Product Liability and the Economics of Pharmaceuticals and Medical Devices

This study examined the economic effects of product liability on firms producing drugs and medical devices. The analysis drew on empirical information from a wide variety of sources, simulations, and interviews at three major pharmaceutical companies to examine the effects of liability on product availability, safety, effectiveness, and innovation. The study found that the liability system enhances the economic contributions of these industries in some ways — for example, encouraging them to invest in safer designs for medical devices; undermines them in some — for example, causing companies to withdraw products that the medical community generally believe were beneficial; and has mixed effects in others — for example, in the areas of pricing and innovation. The effects are industry specific, and the perceptions of firm decision makers about the probability and consequences of liability suits must be addressed to understand both the effects of the current system and the effects of reforms. The study identified liability policy reforms that should improve economic performance: make regulatory compliance central for drugs and extensively regulated devices, specify explicit standards for behavior warranting punitive damages, and improve procedures for weighing scientific evidence about the cause of injury.