The Sensible Alternative: The Voluntary Provision of Assurance

We believe that it would be desirable to move toward a voluntary system in which private firms, organizations, and perhaps also other governments and a voluntary FDA assured consumers of drug safety and efficacy. The desirability of a voluntary system, however, depends not just on how poorly the FDA performs but also on how well such a system would perform in its stead. In this section, therefore, we provide further information on how voluntary practices assure drug safety and efficacy.

Consumers want quality and safety in their drugs and devices. Moreover, consumers—prior to purchase and use—want assurance of quality and safety (see Klein 1997, 2000a). Society has three broad approaches to quality and safety assurance:

1. Voluntary practices and institutions, such as reputation, knowers, and middlemen, which assure quality and safety because it is profitable to satisfy the consumer and live up to one’s promises

2. Tort remedy, by which consumers who are harmed or cheated may sue under the rubrics of fraud, false representation, breach of warranty, negligence, malpractice, and so on

3. Governmentally imposed restrictions on voluntary exchange, whereby government attempts to determine the quality and safety of goods and services, and prohibits exchange until it has given permission

Careful reflection will show that the combination of voluntary practices and the tort system are well able to meet the demand for quality and safety assurance.


In any industry, trade or profession, a seller’s trading partners, associates, and customers develop opinions of his trustworthiness. They develop a sense of whether the seller’s products and services live up to the quality and safety that he promises. A good reputation is one of the most important keys to success because a good reputation will bring satisfied customers calling again and will bring others who hear of the seller’s good reputation. If the seller sells an unsafe product, he will not only pay tort penalties, but also lose his reputation and business. Reputation is generated by word of mouth and by other informal means, but also by various services and organizations that evaluate, rate, and report on the quality and safety of the seller’s products.

Ultimately, the whole enterprise of medical science and pharmacology is about safety and efficacy. Historians of private professional regulation have shown that professional men and women built institutions to research, test, certify, and monitor drug purity, safety, and efficacy even before the FDA existed (see Burrow 1970; Dowling 1970; Sonnedecker 1970). Such efforts often led, rather than followed, government efforts to assure safety and efficacy. The 1906 Pure Food and Drugs Act, for example, made certain privately produced drug compendia the official standards for purity. Glenn Sonnedecker (1970) described the era prior to federal government intervention: “Having relied on voluntary work and democratic decision-making for the creation of the Pharmacopoeia, organized medicine, and later organized pharmacy, also relied on voluntary compliance. It thus seemed a characteristic American venture of free and independent professions” (103).

The Role of “Knower” Organizations

A private organization that knows more than the consumer about a seller’s reputation or about the quality and safety of the seller’s products is called a knower organization. When paid by the seller, knower organizations often inspect quality and safety, and grant a certification mark or seal of approval. This is what Underwriters’ Laboratories does for electronic safety, Good Housekeeping does for many consumer products, Orthodox Union does for kosher foods, Moody’s does for securities, medical schools do for newly graduated practitioners, and the American Dental Association does for dental products (see Campbell 1999; Tollison 1996).

Alternatively, knower organizations may investigate quality and safety, and sell their reports directly to consumers (which includes hospitals, clinics, and HMOs as well as individuals). ECRI, for example, compares and evaluates a variety of medical products for hospitals, HMOs, and government agencies around the world. Consumer Reports, credit bureaus, and doctors and pharmacists who recommend which drugs to take also act as knower organizations. For many years, for example, the AMA ran a drug certification program for products advertised in its journals much as Good Housekeeping does for products in its magazine (Dowling 1970). Other types of seals of approval are a doctor’s membership in a medical group, affiliation with an HMO or hospital, and medical degrees from medical school. These seals of approval assure consumers that they can trust the doctor who recommends a drug. In the drug field, the growth and development of knowers and knower organizations is severely stunted by FDA command of the drug and device industries. Nonetheless, numerous knower organizations exist today. There are major reference compendia such as the AMA Drug Evaluations, American Hospital Formulary Service Drug Information, and U.S. Pharmacopoeia’s Drug Information for Healthcare Providers. There are newsletters such as Clinica, Health Devices Alert, and the Medical Letter. There are many specialized scholarly journals and volumes of conference proceedings, and there are a number of medical Web sites (for encyclopedic drug databases, go to WebMD or Medscape) and specialized sites for particular diseases.

Today, these kinds of knower services are relatively undeveloped because FDA “approval” is mandatory regardless of any other seals of approval; there is, for example, little reason to study and report on a drug that no one intends to sponsor. The FDA’s role as a permission granter is often conflated with its role as a knower organization. Because of its monopoly as permission granter, it has also gained hegemony in the realm of seal-of-approval services. Private organizations would surely expand and mature if drug affairs were depoliticized and decontrolled.

The Role of Middlemen

A retail drug store or pharmacy—such as Rite Aid, Long’s Drugs, or Safeway—is an example of a middleman. The middleman purchases goods from suppliers and then sells to consumers. Middlemen have repeated dealings with customers and wish to induce the customer to continue buying from them. Not only would a pharmacy that sold a customer an unsafe drug be subject to tort penalty; it would probably lose the customer’s business and perhaps the business of those who learned of the wrong. Seeking to build and preserve a good reputation, pharmacies have a strong incentive to keep unsafe and ineffective drugs from their shelves. They have strong incentives to know about drug safety.

Writing of pharmacists in the era prior to any federal control of drugs, Glenn Sonnedecker (1970) noted: “[T]he pharmacist exercised a scientific sense of responsibility as the last link in a chain of medicopharmacal services and the guarantor that the patient would receive exactly what was intended, in the form and quality intended. [A] pharmacist whose living depended upon his knowledge of drugs, and upon his reputation for providing unwavering quality in pharmaceutical service, could best appreciate the significance of reliable and impartial standards” (106, 108).

Another form of middleman is the pharmaceutical company. The company’s profits depend on confidence in its brand name (such as Merck, Johnson & Johnson, Upjohn, Eli Lilly). The company purchases the inventions and discoveries of researchers, develops them into brand-name products, and then sells them to the public. To preserve the reputation of the brand name and to avoid lawsuits, it thinks carefully before putting a new drug on the market.

Another example of the middleman is the health care organization, which employs staff and purchases supplies and equipment. Consumers have repeated dealings with the hospital or HMO, and it has repeated dealings with its suppliers and staff. The HMO has strong incentives to give its members safe and effective drugs because it pays their medical bills. Miller (2000) described this development:

[P]rofound changes have resulted from the evolution of various nongovernmental entities into de facto drug-vetting, standard-setting organizations. The newest and most potent of these are managed-care organizations, which exercise their influence through large-scale purchasing, monitoring, formularies, and drug utilization reviews. [Computerized systems] perform overall integration of the medical record for case management. A physician can be prevented from prescribing medication if, for example, according to computerized monitoring of his decisions, the drug is inconsistent with a patient’s listed diagnosis; excessive in dose, frequency, or length of administration; or likely to interact dangerously with another medication the patient is taking. . . . In a sense the HMO has become a second gatekeeper between the manufacturer and the patient. (29)

A Thought Experiment

How is safety assured in other industries? In electronics, manufacturers submit products to Underwriters’ Laboratories, a private organization that grants its safety mark to products that pass. The process is voluntary: manufacturers may sell without the UL mark , but retailers and distributors prefer the UL mark. Private-sector institutions and the tort system assure safety in electronics.

Suppose someone proposed that the system in electronics were replaced by a regime that forbade manufacturers from making a product until it was specifically tested and permitted by a central government agency (the “Federal Electronics Administration”). What would you think of the proposal? Probably you would think it is crazy. There is no apparent problem with the current free-enterprise approach to safety assurance in the electronics industry. The twentieth century supposedly taught humanity that command and control is inefficient and potentially life-threatening.

But the command-and-control approach is the system we have in drugs. It is inconsistent to favor the free-enterprise approach in electronics but the command-and-control approach in drugs.

Sometimes people rejoin: “But drugs have larger effects on physical well-being. They are too important to be left to free enterprise.” The point, however, cuts both ways. As we have seen, the harms of government control also are great. Drugs are too important to be controlled by politicians and bureaucrats.

Do the math. The historical record—decades of relatively free enterprise up to 1962—shows that free institutions and the tort system succeeded in keeping unsafe drugs to a minimum. The Elixir Sulfanilamide tragedy was the worst of those decades and far exceeded any other of the kind. (The thalidomide tragedy happened in Europe, not in the United States.) The comparison is a grisly one, but we must face harsh realities: The 107 people killed by Elixir Sulfanilamide is a drop in the bucket compared to the yearly—or even weekly—death toll of the post-1962 FDA era. (Peltzman 1973 thoroughly “did the math” on this comparison and reached the same conclusion.)

A nexus of assurance is readily available without the FDA. A drug company suffers devastating losses when it harms consumers with an unsafe drug. Its reputation suffers, and it pays hefty tort damages to victims. Drug safety is assured by brand names, by merchant middlemen, by seals of approval, by newsletters, by medical testing and publishing (the New England Journal of Medicine, etc.), by consumer research (extensive drug information on the Internet), and by the consumer’s questions to the doctor about which drug to take. And the tort system further discourages negligence or fraud (Krauss 1996).

© The Independent Institute.
Direct inquiries using our Feedback Form