The Effect of Direct to Consumer Advertising on Prescription Drug Prices and Sales

The purpose of this study is to estimate the effect of direct-to-consumer advertising (DTCA) of prescription drugs on prescription drug prices and sales. Major increases in broadcast DTCA began in August 1997 when the FDA eliminated the requirement that broadcast advertising present all of the information on the product insert in the advertisement. From 1995 to 2005 DTCA went from $380 million year to $4.24 billion year. Today only the U.S. and New Zealand allow broadcast DTCA. The model shows that a time limited monopoly will initially set prices low and advertising high which will reverse over the patent life. Advertising ends with the expiration of the patent. A pooled data set for all advertised and non-advertised drugs in four major therapeutic classes spanning the period of 1994-2005 was created. Regression models of prescription drug prices and sales on DTCA, detailing, free samples and patent expiration were estimated. Preliminary results suggest that broadcast DTCA has increased prescription drug prices and sales. The expansion in broadcast DTCA may be responsible for about 18 percent of the overall growth in prescription drug expenditures over the sample period. About two-thirds of the growth in expenditures is due to increased sales and about one-third is due to higher prices