Impact of Direct‐to‐Consumer Advertising on Pharmaceutical Prices and Demand

[Author Affiliation]Dhaval Dave, , , , ddave@bentley.eduHenry Saffer, , , , hsaffer@gc.cuny.edu[Acknowledgment]This research was supported by a grant from the Agency for Healthcare Research and Quality to the National Bureau of Economic Research. The authors are grateful to Gregory Colman, Robert Feinberg, Michael Grossman, Dominic Hodgkin, Rick Smith, and two anonymous reviewers for valuable comments. Li Ma and Zhen Ma provided excellent research assistance.1. IntroductionBetween 1995 and 2007, expenditures on prescription drugs increased by 274%, raising the drug-related share of total health care spending from 6% to over 10% and making it one of the fastest growing components of health care costs.1 The growth in prescription drug expenditures has coincided with the growth in pharmaceutical promotion, which increased from $11.4 billion in 1996 to $29.9 billion in 2005 (Donohue, Cevasco, and Rosenthal 2007). Promotion of prescription drugs is generally limited to patented drugs and includes direct-to-consumer advertising (DTCA) on broadcast and print media as well as direct-to-physician promotion (DTPP) through visits by company representatives to physician offices (known as detailing), free samples provided to physicians, and advertising in professional journals. The largest increase in promotion resulted from the expansion of DTCA into broadcast media. This expansion was precipitated by the Food and Drug Administration's (FDA's) clarification of the rules governing broadcast advertising in 1997 and 1999, making it feasible for companies to promote via television and radio advertisements. DTCA spending increased from $150 million in 1993 to $4.24 billion in 2005.These new regulations, which allow broadcast DTCA, remain a controversial policy. Currently, only the United States and New Zealand permit such advertising. DTCA is facing increased scrutiny from Congress and consumer groups. Congressional leaders have contended that DTCA raises prescription drug costs and have requested that the policy be revisited.2 Some groups maintain that the recent increases in DTCA are responsible for the increases in expenditures on prescription drugs. The National Institute for Health Care Management (November 2001) claimed that increases in sales for the 50 most heavily advertised drugs caused 47.8% of the increase in expenditures on prescription drugs.Growth in prescription drug spending is broadly driven by increases in utilization and price and shifts in the composition of drugs being used, all of which may be impacted by DTCA. DTCA can raise the demand for existing drugs and can also affect their price elasticity. The increase in demand can be beneficial if it improves adherence (Donohue et al. 2004; Bradford et al. 2006) or makes individuals aware of the existence of drug therapies for their health conditions. Expenditures have also increased, in part, as a result of the fact that newer drugs generally cost more than older drugs, and DTCA might induce substitution to these newer, more expensive drugs, which also tend to be more heavily advertised. This may be health-promoting since newer drugs have been shown to be more effective in improving health than are older drugs (Lichtenberg and Virabhak 2007). Treatment through prescription drugs can also be more cost-effective than alternative and more intensive therapies, inducing some substitution among these forms of care.3 A key component of this question of the extent to which the growth in DTCA has contributed to rising prescription drug costs relates to how DTCA affects drug prices. To the best of our knowledge, no prior studies have investigated the impact of DTCA on prescription drug prices on a broad scale. This study adds to the literature with an empirical investigation of the role of prescription drug promotion in affecting the price of prescription drugs. Prior studies, which have explored the effects of consumer advertising on sales, have also generally utilized older data collected prior to 2000, have not differentiated between broadcast and non-broadcast DTCA, and have arrived at mixed conclusions regarding the impact of total DTCA on own-sales. …