Association for Public Policy Analysis & Management

Spending on direct-to-consumer advertising (DTCA) of prescription drugs in the U.S. has increased dramatically in the last few decades from $150 million in 1993 to over $4 billion in 2010. The rise of DTCA has generated much debate about its effects on patient welfare. On the one hand, DTCA may be informative if it educates patients about available treatments and encourages individuals to seek care for underdiagnosed conditions. Advertisements may also serve to remind patients to take their existing medications, promoting better drug adherence. On the other hand, the persuasive and product differentiation aspects of DTCA may lead to unnecessary treatments and excessive drug spending by switching consumers from cheaper generics to more expensive advertised branded drugs. There is a lack of consensus on whether DTCA serves primarily to inform or persuade, which matters for assessing its value to patients. This distinction hinges partly on the extent to which DTCA impacts drug utilization and the mechanisms underlying advertising’s impacts, such as whether the effects of DTCA stem from the initiation of therapy versus adherence and whether there are spillovers of advertising on non-advertised drugs. However, identifying DTCA’s causal effects on utilization has been challenging empirically, since demand factors often influence both the amount of advertising and the timing of advertisements.

We address these challenges by introducing a new quasi-experimental approach to estimating how DTCA influences drug utilization. We exploit a large shock to DTCA driven by the introduction of Medicare Part D in 2006. Our instrumental variable strategy exploits variation across geographic areas in the share of the population that is covered by Medicare (ages 65+) to predict changes in advertising exposure across areas. We show that there was a large relative increase in advertising exposure immediately following the introduction of Part D in geographic areas with a high share of elderly compared to areas with a low elderly share. Since advertising cannot be perfectly targeted to the elderly, we use the sudden differential increase in advertising exposure for non-elderly that live in elderly-dominated areas to estimate the effects of advertising on drug use. We find that drug utilization is highly responsive to advertising exposure. Following Part D, there was a 6 percent increase in the number of prescriptions purchased by the non-elderly in areas with high elderly share, relative to areas with low elderly share. Expanded take-up of prescription drugs accounts for about 70% of the total effect of advertising, while increased adherence to drug therapy accounts for the remaining 30%. While advertising increased drug adherence for existing patients, we also find that individuals who initiate drug treatments due to advertising are on average less compliant suggesting some potential wasteful spending. We find evidence that advertising also increased the use of non-advertised drugs in the same therapeutic class as advertised drugs. This effect is concentrated among generic drugs. DTCA on net does not cause substitution away from lower-cost generics to higher-cost advertised drugs; it leads to increased use of generics rather than decreased use.