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

Prescription drug expenditures are the fastest growing component of health care spending, rising threefold over the 1995-2007 period. Coinciding with this growth has been a surge in direct-to-consumer advertising (DTCA), made feasible by the Food and Drug Administrations's (FDA's) clarification of rules governing broadcast advertising in 1997 and 1999. We exploit this natural experiment to investigate the separate effects of broadcast and non-broadcast DTCA on price and demand utilizing an extended monthly time series for all advertised and non-advertised drugs in four therapeutic classes spanning 1994 through 2005, a period that enveloped the shifts in FDA guidelines and the consequent DTCA expansion. Controlling for physician-directed promotion, fixed-effects models indicate broadcast DTCA positively impacts own-sales and price (elasticities of 0.10 and 0.05), while non-broadcast DTCA has a relatively smaller impact. Expansions in broadcast DTCA account for 19% of the overall growth in drug expenditures, two-thirds of this impact being driven by higher demand and the remainder due to higher prices.