The Economic Impact of

Direct-to-Consumer Television Advertising

of Prescription Drugs
on the Healthcare Market

Tama Beth Brooks

Harvard Law School

1
 Part I:
Introduction

With National Health Expenditures soaring over the one trillion-dollar mark, many have their doubts about

the ability of any health care system to control the rising costs of medical treatment. Managed care or-

ganizations, through the use of gatekeepers, the reduction of treatment intensity, and financial incentives,

have been able to slow the growth in health care expenditures, but the numbers are still quickly escalating.

Doctors, hospitals, and long-term care facilities have all been hit hard by the “health care crisis,” as each

group has been forced to deliver services with a dwindling supply of health care dollars.

One sector of the health care industry that is now coming under fierce attack for its increasing contribution

to health care costs is the pharmaceutical sector. Prescription drugs are playing a large role in treatments

for ailments, as manufacturers are producing a new generation of prescription drugs. Pharmaceuticals have

the ability to increase the quality of life for individuals suffering from a wide range of conditions, and with

the increase in third party payer coverage for drugs, consumers are demanding and filling prescriptions at

an alarming rate. Fueling consumer demand for these new brand name drugs are direct-to-consumer print

advertisements, and most recently direct-to-consumer television advertisements which are more accessible

to pharmaceutical manufacturers as a result of the FDA’s Draft Guidance issued during the fall of 1997.

As prescription drug expenditures grow faster than all personal health care expenditures, one must call into

question whether the inflation in demand for pharmaceuticals is a result of direct-to-consumer advertising

and whether this is a positive indication, signaling a new population of consumers who are informed about

health care treatment options.1 The paper seeks to piece together the pharmaceutical market, advertis-
1 Katharine R. Levit, Helen C. Lazenby, Bradley R. Braden, Cathy A. Cowan, Patricia A. McDonnell, Lekha Sivarajan, Jean

M. Stiller, Darleen K. Won, Carolyn S. Donham, Anna M. Long, & Madie W. Stewart, National Health Expenditures, 1995, 18
Health Care Financing Review 175, 184 (1996) [hereinafter Levit].

2
ing, and the economics of consumer information to highlight some of the main concerns and benefits of

direct-to-consumer television advertising.

3
 Part II:
Introduction to Direct-to-Consumer Pharmaceutical Advertising

A. The FDA’s Authority to Regulate Pharmaceutical Advertisements

Among the FDA’s vast powers as a regulatory body is the authority under “the 1962 amendments to the

Federal Food, Drug, and Cosmetic Act (FFDCA) to regulate prescription drug advertising.”2 Originally, the

FDA’s main concern was to ensure that pharmaceutical advertisements presented physicians with accurate

information. Since physicians are the gatekeepers for prescription drugs, the FDA did not want physicians to

be deceived about the realities of a drug as the result of creative advertising. Although the 1962 Amendments

to the FFDCA empowered the FDA to regulate prescription drug promotion, it was not until 1967 that the

FDA put in place the advertising regulations, “enumerating requirements that advertisements must contain

a ‘brief summary’ of side effects, contraindications, and effectiveness.”3 The 1967 revised regulations also

included “the definition of ‘fair balance’ information concerning safety and effectiveness” which required

prescription drug advertisements to be viewed in their entirety by the FDA which would assess whether or

not the advertisement “presents a balanced account of all clinically relevant information, and the risks and

benefits that can influence a physician’s prescribing decision.”4 The result of the regulations were to create

requirements for prescription drug labeling and advertising that would ensure equal attention to benefits and

risks of a drug through either full disclosure for labeling or a brief summary for advertising. Final regulations

were issued in 1979 to cover drug labeling and prescription drug advertising regulations in 21 C.F.R. section

202.1 which were revised “to require that advertising claims or comparisons be supported by substantial
2 William Green, Consumer-Directed Advertising of Contraceptive Drugs: The FDA, Depo-Provera, and Product Liability,

50 Food & Drug L.J. 553, 554 (1995); see also Thomas A. Hayes, Drug Labeling and Promotion: Evolution and Application of
Regulatory Policy, 51 Food & Drug L.J. 57 (1996) (stating that section 502 of the FDCA covering misbranding “provides the
FDA with the substantive authority to regulate...advertising of prescription drugs”).
3 Milind Kale, Lee W. Schwendig, Vaughn Culbertson, Paul S. Cady, William Sharp, & Barbara Adamcik, Monitoring the

Regulatory Process of Prescription Drug Advertising, 5 J. Pharmacy & L. 229, 230 (1996) [hereinafter Kale].
4 Id. at 232.

4
evidence” or “substantial clinical experience.”5

Although the FDA has issued regulations to cover prescription drug advertisements, many “FDA policies

concerning advertising and promotion are not based on regulations, but on interpretations of its authority

published as guidelines or statements of policy.”6 Publishing guidance or policy statements allows the FDA

to operate more efficiently by changing its positions to meet public needs without enduring the difficult

lawmaking process.7 Because of the FDA’s somewhat complex rulemaking policy, to examine the current

FDA policy pertaining to DTC advertising requires synthesizing the regulations and FDA guidelines or

statements to arrive at the following brief statement:

The requisites for DTC advertisements that mention a particular drug are the same as those for
other prescription drugs; statements must be true, and false or misleading claims must be avoided.
The FDA has stated that the ad must reveal material facts about potential consequences or risks
of use when the drug is taken as suggested in the labeling. Disclosure of risk must be of equal
prominence and readability in comparison with other, more positive information. DTC ads should
not focus on factors that only a physician can evaluate, and must contain a brief summary using
words or terms that a layperson would understand. Because of its concern that nonprofessionals lack
previous exposure to and experience with such advertising, the FDA has requested that all DTC
materials be submitted for review and clearance before use.8

To ensure compliance with the FDA regulations and guidance, the FDA will usually send a “warning letter”

or a “notice of violation (NOV)” to a drug manufacturer detailing the violation, however the FDA states that

it has the authority to take legal “action without repeatedly sending notices to a firm.”9 The FDA’s ability

to take advantage of their legal authority to enforce the regulations is subject to different opinions, however

the FDA itself has stated that compliance efforts are restricted due to limited resources. During 1986-1994
5 Hayes supra note 2, at 61.
6 Id. at 66.
7 Nancy K. Plant, Prescription Drug Promotion on the Internet: Tool For the Inquisitive or Trap for the Unwary?, 42 St.

Louis U. L.J. 89, 91 (1998) (stating “[w]hen the FDA changes its regulatory approach, therefore, it does not actually amend
its outdated regulations; rather, the agency produces documents, such as policy statements, guidance documents, and letters,
that do not go through the formal or informal rulemaking process.”).
9 Kale supra note 3, at 232.

5
the FDA “has pursued only two cases” of advertising regulation violation to the point of court action,

however one cannot predict how the FDA will respond to violations with the increase in direct-to-consumer

advertisements (DTC).10,11

B. Recent First Amendment Challenges to the FDA’s Authority to Restrict Promotional

Activities

The FDA has tried to hold firm to its authority to regulate the promotional activity of food, drug, and

medical device manufacturers. Several parties have challenged this authority in the district courts, and

the decisions handed down from those courts indicate that the FDA may not have the unfettered power to

restrict the contents of direct-to-consumer advertisements.

In Washington Legal Foundation v. Friedman, 13 F.Supp. 2d 51 (D.D.C. 1998), the District Court found that

the FDA’s policy under its Guidance Documents of prohibiting drug and medical device manufacturer’s from

disseminating information to physicians about off-label product uses is an unconstitutional First Amendment

violation. The court acknowledged the position that commercial speech, such as the provision of materi-

als during medical conferences, is less protected than pure speech under the First Amendment, however

commercial speech is, nonetheless, afforded some protection from government regulation.12 The District

Court examined the FDA’s Guidance Documents, which prohibited the promotion of off-label uses, under

the four-prong test used by the Supreme Court in Central Hudson Gas and Electric Co. vs. Public Ser-
10 Id.at 233.
11 The Pink Sheet, 55 F.D.C. Reports 32, Aug. 9, 1993. The two cases referred to here are (1) a case against Kabi Pharmacia
where a New Jersey federal court on July 30, 1993 issued a consent decree of permanent injunction after a year long investigation
by the FDA into its advertising for Dipentum and (2) a case against Syntex where a consent decree was issued during October
of 1991 for Syntex’s promotions for Naprosyn; See generally Annual Reports, Department of Health and Human Services, Food
and Drug Administration, Division of Drug Advertising (1986-1981).
12 Washington Legal Foundation v. Friedman, 13 F.Supp.2d 51, 65 (D.D.C. 1998) (stating that commercial speech “is entitled

to qualified by nonetheless substantial protection” under the First Amendment).

6
vice Commission of New York, 447 U.S. 556 (1980).13 Under the Central Hudson test, the District Court

found that the information provided by medical device and drug manufacturers about off-label uses was not

unlawful or inherently misleading since the claims were supported by independently published textbooks,

peer-review articles, and/or physician’s findings.14 The District Court recognized the government’s substan-

tial interest in protecting the well-being of its citizens, but found that the FDA cannot justify the restrictions

imposed by the Guidance Documents on the concern that highly educated and trained physicians will misuse

information provided to them about off-label uses and ultimately harm their patients.15 The FDA failed

the fourth and final prong of the Central Hudson test because the District Court found that the regulations

were more extensive than necessary to serve the asserted government interest and that they unduly burden

important speech.”16 The court enjoined the FDA from prohibiting or restricting manufacturer’s abilities to

disseminate information about off-label medical drug or device uses generated by a “bona fide peer reviewed

professional journal,” a “bona fide independent publisher,” or an “independent program provider,” if the

information provided is not false or misleading.17 On consideration of the FDA’s motion to alter or amend

the judgement and for a stay, the District Court granted one proposed amendment to the injunction and

denied the other.18 However neither of the amendments, even if both were granted, would have softened the

language of the District Court in limiting the FDA’s power to promulgate regulations, guidance documents,

policies, orders or other official actions which are unreasonable limitations on the right of drug and device

manufacturers to engage in truthful and nonmisleading commercial speech.19

13 See id.
14 See id. at 66-69.
15 See id. at 69-70 (stating “[t]o the extent that the FDA is endeavoring to keep information from physicians out of concern

that they will misuse that information, the regulation is wholly and completely unsupportable.”).
16 Id. at 74.
17 Id. at 74-75.
18 See Washington Legal Foundation v. Friedman, 199 WL 101085 (D.D.C.).
19 The requested amendments focused on the scope of the District Court’s injunction. The FDA sought to limit the injunction

to only apply to (1) “unapproved uses of drugs or devices approved by the FDA for some other use” and (2) “the three Guidance
Documents discussed in the Court’s opinion.”). See id.; See also Washington Legal Foundation, 13 F.Supp.2d at 74 (enjoining
the FDA from executing its regulatory power in a way in which the District Court found to violate the First Amendment’s
protection of commercial speech).

7
Another recent case challenging the FDA’s authority to restrict commercial speech also looked at the Cen-

tral Hudson test to invalidate regulations promulgated by the FDA which unreasonably restricted the ability

of dietary supplement manufacturers to make health claims that were not inherently misleading.20 Under

Central Hudson the Court of Appeals in Pearson v. Shalala, 164 F.3d 650 (Ct. App. D.C. 1998), recog-

nized that the government had a substantial interest in “‘ensuring the accuracy of commercial information

in the marketplace,”’ however the government’s regulations were found to not “directly advance the gov-

ernment interest asserted” as required by Central Hudson.21 The government also failed to meet the last

prong of the Central Hudson test because the regulations in question were not found to be a “‘reasonable

fit”’ between the government’s goals and the means chosen to advance those goals.”22 The Appeals Court

found that “when the government chooses a policy of suppression over disclosure–at least where there is no

showing that disclosure would not suffice to cure misleadingness–government disregards a ‘far less restrictive

means.”’23 The Appeals Court suggested that to counteract the potentially misleading statements contained

on dietary supplement labels, the FDA draft disclaimers listing the side effects or require that all dietary

supplement labels contain a statement reading “The FDA does not approve this claim.”24

The FDA received a more favorable ruling in the recent Second Circuit case Nutritional Health Alliance

v. Shalala, 144 F.3d 220 (2nd Cir. 1998), decided prior to Pearson, where the plaintiffs-appellants sought

“to challenge the statute and regulations governing the labeling of dietary supplements before they have

submitted any proposed health claims to the FDA.”25 The Second Circuit found that this claim was not

ripe for judicial review because the “plaintiffs’ complaint did not allege any particular health claims that
20 Pearson v. Shalala, 164 F.3d 650 (Ct. App. D.C. 1998).
21 Id. at 655.
22 Id. at 657.
23 Id. (quoting Board of Trustees of the State University of New York v. Fox, 447 U.S. 469, 479 (1989)).
24 Id. at 658 (also reserving the right for the FDA to ban any claims where the “evidence in support of a claim is outweighed

by the evidence against the claim).

25 Nutritional Health Alliance v. Shalala, 144 F.3d 220 (2nd Cir. 1998) (the plaintiffs-appellants questioned the constitution-

ality of the Nutrition Labeling and Education Act (NLEA) issued regulations requiring persons desiring to make health claims
on labeling of dietary supplements to petition the FDA for authorization.”).

8
the plaintiffs wished to state” and the regulations did not create “a direct and immediate hardship for the

parties.”26 The Second Circuit did rule on whether the potential 540 day waiting period for the FDA to

evaluate a dietary supplement’s health claim was a prior restraint, finding that the 540 day waiting period,

“in the context of evaluating, pursuant to defined standards, whether commercial health claims are truthful

and non-misleading, is constitutionally valid.”27

The Second Circuit was unable to rule on whether the FDA’s regulations pertaining to dietary supplement

health claims are constitutional. However, if the plaintiffs in Nutritional Health Alliance submitted health

claims to the FDA, they would have forced the Second Circuit to consider the constitutionality of the regula-

tions and the decision may have read similarly to Pearson. In general, the recent First Amendment challenges

seem to reign in the FDA’s authority to promulgate regulations, guidance, opinions, and policies, which are

not narrowly tailored to meet substantial government interests, based solely on unfounded concerns that

physicians or consumers may be mislead by these claims.

The First Amendment challenges do not deal directly with the FDA’s authority to regulate prescription

drug advertisements, however it is foreseeable that if the FDA does attempt to further restrict the content

of television advertisements or require some type of mandatory pre-approval process, as suggested later in

this paper, manufacturers will call into question the constitutionality of the regulation. Although the First

Amendment analysis conducted above is brief, it does bring to light some issues need to be considered if the

FDA plans on changing the Draft Guidance to impose more requirements on broadcast media pharmaceutical

advertisers. Even if the FDA does not alter the Draft Guidance, it is foreseeable that some manufactur-

ers may challenge the constitutionality of FDA’s current regulations, guidance, and policies pertaining to

direct-to-consumer television advertising.

26 Id. at 225.
27 Id. at 227.

9
This paper’s analysis assumes that the current decisions do not change the FDA’s authority to regulate

pharmaceutical promotion. The basis for this assumption stems from the fact that two the aforemen-

tioned decisions most directly apply to dietary supplements which are classified as food not drugs under

the FFDCA.28 Dietary supplements do not have to endure the lengthy FDA approval process required for

drugs, and thus are, even prior to the marketing stage, subject to reduced government intervention in their

production process.29 The third case mentioned in this analysis does not remove the FDA’s power to regulate

drug advertisements and promotion, however it does reduce its ability to limit the promotion of supported

claims concerning off-label usage. On the whole, the recent cases serve to reduce the extent to which the

FDA can restrict promotion, however these First Amendment cases do question whether the FDA has the

authority to regulate advertisements and promotional efforts of pharmaceutical manufacturers.

C. The New Audience for Pharmaceutical Advertisements

Drug companies target physicians with advertisements, spending more than $5000 per physician per year

on promoting pharmaceuticals to this audience, and the FDA uses its authority to regulate and control the

labeling and advertising of prescription drugs to ensure that these promotional materials provide doctors

30
with an accurate depiction of the drug. However, pharmaceutical manufacturers no longer consider

doctors the most efficient arena for concentrating their advertising dollars. The healthcare marketplace has

changed drastically since the 1960’s–a time when consumers played a more passive role in their own health

care decisions, relying on doctors to prescribe treatments for their ailments without questioning or suggest-

ing any alternatives. Although a doctor’s visit remains the only way a patient can obtain a prescription

drug, consumers, armed with information supplied to them by manufacturer advertisements in magazines,
28 Federal Food, Drug, and Cosmetic Act, 21 U.S.C.A. §350 (1998) (classifying vitamins and minerals under Subchapter
IV–Food); see generally Peter Barton Hutt and Richard A. Merrill, Food and Drug Law 205-225 (2d ed. 1991).
29 Id.
30 Kale, supra note 3, at 230.

10
newspapers and most recently via television, have demonstrated that they are more than willing to initiate

conversations about new medications and treatment alternatives with their doctors.31

The first “product-specific DTC” advertisement appeared in 1983 and the FDA, confused and unable to

develop a formal policy to address this new type of marketing, “asked the industry to refrain voluntarily

from advertising prescription drugs direct to the consumer until a policy could be developed.”32 The FDA

“lifted the moratorium” in 1985 stating that “DTC advertisements would have to meet the same standard

for fair balance and full disclosure as advertisements directed at physicians.”33 The FDA opened the door

for pharmaceutical firms to market their drugs directly to patients, and the dollars spent by the industry on

DTC advertising has been increasing exponentially ever since.34

D. The Changing Healthcare Market and Rising Pharmacy Costs

Targeting consumers directly has become even more important for manufacturers as managed care organi-

zations (MCOs) become dominant providers of health care services. The traditional long-standing doctor-

patient relationship has given way to fifteen minute appointments with a doctor that participates in the

managed care plan. With limited time to develop relationships with patients and less time to devote to

pharmaceutical representatives as a result of increasing time pressures on their workday, pharmaceutical

manufacturers no longer perceive doctors as the most efficient means of marketing new products. By pro-

viding information directly to consumers, manufacturers are able to encourage patients to schedule doctor’s

visits to discuss new or improved drugs with their physician.35 Pharmaceutical companies are able to direct

marketing efforts to the patient, capitalizing on the trend for individuals to become informed consumers of
31 See Jill Wechsler, Information Please, Pharmaceutical Executive, Nov. 1998, at 19 [hereinafter Wechsler, Information
Please] (citing Prevention magazine survey which indicated “that DTC advertising is encouraging patients to talk to doctors
about health conditions and medications and that a majority who do so receive a prescription.)
32 Wayne L. Pines, New Challenges for Medical Product Promotion and Its Regulation, 52 Food & Drug L.J. 61,62 (1997)

[hereinafter Pines, New Challenges].

33 Id.
34 See Tom Marcinko, What We’ve Learned from 11 Years of Strategic Studies, Medical Marketing and Media, Nov. 1998,

at 52 (stating that “spending on DTC is breaking the $1 billion per year barrier for the second year in a row”).
35 See Hayes, supra note 2, at 57 (1996) (stating that DTC advertising increased 42% from 1993 to 1994 as pharmaceutical

companies “attempted to inform patients and encourage them to ask their physicians about brand-name drugs”).

11
health care in today’s increasingly complex marketplace.

The advent of managed care has also changed the definition of the consumer for many pharmaceutical

companies as “MCOs have become the dominant buyers of drugs...account[ing] for over 70 percent of phar-

maceutical sales dollars” in 1996.36 As managed care organizations attempt to provide lower cost health care

to their beneficiaries, they cannot ignore the cost efficiency of treating an ailment with a prescription drug

versus an expensive procedure. Managed care organizations with their pharmaceutical benefit component

are encouraging consumers to take prescription drugs by covering, in many cases, the bulk of the cost. In

1990 patients paid out-of-pocket for 63.1% of all prescription costs, while in 1998 patients are only paying for

25% of prescriptions, leaving third party payers to absorb three-quarters of the costs of drug treatments.37

Third party payers have assumed more of the cost of drugs because their pharmaceutical benefits only require

beneficiaries to pay a small co-payment for each prescription which is relatively fixed between $2 to $25,

while drug costs, especially for the heavily marketed “new-generation drugs,” can be as much as $15 per pill.

These new drugs are no longer an inexpensive part of total health care costs and patients are using these

more expensive drugs for longer periods of time to treat chronic conditions.38 Although the costs of drugs

now play a large role in total health care expenditures, managed care organizations cannot deny the fact

that prescription drugs can be “‘the most cost-effective, value-added, least-invasive part of the health-care

system.”’39

Informed consumers are driving up the cost of managed care pharmaceutical benefits, as DTC advertisements

have turned patients from “passive recipients of prescriptions” into “savvy and demanding consumers who

insist on getting the latest and greatest drugs, even when older and cheaper medications might suffice.”40
36 Stephen P. Mahinka, Kathryn L. Gleason & Kathleen M. Sanzo, The Dominance of Managed Care Organizations as Buyers
of Drugs and Medical Devises Raises Regulatory Concerns Over Development and Marketing Practices, Nat’l L. J., September
15, 1997, at col. 1 [hereinafter Mahinka].
37 Elyse Tanouye, Toenail-Fungus Cure, The Wall Street Journal, Nov. 16, 1998, at A1 [hereinafter Tanouye, Toenail].
38 Id.
39 Id.
40 Id.

12
DTC advertisements have altered social perceptions about using prescription drugs–patients take drugs more

willingly and are less nervous about complications and side effects. However, many are concerned that “‘pa-

tients are specifically looking for a pharmaceutical product as an easy way to deal with whatever malady

they have.”’41 The increased patient awareness through DTC advertisements and the affordability of drug

therapies due to third party payers, have resulted in rising pharmacy costs. Managed care organizations

expected drug costs to rise about 7% during 1998 while other health care costs were only expected to rise

about 2-3% for the same period.42 Some states, such as Massachusetts, forecast that their state Medicaid

programs will be spending more health care dollars on drugs than hospital stays within the next five years.43

Undoubtedly, direct-to-consumer advertisements have demonstrated that demand for prescriptions is not

fixed based on a medical diagnoses. Promotional efforts have effectively boosted pharmaceutical sales over

the past few years as industry sales and DTC expenditures have soared with an estimated $142 billion in

sales for the 10 largest drug producers alone and $10.8 billion dollars in advertisements and promotions for

the entire industry during 1998.44,45 The FDA has facilitated the use of these DTC advertisements, allowing

manufacturers to appeal directly to patients via print advertisements and most recently through television

commercials by issuing a Draft Guidance in August of 1997 which makes television an affordable venue for

disseminating information about prescription drugs.

E. The Change in the FDA Position on Consumer-Directed Broadcast Advertisements

Television advertisements have become an affordable means by which pharmaceutical manufacturers can

promote new drugs to a wide audience at a relatively low cost per prescription. Before the Draft Guidance
41 Id.
42 JudyChi, Brace Yourself for More Focus on Rx Costs, Drug Topics, Sept. 15, 1997, at 22.
43 Tanouye,Toenail, supra note 37, at A1.
44 Ann M. Thayer, Drug Producers Post Increased Sales, Earnings, Chemical & Engineering News, Feb. 15, 1999, at 33.
45 Thomas M. Burton, Doctoring the Applesauce, The Wall Street Journal, Nov. 18, 1998, at A1.

13
was issued in August of 1997, pharmaceutical manufacturers could not afford the cost of product-specific

television advertisements because they could not absorb the cost of the air time needed to “carry [the] full

disclosure statements in the form of a brief summary or a reasonable version of it” as required by the FDA

regulations.46 The result was few television commercials that were confusing to viewers because “if both the

drug’s name and the disease it treats were mentioned, drug companies were required to show on screen the

entire fine print about risks.”47

The Draft Guidance issued in August of 1997 allows television advertisements to meet the information re-

quirements imposed by the regulations by including in the ad a “thorough ‘major statement’ conveying

all of the product’s most important risk information” while providing a means by which consumers can

obtain more detailed information about the drug.48 The guidance assumes that the advertisement will be

“communicated in consumer-friendly language, and that the advertisement is not false or misleading in any

respect.”49 The FDA, unsure of the impact this easement in the prescription drug advertising policy will have

on the consumers, “plans to evaluate the impact of the guidance on public health, direct-to consumer product

promotion, and consumer directed broadcast advertising within two years of issuing final guidance.”50

The immediate result of the Draft Guidance is a flood of television advertisements, as “spending for

prescription-drug TV commercials was up a whopping 330%” during 1998 to $600 million.51 The adver-
46 Wayne L. Pines, Some Major Issues in Direct-To-Consumer Advertising, 49 Food & Drug L.J. 589, 589 [hereinafter Pines,
Some Major ]; 21 C.F.R. §202.1 (1998).
47 Elyse Tanouye, The Fine Print: As drug ads proliferate, it pays to know what these commercials do–and don’t–tell you,

The Wall Street Journal, Nov. 19, 1998, at R6 [hereinafter Tanouye, Fine Print].
48 Food and Drug Administration, Guidance for Industry: Consumer-Directed Broadcast Advertisements, Draft Guidance

(July 1997) <http://www.fda.gov> [hereinafter Guidance for Industry] (additionally stating that broadcasters may meet the
adequate provision requirement of 21 C.F.R. 202.1(e)(1) by making a major statement and providing a mechanism for the
“dissemination of the product’s approved labeling”).
49 Id.
50 Anonymous, Pharmaceuticals: FDA Proposes Including Risk Information In Broadcast Ads for Prescription Drugs, BNA

Health Care Daily, Aug. 11, 1997, at d5.

51 Chuck Ross, Rx Marketers Pump $600 Mil into TV; Networks Reap Most, Advertising Age, Mar. 15, 1999, at S10.

14
tisements are reaching audiences, as almost all of the older adults polled in one recent survey stated “that

they had heard or seen one or more ads for a prescription drug” and 86% of those advertisements were on

television.52 However, these ads are not without supporters and critics.

Consumers feel more empowered as a result of the advertisements, because they are able to enter their doc-

tor’s offices as informed patrons taking an active role in their own treatments. Early findings on DTC ads

demonstrate that consumers are “generally in favor of prescription drug advertising” and that consumers

are willing to ask their doctors about information they received through a drug advertisement.53 Depending

on the specialty, between 10 and 20 percent of discussions about prescription drug treatments have been

54
initiated by patients.

Another study, conducted by CME Health, found that consumers did not respond as positively to direct-

to-consumer advertising. The study found that “[m]ost pharmaceutical marketing dollars are spent on

ineffective messages” as most consumers failed to respond favorably to advertisements for 18 brands used

in the survey.55 The study also showed that “consumers were twice as apt to strongly dislike the ads [in

the survey] as to strongly like them.”56 The researchers discovered that “[m]ost pharmaceutical ads have

little impact on those most likely to buy the products” because the data indicated that “[c]onsumers who

either personally suffered or had family members who suffered from a specific ailment were no more positive

toward relevant drug ads.” Regardless of the negative feelings consumers in this survey had about the ad-

vertisements themselves, the study found strong evidence that advertising increased awareness for brands,

“with several brands exceeding 60% awareness levels.”57

Notwithstanding consumers’ personal feelings about actual pharmaceutical advertisements, the overall con-
52 Sally Beatty, TV Dethrones Magazines in Drug Ads, The Wall Street Journal, Jan. 1, 1999, at B8 (also stating that “the

top 10 drug advertisers more than doubled their spending on TV to $393 million during the first three quarters of 1998”).
53 Susan M. Petroshius, Philip A. Titus, & Kathryn J. Hatch, Physician Attitudes Towards Pharmaceutical Drug Advertising,

35 J. of Advertising Research 41, 42 (1995) [hereinafter Petroshius].

54 Marcinko, supra note 34, at 53.
55 Laurie Freeman, Study Says Consumers Skeptical, Advertising Age, Mar. 15, 1999, S20.
56 Id.
57 Id.

15
clusion of both studies discussed here is that advertisements have been effective at generating brand name

equity. This conclusion finds additional support in the fact that 88 percent of all patients request certain

prescription treatments by name.58

Doctors are divided on the recent explosion in direct-to-consumer advertisements. Patients are questioning

their doctors’ treatment suggestions and “many physicians may view such patient inquiries as a sign of dis-

trust or even disrespect.”59 Other “doctors say [that] many ads give the impression that a drug has greater

benefits, and fewer risks, than a patient may actually experience” and that other important treatment in-

formation such as cost, treatment alternatives, and debates or controversies concerning the drug are not

provided for through manufacturer sponsored advertisements.60 Concerns about misleading information are

being voiced both in the medical community and beyond, as critics of DTC note that “ads can comply with

FDA requirements that they be truthful, accurate, and present a fair balance between a drug’s benefits and

risks” while still conveying images that are not accurate or complete.61

One early study of physician reactions to DTC advertisements found that a doctor’s position on DTC adver-

tisements appears to be influenced by age, medical specialty, and type of practice. Older physicians were less

responsive to patient “inquiries and requests for prescription drugs,” while internists reacted more negatively

to DTC advertisements than “general and family practitioners and dermatologists.”62 Doctors practicing in

urban practices or group practices were also more willing to listen to patient’s requests for pharmaceuticals.63

Overall, this early study concluded that despite concerns about DTC ads, doctors overall viewed DTC ads

positively, which, in turn, suggests that DTC ads can be an effective marketing technique for prescription
58 Marcinko, supra note 34, at 55.
59 Petroshius, supra note 53, at 41.
60 Tanouye, Fine Print, supra note 47, at R6 (describing several television commercials where images distorted the actual

therapeutic capabilities of the drug. For example, an ad for an asthma medication, “showed people engaged in vigorous
physical exercise while the voice-over touted the asthma drug, Accolate.” A television advertisement for the AIDS drug,
Crixivan, displayed healthy attractive people mountain climbing).
61 Id.
62 Petroshius, supra note 53, at 44.
63 Id.

16
pharmaceuticals.

Empirical data gathered by Scott-Levin research indicates that “patient requests for Claritin were honored

86 percent of the time, while requests for Pravachol–the most promoted drug to consumers in 1997–were

honored an astonishing 93 percent of the time.”64 DTC ads are capable of initiating discussions between

doctors and patients, and doctors, despite their mixed feelings about whether the ads provide patients with

accurate information, are listening to patient requests for prescriptions.

Managed care organizations and insurance companies, as high volume purchasers of pharmaceuticals through

the third party payer mechanism, oppose DTC ads for several reasons. First of all, patients are requiring

more doctor’s visits to obtain prescriptions for drugs that they see advertised on television. Patients also

request these drugs by brand name, and are less willing to accept the cheaper, generic substitute suggested

by managed care formularies.65 As discussed earlier, managed care organizations and insurers are paying

an increasing share of the cost of prescription drugs, and as DTC advertisements boost patient demand for

these more expensive drugs, pharmacy costs for third party payers will continue to rise.

Consumer groups worry about pharmaceutical spending on DTC advertisements, and see these dollars as

amounts that could, instead, go towards research and development efforts. “Glaxo-Wellcome Officials have

stated, for example, that DTC advertising represented 15 percent of that company’s marketing budget during

1996.”66 With television as a viable option for DTC ads, expenditures can only rise as television commercials

are the most expensive advertising venue. Advertising executives estimate that direct-to-consumer television

advertising for prescription drugs will probably rise to reach somewhere between $800 million to $1 billion

dollars during 1999.67

F. Television as the Expanding Media for Prescription Drug Advertisements

64 Marcinko, supra note 34, at 53.
65 William G. Castagnoli, The Coming Showdown on DTC, Medical Marketing and Media, Sept. 1998, at 41.
66 Mahinka, supra note 36, at col. 1.
67 Ross, supra note 51, at s10.

17
Major concerns about the impact of DTC advertisements are only magnified for television advertisements

where time to present complete information is limited. Although the claimed purpose of DTC advertising is to

inform consumers about treatment options, the actual purpose may be to “place small firms and new entrants

at a competitive disadvantage.”68 Since doctors are listening to consumer requests for pharmaceuticals, the

DTC advertising undoubtedly has a substantial effect on the market. Many feel that the dollars spent on

advertising and promotion should be directed towards research and development because they see the social

value of advertising as limited.69 These critics find that promotional “outlays [lead] to higher prices and

increased market power.”70

However, supporters of DTC advertising can look to other studies which find that “advertising [in general]

facilitates both the introduction of new products and the entry of new firms” as results indicate that firms

that spend more on promotion are among the most innovative.71 The ability to attract a large market

stimulates firms to research new and improved products for introduction into the market.

68 William S. Comanor, The Political Economy of the Pharmaceutical Industry, 25 J. of Economic Literature 1178, 1197

(Sept. 1986) (quoting a study that looks at advertising in general and finds that expenditures are too large to make claims that
the primary purpose is informational).
69 Id. at 1196
70 Id.
71 Id. at 1197.

18
 Part III:
The Economics of Advertising and the Pharmaceutical Industry

A. The Economic Impact of Advertising

Advertising’s main purpose is to increase the amount of a good sold and papers on the topic suggest that

there are two main reasons why advertising is able to increase sales for the advertised good. Some researchers

believe that “advertising operates predominantly by changing consumer tastes, while “[o]thers focus on ad-

vertising’s information function.”72 The informational aspects of advertising are heralded by pharmaceutical

manufacturers in defense of their expenditures on DTC advertising, however, as stated earlier, many doctors

and other critics are skeptical of the ability of a television advertisement to be provide accurate informa-

tion to consumers about the advertised drug. Specific concerns arise from the small amount of information

contained in these advertisements due to the astronomical cost of television advertising time.73 One has a

difficult time imagining the informational value of advertisements where paid celebrity endorsers tout the

benefits of using a particular drug, thus many view these types of promotions as directed towards changing

consumers tastes.74

Philip Nelson, in his 1975 study, questioned from an economic standpoint the ability of DTC advertisements

to change consumer tastes. Since “economists have no theory of taste changes,” Nelson hypothesized that

“advertising increases sales by increasing information” available to consumers.75 Nelson found in one of his

earlier papers on advertising that even the type of celebrity endorsements referred to above have an informa-

tional value based on their qualities of “search” and “experience.”76 The study found that for “search” goods
72 Phillip Nelson, The Economic Consequences of Advertising, 48 J. of Business 213, 213 (1975).
73 See Sally Beatty, TV Dethrones Magazines in Drug Ads, Marketing & Media, Jan. 14, 1999, at B8 (stating that the cost
of a thirty second advertisement during “Frasier” in October of 1998 cost $431,000, however sponsors see television as the most
efficient way to market their product due to the wider audience as compared with print advertising).
74 Nelson, supra note 72, at 213; The pharmaceutical advertisements referred to here are recent television spots featuring

celebrities such as Joan London and Bob Dole.

75 Id..
76 Id. at 214.

19
consumers can evaluate “the qualities of a product in advance of purchase,” which allows the consumer to

assess the validity of the advertisement.77 However, for “experience goods,” such as pharmaceutical drugs,

the consumer has more difficulty determining the truthfulness of the advertisement.78 Nelson’s 1974 paper

demonstrates that even for “experience goods” advertisers have incentives to provide accurate information

beyond government regulations regarding truthful promotion. The main impetus for companies to provide

accurate information to consumers through advertising is the simple fact that consumers will not be repeat

purchasers of the brand if the manufacturer makes false claims.79

The conclusions Nelson derives from his 1974 study may not apply to direct-to-consumer advertising for

prescription pharmaceuticals because the “theory of consumer information on which [his] analysis is based

assumes that consumers are able to determine the utility of a brand after enough purchases of that brand.”80

Evaluating the benefits of many medications can be difficult for consumers, especially if the drug is prescribed

for an asymptomatic ailment. One could argue, that despite the difficulty consumers may have in deter-

mining the effectiveness of a drug, the information theory of advertising can be upheld as applied to DTC

pharmaceutical ads because consumers have medical professionals to assist them in evaluating the perfor-

mance of the drug.

Even if consumers are unable to assess the value of the drug through experience, Nelson argues that “ad-

vertising will [still] provide the consumer with information.”81 Since large firms with more resources will

have a larger downside to fraud allegations and will be more likely to be subject to government scrutiny,

consumers can be more confident that large firms will provide accurate information in their advertisements.

Using level of advertising as a proxy for firm size, Nelson claims that to ensure quality consumers should
77 Id.
78 Id.
79 Id.
80 Id. at 215.
81 Id.

20
make purchasing decisions based on the volume of promotion the firm sponsors.82

Critics of advertising also claim that advertising costs are borne by consumers through higher prices. By

examining analyzing the effect of advertising on demand elasticities, Nelson finds that “the consumer pays

none of the costs of advertising, except his own time costs, which are designed by advertisers to be mini-

mal.”83

Nelson is willing to address criticisms such as (1) “the economy devotes too much of its resources to advertis-

ing,” (2) the main informational function of advertising for experience goods is “to tell the consumer which

brands advertise the most,” and (3), “advertising operates as a barrier to entry and...increases monopoly

power.”84 In response to (1) and (2), Nelson concludes that despite these arguments, his analysis demon-

strates that advertising aids consumers in finding “better products” with “no net cost of resources” because

“[t]he costs of advertising are paid for by the redistribution of production to the more efficient producers.”85

As far as raising barriers to entry, Nelson finds that if consumers purchase goods by random sampling then

advertising has an ambiguous effect on entry. However, if consumers do not make purchasing decisions by

random sampling before firms begin to advertise for a good then “advertising will make entry far easier

than it would be in its absence.”86 Since purchasers of prescription drugs do not select a prescription drug

through random sampling, one may be able to extrapolate Nelson’s conclusion to mean that advertising by

branded pharmaceutical manufacturers does not make entry more difficult for subsequent producers.

Nelson’s paper makes very strong claims in favor of advertising, basing those claims on theoretical grounds.
82 Id.
83 Id. at 216 (finding that the impact of a advertising is to increase the elasticity of demand for a good which results in a

lower market price for the brand).

84 Id. at 216-217, 227 (describing “barrier to entry” as the phenomenon that exists when “the rate of return for the original

firms in an industry–if they were of average efficiency–is greater than the competitive rate of return” such that new firms will
not enter the market to reduce the rate of return to the competitive rate. Often the original firm is more efficient because it can
produce at a lower cost because it is able to capitalize on economies of scale in output or has access to expensive technology).
85 Id. at 226
86 Id. at 232; An example of random sampling is purchasing fruit. Fruits all look the same and the only way to know if it is

tasty is to actually take a bite. There is little information about taste that can be gleaned before the individually samples the
fruit. Non-random sampling is when the consumer uses information to select among several different options. An example of
non-random sampling could be deciding which cereal to buy based on nutritional information.

21
The value of those claims is really dependent on an empirical analysis of advertising, which he did not un-

dertake. An empirical study of therapeutic markets that do not use advertising widely versus therapeutic

markets which market heavily may provide some information about the impact of prescription drug adver-

tising on the drug market, however the study would have to adjust for the variations in the data due to

the different therapeutic classes being compared. Time series data which includes advertising expenditures,

prescription drug sales, and the number of branded and generic firms in the market may also be used to

analyze the impact of the increase in prescription advertisements on the pharmaceutical market. This data

would also have to be adjusted to take into account the significant innovations in prescription drugs during

recent years which have caused drugs to be used more widely.

Comanor and Wilson, in their 1979 paper, attempt to synthesize different theories about the economic im-

pact of advertising with the empirical studies available on the topic. In addition to Nelson’s overall positive

view of advertising, Comanor and Wilson examine Schmanlensee’s model of advertising and competition.

Schmanlensee also finds that the presence of advertising does not increase barriers to entry if “‘existing firms

and the entrant can reduce equally effective advertising and equally desirable products.”’87 What Schman-

lensee concedes to and Comanor and Wilson highlight is that the effectiveness of the advertisement often

is not equal because the first producers have an advantage because consumers have more “experience with

[their] product.”88 Comanor and Wilson conclude that “the advantage of established firms is precisely that

they can impose higher costs on entrants without the prospect of retaliation.”89 The result of more effective

advertising is that established firms can earn high returns without stimulating entry into the market. In the

market for prescription drugs, the innovator is the established firm that has the entire life of the drug’s patent

to advertise without the threat of entry. It follows from the fact that the innovator will have more effective
87 William S. Comanor & Thomas A. Wilson, The Effect of Advertising on Competition: A Survey, 17 J. of Economic Liter-
ature 453, 455 (1979) (quoting Schmalensee’s 1974 paper entitled Brand Loyalty and Barriers to Entry)[hereinafter Comanor
& Wilson].
88 Id.
89 Id. at 456.

22
advertising which will reduce the likelihood that other firms will enter the market after patent expiration

because entry will be restricted.

Comanor and Wilson’s paper examines Nelson’s theory that advertising increases demand elasticity, thereby

reducing market prices.”90 Comanor and Wilson reason that advertising can lead to more elastic demand

and lower prices, but that Nelson’s result depends on the ability of advertising to provide information that

influences how consumers perceive the product’s quality.91 They conclude that theoretically advertising can

either increase demand elasticity or decrease it, depending on the type of advertising and its impact on

consumers. Empirical data on the topic is inconclusive, but one study cited by Comanor and Wilson found

that “increased advertising intensity is associated with less elastic consumer demands” and monopolistic

market pricing.92 When examining the demand elasticity for a prescription drug, one finds that the market

may only consist of one manufacturer and a resulting inelastic demand for the product despite the content or

perception of advertising messages. Advertising may be able to increase demand elasticity when the market

consists of more than one manufacturer, however the advertising message may have the opposite effect if it

is directed towards differentiating the quality of the innovator from subsequent producers.

Comanor and Wilson do not agree with Nelson’s theory that firms which produce high quality goods adver-

tise more, stating that “firms with low quality products find it advantageous to set higher advertising levels

to counter their relative product disadvantages.”93 The FDA approval process eliminates many concerns

about quality, leading one to question the informational advantage of advertising for pharmaceuticals if the

only value to advertising for an experience good is providing quality information. Since one cannot simply

shop for a prescription drug by walking down an aisle in a store, the value to advertising for pharmaceuticals

may be simply informing consumers about the existence of the product. The real value to advertising for
90 Id. at 457.
91 Id. at 456
92 Id. at 458.
93 Id. at 457.

23
pharmaceuticals may be the reduction in search costs for consumers, even though quality determinations

about the drug can only be made on an experience basis.

Comanor and Wilson find support for the hypothesis that advertising can have an overwhelmingly anti-

competitive effect on a market, however this impact may be dependent on the sector of the economy.94

Advertising will effect the retail trade sector differently from manufacturing, and several studies have sup-

ported this statement, observing that advertising in the retail sector “‘disseminates market information in

a strict sense, and tends to reduce market imperfection,’ while the opposite result is more likely for adver-

tising by manufacturers of consumer products.”95 Pharmaceutical companies are part of the manufacturing

sector, thus, according to Comanor and Wilson’s theory; advertising for prescription drugs will exacerbate

the market imperfections which will result in higher prices as a result of the anticompetitive behavior of

manufacturers. This extrapolation of Comanor and Wilson’s theory would suggest that the FDA should

seek to decrease the available venues whereby pharmaceutical firms can advertise their products, however,

before extending their theory to this level one should note that pharmaceuticals are not homogenous like

many manufactured products and consumers do not have the unrestricted access to purchase prescription

drugs.

Despite the impact of advertising on market prices and competition, Comanor and Wilson suggest that

advertising acts as a source of readily accessible consumer information which we may not be willing to forgo

because monopoly power results. On one hand, advertising results in a consumer population that is more

willing “to purchase high priced, highly advertised products when lower priced substitutes are available.”96

Although branded products may not advertise heavily when generic equivalents have entered the market,

they do advertise to promote the benefits of their drug over already existing brand and generic drugs in the
94 Id. at 470.
95 Id. at 471 (quoting Kaldor’s 1950 paper entitled The Economic Aspects of Advertising).
96 Id. at 472.

24
same therapeutic class.97 As Nelson suggests, consumer’s are willing to pay higher prices for these new ad-

vertised drugs, even if cheaper old drugs would effectuate similar results, because the advertisement conveys

information which reduces search costs.98 The real policy concern for direct-to-consumer television advertis-

ing, which will be discussed in more detail later in the paper, may not be the monopoly power conferred on

pharmaceutical advertisers, but the accuracy of the information presented to consumers. Advertisers usually

present a limited amount of information which does not include “a complete picture of relative product

qualities in the marketplace.”99 Pharmaceutical television promotions often “give the impression that a

drug has greater benefits, and fewer risks, than a patient may actually experience. Important information

about side effects and other potential problems...barely appear in TV commercials.”100 If the information

presented by pharmaceutical advertisers only serves to create preferences for specific drugs with a resulting

decrease in demand elasticity, the benefits of direct-to-consumer advertising may be difficult to assess. For

the prescription drug market, the benefit of advertising, as evidenced by consumer’s willingness to pay more

for advertised brand name drugs, has been identified as both reducing search costs and “the assurance of

uniform quality which advertised brands presumably convey.”’101

B. The Legal Monopoly

Economists main concern with monopoly power is that monopolies result in suboptimal resource allocation

as compared with competitive markets. Monopoly power produces inefficiencies because firms operating as

monopolists face a “demand curve that is not perfectly elastic.”102 Monopolists are able to extract positive

economic profits, while consumers are forced to pay higher prices than they would in a perfectly competitive
97 Robert Langreth, Net Slips at American Home, Johnson &Johnson After Charge for Restructuring, The Wall Street
Journal, Jan. 27, 1999, at B4 (stating “‘[d]irect-to-consumer advertising and armies of sales-people form a critical mass to
sweep away competition’ from less-expensive older drugs and persuade patients to buy expensive brand-name drugs.”).
98 Comanor & Wilson, supra, note 87, at 472.
99 Id. at 473.
100 Tanouye, Fine Print, supra note 47, at R6.
101 Comanor & Wilson, supra note 87, at 473 (quoting Scherer’s paper entitled Industrial Market Structure and Economic

Performance).
102 Nelson, supra note 72, at 218.

25
market.

Pharmaceutical companies are able to behave as monopolists in the prescription drug market, and the length

of that monopoly depends on several factors. First of all, the presence of monopoly power is evident in the

pharmaceutical industry because of the existence of patents which allow a pharmaceutical firm to have the

exclusive rights to produce the drug for a fixed number of years. Due to the lengthy FDA approval process,

this period usually shrinks from the standard 17 years for a patent to around 10-15 years.103 While the orig-

inal developer of the drug must test for efficacy and safety during the FDA evaluation process, generic firms

that enter the market after patent expiration and typically charge 50 to 70 percent less than the brand name

manufacturer only need to demonstrate “boiequivalence,” which significantly reduces the time for generic

drugs to obtain FDA approval.104

Aside from the actual period in which the pharmaceutical firm operates as a legal monopolist, pharmaceu-

tical firms are consistently earning high rates of return demonstrating their ability to price as monopolists

and earn above normal profits even though their monopoly is only considered to be a limited monopoly as

determined by their portfolio of patents.105 Although the industry claims that high returns on individual

products only offset the costs of the high number of products that never even survive to the FDA approval

process, many scholars of the industry focus on its consistently high profits as evidenced by its net income

level and rate of return to equity holders as a proxy for monopoly power in the industry that extends beyond

the legal monopoly granted to the industry through patent rights.106

103 Christine L. Romero, Generic Drug Maker Finds Market Growing, Knight-Ridder Tribune Business Daily News, Feb. 27,
1999, *1
<http://nrstg2s.djnr.com/cgi-bin/DJIntera...Highlight=on&DocType=TextOnly&View=View=View1>.
104 Id.; Comanor, supra note 68, at 1179; Richard E. Caves, Michael D. Whinston, & Mark A Hurwitz, Patent Expiration,

Entry, and Competition in the U.S. Pharmaceutical Industry, Brookings Papers: Microeconomics 10 (1991) [hereinafter Caves]
(stating that the reduced time for generic drug approval was the product of the Waxman-Hatch Act of 1984 which “eliminated the
requirement of socially wasteful duplicative testing by generic entrants” by allowing generic producers to submit an Abbreviated
New Drug Application).
105 Comanor, supra note 68, at 1178 (stating that rates of return calculated by the Kefauver committee in the late 1950’s and

early 1960’s demonstrated that the pharmaceutical industry was able to generate returns that “exceeded twice the average for
all manufacturing”); Langreth, supra note 97, at B4 (finding that net income in 1998 for three leaders in the pharmaceutical
industry increased 15 to 22 percent from 1997).
106 Comanor, supra note 68, at 1182 (also stating “the extent to which major pharmaceutical companies rely on the revenues

26
The pharmaceutical market, aside from its monopoly power, also has many unique demand side and supply

side characteristics that set it apart from other industries. On the demand side, consumers are not the

ultimate decisionmakers when it comes to making a purchase. Consumers must obtain a prescription from

their physician, an individual who often is not privy to the drug’s cost information and does not consider

price as a key factor, however most consumers do not change doctors because the physician does not pre-

scribe lower cost medications.107 Physicians are also encouraged to prescribe certain drugs based on (1)

professional custom as dictated by the medical community or (2) the formulary lists developed by hospi-

tals.108 The physician’s decisionmaking ability is largely based on her assessment of manufacturer supplied

information about the product.109 If the doctor has chosen to prescribe a drug with an available generic, the

consumer, the pharmacist, and most recently the managed care organization or third party payer, can make

the ultimate decision on “whether the original brand or a generic equivalent is dispensed.”110 Pharmacists

share an interest with consumers and third party payers in substituting a generic equivalent because generic

drugs “tend to yield higher gross margins to pharmacists.”111 The result of the demand side influences

is consumption based on factors that extend well beyond straight cost of a drug. Consumers are able to

make decisions once they obtain a prescription, but the physician is the only one who can dispense that

prescription.

Demand for prescription drugs has been steadily rising, while out of pocket spending by consumers has been

falling. The increase in pharmaceutical demand, as evidenced by the overwhelming rise in drug expendi-

tures, can be explained by scientific innovation in the pharmaceutical industry and the shift from traditional
generated by a small number of products is striking” and “[f]or some major firms, three products alone account for 70 to 80
percent of sales”).
107 Caves, supra note 104, at 5 (finding that doctors “do not ordinarily have information on drug prices charged by pharma-

cists” and that doctors do not normally exhibit price sensitive behavior when choosing to prescribe a brand name or generic
equivalent”).
108 Id. at 5, 7.
109 Mark A. Hurwitz & Richard E. Caves, Persuasion or Information? Promotion and the Shares of Brand Name and Generic

Pharmaceuticals, 31 J. of Law & Economics 299, 300 (1988) [hereinafter Hurwitz & Caves].
110 Caves, supra note 104, at 6.
111 Id.

27
fee-for-service indemnity plans to managed care plans.

The new generation of prescription drugs can treat a vast array of ailments, making drug therapy a more

viable treatment for ailments. These drugs are desirable for consumers who could previously not receive

appropriate relief, and consumer demand for these new effective treatments has correspondingly increased.

Also, recognizing the cost effectiveness of drug treatment as compared to surgery or other previously recom-

mended non-drug treatments, third party payers have been more willing to absorb the expense of prescription

drugs which has contributed to the increase in demand for pharmaceuticals.

Likewise, the change from indemnity plans to cost conscious managed care providers has increased consumer

demand because consumers no longer face the significant out-of-pocket costs of drug treatments. “In tradi-

tional fee-for-service plans, outpatient prescription drugs are typically covered under general plan coverages

that require a yearly deductible.... By contrast, HMO plans require only a nominal dollar copyament, typi-

cally $3 or $5.”112 This decrease in out-of-pocket expenditures explains the rising demand for prescription

drugs. “Low copayments required by managed care plans...encourage patients to fill more prescriptions than

they did when facing higher copayments or deductibles or the entire cost of the prescription.”113

Managed care organizations with their generous prescription drug benefits and formularies are sharing the

role with the consumer as a demander of pharmaceuticals. Managed care organizations, through bulk pur-

chasing agreements and other methods, have been able to reduce pharmaceutical companies’ abilities to

increase prices on a regular basis.

Revenue growth [in the pharmaceutical sector] has remained strong due primarily to unit growth.
In the U.S., the total pharmaceutical market grew by 9 percent in both 1992 and 1995, but in 1992,
‘
price increases contributed to a majority of the gain. By 1995, the situation was reversed , with real
growth representing most of the increase.’114

Thus, pharmaceutical firms have been forced to expand the demand for their products since they can no
112 Levit, supra note 1, at 184-185.
113 Id. at 186.

28
longer rely on regular price increases from third party payers. Direct-to-consumer advertising has been fueled

by the need for pharmaceutical companies to increase revenues, while keeping price levels relatively constant.

By stimulating consumer demand through ads, pharmaceutical manufacturers have been able to keep profits

and drug spending high without steady increases in the price of their products.

If consumers were privy to the same information as physicians they could play more of a role in their demand

preference for drugs by requesting prescriptions from their doctors by name, which suggests that consumers

are an ideal target for pharmaceutical advertising. Likewise, hospital formularies are constantly changing

based on the decision of committees of “pharmacy, clinical, and nursing members” who “pool information

on the cost and effectiveness of different drugs to develop drug lists heavily influenced by the trend in the

health care sector towards cost minimization.”115 Because hospital formulary committees are generally well

informed and demonstrate a high level of price sensitivity, advertising will not be as influential if targeted

directly to the hospital sector.116 In fact, hospital purchases of pharmaceuticals remained constant between

1993 and 1996, while retail pharmacy prescriptions dispensed through retail outlets and mail-order firms

grew 5.7% between 1994 and 1995. Advertisement expenditures also exploded during this period, however

the focus on DTC advertising explains why hospital demand did not rise along with retail pharmacy de-

mand.117

On the supply side, the pharmaceutical industry is comprised of around 600 firms that develop and man-

ufacture a wide array of “drug products, ethical and over-the-counter, branded and generic.”118 Most

pharmaceutical firms do not produce similar products within a therapeutic class, translating to the conclu-

sion that competition in the industry is mainly inter-firm. Pharmaceutical companies, unlike other producers

of consumer goods, do not focus on scale economies in production as many of the processes integral to drug
115 Caves, supra note 104, at 8.
116 Id. (citing empirical paper by Hurwitz and Caves which supports this proposition).
117 Levit, supra note 1, at 187 (stating that “[s]pending on direct-to consumer prescription advertisements has more than

doubled since 1992.)

118 Caves, supra note 104, at 8.

29
manufacturing need to be “carried out on small scales” due to “quality control considerations and the small

absolute quantities of active ingredients produced.”119 The level of integration between manufacturing and

distribution varies for pharmaceutical companies, however the trend is towards an increased role for inde-

pendent wholesalers, especially for generic producers.120

The supply side is split between brand name producers and generic producers, each with varying costs

of production largely based on research and development costs and the cost of obtaining FDA approval,

both of which are lower for generic pharmaceutical firms.121 Because of the lower costs of bringing gener-

ics to the market, one may assume that generics face minor barriers to entry, however generic producers

“may encounter technical difficulty in producing the active chemical ingredient for some drugs.”122 An-

other important barrier to entry for generic pharmaceutical companies stems from the demand side factor

of “accumulated goodwill assets of branded producers and any concerns about quality differences between

branded and generic drugs.”123 Generic producers that have established goodwill have more success when

they enter the post-patent market, and branded producers are more likely to reduce their prices in response

to a branded generic entrant as opposed to a small generic company entrant that has not established the

same level of acceptance among physicians, pharmacists, and consumers.124

The result of this demand side barrier to entry is the response from branded producers in the form of

heavy advertising during their patent periods to retain their market share.125 Studies have demonstrated

that promotion is “a competitive weapon” against the reduction of market share due to generic entrants.126

“Hurwitz and Caves found that the shares attained by generic entrants and the number of generic entrants
119 Id. at 8, 9.
120 Id. at 10.
121 Id.
122 Id.
123 Id. at 10, 11.
124 Id. at 11.
125 Id. at 28 (finding that a brand name drug’s “price falls roughly 2 percent with the entry of the first generic competitor, 8.5

percent with five generic competitors, 15 percent with ten generic competitors, and 22 percent with twenty generic competitors”).
126 Id. at 12.

30
decrease as both the current promotion outlays and the goodwill stocks of innovators’ brand increase.”127

This only serves to magnify concerns about the scope of DTC advertising. If pharmaceutical companies

have more access to consumers through different mediums, the chances of creating this goodwill barrier to

entry for generics will only increase. The effect of increased promotion by brand name producers can be to

thwart generic producers efforts to penetrate the market, resulting in high costs of branded pharmaceuticals

beyond the patent period. Although prior to now branded drugs have not been able to maintain high prices

for long after their patent expiration, it is not impossible that the net result of DTC television advertising

may be continuing market power for brand name pharmaceutical producers who are able to charge above

market prices and earn monopolistic returns beyond their statutorily allowed number of years.

C. A Closer Look at Advertising and the Economics of the Pharmaceutical Market

1. The Effects of Promotion on Market Share of Branded and Generic Producers

A 1991 empirical study by Caves, Whinston, and Hurwitz hypothesized that the “degree to which promotion

can be used” to reduce the market share of generic producers during post-patent production of a therapeutic

drug should be evidenced by the “rates of expenditure over time on promotion of a given drug.”128 The

researchers found that generic entry dramatically reduces the branded producers advertising expenditures.

The results indicated that “branded advertising falls roughly 20 percent with the entry of the first generic

drug, another 40 percent when the number of generic entrants reaches five, and still another 20 percent when

the number of entrants reaches 10.”129 The reduction of promotion due to generic entry combined with the

finding that the level of advertising for brands decreases before generics even enter the market suggests the
127 Id.
128 Id.
129 Id. at 39.

31
following points: (1) “the significant declines in advertising levels due to impending and actual entry of

generic drugs strongly suggests that expanding the overall market for the chemical entity is a significant

function of branded drug advertising” and (2) “the declines in advertising expenditures before actual generic

entry seem to confirm the durability of advertising’s effects because they imply that the drug innovators ex-

pect lower returns from advertising expenditures once the patent expires and generic entry grows likely.”130

Overall the study concluded that advertising effects the amount of a drug that is sold. The researchers found

that the quantity of a drug sold after patent expiration decreased, despite lower priced generic entrants, due

to the reduction in advertising by the branded drug in anticipation of patent expiration and generic entry.131

The findings of the Caves, Whinston, and Hurwitz study imply that the explosion of DTC television ad-

vertising due to the easement of the FDA’s position on DTC broadcast media advertising should not limit

generic competition after expiration of the drug’s patent because branded producers will reduce advertising

in anticipation of generic entry.132 However, one can challenge this extrapolation of their results based on the

fact that this study was done when direct-to-consumer advertising was more limited and most promotional

spending was directed towards physicians. Television media allows pharmaceutical companies to market their

drugs directly to millions of consumers. The combination of brand sensitive consumers with more generous

insurance drug benefits may create a consumer market that will not be swayed as much by the lower cost of

generics. It is possible that brand name manufacturers will not significantly reduce their advertising efforts

in anticipation of patent expiration and generic entry because they will want to continue marketing their

brand to a group of consumers that is less price sensitive.

The Caves, Whinston, and Hurwitz study estimates that generics can capture 25.2 percent of the market,

however by creating brand name equity through direct-to-consumer marketing generics may not be able to

reach that level. If the attainable market share decreases because consumers are brand loyal, the barriers
130 Id. at 40-41.
131 Id. at 45.
132 Id. at 41.

32
to entry for generics may be too high and the market may see less competition from generics after patent

expiration resulting in higher overall average prices for pharmaceuticals. A counterargument to this hypoth-

esis is the fact that managed care organizations will want to encourage and in many instances will mandate

generic substitution, especially if branded drug prices do not fall significantly after patent expiration.

Empirical results suggest that “a larger fraction of purchases are made from large firms” when these firms

advertise, and, along the same lines, “the share of the market held by large commercial firms declines when

advertising is prohibited.”133 The implication of these findings is that small firms are more likely to gain

market share when advertising is prohibited. With the presence of advertising in the market and the ability of

manufacturers to present their message to wider audience through the broadcast media, the pharmaceutical

market in the future may be supplied by more brand name drug manufacturers than generic manufacturers.

Generic manufacturers do not advertise, which makes it more difficult for them to establish themselves in a

therapeutic drug market. The end result of DTC advertising may be increased drug spending on branded

products if generic manufacturers are unable to capture sufficient market share to stimulate entry into the

established therapeutic drug market. However in response to this slippery slope argument, the market may

never reach a point where generics cannot capture market share through low cost pricing if managed care

organizations continue their efforts to exert pressure on beneficiaries to substitute available generics for the

branded prescription. Some managed care organizations are hesitant to mandate generic substitution due

to fear of consumer upheaval, however when the cost of brand name drugs significantly increase third party

spending on prescriptions, these payers will be forced to limit reimbursement for brand name pharmaceuti-

cals.

2. Market Share and the Provision of Information Through Advertising

133 Lee Benham, The Effect of Advertising on the Price of Eyeglasses, 15 J. of Law and Economics 337, 350-351 (1972).

33
A later study by Hurwitz and Caves attempts to ascertain “whether advertising and other messages supplied

by sellers to buyers [of pharmaceuticals] represent the efficient provision of information or the exploitation

of buyers’ imperfect access to it.”134 If advertisers only seek to pursue their own objectives when supplying

information through advertising, consumers may have to bear the burden of increased social costs.

The pharmaceutical industry must promote its products extensively through “visits to physicians, pharma-

cists, and other health care sales professionals” through a process known as “detailing.”135 Since doctor make

the ultimate prescription decision and pharmacists dispense the drug through retail or hospital pharmacies,

detailing is a crucial element of prescription drug promotion. This type of sales-promotion was found, by

Hurwitz and Caves, “to both convey information and seek rents for their innovators.” Branded pharma-

ceutical manufacturers were able to preserve their market share from generic entrants through promotional

outlays. Through drug promotion branded producers were able to “build up the goodwill stock under patent

and preserve loyalty” after patent expiration.

Hurwitz and Caves do not test the impact of DTC advertising on the ability of a branded producer to retain

market share despite generic entry. However, one may hypothesize that the willingness of consumers to sub-

stitute a generic will be reduced with an increase in a brand manufacturer’s direct-to-consumer promotional

outlays. If DTC advertising induces consumers to ask for a drug by name they will probably not be willing

to accept the generic substitute, unless their third party payer refuses to pay for a brand name drug if the

generic is available.136
134 Hurwitz & Caves, supra note 109, at 299.
135 Id.at 302.
136 Most managed care companies are reluctant to impose this restriction because of fear of consumer backlash. Managed care

companies are constantly under attack and would prefer to increase customer satisfaction. Managed care organizations recognize
that brand drugs are more expensive than generics, but they are far less expensive than surgery. Some individuals forecast that
when employment decreases and employers no longer need attractive benefits packages to attract qualified employees, managed
care organizations and self-insured employers will be more willing to mandate generic substitution. See e.g. Burton, supra note
45, at A1.

34
With the advent of television advertising, consumers will be more familiar with a brand name drug and

may be less likely to accept a substitute. This means that regardless of the doctor’s tendency to prescribe

by brand name, brand name producers will be able to maintain an even higher market share through a

combination of “detailing” and DTC promotion because consumers will be less likely to switch the branded

drug for a generic when they have the drug dispensed by a pharmacist.

Hurwitz and Caves find that the promotion of new drugs through detailing provides an important source

of information, which when combined with increasing consumer awareness of a drug through direct-to-

consumer television advertisements may create a balance between the manufacturer’s rent seeking goals and

the consumers desire to obtain accurate information about a new therapy. By encouraging individuals to

discuss a drug with their doctor, consumers will be able to separate the image of the drug as presented

by the manufacturer from the reality of the benefits it can offer. Despite the informational benefits of the

combination of these two types of promotion, the impact of informed and brand sensitive consumers on

the prescription drug market many not be as positive. The market may demonstrate increased post-patent

market share for brand drugs because promotional outlays directed towards both health care professionals

and consumers will only decrease the likelihood that consumers will substitute low cost generics when filling

their brand name prescription. Although this theory seems sound and partially supported by the Hurwitz and

Caves findings, an empirical study of brand name market share before and after DTC television advertising

would be necessary to confirm the hypothesis.

3. The Effect of Broadcast Media Advertising on Pharmaceutical Prices

35
Many economist have sought to identify the impact of advertising on market prices, while attempting to prove

or disprove the hypothesis that “the persuasive aspects and the product differentiation effects of advertising

tend to raise the prices of products to consumers.”137 Even critics of advertising have found during their

analyses that advertising provides “consumers with information about products and alternatives in the

market, allowing them to economize on search and locate.... sellers more readily.”138 Acknowledging the

shortcomings of theoretical and limited empirical attempts to assess the effects of advertising on the market,

Benham conducted an empirical study of markets where advertising was permitted versus markets where

advertising was prohibited. Benham hypothesized that “market organization and price structure may be

significantly affected by the presence in a market of even one seller who advertises or who potentially can do

so.”139 By examining the market for eyeglasses in states prohibiting advertising and allowing advertising,

Benham was able to estimate that “advertising restrictions in this [eyeglass] market increase the prices paid

by 25 percent to more than 100 percent” without any “systematic quality differences.”140

Benham’s results demonstrate that in certain markets, such as eyeglasses, advertising makes consumers better

off through lower prices and reduced search costs without any apparent reduction in quality. However, the

question that needs to be explored is whether his results apply to advertising in the prescription drug market.

If Benham’s results are applicable and prescription drug advertisements lower overall costs to consumers,

the easement in the FDA’s policy on broadcast media advertisements should be continued past the two year

testing period.

Benham’s model for the full cost to consumers for eyeglasses is as follows:
137 Benham, supra note 133, at 337.
138 Id.
139 Id.
at 338.
140 Id.
at 344, 348 (also stating that these estimates probably understate the price differential between advertised markets and
non-advertised markets because advertising reduces search costs for consumers).

36
 Cf = Cg + Ck + Ct ;where

Cf = the full cost of purchase,

Cg = the cost of the item,

Ck = the cost of knowledge concerning location of sales outlets and prices for the
item, and

Ct = the cost of time and transportation required to purchase the item.141

Benham hypothesized that actual prices paid, Cg , would be lower with advertising if “advertising increases

consumers’ knowledge of alternative prices in the market” because large volume low price sellers need to

attract a large number of consumers to maintain their price levels.142 Advertising for eyeglasses provided

consumers with information about discount retailers, which allowed these sellers to generate enough sales

volume to keep their prices low.143 Notice, also, how Benham’s model considers search costs (Ck and Ct ) to

be an important component of the full cost of a drug. If advertising reduces search costs then, according to

Benhham’s model, the price of a branded advertised drug may be less than the full cost of a generic drug

which may have higher search costs associated with it. Even though consumers may know the generic drug’s

name, because the branded drug is required carry the established name of the drug, they may be uncertain

about the quality differences between available generic products.

Pharmaceutical advertisers are not concerned with reducing consumer search costs for lower priced generic

drugs. Most drug advertisements focus on the benefits and risks of the branded drug, without any mention of

consumer cost. Pharmaceutical manufacturers hope that these ads will encourage consumers to talk to their

doctors about their condition and the treatment option provided by the advertised drug. These ads may

reduce search costs, even though the ads are not cost focused, because they provide locations where consumers
142 Id. at 339.
143 Id.

37
can learn more about the drug before scheduling a costly and time consuming doctor’s visit.144 Additionally,

by learning about new treatment therapies for conditions before they visit their doctor, consumers will be

able to maximize their time spent with their physician by focusing the discussion on a specific drug therapy.

Even though pharmaceutical manufacturers do not engage in price advertising, actual prices for prescription

drugs may be lower with advertising. Benham examined “the effect of non-price advertising on prices” and

found that “in states prohibiting only price advertising prices are slightly higher than in states with no

restrictions, and are considerably lower than in states prohibiting all advertising.”145 The applicability of

Benham’s results to an analysis of how the expansion of DTC advertising impacts prescription drug prices

can still be called into question because, unlike the eyeglass retailers, pharmaceutical manufacturers do not

engage in the sales of their products. If advertising impacts manufacturing markets differently than retail

trade markets, as suggested earlier, one may have difficulty extending Benham’s finding that advertising

reduces prices to the pharmaceutical sector.

The study may provide some insight into the impact of advertising on the drug market because, aside

from generating price estimates for markets with and without advertising, Benham questioned “the extent

to which economies resulting from the information provided through advertising are offset by the costs

of advertising and by product differentiation.”146 Again, the answer to this question as it applies to the

prescription drug market rests on the type of information provided in the advertisement. Benham notes

that “eyeglass advertising contains substantially more information than other types of advertising and that

consequently [his] findings cannot be generalized to most other goods and services.”147 However, Benham

found that several eyeglass advertisers advertised heavily on television which is a “less information-intensive

form of advertising” and eyeglass prices in those states were still lower. These results may suggest that
144 See Guidance for Industry, supra note 48, at 1.
145 Benham, supra note 133, at 349-350.
146 Id.
147 Id. at 349.

38
the information provided during brief television advertisements can reduce market prices for pharmaceutical

drugs, however this is, once again, dependent on the type of information provided during the commercial.

Since Benham does not examine the type of information provided in the eyeglass television advertisements

and prescription drugs are different than the retail eyeglass market, it may be difficult to extend his findings

on television ads to this paper’s analysis.

D. Truthfulness in Advertising and the Economics of Consumer Information

One reason that DTC advertising has become widely accepted by consumers is the increase in consumer’s

health care decision making. “[S]ociety is stressing more prominently the concept of individual responsibility

for health.”148 Consumers are leading healthier lifestyles and are more willing to speak with their health

care providers about treatment options.149 No longer content to follow the doctor’s orders without question,

consumers find that they need to be active participants making informed health care choices. The willing-

ness of consumers to respond to information provided by the marketplace makes them an ideal target for

direct-to-consumer advertising.

If pharmaceutical manufacturers have the ability to provide a source of important consumer information

through DTC advertisements, the questions that remain are (1) whether television is a medium that can

efficiently provide accurate information, (2) whether opening up broadcast media as a venue for DTC ad-

vertising will lead to overinvestments in advertising which results in a suboptimal production of consumer

information, and (3) whether direct-to-consumer television advertisements only serve to stimulate demand for

“lifestyle” drugs which only increase prescription drug expenditures with limited improvement in consumer’s

overall health status.

148 Judith A. Sangl & Linda F. Wolf, Role of Consumer Information in Today’s Health Care System, 18 Health Care Financing

Review 1, 1 (1996) [hereinafter Sangl & Wolf].

149 Id.

39
1. Television and Nonfradulent Advertising

The accuracy of consumer information provided by pharmaceutical manufacturers has been challenged by

doctors and others who claim that drug “‘advertising suggest that wonderful things will happen if you use this

particular product.”’150 Since the FDA’s easement of its position on DTC broadcast advertising, the FDA’s

Division of Drug Marketing, Advertising and Communications (DDMAC) has responded “to a rise in false

and misleading statements and unsubstantiated claims, much of it involving DTC advertisements.”151 The

DDMAC director, Minnie Baylor-Henry, shocked and disappointed at the increase in advertising messages

that violate the FDA policy, responding to the messages by issuing 10 untitled warning letters by October

of 1998.152 The main problems the DDMAC has found with the television advertisements have been “un-

balanced risk versus benefit information and problems with efficacy claims.”153 In order for information to

benefit consumers who are seeking treatment options, “research has shown that the information must be

relevant, comprehensible, and credible.”154 If consumers cannot rely on the truthfulness of the information

provided in DTC television advertisements, then consumers will not be able to use this information to make

health care decisions.

The following excerpt from a 1998 Wall Street Journal article details the type of problems that can arise

when consumers cannot rely on pharmaceutical manufacturers to present truthful, accurate information that

fairly balances the benefits and risks of a drug in their television advertisements.
150 Tanouye, Fine Print, supra note 47, at R6 (quoting “Nancy Dickey, a family physician in College Station, Texas, who is
president of the American Medical Association.”).
151 Jill Wechsler, Promotional “Creep” Upsets FDA, 18 Pharmaceutical Executive S6, S6 (Oct. 1998) [hereinafter Wechsler,

Promotional “Creep”].
152 Id. (also stating that during the entire 1997 year the DDMAC only issued 3 untitled warning letters).
153 Id.
154 Sangl & Wolf, supra note 148, at 2.

40
 Ubiquitous magazine and TV ads for the cholesterol-lowering medication Pravachol...make sweeping
claims that the drug prevents first heart attacks, and reduces the risk of death from heart disease
and the need for heart surgery. The ads don’t include the actual results of the clinical trials used
to support the claims. If consumers hunt down a copy of the drug’s labeling, they would find that
Pravachol indeed reduced first heart attacks by 31%. But consumers would have to do their own
math to find out that the individual patient’s risk is low: 7.5% of patients who didn’t take the drug
had heart attacks, compared with 5.3% of patients who took Pravachol.
Stated another way, among every 100 patients taking the drug, 92 or 93 of them don’t have any risk
of a heart attack to start with, five would have heart attacks despite taking the drug, and two or
three people would be spared.
Spread over large populations, the numbers are significant – if one million people take the drug,
22,000 heart attacks should be averted. But for the individual patient deciding whether to take the
drug, chances are he or she will be among the 978,000 people who won’t benefit.155

Claims such as the ones for Pravachol cause patients to see their doctors who need to explain the risks of

the medication in light of the slim chance of any offsetting benefit.156 Consumers who are disillusioned by

manufacturers advertising claims must expend both time and money to have a physician clarify the message

presented by the advertisement. The exaggeration of the benefits of drugs presented by some DTC televi-

sion advertisements, results in the provision of imperfect consumer information. By providing this type of

information, pharmaceutical manufacturers effectively “misdirect market activity rather than guide market

outcomes to maximize consumer information.”157 If DTC television advertisements supply the market with

inaccurate information, empirical studies show that consumers are likely to make unsound treatment deci-

sions due to their “imperfect knowledge of the issue and associated risks.”158

A natural response to the concern that consumers will not make wise treatment choices is the fact that

consumers do not make treatment decisions alone because they require a doctor’s prescription for the med-

ication. If the advertisements serve to increase consumer awareness of a drug then doctors will naturally

step in to correct any false impression created by DTC television advertisements. However, doctors “may

be prone to prescribe less effective or efficient medications in an effort to be responsive to the requests of
156 Id.
157 J. Howard Beales, III, Economic Analysis and the Regulation of Pharmaceutical Advertising, 24 Seton Hall L. Rev. 1370,

1371 (1994).
158 Martin S. Roth, Patterns in Direct-to-Consumer Prescription Drug Print Advertising and Their Public Policy Implications,

15 J. of Public Policy & Marketing 63, 64 (1996).

41
their patients.”159 Also, some less ethical physicians may advertise these new prescriptions drugs by name

making claims such as “Viagra Prescribed Here.”

Consumers do have a certain level of control over the prescriptions which are ultimately dispensed, as

evidenced by the fact that one third of all patients “who talked to their doctors about an advertised drug

ended up with a prescription for it.”160 The concerns about the accuracy of consumer information presented

by DTC television advertisements are not alleviated by the fact that a physician serves as an intermediary

between the consumer and the drug.

Even if doctors refused to prescribe drugs that were not the optimal treatment for a patient, the presence of

misleading information in DTC television advertisements would still produce an inefficiency. Doctors would

find their schedules consumed by misinformed or confused patients requesting inappropriate prescriptions.

The time that the physician must spend explaining the reasons why the drug is inappropriate would reduce

the available time doctors have to spend with those patients to discuss proper treatments.161

If consumers are able to doctor shop to obtain prescriptions, then doctors are not a reliable safeguard to

protect consumers from taking a certain drug based on information presented in television advertisements.

Even if the drugs are not harmful, consumers may be forgoing more appropriate, less costly, and more

beneficial treatments as a result of images depicted on TV. Thus, the messages contained in the television

spots need to convey a more accurate depiction of the benefits and risks associated with the medication.

If the market can eliminate the production of imperfect information presented in television advertisements,
159 Petroshius,supra note 53, at 41.
160 Beatty,supra note 73, at B8.
161 One doctor has stated “that for every patient whom an ad has rightly persuaded to see a physician, ‘it has convinced four

others to come in and ask for drugs they don’t need,’ which consumes the limited time she would have otherwise used for
education or prevention.” See Tanouye, Fine Print, supra note 47, at R6.

42
DTC advertising could prove to be an efficient means of disseminating information about new and important

therapeutic drugs, resulting in “large potential social benefits from the more rapid adoption of superior drug

therapies.”162

The notion that DTC television advertisements will only be an effective means of distributing consumer in-

formation if the presented material complies with the FDA’s accuracy and fair balance requirements suggests

a role for further FDA regulation requiring either pre-approval of DTC television advertisements or specify-

ing precise information that must be included in advertising.163 If the FDA made review of DTC television

advertisements mandatory, consumers would be shielded from the imperfect information that makes con-

sumers worse off. Currently the FDA allows pharmaceutical manufacturers to submit their advertisements

for review, but FDA approval is not required before the ad appears on television.164 Although this waiting

period may increase advertising costs for pharmaceutical companies, the approval process will ensure that

the information presented to consumers is truthful.165 An approval requirement may strain already limited

FDA resources, however one could envision a relatively low cost procedure since only a limited number of

products are willing to absorb the high expense of television advertising.166

The real question with implementing an approval requirement is whether or not it would be constitutionally

sound. In Nutritional Health Alliance, the Second Circuit found that a 540 day waiting period to approve

dietary supplement’s health claims was constitutionally valid.167 In light of the recent decision in Nutritional

Health Alliance, one could argue that an approval period under the current status of the law would be within
162 Keith Leffler, Persuasion or Information? The Economics of Prescription Drug Advertising, 21 J. of Law and Economics
45, 74 (1981).
163 See Castagnoli, supra note 65, at 43 (stating that the FDA has the ability to control the amount of DTC advertising

produced in the marketplace by requiring advertisements to meet specifications set by the FDA).
164 Plant, supra note 7, at 10.
165 Dr. Kessler has urged DTC advertisers to keep their promotions “under control.” While acknowledging that the FDA will

never ban DTC advertising, Kessler notes that the FDA can specify how advertisers present their messages. For now, it seems
that pharmaceutical manufacturer’s are being urged “to take and ‘ethical’ approach to advertising,” however many companies
are refusing that advice. See Castagnoli, supra note 65, at 42.
166 C.f. Kale, supra note 3, at 239 (stating that a representative from the FDA’s Division of Drug Advertising has claimed

that “‘the vast majority of promotional materials submitted for consideration to the FDA are false and/or misleading [but] the
Agency is able to take regulatory action in only about 5% of the cases.”’).
167 Nutritional Health Alliance, 144 F.3d at 227.

43
the FDA’s authority and would not be unconstitutional as a prior restraint. However, if the FDA did impose

an approval requirement pharmaceutical manufacturers may challenge the FDA’s authority to impose such

a restriction and another court may be persuaded to rule against the FDA.

Considering the difficulty, due to limited resources, that the FDA has in policing and prosecuting DTC

advertisements under the current regulatory scheme, specifying requirements for the content of DTC adver-

tisements may not seem to be a viable option. By requiring television advertisers to submit each broadcast

promotion to the FDA for prior approval, the FDA does not need to monitor the airwaves to ensure that all

of the advertisements meet the FDA’s requirements for accuracy, fair balance, and any other requirements

specified by a proposed regulatory change. Even if ads that violate the FDA’s requirements are brought to

the FDA’s attention by industry complaints the FDA must still expend resources to take action against the

firm and correct for any misinformation produced by the advertisement. Since the impact of a change in

the FDA’s approach to regulating DTC television advertisements would be greatest if it could be enforced

with limited additional resources, the pre-approval approach may be a more favorable approach if it can

withstand judicial scrutiny.168

The general argument advocating more stringent FDA control over DTC television advertising by no means

presumes that it would be feasible to provide complete information about a drug during a thirty second

television commercial.169 Although the Draft Guidance requires broadcast advertisers to present an addi-

tional source of information, consumers may be more likely to schedule a doctor’s appointment, which has

real costs to both patients and doctors as well as time costs, than to call an 800 number or access a web

site. Even if consumers obtain this additional information, they are often unable to understand the risks
168 One should note that additional regulation of the content of DTC television advertisements may also have to stand up to

constitutional attacks by manufacturers who are increasingly willing to challenge the FDA’s authority to regulate advertising.
169 Beales argues that any information is necessarily incomplete, thus any direct-to-consumer advertisement could provide

complete information about a drug. However, the argument here does not require complete information, it only requires
accurate information and equal balance to risks and benefits. I would agree that the costs of providing complete information
to consumers would be prohibitive. A low cost method of approving television advertisements would allow the dissemination
of truthful product information without deterring manufacturers from sponsoring DTC television ads. See e.g. Beales, supra
note 157, at 1378.

44
and benefits, especially in the wake of viewing a commercial which exaggerates the positive effects of the

medication. Broadcast advertisements do not need to provide an all encompassing source of information,

but a consumer’s exposure to information about a drug via television needs to leave the consumer with more

realistic expectations about the capabilities of the advertised medication.

2. Optimal Level of DTC Promotion

Unquestionably, consumers would be better off if the pharmaceutical market did not produce fraudulent ad-

vertisements. Even if doctors never prescribed inappropriate treatments for consumers requesting a specific

drug or the misleading information contained in the advertisement could be corrected through a doctor’s

visit, DTC television ads can impose a real cost to consumers through lost time and money. Assuming that

the industry could be held to a standard whereby the information presented in their television ads would

be an accurate depiction of the benefits and risks of the drug, economic literature is inconclusive as far

as benefits of any one level of promotion. DTC advertising does provide information to consumers about

treatment options, however the type of price advertising that is often cited for its procompetitive effects is

not presented by branded drug manufacturers.170

DTC television advertising is more likely to have procompetitive effects on the market if the messages pre-

sented to consumers “compensate for prior consumer experience with (and, hence, reliable knowledge of)

older, established products.171 Advertising can serve as a surrogate for experience with a type of therapeutic

drug if there exist perfect substitutes for the drug in a homogenous product market. The availability of
170 See e.g. Benham, supra note 133, at 338; see also Leffler, supra note 162, at 46 (stating that “price comparison ads of

standardized products (for example, ground beef) may lower both entry costs and average price paid, while “image advertising”
of heterogeneous products (for example, perfumes) may increase prices and costs of new entrants gaining consumer trials.”).
171 Leffler, supra note 162, at 64.

45
advertising increases consumer experience with a drug, and augments the benefits of being the first pro-

ducer.172 Even if advertising is accessible to generic entrants, advertising by the market innovator increases

that producers market power.173 By increasing the value of being the first entrant into a therapeutic drug

market, television advertising may be able to decrease the likelihood that generic producers will be able to

capture a significant amount of the market share and bring price levels down.

Despite the preceding statements, high levels of advertising to physicians throughout the branded drug’s

patent period have been empirically shown to offset, to some extent, the “entry barring effects of advertis-

ing.”174 If those findings extend to consumer directed advertising, then this type of advertising, even at high

levels, may stimulate entry and have pro-competitive effects on the market.

Further empirical studies need to be conducted before one can suggest an optimal level of advertising. If

advertising reduces competition in the drug market and augments the branded drugs first mover advantage,

then the DTC advertising beyond a certain level may cease to be beneficial. One conclusion that can be

drawn is that the ability of any level of advertising to increase welfare rests on the content of the advertising

message. Truthful, informative ads are more likely to introduce consumers to new drug therapies which will

reduce social costs of any resulting market imperfections. Uninformative, repetitive, and persuasive ads may

result in a market of brand sensitive consumers who will refuse to substitute cheaper, generic equivalents

when they have their prescription dispensed. As stated earlier, some managed care companies are already

refusing to pay for some expensive brand name drugs, however “under attack in Congress and competing

to woo customers, many managed-care plans are reluctant to antagonize patients any further.”175 Another

concern is that these advertisements may cause consumers to switch to the new brand name drug, before
172 Id. at 64-65.
173 Id. at 65.
174 Id. at 70 (summarizing Telser et al. who “examined the relationship between changes in promotional intensity and

entry for therapeutic categories,” however their study was conducted before DTC advertising was allowed. During this period
pharmaceutical promotion was mainly detailing to induce physicians to prescribe a specific drug.)
175 Burton, supra note 45, at A1.

46
generic equivalents are available, even though older, cheaper drugs are as effective.

However, another way to interpret consumers brand sensitive behavior is that consumer’s reliance on a heav-

ily advertised brand reduces their decision making cost by a degree that “exceeds the gains from selecting

lower-priced, unadvertised products.”176 This interpretation is relatively unpersuasive in our current health

care market because consumers do not fully realize the cost of a medication due to the presence third party

payers. The presence of prescription drug benefits effectively eliminates one from drawing conclusions about

whether uninformative advertising messages reduce search costs and offset the increase in price consumers

face by selecting the heavily marketed brand name drug. Only when all managed care organizations and

other third party payers mandate cost effective generic substitution, will consumers be able to indicate the

extent to which they personally value advertisements that only establish an easy to remember brand name.

176 Roth, supra note 158, at 66.

47
3. Lifestyle Drugs Versus Medically Necessary Medications

With the increase in audience for direct-to-consumer television advertisements as a result of the easement

in the FDA’s policy on broadcast media, pharmaceutical manufacturers have the opportunity to stimulate

demand for medications. Some critics of the DTC advertisements as a venue for promoting costly lifestyle

enhancing drugs that have little therapeutic benefit.177 Lifestyle drugs are one set of medications that lend

themselves to television advertising, and the following analysis of the manufacturer’s advertising behavior

suggests that medically necessary drugs which cure life-threatening diseases are probably less likely to be

promoted through DTC television advertising as compared with lifestyle drugs.

Manufacturers make their decision to market directly to consumers based on the drug market. Market

characteristics include the size of the drug market the types of disease or symptoms that the drug has

been designed to target. If “the potential market for a drug and its associated disease state” is large,

pharmaceutical manufacturers will be more likely to promote the drug through DTC advertising.178 Since

television advertising is extremely expensive, pharmaceutical companies are more likely to advertise on

television when there exists a large potential market which will offset those costs and result in “lower

advertising costs on a per-treatment basis.”179,180 Lifestyle drugs, according to this theory, will only be

advertised on television if there exists a large market for the drugs. Since the market for many life-threatening
177 See e.g., Tanouye, Toenail, supra note 37, at A1 (also defining lifestyle drugs as medications “that make things more
pleasant but don’t necessary tackle life-threatening diseases).
178 Roth, supra note 158, at 65.
179 Id. at 66.
180 The author’s empirical study of market size suggests that manufacturers will target both large and mid sized markets

through DTC advertisements print advertisements. Whether these results translate to DTC television advertising is unclear.
It does not seem incorrect to state that manufacturers will not spend hundreds of millions of dollars on television advertising
for drugs with extremely small markets, in fact economic principles would suggest that manufacturers will only advertise to the
point where the marginal benefits of advertising exceed the marginal costs. This supports the conclusion that only drugs with
large markets will be advertised on television because manufacturers will demand a larger potential market to offset the cost of
television ads. See id. at 68 (discussing the author’s empirical results).

48
diseases is arguably not very large, it seems less likely that these types of drugs would even be marketed

directly to consumers.

The drug’s usage may dictate whether or not it is a good candidate for DTC television advertising because

consumers with specific conditions are more likely to appreciate information about a new therapeutic drug.

For example, one study on the topic claims that “maintenance drugs, those that are taken constantly on a

long-term basis for chronic conditions, are not good candidates for DTC advertising.... [C]onsumers in this

situation are interested in and informed about all new drug treatments and thus are not good candidates for

drug advertising.”181 The justification for this position is the fact that consumers who suffer from diseases

that only require periodic treatment, such as seasonal allergies, are constantly seeking for new information

about treatment alternatives.182 Although the position that medications that have a large potential market

for periodic conditions are more likely to be promoted through television advertisements seems persuasive,

actual data suggests that “the majority of DTC advertisements were for maintenance drugs...that are used

over a long period of time for chronic conditions.”183 One cannot really draw any conclusions about what

type of usage market DTC television advertisements will target because the data that contradicts the earlier

stated theoretical position was collected from 1993-1995 when television advertising was not widely used due

to the FDA’s brief summary requirement. The data suggests that manufacturers will be less likely to market

lifestyle drugs directly to consumers through television advertisements if the drug does not treat a chronic

condition. However, the theoretical position would claim that lifestyle drugs will be marketed through DTC

ads if the drugs provide short-term therapy. Either way, a certain number of lifestyle drugs are bound to be

advertised on television because there are numerous lifestyle drugs that treat both chronic and short-term

conditions.184 Medications to treat life-threatening illnesses will be potential candidates for DTC television
181 Id. at 65.
182 Id.
183 Idat 68.
184 An example of a short-term lifestyle drug would be a seasonal allergy medication while a long term lifestyle drug may be
birth control medication.

49
ads under either of these theories, as well.185

Pharmaceutical companies are more willing to advertise drugs on television that have few or relatively mild

side effects and are in the early stages of the drug’s product life cycle (PLC).186 Part of the reasoning behind

promoting drugs with few or mild side effects is that manufacturers do not want to use precious air time

listing all of the side effects associated with the medication.187 Also, consumers would be less persuaded to

consider the drug as a treatment option if they were bombarded with all of the potential side effects that

were disclosed during the advertisement. The fact that manufacturers are more willing to spend for DTC

advertisements when there are few side effects supports the concern that television will be a likely venue for

lifestyle drug ads. Most individuals would be unlikely to take a prescription medication that was medically

unnecessary if there were a significant number of side effects unless it drastically improved their quality of

life. Similarly, DTC television advertisements may be less likely to promote complex medications to treat

life-threatening conditions if these medications have numerous and serious side effects without offsetting

improvements in quality of life.

Manufacturers are more willing to spend advertising dollars on drugs that are in the early stages of their PLC

because they have patent protection and are, thus, differentiated from competing therapeutic treatments.

Advertising expenditures are more justified when a drug has few low cost generic competitors that will

benefit from the branded drug’s promotion.188 This proposition does not favor the promotion of lifestyle

drugs over disease targeting drugs because under this theory manufacturers will tend to market products

to consumers based on their PLC, not the effects of the medication. One positive aspect of this marketing

practice is that both lifestyle drugs and medically necessary drugs will be marketed during the early stages
185 Drugs to treat life-threatening illnesses may be prescribed for short term therapy or long term therapy. For example, anti-
hypertensive drugs will probably need to be taken for long periods of time, while breast cancer medications will be prescribed
during a comparatively shorter treatment phase.
186 Id.
187 Id.
188 Id.

50
of their PLC based on this analysis, making it more likely that consumers will be informed early on about

drugs that target both categories of conditions.

According to the analysis of direct-to-consumer marketing practices, lifestyle drugs are likely to be marketed

through broadcast media directly to consumers which will, in turn, increase demand for these products.

Advertisements directed towards consumers with life-threatening conditions will, under the analysis, be less

likely to appear on television, unless side effects are significantly outweighed by improvements in quality of

life.

One of the main harms in advertising lifestyle drugs, as with all prescription medications, on television is the

fact that, “unlike print advertisements, television does not typically provide enough time to present the same

breadth and depth of information.”189 If consumers receive accurate information that fairly balances the

benefits and risks associated with these drugs or the information can be verified or corrected by a physician,

then the only remaining concern is the increase in health care dollars spent due to the cost of these new

expensive drugs. The way to attack the problem of consumer’s demanding drugs without internalizing

the full cost is to have third party payers continue to limit pharmaceutical benefits which largely offset

190
consumer’s out-of-pocket costs. If third party payers are unwilling to fully reimburse consumers for

costly lifestyle drugs, the potential market for these drugs may diminish, reflecting consumer’s true demand

for these products. If consumers demonstrate that they are willing to spend out-of-pocket for these drugs,

then one would have a difficult time making a persuasive argument against DTC television advertising based

on the paternalistic notion that consumers do not really need to take these medications.

If the potential market size for certain lifestyle drugs decreases in response to reductions in reimbursement,

then these advertisements may be less likely to appear on television, weakening the criticism that DTC

television advertisements fail to provide important health care information to consumers. On the other
189 Id.
at 71.
190 See
Tanouye, Hard to Swallow, supra note 37, at A1 (stating that employers and health plans are “raising co-payments for
some drugs and refusing to cover others, such as Viagra and Propecia.”).

51
hand, if consumers are willing to pay the full cost of the lifestyle drugs in the absence of pharmaceutical

benefit coverage, some of the original arguments against DTC television advertisements for lifestyle drugs

are not as strong.

52
 Part IV:

Conclusion

Today’s complex healthcare marketplace encourages active consumer participation and forces consumers

to take responsibility for their own health, with economists and others touting the benefits of increased

consumer awareness. However, consumers can only participate in healthcare decisionmaking when they

receive accurate information about their health choices. Direct-to-consumer television advertisements could

provide an easily accessible source of consumer information about drug treatments, however these ads can

also impose significant inefficiencies on the pharmaceutical market. By producing often misleading images

these ads create a consumer population demanding access to advertised medications. Although doctors are

listening and correcting some of the inaccurate information presented, one-third of all doctors will prescribe

a medication that a consumer requests.

Even if consumer health is not harmed by taking these medications, dollars are being spent on treatments

that may be suboptimal. Many employers, managed care organizations, and other third party payers are

attempting to respond to brand sensitive consumers by requiring generic substitution. However, if generics

are not yet available, brand name advertisers can motivate consumers to switch from older, cheaper drug

treatments to their new generation of medications without imposing large additional out-of-pocket costs on

consumers. This change in treatment may fail to result in significant health improvements to justify the

additional cost, imposed on third party payers, of the new drugs.

53
The effects of DTC television advertisements on competition and market prices cannot be confirmed with-

out an empirical study examining the impact of the 1997 Draft Guidance on drug prices and branded and

generic producers. The advertisements may serve to increase competition by inducing generic producers to

enter markets where consumers are aware of treatment options. On the other hand, brand name advertisers,

through television ads, may create loyal consumers that are unwilling to switch to generics and will pay for

brand name drugs out-of-pocket if necessary.

One conclusion that can be drawn from the paper’s analysis is that consumer information should be en-

couraged if it contains a threshold level of accuracy. If doctors cannot correct for consumers misinformation

and consumers are able to find doctors willing to prescribe the desired medications by doctor shopping,

then the FDA must monitor these advertisements closely to ensure that they meet the current broadcast

media requirements. If manufacturers fail to comply with current regulations then the FDA may need to

flex its regulatory muscles to correct for the provision of misinformation through television advertisements.

Whether the FDA tries to impose stricter penalties, attempts to specify additional requirements, or requires

pre-approval of DTC television advertisements, the FDA will most likely have to face challenges to its con-

stitutional authority to regulate direct-to consumer television advertising. If the FDA cannot withstand

judicial scrutiny, consumers may need to rely more heavily on the ethics of the medical profession and the

cost-conscious motives of managed care to protect them from making suboptimal health care decisions.

54