Direct-to-Consumer Advertising and Insurers’ Spending Control Mechanisms for Prescription Drugs

Numerous studies have examined the effects of direct-to-consumer advertising (DTC) on patient and physician behaviors; however, none has focused on the relationship between DTC and insurance benefit design. In this study, we explored the impact of DTC advertising on the cost control behaviors of private firms supplying insurance in the Medicare Part D program. We used data from the IMS National Prescription Drug Promotions database and formulary information from Medicare Part D prescription drug plans from the Centers for Medicare and Medicaid Services (CMS) to study the relationship between DTC spending and formulary tier placement, using an instrumental variables estimator to control for the endogeneity of DTC spending. Our results suggest that direct-to-consumer advertising puts pressure on insurers for more favorable formulary placement. Television direct-to-consumer advertising and other measures of manufacturer market power had a significant and negative effect on the likelihood of a branded drug being classified as nonpreferred in formularies. Similarly, we found that when insurers had more market power, branded drugs were more likely to be placed in a nonpreferred formulary tier. We hypothesize that consumers play an important mediating role in the relationship between DTC advertising and insurance coverage for drugs.