SHANG Li-Yan



An Research on Establishing the System of Drug Safety Mandatory Liability Insurance

SHANG Li-Yan

Objective To reduce the damage of drug safety events through setting up the system of drug safety mandatory liability insurance. MethodsCost-profit theory in institutional economics was applied. Results and ConclusionIt is necessary to set up drug safety mandatory liability insurance system in China, which can be achieved through legislation.

drug; safety liability; mandatory insurance

In recent years, drug safety accidents have occurred from time to time. From the counterfeit drug to adverse drug reaction, causing great harm to the users on physical and mental. In Germany, the “drug law” clearly stipulates that drug manufacturers must have liability insurance or provides guarantee liability by financial institutions. Sweden prescribes drug manufacturers should bear the liability without fault for drug damage. Manufacturers should pay for the insurance[1]. USA, Canada and Japan have also forced local sales products manufacturers to pay for product liability insurance. But in China, this system is still in the theoretical exploration stage. In order to make the victim and his family obtain rapid and effective relief caused by the drug safety accidents, this paper discusses the necessity to establish the drug safety responsibility compulsory insurance system from the perspective of institutional economics.

1 Defination of the drug safety responsibility compulsory insurance system

The system can be used to reduce the uncertainty and risk. Drug safety liability compulsory insurance system refers to the system that guarantees the victim to receive compensation for the drug defect[2], and safeguards the rights and interests of patients.

The general sense of liability insurance belongs to voluntary insurance, establishment amendment and termination of the insurer and the insured’s rights and obligations in accordance with the contract.

However, drug safety compulsory liability insurance system is mainly contracting through the compulsory liability, rather than voluntary.

These insurance system participants include: The insurer is the insurance company; in accordance with the law or the contract after the accident; the insured person, namely the drugs production enterprise; victims are the people who got injured due to drug safety accidents. Its main contents are provisions on insurance amount, duration and interest rate and claims.

2 Cost-benefit analysis of establishing drug safety liability compulsory insurance system

It is difficult for a new system to maximize the social welfare without changing any personal welfare conditions. Therefore, the establishment of the new system is a non Pareto improvement process. The increase of a person’s interest is at the expense of another person’s interest. So we must compare the cost and benefit. When the benefit exceeds the cost, the new system is essential to establish. Generally speaking, the costs include: rules formulated and operation cost. The benefits include: market benefit, society benefit and rulers benefit. But the subject of institutional costs and benefits are often inconsistent. A group of people are the beneficiaries; the other group is the cost bearers. Therefore, the implementation of the new system should consider the individual cost and social cost, and combines the social benefit, personal benefit and political benefit.

This cost is mainly preparatory input for the operation of the system, the subjects are rulers. The main cost is mental. A system only sets reasonable contents that can ensure the rationality and validity of the system. Since the government should establish the system, it must take the following factors into consideration such as the industry investigation and repeated demonstration, specific provisions of the insurer, the insured, the third victim identity, respective rights and obligations, the mode of operation, the scope of punitive measures, the loss sharing plan, the insurance cost etc based on environment and background. we can learn from the existing laws like “road traffic safety law”, “marine environmental protection law”, “coal law”, “construction law” to reduce the cost.

The vitality of a new system not, only comes from the ideal design, but also the implementation. This cost is the sum of all the essential resources that must be applied to maintain the effective operation of the system, namely, it is the material cost. The specific undertakers of the cost are pharmaceutical company and insurance company. On one hand, it is a mandatory insurance, the pharmaceutical enterprises must participate. Insurance expenses will increase business operating costs. On the other hand, for the insurance companies, the insurance has a certain public welfare, not for profit. The insurer is in high risk at the same time, it also must ensure the public welfare and non-profit. Then, how to solve this contradiction? Only emphasizing the public welfare will reduce the enthusiasm of companies to participate in the construction of system of insurance. And the insurer will choose to give up this business. If public welfare is abandoned to pursuit high return with high risk, it will also directly increase the economic burden of the insured, which makes it hard to bear. Therefore, the cost must be properly shared between the two parties, and the improved design of the system can reduce the operation cost.

The market subjects mainly refer to the pharmaceutical enterprises and the victims. Before establishing drug safety liability insurance system, the interests of the victims and enterprises are completely opposite, that to say, it is a zero sum game, and one side’s income is the other’s loss. Once the establishment of drug safety liability insurance system is done, there will be accurate expectations for the share of liability for both parties. Enterprises transfer the liability of compensation to insurer through purchasing drug liability and safety insurance. The injured can receive reasonable compensation because of drug liability and safety insurance. Therefore the victims can resume normal life as soon as possible which solves the problem that victims can not get timely relief and subsequent treatment.

In addition, most of China’s pharmaceutical enterprises are in small scale and enterprises affordability is limited. Once the liability accident occurs and the compensation liability is huge, enterprises will be forced to terminate the production, sales, and even become bankrupt. If the enterprises want to improve product liability and avoid the greater impact of product liability risk, the most effective way is to transfer liability risk with products liability insurance. It is visible that market subject’s benefit to establish drug safety liability compulsory insurance is enormous.

The social benefit refers to the actions of single economic activity brought to the whole society[3]. This can be interpreted as reducing the external cost. The external cost refers to someone's behavior causes loss to others and the society, and the loss is not compensated. The problem of drug safety has a lot of external costs. Due to the external cost, many drug manufacturers only consider the individual interests while ignoring the public interest when they make production decisions. When the illegal cost is relatively low, it will transfer the cost of producing fault to public. Through the mode of compulsory contract, compulsory liability insurance system limits drug producers and sellers’ right to guarantee specific third person’s legal rights. The establishment of the system is meaningful to the public interest and the external cost becomes internalized, that is, to increase the whole social benefits.

In terms of drug safety events, the victims include consumers, pharmaceutical industry and government reputation. After the implementation of drug safety liability compulsory insurance system, the insurance company will play an important role in drug safety supervision, which effectively shares the government supervision responsibility; therefore, the government has saved administrative costs. And it can make full use of professional operation of insurance companies on business risk. The financial burden of the government can be effectively reduced and the efficiency of accident disposal is improved. The government can provide better public services and improve people's livelihood.

Drug safety liability compulsory insurance system needs to be made under the supervision of society, thus it incurs certain costs, including the cost of formulation and implementation. For example, the pharmaceutical enterprises undertake the insurance premium and the insurance company assume the risk. It also includes the social opportunity cost. It means if we do not choose this system but other methods to solve the problems of drug safety which brings the differences of interests. This is the cost evaluation. At the same time, this system can change the allocation way through certain means so that it controls certain behavior of enterprises and bring some benefits to the enterprises, the society and the government. This is the benefit evaluation.

The rational standard system of cost-benefit evaluation should be the marginal cost equals the marginal input. Namely, the system equilibrium is the benefit target of the system pursuit. Our task is to find the equilibrium point. As long as the design of the system can fulfill the double targets of balance the incentive and constraint, it can reduce the system cost maximally and increase the system profit. At the same time, in order to save the system resource cost, we must allocate the intelligence cost and material cost reasonably.

3 Suggestion on establishing drug safety liability compulsory insurance system

System innovation is divided into self created innovation and reference innovation. Reference innovation means we make a new system by transplanting and digesting the old ones, which can produce a strong demonstration effect, and it has high credibility. American and Germany adopt legislative method to reduce the victim's economic loss caused by the defects of drug and adverse reactions. We can learn from their practice and revise the existing “Drug Administration Law” to establish supporting system by increasing relates terms of “relevant provisions of drug safety liability compulsory insurance”, or we can stipulate the contents by establishing “drug safety accident liability compulsory insurance regulations” provisions. In the ADR compensation, the consumers can sue the illegal enterprise to cover their loss[4].

The system of self reinforcement is the comprehensive calculation of costs and benefits after the system adjustment. In order to ensure the smooth implementation of drug safety liability insurance system and predict the drug safety accidents can be timely and effective, drug safety risk evaluation system should be established as the auxiliary measures of the system. At the same time, with the information communication platform, the government, the insurance industry and the pharmaceutical enterprises can transmit information quickly. The government will use its advantage to disclose the pharmaceutical producing enterprises’ risking information regularly and share information resources with insurance industry. It is also necessary to establish a claims database between drug enterprises and insurance enterprises. This can help to get information and reduce the cost of insurance, which provide support for the insurer to determine the premium rate. So it can perfect the system itself continuously to realize self reinforcement.

The system is to maintain a specific order, and the system itself should be maintained to exist. Liability insurance and drug safety is a high risk business for insurance companies; it is difficult to complete the payment of compensation on the premium after the accident. If the underwriting conditions and rates is improved it will lead to adverse selection, which reduces the public welfare, and it will affect the sustainability of this system. In view of this, the risk of coinsurance foundation and national reinsurance plan can make up for the lack of alternative compensation costs. Government should also play a certain role by using tax incentives, financial subsidies, giving some financial support to insurance company, lowering underwriting insurance operation cost of enterprises to weaken the motives the of insurance enterprises pursuing profit. At the same time, it can reduce the cost of insurance for pharmaceutical enterprises and improve the enthusiasm of insurance company and pharmaceutical enterprises to promote the sustainable development of drug safety liability insurance system.

[1] WANG Ze-jian. The Theory and Case Study of Civil Law (Third Volumes) [M]. China University of Political Science and Law Press, 1998: 213.

[2] Food Safety Law: Should Join the Product Liability Insurance Clause [EB/OL]. http://www.chinalawedu.com/new/16900_175/2009_11_17_ji588121971119002652.shtml, 2009-11-17.

[3] Baidu Encyclopedia [EB/OL]. http://baike.baidu.com/link?url=e4Z0m7NQcYqALF9WCJZmzEFCsk9C39I2kQ03nvVFdFiqHeBwURRLbfLZru_EcaHadrY20lcPInFL5FGCUAO84q, 2014-04-03.

[4] Compulsory Insurance System and the “Drug Administration Law” [EB/OL].http://www.zyzhan.com/news/detail/34367.html, 2013-08-28.

Author’s information: SHANG Li-yan, Lecturer. Major research area: Institutional Economics. Tel: 13332448020, E-mail: suninyoung@126.com