Television advertising of prescription drugs is controversial, and it remains illegal in all but two countries. Much of the opposition stems from concerns that advertising directly to consumers may inefficiently distort prescribing patterns toward the advertised product. Despite the controversy surrounding the practice, its effects are not well understood. Exploiting a discontinuity in advertising along the borders of television markets, I estimate that television advertising of prescription antidepressants exhibits significant positive spillovers on rivals’ demand. I then construct and estimate a multi-stage demand model that allows advertising to be pure category expansion, pure business stealing, or some of each. Estimated parameters indicate advertising has strong market-level demand effects that tend to dominate business-stealing effects. Spillovers are both large and persistent. Using the demand estimates and a stylized supply model, I explore the consequences of the positive spillovers on firm advertising choice. Compared with a competitive benchmark in which firms optimally free ride, simulations suggest a category-wide cooperative advertising scenario would produce a significant increase in total advertising.
Positive Spillovers and Free Riding in Advertising of Prescription Pharmaceuticals: The Case of Antidepressants by Bradley Shapiro :: SSRNFebruary 8, 2016
The Manhattan Institute’s HEALTH CARE 2.0: USHERING IN MEDICINE’S DIGITAL REVOLUTION series delves into the details of how government policy stifles innovation in the delivery of health care. This paper, Part 1, surveys the key economic principles that drive innovative, dynamic sectors of the economy—and explains why American health care does not live up to those principles.
- Health care-market distortions have considerably worsened since Kenneth Arrow famously described them in 1963; but in other industries less dominated by misguided government intervention, similar distortions have gradually eroded, thanks to technology, especially the rise of the Internet.
- The tech world is full of stories of individuals who dropped out of college to design software and hardware that changed the world; but such innovation is far less common in health care—for reasons largely determined by public policy.
- Each current barrier to a more innovative, competitive, affordable health care system was created for a reason; but the cumulative weight of these policies has been to make U.S. health care less innovative, less patient-centered, and less affordable.
It’s important to distinguish between new medicines that are priced at a premium because they represent genuine innovation and risk-taking, and drugs that are priced high simply because investors are manipulating regulatory failures. If Mrs. Clinton is serious about helping patients, she should focus on lowering the cost and time necessary for generic-drug entry, thus reducing the chance of perpetual monopolies for old, off-patent drugs like Daraprim.Yet Mrs. Clinton’s proposed policy changes are mostly focused on new medicines that are transforming the treatment of disease, but also take a lot of risk and cost to develop. More than 40% of the drugs approved by the FDA in 2014 treat rare or vexing medical problems, including a cure for hepatitis C, the first and only vaccine for meningococcal B, and a radical treatment for metastatic melanoma—a disease that was once a death sentence. About 70% of the drugs in development are “first in class” medicines, meaning they use a completely new approach in fighting a disease.
We describe the broad range of uncertainties faced by the developers of medical technologies. Empirically, we estimate the asset market incidence of two realizations of uncertainties we classify as within-market policy risks. The events we analyze concern the intellectual property of Myriad Genetics, Inc., an American molecular diagnostics firm. In July 2013, the Supreme Court invalidated several of Myriad’s intellectual property claims. Subsequently, the Center for Medicare and Medicaid Services reevaluated the reimbursements it pays for the services at issue in this patent litigation. We estimate that these events substantially moved Myriad’s market capitalization, by just under 25 percent in the case of the Supreme Court’s decision and nearly 20 percent in the case of CMS’s reimbursement rate re-determination. Myriad’s exposure to the realization of these intellectual property risks reflects its unusually high reliance on revenues linked to the services at issue. We discuss the implications of these risks for the total volume of medical innovation and for its organization across firms.
Representative Fred Upton, chairman of the House Energy & Commerce Committee, recently released a discussion draft of legislative language for the 21 Century Cures Initiative. This initiative attempts nothing less than to “boil the ocean” of regulations and incentives that govern medical innovation in the U.S. The 400-plus-page draft rolls up a number of previously proposed bills (including an updated version of Representative Marsha Blackburn’s SOFTWARE Act, discussed in a previous column).
A large share of the draft incorporates legislation that is designed to improve the incentives for inventing new medicines, or finding new uses for old medicines. This is important, because we are facing a crisis in pharmaceutical innovation.
Stiglitz argues that enshrining stronger protections will slow cheaper generic drugs from entering the market. Not only is this not true, but he also fundamentally misunderstands IP: firms in IP-based industries depend on intangible capital, such as source code, molecular compounds and digital copy-written content. But if competitors are able to enter and/or remain in the market because they obtain an innovator’s IP at less than the fair market price (either through theft or coerced transfer), they are able to siphon off sales that would otherwise go to innovators, thereby reducing the ability of innovators to reinvest in the next round of innovation.
This new war between the drug giants seems unlikely to cease soon.
As for price-controls, if a large, private PBM like Express Scripts could secure a major deal pitting drug rivals against each other, it is strong evidence that, even in a patent-protected market, competition can work wonders. This outcome is, in fact, precisely what we pay insurers and PBMs to do—a job they generally do well.