Bradley Shapiro, an MIT economics Ph.D. and an assistant professor of marketing at the University of Chicago’s Booth School of Business, has completed a study of direct to consumer advertising (DTCA) of antidepressants. He’s also written a summary of his research for the Cato Institute.

Here’s the issue. I’m sure you’ve noticed how much drug companies advertise their prescription drugs directly to consumers. You know those ads. They’re the ones that tell you what ailment the drug is meant to address and then show you happy people enjoying life while telling you that the side effects may include suicidal impulses, acne, bleeding, etc.

My casual impression is that DTCA has increased in the last decade. But my first big surprise is that actually the trend has gone the other way. Shapiro writes:

Total DTCA of prescription drugs, while significant, has decreased from about $3 billion in 2004 to a little more than $2 billion in 2012. Meanwhile, antidepressant DTCA makes up an important fraction of total DTCA and has increased from about $200 million in 2004 to a peak of about $400 million in 2011, declining to about $300 million in 2012.

Of course, it’s possible that it has increased a lot since 2012. I don’t know.

How do we evaluate such spending? Shapiro nicely details the tradeoffs. On the one hand, people who can benefit from an antidepressant may be motivated to contact the doctor and get him/her to prescribe. On the other hand, most people who do so won’t face the full cost of the drug but, instead, will typically pay a small co-pay (a fixed amount) or co-insurance (a percentage of the price.) So people who value it just more than their share of the price will get it and insurers (which means the rest of us in our premiums) will pay the bulk of the cost. Shapiro actually has a more complete list of costs and benefits. I’ll leave you to read them in his short summary.

Shapiro notes that the subjective benefits are virtually impossible to estimate. But what he can do is measure the effect on labor supply. Here’s his key paragraph:

I find that DTCA induces more patients to be prescribed antidepressants with an elasticity of about 0.031, leading to a direct cost of DTCA to consumers and insurers. Second, I find that conditional on being prescribed in the previous month, current advertising reduces refill prescriptions by a small amount. Next, I find evidence against DTCA having an economically meaningful effect on either the price or the copay of the drug, conditional on prescription. I also find evidence against an economically meaningful effect of advertising on the generic penetration rate. Finally, I find that DTCA causes benefits in the form of increased labor supply. The benefits of increased labor supply outweigh the total cost of additional prescriptions by more than an order of magnitude. The preferred estimates imply that a 10 percent increase in DTCA brings $769.5 million in wage benefits while generating $32.4 million in prescription costs. This finding implies that on average, DTCA is generating prescriptions that are worth more to patients than they cost. In other words, the average DTCA marginal prescription is not a “mistake.”

How does he measure the effect on labor supply? By looking at the number of days of work missed. Go to his longer paper, pp. 14-15, if you want to see more.

I would note two cautions. In one way he  overstates costs and in the other way, he overstates benefits.

On the cost side, the amount spent by insurance companies and paid by the rest of us is not pure cost. A large part of it is a gain to the drug company. And even if that doesn’t make you click your heels with delight, that gain to the drug company will, in the longer run, give them an incentive to research and develop new drugs.

On the benefit side, the $796.5 million is not pure benefit. It would be so only if the value of leisure were zero. On the other hand, if you’re missing work because you’re depressed, the value of leisure may well be close to zero.

Bottom line: if Shapiro did his econometrics well–and I bet he did–direct to consumer advertising of antidepressants produces a net gain for the economy.

HT2 Jeffrey Miron of Cato.