If you’re still wondering why drug costs are going up so far so fast, here’s another reason. Direct to consumer advertising costs. Big pharma increased their spending on advertising by 9% in the first half of 2006.
Expect total spending on DTC advertising to hit $5 billion this year.
No wonder prices have jumped this year.
Oct
10
I don’t really think advertising costs are an especially large driver of drug prices. I think the primary factors are what the traffic will bear and what the industry thinks it can get away with.
The good news is that generics now account for over 50% of all prescriptions but only about 20% of the dollars spent on drugs. Starting this year and for the next several years, there will be an above average number of high selling drugs losing patent protection which will mitigate overall prescription drug cost increases to some extent.
Joe,
I think I was late to the party interms of commenting on direct provider contracting. Any chance of you posting my comments in a fresh area of your postings to generate a response from you readers? Keep up the great work. You have a very interesting site. Best regards, Pete Scruggs
“Is there a specific number of lives where direct contracting makes the most sense? I am an employee benefits broker trying to reduce the risk of premium increases for employer groups from 150 lives to 500 lives. Also, are there any good third party vendors with expertise in making this happen? Does this only make sense for a self insured employer or also for one that is purchasing stop loss insurance?”
It is wrong to imagine that drug advertising has any particular role in drug prices. Do McDonald’s burgers cost more because of ads? No. They cost what people a willing to pay based on the competition and value of the experience. Similarly, drugs are prices based on value and competition (yes, they have competition from therapeutic alternatives and other medical treatments). You may not like the price of a drug, but don’t post a canard conntecting that price to ads.
AB – back to school for you. You describe one means of pricing, the one that is value-based. there are multiple methods and ways of pricing goods and services; another common one is to establish the fixed and variable costs, determine the likely selling price, and figure out if the delta is greater than the desired IRR, or internal rate of return. Thus, advertising is a significant component of drug costs, as well as a contributor to payers’ drug expense. One only has to see the effect of DTC advertising to understand this. Finally, snarky comments are not welcome. If you disagree, that’s fine, just do it with courtesy.
Sorry you found the comment snarky. Wasn’t intended that way and not sure what you took offense to. In your “other common means” to establish price, you say that one determines the “likely selling price.” Exactly. If a company adverstising costs are too high, then they can’t make the IRR work. However, advertising is still not jacking up the price. Thanks for continuing to listen — even to those of us who must remain anonymous.
AB – i take your point, but the difference between drugs and other economic goods is a substantial portion of the demand is from people who are not overly concerned about price. Therefore, what happens is the drug companies add up all their costs, including advertising, figure out the margin needed to hit the IRR, and price above that level. If they can’t sell above that level, they don’t make the drug.
To push your point to its logical conclusion, if advertising costs do not contribute to drug prices, than drug companies could spend a billion dollars a day on advertising each drug. Clearly that is not the case, and therefore advertising costs do influence drug prices.