentive mechanisms of post-market drug risk supervision should be established to ensure further the safety of post-market drugs.

post-market drug risk; government supervision; cost and benefit; equilibrium

Drug risk management is divided into pre-market supervision and post-market supervision. From the perspective of the regulatory means and measures, compared with post-marketing surveillance, pre-marketing surveillance is more systematic and perfect with intense supervision and various methods. From the economic angle, there exists a problem of effective regulation border. If the post-market surveillance lies near the effective border, it will act positively. If the surveillance lies outside the effective area, it will act negatively. For the boundary of the supervision is a noteworthy topic for the regulators.

The choice of drug post-market surveillance intensity for manufacturing enterprises is a consequence of market function. The drug post-market surveillance defined in this article includes surveillance to ADR, the cost-benefit evaluation of post-marketing drugs, drug suspension and withdrawal. This article analyzed the costs and benefits of regulatory of post-marketdrugs by equilibrium theory and marginal effect theory, and provided some recommendations for the regulatory agencies.

1 The basic concepts and general assumptions

In order to use equilibrium analysis in economy for analyzing drug post-marketing risk management effectively, we should assume: (1) The supplier and demander of drug safety post-market surveillance are rational economic men and they can obey the maximization principle of individual interests. (2) Drug post-market safety regulation should consume costs, divided into direct and indirect costs, and regulation can also get the same benefits, namely the drug safety guarantee and the steady and orderly health development. (3) The market refers to the place where drug safety post-market surveillance exists.

2 Analysis of the cost of drug post-market risk for drug administration department

The cost of drug post-market safety can be divided into direct costs and indirect costs. Direct costs include labor and post-market supervision costs. Indirect costs include the economic consequences caused by the lack of supervision, etc. such as imperfect drug post-market surveillance law which leads to increasing speculation and irregularities. As to pharmaceutical production enterprises, the costs include the compliance costs and the reputation losses for their poor regulation[1, 2].

For the drug regulatory department, the implementation cost of regulators includes publishing relevant rules and regulation cost of drug post-market risk supervision. For the pharmaceutical production enterprises, the costs of complying with the regulation include ADR report cost, PSUR writing cost, and the production suspension and recall costs and so on.

Drug post-market safety regulation also has the marginal effect, excessive intervention of drug market means excessive regulation and it will destroy the market regulating capacity as a result. When supervision reaches a certain level, even more investment is added to it, regulation effect will be no obvious, concealing drug safety information and market irregularities will still exist[3].

3 The cost-benefit of drug post-market safety regulation model

At present, China’s drug post-market risk regulation is mainly around ADR report and monitoring, the amount of drug safety information disclosure is the key indicators for drug post-market safety regulation. With the increasing intensity of drug post-market safety regulation, the number of drug safety information and the information authenticity will increase. Two models can be set up for the amount of drug safety information disclosure and drug post-market safety cost and the regulatory income, as shown in Figure 1 and Figure 2.

The amount of drug safety information disclosure

Figure 1 The model of regulatory cost and the amount of drug safety information disclosure

The amount of drug safety information disclosure

Figure 2 The model of regulatory income and the amount of drug safety information disclosure

Figure 1 and Figure 2 show that the1 is the lowest point which means drug post-market is in the unregulated state, a large number of production enterprises conceal information safety. It leads to cost increase for regulatory department. The main reason is that market regulation cost is infinite and the gains tend to be minimized. Drug safety information is disclosed in great quantities with the strengthening supervision on drug post-market, production enterprises irregularities are weakened, and regulatory costs also decrease. When regulatory strength is in, the drug regulatory obtains the largest gains with reasonable cost. The market is in an orderly state and the quality and quantity of the drug safety information disclosure is relatively appropriate. Regulation is in the best condition. When regulatory intensity increases to2, which means to strengthen the drug post-market surveillance for production enterprises, it may lead to more irregularities and excessive intervention. Ultimately the cost curve intersects with the yield curve again, regulatory returns tend to be rapidly reduced, and the trend of the regulatory costs will increase rapidly, too.

4 Analysis of the equilibrium for drug post-market safety regulation

Figure 1 will change a bit and we get Figure 3. We can see the quantity and quality of the disclosure information is proportional to the strength of drug post-market surveillance. So Figure 3 shows the relationship between the intensity of drug post-market surveillance and regulation cost. If the drug post-market safety regulation is at low level, production enterprises will have more violation; their performance will not be in accordance with the rules. The function relationship between drug post-market risk regulatory costs and regulatory intensity is defined as:=(Q), prepresents the cost of regulation,>0,>0. That is to say, with the increase of surveillance intensity, the surveillance costs will increase and the curve is convex, see Figure 3[4].

Figure 3 The surveillance intensity and costs of drug post-market risk management

When=(Q) we can work out the inverse functionQ=B1(), taking it to=(Q) and we work out=(Q) =[B1()], the first derivative>0. As shown in Figure 4.

Figure 4 Regulatory costs and benefits

Function(,) is used as the regulators utility, under the condition of unchanged,(,) is proportional to the. Under the condition of constant,(,) is inversely proportional to the P, namely>0,<0. Figure 5 describes the regulatory utility indifference curve, obviously, the curve represents the higher utility regulation.

In Figure 4 the linear=() =[-1()] and regulatory utility levelUof the indifference curve is tangent to(Figure 5),is the regulatory equilibrium. This equilibrium means regulation can achieve the highest level of utility under cost-benefit constraint, the corresponding*,* and formula=(Q) =[-1()], can be deduced from the optimal intensity of regulation*.

Figure 5 Equilibrium point of government supervision of post-market risk

Figure 6 Moderation line of post market risk regulatory

The above analyzed the post-market risks (adverse drug reaction reporting) and conducted a balanced regulatory. Other regulations include drugs listed pause supervision of production, withdrawal from the market and other work. Each item of regulation has a corresponding optimal regulatory intensity*. IfQ<*, it means the post-market safety supervision strength is not enough, known as inadequate supervision. The probability of production enterprises irregularities will increase. IfQ>Q*, it will cause excessive regulation resulting in the total cost of regulatory enforcement costs, compliance costs, and market will lose vitality. The income is less than the cost of inputs for the regulators. If we connect different regulatory equilibrium, we will get the moderate regulation line for drug post-market safety.

5 Discussions and conclusions

We build a model of post-market drug safety supervision intensity (drug safety information release conditions) and regulatory costs and returns based on the analysis of the cost of drug post-market risk supervision. And finally through the function relationship, drug post-market safety regulatory equilibrium was obtained. The conclusions are as follows: (1) When the drug post-market safety regulation (such as ADR report) strength increases gradually, the income of regulation will decrease. (2) When drug post-market safety regulation strength increases, regulatory costs will increase gradually. (3) The indifference curve tangent point of the cost and benefit function and regulation effect function is the strength of the drug post-market safety regulatory equilibrium. (4) From Figure 6, drug post-market safety regulation moderate line is formed by the strong regulation line, weak regulation line and the line of the optimal regulation. The regulation strength between two weak regulation lines called moderate supervision. In Figure 6, if you move moderate regulatory line to the upper right and close to the line of strong regulation it will lead to the increase of regulatory costs which can cut innovation and market efficiency, even at risk of adverse selection. If you move closer to the lower left of the line of weak regulation, it will lead to irrational speculative market, opportunism will prevail and it will finally destroy the fair market.

The post-market supervision of pharmaceutical companies has been the bitter subject for regulatory agency. There is a certain contradiction between the fighting against illegal activities and development of the pharmaceutical market. Choosing a stringent regulatory system undoubtedly will stifle innovation and vitality of the market, while taking too much care of the market may decrease regulation. It is necessary to find the equilibrium point by analyzing the inspection and compliance costs for business. We can structure a moderate regulatory line for the entire of the system of post-market regulation, after calculating the equilibrium drug post-market surveillance.

6 The comments and suggestions on the drug post-market risk supervision

Drug post-market safety regulation is a long-term job; the core of the regulation is the combination of minimized regulatory costs and maximized regulatory benefits. We proposed some comments and suggestions on how to balance the costs and benefits for regulators.

First, we should strengthen self-regulation and give full play to self-discipline organization. Self-regulation refers to the market outside of the main drug regulatory agencies involved in self-regulation and self-management, and its advantage lies in its flexibility and efficiency. Self-regulation, as an effective complement to the rigid government regulation can increase regulatory effectiveness with the fixed government regulation cost. Self-regulation can increase the regulatory revenue. by constraining the regulation behaviorQ. An effective solution to improve self-regulatory capacity is to make pharmaceutical production managers attach importance to drug post-market supervision. Currently, the regulation of risks for pharmaceutical production mainly focuses on the pre-market. The key point of business management is clinical trials and GMP certification. To enhance the effectiveness of government regulation, we can enhance the risk awareness on products in the market and strengthen the monitoring of adverse drug reaction reports and other work.

Drug regulatory departments shall establish specification punishment mechanism; the corporate violations will be investigated and quantitative assessment of their impact should be made as well. For serious violations, such as concealment of adverse drug reactions and other acts, they should be punished to achieve the effect of regulation.

Incentive and restraint mechanisms are equally important for government regulation measures. Drug regulatory authorities can set a benchmark company with better management of post-market supervision as a good example for other enterprises. And some other incentive measures can be given to the company to promote the effectiveness of risk management.

[1] Kauffman. Regulatory Regimes: The Independence of Rules and Regulatory Structure [M]. Chicago: The University of Chicago Press, 2001: 24.

[2] Huberman. Familiarity Breeds Investment [J]. Review of Financial Studies, 2001, (14): 659-80.

[3] ZHOU Dao-xu. Research on Modern Financial Supervisions [M]. Beijing: China Financial Publishing House, 1999: 30-32.

[4] YIN Hai-yuan, LI Zhong-min. Analysis of the Regulation Equilibrium in China’s Security Market [J]. Journal of Chongqing University, 2011, 17 (3): 58-61.

Author’s information: WU Zhi-ang, Professor. Major research area: Drug risk management. Tel: 024-23986542, E-mail: zhiangwu@163.com