Obligatory Responses to FDA Inspection Outcomes and Future Drug Shortages

Problem definition: The Food and Drug Administration (FDA) is the regulator tasked with overseeing two key dimensions of the drug supply chain: quality and shortages. Whereas the primary policy tool used by the FDA to oversee drug quality is recurring plant inspections, there are fewer similar tools used by the FDA to reduce drug shortages. In an effort to better understand the pernicious public health problem of drug shortages and the role of the FDA in reducing shortages, the U.S. Congress tasked the Government Accountability Office (GAO) to study this problem. A key conclusion in the GAO report is that when the FDA gives their most unfavorable plant inspection outcome, those plants develop shortages soon thereafter, a possible sign of onerous FDA corrective actions that may come at the cost of reliable drug supplies. We examine whether these most unfavorable FDA inspection outcomes help or hinder drug shortages, using a rigorous econometric approach. Methodology/results: We employ instrumental variable (IV) analysis to conduct a verification of this GAO report. We examine the relationship between the most unfavorable inspection outcome given by the FDA, an official action indicated (OAI), and future drug shortage risks. We find that, contrary to the GAO report, OAI inspection outcomes lead to reduced shortage risks. Robustness checks give consistent results. In posthoc analyses, we continue to leverage instrumental variable analyses to explore the impact of the other inspection outcomes, as well as merely receiving an inspection, on shortage risks. We find evidence of an incrementally beneficial relationship between inspection outcome severity and shortage risk reduction. Managerial implications: The FDA hesitates to issue OAI outcomes, doing so at an exceedingly low rate. Our results indicate that if the GAO report created any organizational hesitancy on the part of the FDA to issue OAIs out of a concern that they may lead to shortages, this hesitancy appears to be unwarranted. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.0322 .