A March 15th article in the Wall Street Journal, entitled "In Europe, Prescription-Drug Ads Are Banned and Health Costs Lower" suggests that prescription drug advertising is the reason for high health care costs. With talk of the European Union easing its ban on direct-to-consumer marketing by drug companies, many consumer groups and European officials fear that increased spending on advertising will result in higher prices on prescription drugs, squeezing already tight healthcare budgets. However, a basic economics lesson would teach them that such worries are unfounded.
Companies cannot set a high price to "cover" their advertising budgets and assume consumers will pay that price. Rather, supply and demand decide the price and are determined independently. The sellers, or drug companies, determine the supply; the buyers determine the demand. In a free, competitive market, the price of a drug moves up or down until the amount supplied equals the amount demanded.
The value of a marketing plan is determined by the value consumers place on a drug, not the other way around. Drug companies develop and advertise drugs that they believe will benefit the population, will be in high demand, and will bring them a profit. For example, Lipitor, a cholesterol-lowering drug, is the second-most prescribed drug in this country. The reason: 140 million Americans have borderline or high cholesterol and cardiovascular disease is the leading cause of death in the United States. Scientific evidence, as reported by the American Council on Science and Health, shows that "cholesterol-lowering drug therapy can reduce the risk of heart attacks by about 30 percent" (See ACSH's booklet Chemoprevention of Coronary Heart Disease). Therefore, Lipitor is of high value to consumers, and as a result, its maker, Pfizer, is putting a lot of money into marketing and into supplying that demand.
Obviously, drug companies don't enter advertising campaigns to increase their costs they advertise to disseminate the necessary information to make the drug sellable. Drug makers argue that by banning prescription drug ads, governments are denying patients access to valuable information and thereby denying them access to drugs. Advertising often prompts consumers to make appointments and seek diagnoses and treatments for what could potentially be severe health problems. If consumers don't know about the drug and its benefits, then they won't be in a position to request it. On average, it takes fifteen years and costs a company $500 million to get one new medicine from the laboratory to your medicine chest. And only five in 5,000 compounds that enter preclinical testing make it to human testing, with only one of those five being approved for sale. Companies would not invest all of that time and money in a product with no potential.
Suppose the title of the Journal article read, "In EU, Direct-to-Consumer Auto Ads Are Banned And Car Prices Are Lower!" Would we make the same assumption, linking the cost of advertising to high auto prices? Would governments be using the same arguments in favor of banning auto ads? "By relaxing the ban, it will merely increase the marketing budgets of car companies, put upward pressure on car prices, and have no appreciable affect on the way Europeans get around." Should we be denying people access to information about cars? Should we be telling everyone to just walk or "go Greyhound" because they don't really need cars? If that sounds absurd, why is it right to deny an aging European population information about valuable drugs that could vastly improve their quality of life?
