Drug Advertising and Prices

By December 7, 2009Commentary

While drug spending is one part of health care where the curve has been bent downward in recent years, concerns remain about the appropriateness of prescribing behavior and the impact of drug company promotional activities on that behavior.  In a brief report, the Congressional Budget Office looks at pharmaceutical firms’ spending on marketing activities, primarily detailing (direct sales activity to physicians) and direct-to-consumer advertising.  (CBO Report) The report is largely descriptive.  It sets out the purported benefits of both detailing and DTC advertising and the adverse effects which might occur, particularly in regard to cost.

Drug companies spent about $4.7 billion on DTC in 2008 and about $12 billion on detailing, out of a total promotional budget of $20.5 billion.  In addition, probably around $20 billion of free samples of product were distributed to physicians.   Note that sales in the US of drugs in 2008 amounted to around $190 billion and R & D costs were about $38 billion.  So in total, pharmaceutical companies were allocating almost as much spending to promotion as to development of new products and that spending is 20% or more of sales.  Not surprisingly, much of the promotional spending, especially DTC, is on drugs for widespread chronic diseases.    More money also tends to be spent on drugs with little competition  and on relatively new products.

A specific example of the effects of this spending is reported in the Archives of Internal Medicine.  (Archives Abstract) Researchers examined the effect of direct-to-consumer advertising for Plavix on Medicaid prescription drug costs.  If a company initiates DTC for a product, it must be anticipating recouping the substantial costs of the advertising through more unit sales and/or price increases.  Examining Medicaid spending in 27 states covering 30 million enrollees, the researchers found that after the start of DTC advertising the trend of increase in the number of Plavix prescriptions did not change.  But unit prices, and therefore total costs for Plavix, did increase significantly, by around 12%.

While other factors might account for both the lack of unit sales increase and the price rises, it seems logical to conclude that a firm needs to raise prices to cover the cost of DTC and that it would believe the effect of DTC would support demand for the product even at the higher price.  The researchers did not look at the appropriateness of Plavix prescribing, but that would obviously be of interest.  Banning DTC and limiting other promotional activities, which has been proposed by some policymakers, would have a substantial lowering effect on drug company costs, which might in turn allow for a reduction in unit prices.  It might also help ensure appropriate prescribing.

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