But companies in the health space that produce products, using many of the same components as what goes into the email server, face a much different problem set. If their product doesn’t work consistently and reliably, they can hurt people, or even cause their deaths. So we don’t, and can’t, rely simply on competition to weed out the good from the bad. Instead, we regulate them.
That’s more than just a legal framework: that’s a philosophy for how the marketplace in health works. You can think of federal regulation as just a bunch of health and safety laws that prescriptively require that you do this and not do that, but it’s more accurate to think about federal regulation as saying we only want companies willing to invest the significant resources required to get the product right the first time they enter the market, and to take the risk of failure to meet high standards of safety and effectiveness.
To put it in business school terms, federal regulation amounts to a significant barrier to entry for the health markets. And that is quite deliberate. FDA law means don’t enter this business unless you’re willing to do it right. And, as classic economic theory suggests, companies that are willing and able to invest the additional resources required and take greater risk get rewarded with greater return. That’s as it should be, to protect the public from unsafe protects and to further the public health by encouraging companies to invest in medical innovation. In that later regard, FDA law rewards innovation in a manner similar to the patent laws. We simply do not want all companies to be able to make health care products. We choose to impose much higher standards in that field, and for companies willing and able to meet those standards we allow them to earn a potentially higher return.
Benefits and Burdens of FDA Regulation
Let’s bring it down from the 100,000 ft. view and get more specific about how entering FDA-regulated space affects both the company’s cost structure and opportunities to earn a higher return. For a specific company, this would require a fairly detailed analysis, but let me provide you with an overview here.
To conduct this analysis, I’ve chosen the competitive strategy framework developed by Prof. Michael Porter at the Harvard Business School. It’s familiar to many and reasonably well-suited to assessing the impact of a regulatory scheme on a business. In a pair of roughly 500 page books, Prof. Porter details an entire methodology for considering a company’s strategic options in light of the markets and business environment in which they operate. I’ll focus on two tools he uses in his analysis.
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