When you go to the pharmacy for aspirin, do you buy Bayer or the private-label generic alternative offered by chains such as CVS? The price for Bayer's version is more than twice that of CVS's, yet the active ingredient is exactly the same. The choice may seem trivial, but it provides insight into larger economic and health questions.
Research by Matthew Gentzkow of the University of Chicago -- who last week won the prestigious John Bates Clark prize for the best young economist in the U.S. -- and co-authors studied exactly this question. They estimate that U.S. consumers would save $32 billion a year by switching to generic labels for goods (not just aspirin) that are equivalent to their brand-name alternatives.
Gentzkow and colleagues used data from the Nielsen Homescan Consumer Panel, which gave households optical scanners to record the barcodes of all packaged goods they bought, and surveyed additional household characteristics. They found that generics accounted for 71 percent of all headache pills purchased (including aspirin, ibuprofen and related products) and 49 percent of the dollars spent on those pills.
What types of people spend more for the branded alternative, when the products are ostensibly equivalent? Not pharmacists and physicians, who are presumably well-informed about what they are buying. They were 18 percentage points more likely than otherwise similar consumers to purchase the generic version. Gentzkow's study found that total consumer spending on headache pills would fall by 15 percent, or about $400 million a year, if all households behaved like physician or pharmacist households in choosing these products.
The interpretation offered by Gentzkow and colleagues is that you buy Bayer only if you don’t know very much about what’s in it (compared to the generic). After all, why waste your money? That conclusion is reinforced by their analysis of nonphysician households who correctly identify the ingredients in the headache pills; such households buy the cheaper versions about as frequently as physicians do.
What if the impact of aspirin depends not just on the active ingredient, but also on what you believe about the brand itself? In other words, what if two products with the same active ingredient are not, in practice, equivalent in terms of their medical impact? That is exactly what a 1981 double-blind randomized study published in the British Medical Journal found. As the authors noted, “the branding of tablets used in self-medication significantly affects the relief of headaches.” This is related to the placebo effect and is presumably driven by the same causes.
For example, among regular users of a brand-name aspirin, the reported pain relief for those randomly assigned a placebo pill contained in branded packaging was about half as large as the effect from an unbranded active aspirin. And these consumers received the most relief when they were randomly assigned the active version of their branded aspirin. Indeed, for these consumers, the difference between the brand-name aspirin and the unbranded version was just as large as that between an unbranded aspirin and a branded placebo.
These results strongly suggest that it's not just the active ingredient that matters. “When people have conviction in a particular brand from, say, past experience, hearsay, advertising, etc., they may experience greater relief from taking that brand than the same active ingredients unbranded or another brand," the authors wrote.
Which brings us back to the Gentzkow study. Because the difference between the Bayer version of aspirin and the CVS version amounts to about 5 cents a pill, is it really worth saving the money if the Bayer version actually works better for you -- despite the equivalence of the active ingredients? That phenomenon applies beyond just headache pills; other studies show similar effects for antihistamines and even blood-pressure medication.
The larger lesson is that in too many health-care settings, we downplay the effect of belief and psychology. Rather than ignoring the beneficial effect of people's expectations, we should try to purchase it as cheaply as possible. So if for whatever reason you believe Bayer works better than the CVS aspirin, go ahead. And if you have a doctor who can convince you that CVS's version will be more effective for you, even better.
(Peter Orszag is vice chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup Inc. and a former director of the Office of Management and Budget in the Barack Obama administration.)
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