The effect on social welfare of a switch of second-generation antihistamines from prescription to over-the-counter status: A microeconomic analysis

Abstract

Background: The US Food and Drug Administration (FDA) recently held a meeting to determine whether the status of second-generation antihistamines (SGAs) should be switched from prescription (Rx) to over-the-counter (OTC) status. Objective: This article provides a conceptual microeconomic framework for addressing issues regarding the impact of such a switch on social welfare. Methods: A review of the economic literature on Rx-to-OTC switches was conducted. Relevant articles published in English between 1990 and 2001 were identified through searches of ABI Info, EconLit, PsychInfo, MEDLINE, CANCERLIT, AIDSLINE, and HealthStar, as well as a general Internet search for statements in the press or on the FDA Web site. The search terms used were Rx, prescription, OTC, over-the-counter, second-generation antihistamines, nonsedating antihistamines, first-generation antihistamines, and sedating antihistamines. Microeconomic models focusing on consumer surplus were employed to determine the potential price response and social-welfare implications of a switch of SGAs to OTC status. Results: Unlike the agents involved in previous Rx-to-OTC switches, SGAs are still under patent protection. Economic theory suggests that a firm that is protected by a patent will price aggressively. The market for OTC SGAs is likely to be more elastic due to a lack of insurance coverage for OTC products; hence, drug manufacturers would be likely to charge a lower price if SGAs were sold OTC. However, a lower price does not necessarily guarantee an improvement in social welfare; the net impact is determined by whether the increase in consumer surplus outweighs the deadweight loss (losses of consumer and producer surplus not transferred to other parties). Additionally, the assumption of a price reduction would be called into question if there were inequalities in marginal costs between the Rx and OTC markets. In this situation, the postswitch price might increase or not be reduced significantly. Conclusions: It is uncertain whether granting OTC status to SGAs would be cost saving to society, particularly as these drugs are patent protected. The social-welfare implications of such a switch would depend heavily on pricing strategies and consumer behavior. Further analyses are needed to determine how both factors influence social welfare; only then can the costs and benefits of a switch be understood completely.