Jump to ContentJump to Main Navigation
Show Summary Details
More options …

The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

4 Issues per year


IMPACT FACTOR 2016: 0.252
5-year IMPACT FACTOR: 0.755

CiteScore 2016: 0.48

SCImago Journal Rank (SJR) 2016: 0.330
Source Normalized Impact per Paper (SNIP) 2016: 0.526

Online
ISSN
1935-1682
See all formats and pricing
More options …
Volume 14, Issue 1 (Dec 2013)

Issues

Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

In Whom We Trust: The Role of Certification Agencies in Online Drug Markets

Roger Bate / Ginger Zhe Jin / Aparna Mathur
Published Online: 2013-12-25 | DOI: https://doi.org/10.1515/bejeap-2013-0085

Abstract

This article uses an audit sample and a consumer survey to study the intriguing market of online prescription drugs facing US customers and assesses the role that certification agencies play in online drug markets.

On the supply side, we acquire samples of five popular brand-name prescription drugs from three types of online pharmacies: tier 1 are US-based and certified by the National Association of Boards of Pharmacy (NABP) or LegitScript.com, tier 2 are certified by PharmacyChecker.com or the Canadian International Pharmacy Association but not by NABP or LegitScript, and tier 3 are not certified by any of the four agencies. Most tier-2 and tier-3 websites are foreign. We find that 37 of the 365 delivered samples are different from the products we ordered and, therefore, non-testable. Conditional on testable samples, Raman spectrometry test finds no failure of authenticity except for eight Viagra samples from tier-3 websites. After controlling for testability and authenticity, tier-2 websites are 49.2% cheaper (p<0.01) and tier-3 websites are 54.8% cheaper (p < 0.01) than tier-1 sites. These differences are driven by non-Viagra drugs. For Viagra, failing samples are cheaper, but there is no significant price difference across tiers once we condition on testability and authenticity.

To study the demand side, we designed a survey that was distributed by RxRights. Among the 2,522 respondents who have purchased prescription medication and are concerned about the price of US pharmaceuticals, results show that 61.54% purchase drugs online and mostly from foreign websites, citing cost saving as the leading reason. Conditional on shopping online, 41.11% check with a credentialing agency.

Both samples convey a consistent message that certification agencies deliver useful information for foreign websites and online consumers. Further, while these findings confirm the Food and Drug Administration warning against rogue websites, they do suggest that a blanket ban against all foreign websites may deny consumers substantial savings from certified tier-2 websites.

Keywords: prescription drugs; counterfeit; online pharmacy; price; certification

JEL Classification: D18; D8; I18

References

  • Akerlof, George A. 1970. “The Market for ‘Lemons’”: Quality Uncertainty and the Market Mechanism, the Quarterly Journal of Economics, 84(3):488–500.Google Scholar

  • Arruñada, B. 2004. “Quality Safeguards and Regulation of Online Pharmacies.” Health Economics 13(4):329–44.CrossrefPubMedGoogle Scholar

  • Baker, L., T. H. Wagner, S. Singer, and M. K. Bundorf. 2003. “Use of the Internet and e-Mail for Health Care Information: Results from a National Survey.” Journal of American Medical Association 289(18):2400–6.CrossrefGoogle Scholar

  • Bate, R., and K. Hess. 2010. “Assessing Website Pharmacy Drug Quality: Safer Than You Think?” Public Library of Science One 5(8):e12199.Google Scholar

  • Bate, R., P. Coticelli, R. Tren, and A. Attaran. 2008. “Antimalarial Drug Quality in the Most Severely Malarious Parts of Africa – A Six Country Study.” Public Library of Science One 3(5):e2132.Google Scholar

  • Bate, R., R. Tren, L. Mooney, K. Hess, B. Mitra, B. Debroy, and A. Attaran. 2009. “Pilot Study of Essential Drug Quality in Two Major Cities in India.” Public Library of Science One 4(6): e6003.Google Scholar

  • Bate, R., G. Z. Jin, and A. Mathur. 2011. “Does Price Reveal Poor-Quality Drugs? Evidence from 17 Countries.” Journal of Health Economics 30(6):1150–63.PubMedCrossrefGoogle Scholar

  • Becker, Bo, and Todd Milbourn. 2010. “How did increased competition affect credit ratings?” Harvard Business School Working Paper 09-051.Google Scholar

  • Bugay, D., and R. Brush. 2010. “Chemical Identity Testing by Remote-Based Dispersive Raman Spectroscopy.” Applied Spectroscopy 64(5):467–75.CrossrefWeb of SciencePubMedGoogle Scholar

  • Cantor, R., and F. Packer. 1997. “Differences of Opinion and Selection Bias in the Credit Rating Industry.” Journal of Banking and Finance 21(10):1395–417.CrossrefGoogle Scholar

  • Catalano, C. S. 2008. “The Viagra Juggernaut: An Analysis of the ‘Rock Star’ of the Prescription Drug World’s Direct-to-Consumer (DTC) Advertising, Mega-Brand Status, and Cultural Iconicity.” Dissertation, Purdue University.Google Scholar

  • Chesnes, M., W. Dai, and G. Z. Jin. 2013. “Consumer Protection or Consumer Frustration? The Impact of Banning Foreign Pharmacies from Sponsored Search.” Working paper.Google Scholar

  • Clifton, L. B. S. 2003. “Internet Drug Sales: Is It Time to Welcome ‘Big Brother’ into Your Medicine Cabinet?” Journal of Contemporary Health Law and Policy 20:541–70.Google Scholar

  • Cohen, R. A., B. Stussman, and CDC/National Center for Health Statistics. 2009. “NCHS Health E-Stat: Health Information Technology Use Among Men and Women Aged 18–64: Early Release of Estimates from the National Health Interview Survey, January-June 2009.” http://www.cdc.gov/nchs/data/hestat/healthinfo2009/healthinfo2009.htm.

  • Congressional Budget Office. 2012. “Estimates for the Insurance Coverage Provisions of the Affordable Care Act Updated for the Recent Supreme Court Decision.” http://www.cbo.gov/sites/default/files/cbofiles/attachments/43472-07-24-2012-CoverageEstimates.pdf.

  • Deloitte Center for Health Solutions. 2009. “Health Care Consumerism: Opportunities and Challenges for Health Plans.” http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_chs_Health%20Care%20Consumerism_OpportunitiesandChallengesforHealthPlans.pdf

  • Dewan, S., and V. Hsu. 2004. “Adverse Selection in Electronic Markets: Evidence from Online Stamp Auctions.” Journal of Industrial Economics 52(4):497–516.CrossrefGoogle Scholar

  • Duggan, M., and F. Scott Morton. 2006. “The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing.” Quarterly Journal of Economics 121(1):1–30.Google Scholar

  • Fox, S. 2004. Prescription Drugs Online. Washington, DC: Pew Internet & American Life Project. Accessed August 23, 2011. http://www.pewinternet.org/~/media//Files/Reports/2004/PIP_Prescription_Drugs_Online.pdf.pdf.

  • US Government Accountability Office (GAO). 2001. “Prescription Drugs: Prices Available Through Discount Cards and from Other Sources.” GAO-02-280R.Google Scholar

  • US Government Accountability Office (GAO). 2004. “Internet Pharmacies: Some Pose Safety Risks for Consumers.” http://www.gao.gov/products/GAO-04-820.

  • US Government Accountability Office (GAO). 2011. “Prescription Drugs: Trends in Usual and Customary Prices for Commonly Used Drugs.” GAO-11-306R.Google Scholar

  • Grossman, S. 1981. “The Informational Role of Warranties and Private Disclosure about Product Quality.” Journal of Law and Economics 24:461–89.CrossrefGoogle Scholar

  • Gryniewicz, C., J. Spencer, M. Hankins, and J. Kauffman. 2007. “Spectroscopic Methods for Rapid Determination of Diethylene Glycol in Glycerin.” American Pharmaceutical Review 10(7):24–30.Google Scholar

  • Hubbard, Thomas N. 2002. “How Do Consumers Motivate Experts? Reputational Incentives in an Auto Repair Market.” Journal of Law and Economics, 45(2):437–68.CrossrefGoogle Scholar

  • Jin, Ginger Zhe, and Andrew Kato. 2006. “Price, Quality, and Reputation: Evidence from an Online Field Experiment.” RAND Journal of Economics, 37(4):983–1005.CrossrefGoogle Scholar

  • Jovanovic, B. 1982. “Truthful Disclosure of Information.” Bell Journal of Economics 13:36–44.CrossrefGoogle Scholar

  • Keith, A. 2000. “The Economics of Viagra.” Health Affairs 19(2):147–57.CrossrefGoogle Scholar

  • Lizzeri, Alessandro. 1999. “Information Revelation and Certification Intermediaries.” RAND Journal of Economics, 30(2):214–31.CrossrefGoogle Scholar

  • Michaely, Roni, and Kent L. Womack. 1999. “Conflict of Interest and the Credibility of Underwriter Analyst Recommendations.” Review of Financial Studies, 12(4):653–86.CrossrefGoogle Scholar

  • Milgrom, P. 1981. “Good News and Bad News: Representation Theorems and Applications.” The Bell Journal of Economics 12:380–91.CrossrefGoogle Scholar

  • Orizio, G., A. Merla, P. J. Schulz, and U. Gelatti. 2011. “Quality of Online Pharmacies and Websites Selling Prescription Drugs: A Systematic Review.” Journal of Medical Internet Research 13(3).CrossrefWeb of SciencePubMedGoogle Scholar

  • United States Pharmacopeia and USAID. 2009. “Survey of the Quality of Selected Antimalarial Medicines Circulating in Madagascar, Senegal, and Uganda.” US Pharmacopeia. Accessed March 20, 2012. http://www.usaid.gov/our_work/global_health/hs/publications/qamsa_report_1109.pdf.

  • Quon, B. S., R. Firszt, and M. J. Eisenberg. 2005. “A Comparison of Brand-Name Drug Prices between Canadian-Based Internet Pharmacies and Major U.S. Drug Chain Pharmacies.” Annals of Internal Medicine 143(6):397–403.PubMedCrossrefGoogle Scholar

  • Rajamma, R. K., and L. E. Pelton. 2009. “An Empirical Investigation of Consumers’ Procurement of Pharmaceutical Products via Online Retail Channels.” Psychology Marketing 26(10):865–87.CrossrefWeb of ScienceGoogle Scholar

  • Skinner, B. J. 2005. Canada’s Drug Price Paradox: The Unexpected Losses Caused by Government Interference in Pharmaceutical Markets. The Fraser Institute Digital Publication. http://www.fraserinstitute.org/research-news/display.aspx?id=12864.

  • Skinner, B. 2006. “Price Controls, Patents, and Cross-Border Internet Pharmacies Risks to Canada’s Drug Supply and International Trading Relations.” The Fraser Institute, Critical Issues Bulletin 2006. http://www.fraserinstitute.org/research-news/display.aspx?id=13315.

  • Temkin, Bruce, H. Manning, S. Geller and O. Melnikova. 2007. “The Customer Experience Index.” Forrester Research, http://www.forrester.com/The+Customer+Experience+Index+2007/fulltext/-/E-RES43877?docid=43877

  • de Veij, M., P. Vandenabeele, K. Alter Hall, F. Fernandez, M. Green, N. White, A. Dondorp, P.Newton and L. Moens. 2007. “Fast Detection and Identification of Counterfeit Antimalarial Tablets by Raman Spectroscopy.” Journal of Raman Spectroscopy 38:181–7.Web of ScienceCrossrefGoogle Scholar

  • Veronin, M. A., and B.-B. C. Youan. 2004. “Magic Bullet Gone Astray: Medications and the Internet.” Science 305(5683):481.CrossrefPubMedGoogle Scholar

  • Veronin, M. A., E. Lee, and E. N. Lewis. 2007. “‘Insight’ into Drug Quality: Comparison of Simvastatin Tablets from the US and Canada Obtained via the Internet.” The Annals of Pharmacotherapy 41(5):1111–15.Web of ScienceCrossrefPubMedGoogle Scholar

  • Waguespack, David M., and Olav Sorenson. 2011. “The Ratings Game: Asymmetry in Classification”, Organizational Science 22:541–553.CrossrefGoogle Scholar

  • Westenberger, B. J., C. D. Ellison, A. S. Fussner, S. Jenney, R. E. Kolinski, T. G. Lipe, R. C. Lyon, T. W. Moore, L. K. Revelle, A. P. Smith, J. A. Spencer, K. D. Story, D. Y. Toler, A. M. Wokovich, and L. F. Buhse. 2005. “Quality Assessment of Internet Pharmaceutical Products Using Traditional and Non-Traditional Analytical Techniques.” International Journal of Pharmaceutics 306(1–2):56–70.CrossrefPubMedGoogle Scholar

  • Wimmer, B. S., and C. Brian. 2003. “An Empirical Examination of Quality Certification in a ‘Lemons Market’.” Economic Inquiry 41(2):279–91.CrossrefGoogle Scholar

  • Witkowski, M. 2005. “The Use of Raman Spectroscopy in the Detection of Counterfeit and Adulterated Pharmaceutical Products.” American Pharmaceutical Review. Accessed April 16, 2009. http://www.horiba.com/fileadmin/uploads/Scientific/Documents/Raman/aprraman.pdf.

  • Wolinsky, Asher (1983) “Prices as Signals of Product Quality” The Review of Economic Studies 50(4):647–658.CrossrefWeb of ScienceGoogle Scholar

  • World Health Organization. 2011. “Survey of the Quality of Selected Antimalarial Medicines Circulating in Six Countries of Sub-Saharan Africa.” World Health Organization. Accessed March 20, 2012. http://www.who.int/medicines/publications/WHO_QAMSA_report.pdf.

About the article

Published Online: 2013-12-25


IMS Institute, April 2011. “The Use of Medicines in the United States: Review of 2010.” Accessed March 20, 2012. http://www.imshealth.com/deployedfiles/ims/Global/Content/Insights/IMS%20Institute%20for%20Healthcare%20Informatics/IHII_UseOfMed_report1_.pdf.

Accessed December 24, 2012. http://www.justice.gov/opa/pr/2011/August/11-dag-1078.html.

GAO (2011) shows that retail price of 100 commonly used prescription medications increased at an average annual rate of 6.6% from 2006 to 2010. The annual price rise is particularly high in brand-name drugs (8.3%) as compared to generic drugs (–2.6%). The pain of high price is real and substantial: According to the Commonwealth Fund, 48 million Americans did not fill a prescription due to cost in 2010, up 66% since 2001 (http://www.commonwealthfund.org/Surveys/2011/Mar/2010-Biennial-Health-Insurance-Survey.aspx).

We compute these numbers based on tables presented in GAO (2001).

This number has adjusted for currency equivalency. Skinner (2005) also reported that the 100 top-selling generic drugs are on average priced 78% higher in Canada than in the US. This explains why most cross-border sales from Canada to US concentrated on brand-name drugs.

Orlando Sentinel, May 2, 2012. “It’s Illegal, but desperate Americans are buying drugs online from Canada.” Accessed March 20, 2012. http://articles.orlandosentinel.com/2010-05-02/news/os-drugs-canada-online-20100502_1_doughnut-hole-canadian-online-pharmacy-drugs.

In numerous actions, the FDA has confiscated parcels at customs and discovered various problems with foreign online pharmacies: First, drugs that are claimed to be of Canadian origin could come from 27 different countries (“FDA Operation Reveals Many Drugs Promoted as ‘Canadian’ Products Really Originate From Other Countries” December 16, 2005. Accessed February 29, 2012. http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/2005/ucm108534.htm). Second, some parcels have counterfeit or substandard drugs which contain no active ingredients, or the wrong active ingredients or incorrect amounts of the active ingredients and could generate serious health problems if consumed by human beings (“The Possible Dangers of Buying Medicines over the Internet”, updated January 26, 2011. Accessed February 29, 2012. http://www.fda.gov/ForConsumers/ConsumerUpdates/ucm048396.htm); third, even if the drugs are authentic, they may not be adequately labeled in English to help assure safe and effective use. Even the belief of cost savings can be misleading: FDA’s examination of foreign mail shipments finds that about 45% of imported products are already available in the US as an FDA-approved generic drug and about half of these generic drugs can be obtained from national pharmacy chains at the relatively low cost of $4 each (FDA announcement “FDA Finds Consumers Continue to Buy Potentially Risky Drugs Over the Internet”, July 2, 2007. Accessed February 29, 2012. http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/2007/ucm108946.htm).

NABP news “NBAP Applauds LegitScript and KnujOn for Spotlighting Exploitation of Internet Ad Programs by Rogue Internet Drug Outlets”, August 18, 2009. Accessed September 19, 2012. www.nabp.net.

http://wwwlegitscript.com/download/DNR-letter_10Feb2011.pdf.

FDA “Travelers Alert” updated on June 30, 2012. Accessed February 29, 2012. http://www.fda.gov/ForIndustry/ImportProgram/ucm173743.htm.

Accessed August 14, 2012. http://www.pharmacychecker.com/onlinepharmacyratings.asp.

One may argue that foreign websites could specify different prices for US and local customers; hence, their US price need not be subject to local demand or local regulations. Unfortunately, we do not have any first-hand experience on this, but some websites do post price online for all potential consumers around the world and this could limit their ability to price discriminate against US customers.

The Wall Street Journal Online/Harris Interactive Health-Care Poll (2004) Six Million People Have Bought Prescription Drugs Online; Most Are satisfied. The Wall Street Journal Online 3(6).

The internal AEI ethical review conducted for the early part of this project in 2009 concluded that no websites would be named.

Checking with CIPA involves entering the website name in the name-check box on cipa.com. PharmacyChecker does not offer such an interactive checking process on its own website, so checking with PharmacyChecker involves email exchange with Gabriel Levitt, the Vice President of PharmacyChecker.

In February 2010, Google has stopped using PharmacyChecker as the certification agency for online pharmacies listed in Google search results and switched to contract with LegitScript in April 2010. In August 2011, Google and the US Department of Justice settled for the investigation of Google advertising for illegal pharmacies, with Google paying $500 million for the settlement.

The lead author did the testing after being trained by a spectroscopist from the company that owns the spectrometer platform. In addition to the company’s assistance, all testing was completed in the observation of a professional outside our research team.

Indeed, for a truly thorough analysis, myriad techniques including dissolution analysis, and tandem mass spectrometry, would be required to monitor all types of problems.

Each medicine made by each manufacturer has a unique Raman signal. The signals will be close in similarly approved products, but will rarely be identical. There are allowances in production, so that a generic manufacturer does not have to use the same binding agents and dyes as the brand-name product. This means that two generic products could have different signals from each other and different from the brand. Since there is only one brand, by instructing pharmacies to provide it we should always have the same Raman signal from legitimate products. If we included generics we could not be sure if a product “failed” the Raman authentication because the product was a fake or just simply a different generic. This is why we demanded brand only products.

Historical CPI table for all urban consumers as of February 17, 2012. Accessed March 13, 2012. ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt.

When we purchased from tier-2 websites, everyone of them required prescription.

“FDA Operation Reveals Many Drugs Promoted as ‘Canadian’ Products Really Originate From Other Countries,” Accessed February 29, 2012.http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/2005/ucm108534.htm.

See more on Pfizer’s pricing strategy at a December 1, 2012 Times article “Lipitor Already Cheaper after Patent Expiration” by Josh Sanburn. Accessed March 14, 2012. http://moneyland.time.com/2011/12/01/lipitor-patient-expiration-wont-mean-cheaper-generics-yet/.

We create drug source dummies for Europe, Asia/Pacific, and Canada. We omit US and missing drug source, because all US sourced drugs are in tier 1 and all drugs with missing source are in tier 3.

In our sample of tier-1 pharmacies, only four out of eight have retail stores. Having a retail store could signal that the company is an established brand, and this might be one reason why consumers are willing to pay higher prices for tier-1 drugs. However, in Table 5, we explicitly control for the presence of a retail store, and the coefficient is not significant in either the testability or price regressions.

The question does not specify a time frame for drug purchase. But later on, another question about purchase frequency on the Internet shows that most respondents buy every month or once a year.

Accessed May 31, 2013. http://www.people-press.org/2012/05/15/assessing-the-representativeness-of-public-opinion-surveys/.

This figure is conditional on the respondents who provided valid answer in zipcode. Of the 2,522 respondents in our final sample, 105 (4.16%) are missing in zipcode.

Citations of these surveys are provided in Footnotes 2 and 3.

Google has contracted with LegitScript since April 2010 to filter pharmacy websites on Google.


Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, ISSN (Print) 2194-6108, DOI: https://doi.org/10.1515/bejeap-2013-0085.

Export Citation

©2014 by Walter de Gruyter Berlin / Boston. Copyright Clearance Center

Comments (0)

Please log in or register to comment.
Log in