Pharmaceutical advertising and Medicare Part D

Abstract

We explore how and to what extent prescription drug insurance expansions affect incentives for pharmaceutical advertising. When insurance expansions make markets more profitable, firms respond by boosting advertising. Theory suggests this effect will be magnified in the least competitive drug classes, where firms internalize a larger share of the benefits from advertising. Empirically, we find that the implementation of Part D coincides with a 14–19% increase in total advertising expenditures. This effect is indeed concentrated in the least competitive drug classes. The additional advertising raised utilization among non-elderly patients outside the Part D program by about 3.6%. This is roughly half of the direct utilization effect of Part D on elderly beneficiaries. The results suggest the presence of considerable spillover effects from publicly subsidized prescription drug insurance on the utilization and welfare of consumers outside the program.