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The Impact of Direct-to-Consumer Advertising on Health Insurance Markets

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Abstract

Direct-to-consumer advertising (DTCA) for drugs has increased from US$200 million in 1997 to US$4 billion in 2011. While studies show that DTCA impacts the patient-physician relationship, little is known of the effect of DTCA on health insurance markets. We test whether DTCA raises the costs in these markets or makes the markets more efficient in drug pricing. Across 212 markets, we examine the impact of DTCA on insurers’ negotiated prices for 166 drugs. Controlling for unobserved pharmacy and pharmacy benefit manager attributes, as well as manufacturer advertising market selection effects, we find that an increase in a manufacturer’s DTCA spending lowers insurer prices and reduces insurance market price dispersion. These competitive effects intensify as DTCA competition increases between drug manufacturers.

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Notes

  1. Keehan et al. (2012).

  2. IMS (2011).

  3. Magna (2010).

  4. Brownfield et al. (2004).

  5. See Iizuka and Jin (2005); Bradford et al. (2005); Wosinska (2005); Ridley (2013) and Donohue et al. (2004). See Berndt and Donohue (2008) for a recent review of the literature on the effects of DTCA.

  6. GAO (2006).

  7. Randomised controlled trials show that physicians often prescribe brand drugs to patients requesting the drug, even for weak indications (Kravitz et al., 2005).

  8. Humphreys (2009).

  9. Some papers have looked at the effect of drug advertising on other commodity prices. For example, Safferet al. (2007) estimate that a ban on nicotine replacement therapy drug advertising would increase cigarette prices by 10 per cent.

  10. Myers et al. (2011).

  11. Weissman et al. (2004).

  12. Bradford et al. (2005, 2006).

  13. Donohue et al. (2004); Wosinska (2005); Armantier and Namoro (2006); Bradford et al. (2006).

  14. Berndt and Donohue (2008).

  15. Rather, physician detailing impacts individual share (Donohue and Berndt, 2004).

  16. Iizuka (2004) and Iizuka and Jin (2005).

  17. Palumbo and Mullins (2002).

  18. Cady (1976). See Kaul and Wittink (1995) for a review of price advertising.

  19. Similar pro-competitive effects have been found with price advertising for eyeglasses, optometric services, physician services and legal services. See Rizzo and Zeckhauser (1992) for a review.

  20. Moreover, very few pharmacies and retailers advertise full price information, even when required by law (Council of the City of New York, 2004).

  21. See Farris and Albion (1980); Leffler (1981); Capella et al. (2009).

  22. Kaldor (1950); Bain (1956); Schmalensee (1972).

  23. Leffler (1981).

  24. Comanor and Wilson (1967, 1969, 1974).

  25. Comanor and Wilson (1974).

  26. Stigler (1961); Telser (1964); Nelson (1974).

  27. Steiner (1973, 1993).

  28. Stigler (1961); Sorensen (2000) and Hong and Shum (2006).

  29. No one model seems to dominate in the empirical marketing literature. In 12 nonprice advertising papers in the marketing literature reviewed by Kaul and Wittink (1995), nine found that advertising reduced price sensitivity and four increased price sensitivity. In marketing theory, Amaldoss and He (2009) show in a theory model that no one effect should be expected to dominate across all scenarios.

  30. Huh and Becker (2005).

  31. Capella et al. (2009).

  32. Dave and Saffer (2010).

  33. Available at www.fda.gov/Drugs/InformationOnDrugs/ucm142438.htm.

  34. The dispersion will be even larger between cash-paying customers and insured customers.

  35. Congressional Budget Office Report (2007).

  36. Lipton et al. (1999).

  37. Brooks et al. (1999).

  38. PBMI (2012).

  39. For fixed effects methods used with DTCA, see Mizik and Jacobson, 2004.

  40. Federal Trade Commission Report, page 47 (2005).

  41. Federal Trade Commission Report (2005).

  42. Calfee (2002).

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Acknowledgements

We are thankful for comments from David Bradford and from participants at the Federal Trade Commission’s Roundtable on Pharmaceutical Economics, the Annual Health Economics Conference at the University of Chicago and the American Society of Health Economists Meetings at Duke University. We thank also Tamer Abdelgawad of Pfizer, Inc., for insightful comments. The views expressed in this paper are those of the authors, and no official endorsement by AHRQ or DHHS is intended or should be inferred.

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Authors and Affiliations

  1. McCourt School of Public Policy, Georgetown University, 37th Street NW and O Street NW, Old North #100, Washington, 20057, DC, U.S.A.

    William Encinosa

  2. Lehigh University, 621 Taylor Street, Bethlehem, PA 18015, U.S.A.

    Chad Meyerhoefer

  3. NBER, 1050 Massachusetts Ave, Cambridge, MA 02138, U.S.A.

    Chad Meyerhoefer

  4. Agency for Healthcare Research and Quality, 540 Gaither Road, Rockville, 20850, MD, U.S.A.

    William Encinosa & Samuel Zuvekas

  5. Food and Drug Administration, Center for Devices and Radiological Health, 10903 New Hampshire Avenue, Silver Spring, MD 20993

    Dongyi Du

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Encinosa, W., Meyerhoefer, C., Zuvekas, S. et al. The Impact of Direct-to-Consumer Advertising on Health Insurance Markets. Geneva Pap Risk Insur Issues Pract 39, 749–767 (2014). https://doi.org/10.1057/gpp.2014.33

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