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"Big drug companies are putting more money into advertising and promotion than they are into research and development," said Al Gore on the campaign trail, neatly summarizing another popular complaint against the pharmaceutical industry. This widespread assertion, however, is just plain wrong. In 1999, for instance, the pharmaceutical industry spent $13.9 billion on advertising and promotion. (Half the promotion costs, incidentally, were for drug samples that doctors give to patients for free.) R&D expenditures for 1999 were more than $24 billion.
There are, to be sure, more drug ads around these days. In 1997, the Food and Drug Administration, concerned about a couple of First Amendment lawsuits against its regulations, relaxed its restrictions on advertising prescription drugs. Since then, there has been an explosion of direct-to-consumer television and print ads for prescription drugs. In 1999, pharmaceutical companies spent $1.8 billion appealing directly to consumers. Industry critics charge that advertising directly to consumers causes patients to demand drugs they don't need. As Gore put it, drug makers were nefariously "spending hundreds of millions of dollars on television and on magazine advertising to persuade people to buy newer and more expensive medications when less expensive versions work just as well."
Such charges raise several issues. First, do less-expensive medicines work just as well as those "newer and more expensive ones"? In a study of the benefits and costs of newer drugs, Lichtenberg shows that older drugs are, in general, not as good as newer drugs. Using data from the 1996 Medical Expenditure Panel Survey, an in-depth national survey of the health care expenditures of more than 22,000 people, Lichtenberg developed an econometric model to compare the costs and benefits of using older and newer drugs to treat similar medical conditions. He concluded that "the replacement of older by newer drugs results in reductions in mortality, morbidity, and total medical expenditure." Lichtenberg also found that "denying people access to branded drugs [as opposed to cheaper generic drugs] would increase total treatment costs, not reduce them, and would lead to worse outcomes" (emphasis in original). Newer is clearly better.
What about the claim that advertising simply tricks consumers into demanding more expensive drugs? Obviously, advertising can generate interest in a product -- that, after all, is the whole point. But the idea that advertising can simply create a demand for a worthless product is no less convincing when it comes to medical care than it is for other goods and services. If anything, it is less so in this case, since the advertiser needs to convince two buyers -- the patient and her doctor -- to make a sale.
More to the point, such criticisms ignore basic realities of the health care market. "There are substantial societal benefits to health from consumer advertising," says Alison Keith from Pfizer. "Patients have a lot of information about themselves that otherwise would not go into the medical system." A survey in 1999 by Prevention magazine estimated that direct-to-consumer advertising encouraged nearly 25 million patients to talk with their doctors about illnesses or medical conditions that they had never discussed before. In my case, a television ad for Zyrtec showing people being pursued by herds of allergen-generating cats alerted me to its marriage-saving possibilities. As important, by providing information outside of the traditional doctor-patient relationship, direct-to-consumer advertising can also give patients some protection against incompetent or indifferent physicians who have failed to keep up with new developments.
"The industry...also downplays the fact that many 'new' drugs aren't medical breakthroughs," complains The American Prospect, jabbing away at the pharmaceutical industry, looking to win its argument on points if not by knockout. "About half of industry research is aimed at developing me-too drugs," that treat problems already addressed by existing medications, it adds. The implication is that companies are simply trying to take market share away from each other without providing any "real" benefits to patients.
Such a scenario ignores the simple fact that companies are likely to be researching similar drugs to begin with and that one firm has to be first to market. But so-called me-too drugs actually benefit patients, not simply by offering different treatments for similar conditions -- Tagamet and Zantac, for instance, have different active ingredients -- but by driving down prices in a given treatment category. "The period of one-brand dominance for an innovating drug within a breakthrough therapeutic category has unmistakably shortened," writes AEI's Calfee. This faster competition leads to price cuts among competing medicines. Hence, when new anti-depressant medications were introduced in the mid-1990s, they cost only 53 percent as much as Prozac did when it first hit shelves in 1988 and had the field more or less to itself. Similarly, new cholesterol-lowering drugs that came to market in the mid-1990s cost 60 percent less than pioneering effort Mevacor did when it first showed up in 1987.
First, Do No Harm
The Hippocratic Oath famously insists that doctors do nothing to worsen a patient's condition: First, do no harm. Unfortunately, when it comes to most policy recommendations regarding prescription drugs, the potential for harm, usually in the form of price controls and universal, mandatory coverage, lurks everywhere.
Central to virtually all "reform" agendas is reining in those drug company profits. Will that contain health care costs? "Suppose we seize all pharmaceutical profit," suggested Sidney Taurel, CEO of Eli Lilly & Co., in a speech last October. "Drugs are just 8 percent of total health care. To simplify the arithmetic, let's stretch and say [profits are] 20 percent of sales. Twenty percent of 8 percent equals just 1.6 percent of total health care costs. Does that sound like a solution to you?" Despite its political appeal, it's not much of one. In fact, that sort of thing would almost certainly retard the development of new drugs by destroying the incentive for research. (It's not called the profit motive for nothing.)
Given their relatively small cost as a percentage of health care dollars and overall household consumption, why have drugs raised the ire of politicians and populists so forcefully? The short answer is third-party payments. "Most of the drugs are not being paid for by users. Third parties are paying but not getting the benefits, so they are very concerned about costs," explains AEI's Calfee. As doctors prescribe more drugs to cure and ameliorate the ills that afflict their patients, this means that health insurance and managed-care providers are spending more on drugs. Insurers, in turn, pass along the additional spending to their customers, companies who provide job-based medical coverage, whose bottom lines are squeezed by the additional spending.
In many cases, spending on drugs does lower health care costs, but often enough the new drugs do cost more than earlier, less effective therapies, so third-party payers are shelling out more money while patients are getting greater benefits. From a strictly actuarial point of view, it's cheaper for patients to drop dead of heart attacks than for the government or insurers to pay for years of cholesterol-lowering life-extending drugs. Employers who don't want to pay the rising costs for employee health insurance, and politically potent seniors who have been schooled by Medicare to think that all health care is a right, complain to legislators that drug costs are out of control. Such complaints focus on increased spending on drugs, while ignoring the costs saved through pharmaceutical treatments and the suffering and disability that afflicted patients before pharmaceutical companies developed the new drugs.
The policy initiatives that respond to such complaints are fraught with problems. Those that simply award consumers more money specifically earmarked for drugs amount to little more than corporate welfare, by giving pharmaceutical companies a new revenue stream. More typically, though, policies that address prescription drugs end in some sort of price control scheme that, by undercutting the possible return to investment in the pharmaceutical industry, will over time harm patients by reducing the supply of new drugs. Trying to devise some sort of drug benefit for seniors -- a major goal of the Bush administration -- is treacherous policy territory, since misguided or ham-handed regulation can have serious consequences, especially with respect to not-yet-invented drugs. During the debate over the Clinton health plan, notes AEI's Calfee, just the threat of price controls spooked pharmaceutical R&D. "Growth in research spending dropped off dramatically from 10 percent annually to about 2 percent per year," according to Calfee.
Yet the perception that drug prices -- and drug company profits -- are too high is likely to drive policy. Last year, Congress passed legislation allowing the reimportation of drugs manufactured in America from Canada, where drug prices are significantly lower due to price controls, which are in place in some form in virtually all developed nations outside the U.S. The law drew part of its moral authority from the fact that American drug companies routinely sell their drugs abroad at lower prices than they do in the U.S. Why shouldn't Americans get as good a deal? asked lawmakers.