Government regulation is supposed to make products safer. But new research shows that, at least for medical devices, regulation can have the opposite effect.

In a paper published this past November, UC San Diego economist Parker Rogers found that when the U.S. Food and Drug Administration reduces regulation on a category of products, innovation and competition in that category increase, prices decrease, and safety actually improves.

How could this be? Rogers hypothesized that firms “increas[e] their emphasis on product safety as deregulation exposes them to more litigation.”

He was able to study the question because the FDA reduces medical-device regulation on a regular basis. 

Medical devices include everything from tongue depressors to pacemakers to x-ray machines. The FDA classifies them based on their novelty. Devices that represent a whole new category are considered Class III and must go through a stringent approval process that demonstrates safety and effectiveness.

If a new device falls into the same category as one that’s already approved, it gets a Class II designation. The manufacturer has to prove that the product is equivalent to existing competitors, but the approval process is less demanding. 

For Class I devices, which are considered low risk, the only requirement is that manufacturers register their facility with the FDA.

Notably, each class of device has different rules for injury lawsuits, as George Mason University professor Alex Tabarrok detailed in a review of Rogers’s paper. Since the FDA vets Class III devices for safety, manufacturers are shielded from product liability claims. Class II products are also largely protected from tort litigation. 

But since the FDA doesn’t approve Class I devices, users can sue the manufacturer.

As the marketplace evolves and yesterday’s cutting-edge innovation becomes commonplace, the FDA sometimes re-classifies product categories. For example, in 1994, it moved daily-wear soft contact lenses from Class III to Class II. Rogers studied what happened after these “down-classifications.”

He found that innovation increased dramatically. When a category moved from Class III to Class II, the number of new devices within it — as measured by new patent applications and FDA submissions — increased 200%. Moreover, the quality of those patents — measured by the number of times they were cited in other patent applications as well as market valuation — likewise increased 200%.

Down-classification also encourages new companies to enter a category. After Class III to Class II switches, Rogers found a 10-fold increase in market entry by companies that had not previously produced devices, and a four-fold increase by companies that already made medical devices. 

Professor Tabarrok posits that these increases suggest that companies have devices ready to go — but are waiting for deregulation before putting them on the market. 

In other words, regulation is keeping useful products out of the marketplace.

Not surprisingly, when new companies and medical products enter a market, prices decline. According to Rogers, hospital procedures that used deregulated devices cost 40% less after the category was down-classified. Manufacturers may find they’re able to charge less following re-classification, because it’s now cheaper to get their devices approved. 

Indeed, it can cost $75 million to see a Class III device through FDA approval, compared to $24 million for a Class II device.

Finally, Rogers found that product safety can improve following deregulation. Patients who used devices reclassified from Class II to Class I experienced significantly fewer adverse medical events — such as injuries — than a control group of Class II device users. Rogers chalks this up to the change in litigation rules. 

When companies face a risk of lawsuits, it causes them to make their products safer.

We already knew that deregulation tends to promote innovation and drive down prices. This new research shows that it can make medical products safer, too. 

Sally C. Pipes is president and CEO of the Pacific Research Institute. Her latest book is False Premise, False Promise: The Disastrous Reality of Medicare for All (Encounter 2020).