Policies designed to encourage drugmakers to introduce over-the-counter (OTC) versions of previously prescription-only medications may in fact harm consumers, a new study co-authored by a University of Massachusetts Amherst economist shows. The research, published in The RAND Journal of Economics, includes what is believed to be the first model that weighs “strategic delay” incentives against “racing to the market” incentives in the U.S. OTC market.

The decision to release an OTC version of a prescription medication can be a costly and uncertain process for drugmakers. To help pharmaceutical companies recoup costs and encourage OTC drugs, the Food and Drug Administration provides three-year market exclusivity to medications transitioning from prescription to OTC. 

The study of anti-ulcer medications, which are among the top-selling therapeutic classes of drugs and include brands like Prilosec and Nexium, found that the current approval process caused many pharmaceutical companies to delay entry into the OTC market until prescription patents expire, to maximize profits and thwart potential competitors. 

The research indicates that these delays reduce consumer benefits by $1.6 billion compared with a scenario in which OTC drugs could enter the market immediately. Because delayed entry limits competition and reduces the availability of lower-cost alternatives, patients pay more for branded drugs, and some may forgo treatment.

“We found that if the FDA were to eliminate the market exclusivity policy, it would incentivize drugmakers to release OTC versions of their products two to five years earlier, improving the benefit to consumers,” says Debi Prasad Mohapatra, assistant professor of resource economics at UMass Amherst.

However, he cautions that removing market-exclusivity protections would likely weaken pharmaceutical companies’ motivation to develop OTC drugs. To address this, the study proposes an alternate policy that ties OTC exclusivity to expiration dates for prescription patents. 

An analysis of the proposed alternate policy shows it would curb drugmakers’ incentives to strategically delay OTC drugs, prompting the medications to be introduced three to five years earlier, and improving consumer welfare by $3.4 billion.

“It’s important to maintain the delicate balance between the incentives of different players in the pharmaceutical market,” Mohapatra explains. “The alternate policy we developed does that—improving access to OTC drugs, providing incentives to innovate and allowing doctors to focus their attention on more pressing health care needs.” 

He adds that while the alternate policy was tested in the anti-ulcer drug market, it can be applied to other classes of drugs as well—offering another approach to addressing surging prescription costs in the U.S.

The study’s dynamic structural model is based on U.S. sales, pricing, investment and marketing data for anti-ulcer drugs from 1992-2015. The market accounted for average annual revenues of nearly $28 billion during the study period.