Market forces drive innovation in pharmaceuticals, and pharmaceuticals significantly enhance longevity and quality of life. The Food and Drug Administration (FDA) plays a crucial role in regulating pharmaceuticals in the United States and influencing drug diffusion globally. The FDA’s primary role is to approve new drugs whose safety and efficacy benefits exceed any risks. FDA regulation involves a lengthy, costly, and uncertain drug approval process, high regulatory barriers to making even small changes to drugs after their initial approval, and expensive post-market surveillance. Currently, it takes about 15 years to bring a new pharmaceutical compound to market. Only 11.8 percent of new compounds approved for testing on human subjects are approved for marketing. Research estimates that firms spend, on average, $1.4 billion (in 2013 dollars) per approved compound and $2.9 billion after accounting for post-approval monitoring. These costs have been growing significantly faster than the rate of inflation since the 1970s.

Prior research on the FDA approval process has focused on the drug review portion that consumes the last 1.3 years, on average, of the 15-year process. Several of these studies found that decreasing drug review times did not increase the frequency of adverse events associated with new drugs, but these findings do not necessarily generalize to the entire approval process or regulation after approval.

Our study addresses this gap by evaluating the full effect of FDA drug regulation—from initial application preparation to post-market activities—for electronic cigarettes (e‑cigarettes), which the Circuit Court for the District of Columbia unexpectedly exempted from drug regulation in December 2010. This meant e‑cigarette companies could bypass the lengthy and costly drug approval process entirely. Additionally, e‑cigarette companies could freely enter the market, modify products without approval, and bypass extensive post-market reporting requirements and quality control standards.

Our study produces several findings. First, e‑cigarette innovation increased dramatically after receiving an exemption from regulation. E‑cigarette patent applications increased sharply in the United States between 2011 and 2019 compared with e‑cigarette patent applications in Australia, where e‑cigarettes have been regulated as drugs, and compared with applications for other smoking cessation drugs in both countries.

Second, our study finds that the exemption reduced mortality attributable to smoking by approximately 10 percent. For comparison, a prior study found that a $1 increase in cigarette taxes experienced between the ages of 14 and 17 reduced mortality by 4 percent. Furthermore, our findings reveal that the regulation exemption reduced the causes of death most associated with smoking by the largest amount. And survey data suggest e‑cigarettes reduced the percentage of those who smoke regularly by 4.3 percentage points and those who smoke daily by 4.2 percentage points.

Finally, our study shows that the regulation exemption enabled innovation that increased years of life among the US population by approximately 74,000 annually from 2011 to 2019. Furthermore, survey data reveal that the exemption reduced years of smoking among the population by 7.2–8.1 million. Reductions in mortality occurred approximately four years after the rate of smoking began to fall.

The FDA has authorized only 34 of the 6.7 million e‑cigarette product applications submitted by September 2020, and few of the approved products are flavored or have high nicotine concentrations. Due to the regulation exemption, many unauthorized e‑cigarettes legally remain on the market. However, if the FDA clears unauthorized e‑cigarettes from the market, the mortality reductions associated with e‑cigarettes may shrink. The FDA could authorize e‑cigarettes at a far higher rate to protect this public health benefit. The agency could also permit an e‑cigarette prescription market alongside the consumer market, which one study found could offer substantial benefits.

One potential limitation of our study is that we analyzed mortality over 13 years after the introduction of e‑cigarettes rather than over the length of a lifetime. E‑cigarettes could reduce mortality initially but increase it later. However, several factors suggest e‑cigarettes are likely to continue reducing mortality if the regulation exemption remains. First, our research documents years of life saved only through 2019. Deaths averted through 2019 will likely save additional years of life beyond 2019, and deaths averted in the future will save additional years of life. Second, our study finds no evidence that the extent of mortality reduction for older people differs from that for people ages 18–29. Third, most evidence indicates that e‑cigarettes are replacing cigarette use among youth.

Market-based approaches to drug regulation could maintain many of the safety and efficacy benefits of the current FDA approval process while allowing faster action and more innovation.

For example, firms could be permitted to operate outside the drug approval process provided they carry sufficient product liability insurance. Such an approach would effectively make the drug firm’s insurer the new regulator, though likely a faster and more flexible one. Additionally, prior research has argued that product liability law is sufficient for a well-functioning drug marketplace.

Our findings do not suggest that drug deregulation or e‑cigarettes are harmless. However, they do suggest that the benefits of deregulated e‑cigarettes outweigh the costs. Drug regulation may be a promising area for reform, offering opportunities to reduce regulatory costs while improving health outcomes.

Note
This research brief is based on Michael Pesko and Christian Saenz, “Pharmaceutical Drug Regulation and Mortality: Evidence from E‑Cigarettes,” Social Science Research Network, February 23, 2025.