# Presentation: 712050

## Strategy: Increasing Financial Incentives for Research, Development, Production, and Administration 

- 2nd NVAC Workshop on Strengthening the Supply of Vaccines in the U.S.
- January 25, 2005

## An Economist’s View

- 		         Frank A. Sloan
- 			J. Alexander McMahon Professor of
- 			Health Policy and Management
- 			Duke University

## Relationship of Economics to the Issue 

- Concern with the optimal allocation of resources
- This occurs where marginal cost = marginal benefit
- Market failures in this context
- 		--role of health and financial 				externalities
- 		--possible risk misperceptions
- 		--government policies
- 		--policies of private insurers
- Responses to financial incentives

## I draw some of my comments from a recent published article.  

- Sloan, F., S. Berman, S. Rosenbaum, R.A. Chalk, and R.B. Giffin,“The Fragility of the U.S. Vaccine Supply,” _New England Journal of Medicine_, vol. 351, no. 23, Dec. 2, 2004: 2443-7.

## The Vaccine Supply Industry 

- The number of companies producing vaccines in the U.S. has declined markedly since 1960s.
- For each of 8 routine vaccines, there is only one supplier.
- In 2001-2002, the U.S. had shortages of 8 of ll recommended childhood vaccines.
- In 2004, the U.S. had shortage of pneumoccal conjugate vaccine, which caused CDC to recommend suspension of 3rd & 4th doses
- Shortage of flu vaccine not unique

## Why So Few Suppliers? 

- Developing a new vaccine is costly and risky
- Stringency of FDA regulation: difference between biologics and other products
- Complexity of production + FDA-mandated production upgrades limit savings from developing more efficient processes over time.
- Threat of product liability lawsuits
- Risk-adjusted returns on investment low
- As with drugs, FDA does not accept data from foreign clinical trials

## There is a crisis!

- Vaccine supply “fragile.”
- Insufficient investment in R&D (process and product innovations)
- Too little immunization
- Too little knowledge about how the system REALLY operates

## Disincentives to Supply Current Vaccine and for Vaccine R&D 

- Monopsony power of purchasers, especially for childhood vaccinessubstantial discounts and enforcing price caps
- Small size of vaccine market, especially compared to pharmaceutical products
- Sellers have less information to use in extracting consumer surplus for vaccines than for certain pharmaceuticals (e.g., for cancer treatment).

## Immunization Coverage 

- 11 million children and 59 million adults have private insurance that excludes immunization.
- Patients with coverage for vaccines often face substantial cost sharing
- Vaccines for Children’s Program provides free vaccines to 10 mil. children in U.S.
- Medicare pays for vaccination for influenza, pneumococcus, and hepatitis B.
- 89 million adults age 18-64 have no coverage for vaccines.

## Barriers to Receipt of Vaccines  

- Financial burden on individuals
- Individuals do not take account of health and financial externalities of vaccines
- Risk misperception: people may underestimate the probability of contracting illness; overestimate probability of potential adverse side effects; are myopic
- Non-financial barriers to use

## There is a lot we do not know about vaccine market. 

- Demand responsiveness to a change in price to the consumer
- Risk perceptions of consumers
- Trends in cost of regulation as it affects vaccine manufacturers
- Litigation patterns: Are vaccine manufacturers really sued for flu? For which vaccines are suits common?
- What does the experience with no-fault for vaccines offer for future public policies?

## There is a lot we do not know about vaccine market, cont. 

- How have firms responded to financial incentives to produce steady supply of vaccine, to innovate?

## Immediate and Long-Run Solutions

- Recent flu vaccine shortage another “wake up” call
- Details of immediate causes of vaccine shortages differ but results are the same
- Solving flu vaccine shortages as part of a larger comprehensive solution

## Two Directions for Public Policy 

- _Demand pull_: underlying premise—with sufficient market size, we will see more R&D, entry, etc.
- 	--insurance mandates, public subsidies, vouchers for vaccine for the uninsured
-     --stockpiles, changes in government vaccine procurement policies
-    --address issues of lack of demand other than price

## Two Directions for Public Policy, cont. 

- _Supply push_: underlying premise—with fixes to some of the cost side impediments to profitability barriers, we will see more R&D, entry, etc.
-    --relax regulatory restrictions
-    --“tort reform”
-    --investment tax credits

## Solutions 

- IOM’s proposal for mandate, subsidy, and voucher program too much for flu vaccine only policy
- More limited policy, say for flu vaccine, focus on: (1) securing additional manufacturers; (2) extra vaccine to meet fluctuations in demand; (3) and funds for flu vaccine R&D.
- Extra vaccine: no need to transport

## Solutions Differ Depending on Scope of Public Policy

- Do we seek solutions for vaccines as a group or for a few specific vaccines?

## Plea for More Research

- Limitations of stakeholders’ meetings: need to distinguish between special interest pleas and real findings
- “Unknowns” listed above should be studied
- Need to study effectiveness of demand pull and supply push public policies in affecting R&D investment in other industries, other countries, related public policies (e.g., defense procurement methods, BioShield, Orphan Drug Act)

## Convene research conferences where findings can be reviewed and discussed