Governments limit the sale of goods thought to be of risk to public health under the rationale that these products generate negative externalities that are not otherwise internalized by consumers (Conlon and Rao 2023). To reduce consumption of such goods, policymakers have adopted numerous strategies, including raising prices through excise taxes (Cawley et al. 2019; DeCicca et al. 2022); requiring a license to buy, sell, or use a product (Dee et al. 2005; Depew and Swensen 2022); and outright prohibiting sales to at least some consumers (Carpenter and Dobkin 2011; Adda et al. 2012; Knight 2013; Dobkin et al. 2014). Despite the widespread adoption of these policies and large literatures studying how these interventions affect consumer outcomes (e.g., Carpenter and Dobkin 2009; Buchmueller and Carey 2018; Hansen et al. 2023), relatively less is known about whether and how these policies affect firm decisions and outcomes.

This paper provides new evidence on how supply-side drug interventions affect firm performance by studying the relationship between state laws intended to curtail excessive opioid prescribing by pain management clinics, known as “pill mills,” and retail pharmacy market outcomes. Drug overdose is the leading cause of injury mortality in the U.S.; over 70 percent of these deaths are attributable to opioids (National Center for Health Statistics, 2023). To combat the ongoing opioid epidemic, state and local officials have adopted numerous measures aimed at limiting the supply of prescription opioids. Broadly speaking, state pill mill laws establish legal authority for state inspections and set training requirements for clinic owners and associated physicians (Mallatt 2017; Maclean et al. 2021; Ziedan and Kaestner 2024). The goal of these policies is to reduce the supply of prescription opioids by (i) closing the most egregious pain management clinics and (ii) reducing the volume of prescribing at remaining facilities. As such, we use the adoption of these state pill mill laws as natural experiments to study how firms are affected by government policies limiting product sales.

The relationship between state pill mill laws and pharmacy sales depends on the extent to which establishments were previously filling inappropriate opioid prescriptions, whether the laws were effective at reducing inappropriate prescribing, and whether the laws inadvertently discouraged medically justified prescribing. To the first point, a recent paper by Janssen and Zhang (2023) using data on opioid shipments found evidence of drug diversion among small, independent pharmacies, in part due to competitive pressures and the financial incentives of owner-operator pharmacists. Moreover, existing evidence shows that state pill mill laws reduced opioid prescribing (Kaestner and Ziedan 2023), and other prior work suggests that policies discouraging inappropriate prescribing can also reduce the volume of prescriptions for legitimate medical reasons (Buchmueller et al. 2020; Sacks et al. 2021; Alpert et al. 2024).1 Indeed, while some pill mill pain-management clinics prescribed and filled prescriptions on-site, others directed patients to off-premises establishments whose pharmacists may or may not have known they were filling inappropriate prescriptions (Twilman 2012; Committee on Energy and Commerce of the 115th Congress 2018; IRS 2022). So, while the existing literature suggests that state pill mill laws may have adversely affected pharmacies, the degree to which establishments were affected remains an open empirical question.

We examine the relationship between state pill mill laws and changes in the retail pharmacy industry using 2000–2018 National Establishment Time-Series (NETS) data and a difference-in-differences identification strategy that accounts for the staggered adoption of the policies and potential dynamic treatment effects (Borusyak et al. 2024). First, we find that state pill mill laws were associated with an approximate 5-percent reduction in pharmacy sales and a 3-percent reduction in the number of pharmacy employees. The reductions were limited to the post-adoption period and are robust to alternative controls for time-varying spatial heterogeneity, sample restrictions, and difference-in-differences estimators. Second, we show that these reductions were driven by pharmacies located in highly competitive areas, which is consistent with prior evidence that pharmacies engage in drug diversion to offset competition-induced reductions in revenue (Janssen and Zhang 2023). We also find evidence that pharmacies located across the border in states without a pill mill law experienced an increase in sales and employment, suggesting that some individuals crossed state lines to obtain their prescription opioids, providing an additional example of behavioral responses aimed at evading regulation (Lovenheim and Slemrod 2010; Knight 2013; Hansen et al. 2020; Deiana and Giua 2021; Shakya and Ruseski 2023). Third, we show that these reductions in sales and employment were driven by an increase in pharmacy closures, particularly among standalone (i.e., non-chain) establishments, with surviving establishments experiencing, at most, small increases in sales and employment from these policies.

Prior work showed that state pill mill laws led to sizable reductions in the supply of prescription opioids, increases in illicit opioid prices, and reductions in overall opioid mortality (Meinhofer 2018; Kaestner and Ziedan 2023), though these public health improvements were partially offset by increases in heroin deaths (Meinhofer 2018; Kim 2021). However, given that pharmacies are the most frequent service-delivery touchpoint within the U.S. health care system (Berenbrok et al. 2020; Trygstad 2020; Valliant et al. 2022), and given that the role of pharmacies in delivering health care has expanded over the last several decades (Manolakis and Skelton 2010; Abouk et al. 2019; Viscari et al. 2021; Smart et al. 2024), it is worth considering whether these policies may have affected pharmacy access for non-opioid users. We do not detect any evidence that state pill mill laws were related to changes in the likelihood that counties had no retail pharmacies or in the number of available pharmacies. That we do not detect a change in overall pharmacy access is consistent with our finding that state pill mill laws harmed pharmacies in locally competitive markets. Moreover, while we find evidence that state pill mill laws reduced pharmacy employment, prior work found that these policies were associated with modest but statistically significant increases in the aggregate labor market outcomes of younger adults. Overall, both our results and findings from prior work are consistent with state pill mill laws adversely affecting pharmacies that were previously filling inappropriate opioid prescriptions without meaningfully altering broader access to retail pharmacies.

This paper contributes to several notable literatures. By showing that state pill mill laws adversely affected the retail pharmacy industry, we add to existing research connecting public health interventions to changes in firm behaviors and outcomes (Adda et al. 2012; Cornelsen and Normand, 2012; Nguyen et al. 2019; Butters et al. 2022; Dickson et al. 2025). We also build on work in health economics exploring firm behaviors and outcomes, including advertising (de Frutos et al. 2013; Lawler and Skira 2022), product sales (Bedard and Kuhn 2015; DeCicca et al. 2021; Cotti et al. 2022), employment (Clark and Milcent 2011; Raja 2023), and market structure (Carpenter and Sebastian Tello-Trillo, 2015; Dalton and Bradford, 2019). Finally, we most directly add to a literature studying policies intended to curtail the excessive prescribing of prescription opioids (Buchmueller and Carey 2018; Meinhofer 2018; Kim 2021; Mallatt 2022; Shakya and Hodges 2022; Kaestner and Ziedan 2023; Neumark and Savych 2023; Ukert and Polsky 2023). In the study perhaps most related to ours, a working paper by Mallatt (2017) found that state pill mill laws were associated with a 6.5-percent reduction in the number of establishments categorized as “all other outpatient care centers” – a category that includes pain management clinics – in the 2004–2015 Quarterly Census of Employment and Wages (QCEW) data.2

The rest of this paper proceeds as follows: Section 2 discusses the policy background and summarizes the existing evidence on the effects of state drug policies. Section 3 describes the National Establishment Time-Series data and our difference-in-differences identification strategy that accounts for the staggered adoption of state pill mill laws. Section 4 presents our results on the relationship between these laws and changes in retail pharmacy market outcomes. Finally, Section 5 discusses the policy implications and limitations of our results.