The Effect of Price Caps on Pharmaceutical Advertising: Evidence from the 340b Drug Pricing Program

Abstract

We study the effect of price caps on the provision of costly effort by pharmaceutical firms using variation in drug discounts generated by a price regulation program that allows eligible hospitals to purchase outpatient drugs at steep discounts. These discounts directly affect drug manufacturers’ markups, and may change firms’ incentives to exert promotional effort targeted towards physicians at these hospitals. We find that the effects of price regulation on pharmaceutical firm effort depend crucially on the design of the regulations. Using detailed data on marketing payments from pharmaceutical firms to physicians, we observe that physicians receive 12% fewer promotional payments after their hospitals take up the program. The design of the price caps imply that discounts tend to increase with a drug’s age. Consistent with theoretical predictions, we find that pharmaceutical firms shift promotional payments away from older drugs and towards newer drugs, which are less affected by the price caps.

Keywords: advertising, pharmaceutical industry, 340b drug pricing program, price caps, firm effort

JEL Classification: L51, L65, M37, M38, I18, I11