No Free Lunch? Welfare Analysis of Firms Selling Through Expert Intermediaries
95 Pages Posted: 3 Aug 2018 Last revised: 6 Aug 2020
Date Written: August 4, 2020
We study how firms target and influence expert intermediaries, and the welfare impact of banning those relationships. In the case study we investigate, manufacturers of statins, a class of cholesterol-lowering drugs, provide meals and other payments to physicians. Leveraging variation in exposure to spillovers from academic medical centers’ conflict-of-interest policies for identification, we estimate significant heterogeneity in the effects of payments on prescribing, with firms targeting highly responsive physicians. Payments offset the negative effects of oligopoly pricing and other frictions on utilization, but at great expense to consumers and insurers because payments promote high-price branded drugs. To understand the net effects of payments in the presence of various factors that may drive a wedge between physicians’ decisions and patients’ best interests, we introduce a decision error into our framework and explore the assumptions under which payments benefit consumers. We calibrate this decision error using clinical trial results on statin effectiveness for a similar population. This exercise suggests that, in the case of statins, firm payments to physicians benefit consumers due to significant underprescribing at baseline.
Keywords: Expert Intermediaries, Pharmaceuticals, Payments, Decision Errors, Welfare Analysis
JEL Classification: I1, L00
Suggested Citation: Suggested Citation