EVENTS

Date:	Monday, December 1, 2003
Time:	11:00 AM -- 1:00 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

December 2003
A New Approach to Vaccine Development

The current system of supplying vaccines appears to be in a state of crisis. While immunization rates among children are high, there have been periodic shortages of vaccines. In addition, there are few incentives to develop new vaccines, and a declining number of  manufacturers. That has raised concerns that we would not adequately be protected against potential bioterrorist attacks or future outbreaks of serious diseases. To address this crisis, a recent report by the Institute of Medicine (IOM) calls for major changes in the current system of financing vaccine purchases. The IOM recommends a government mandate that all public and private health insurance programs cover vaccines, grant vouchers to uninsured individuals, and provide subsidies for vaccines based on their estimated value to society.

An eleven-person panel chaired by Duke University economist Frank Sloan devised the IOM report and its recommendations. Professor Sloan and panel members Sara Rosenbaum and Mark Pauly presented the report's findings at an AEI conference on December 1, 2003. The report's conclusions were assessed by three experts in the pharmaceutical and health insurance markets: AEI economist John Calfee; Christine Grant, vice president of Aventis Pasteur, a major vaccine producer; and Carmella Bocchino, vice president of the association of health insurers and health plans.
 
Frank Sloan
Duke University
Chairman of the IOM Committee

Over a period of eighteen months, the committee commissioned eight papers and carried out an extensive review of state vaccination programs. Our first task was to look at the vaccine purchasing and distribution systems currently in place in the private and public sectors. We developed incentives and potential strategies to increase immunization rates and sketched a general blueprint for system-wide reform.

Problems of both demand and supply complicate immunization efforts. The financing and delivering of vaccines is fragmented between the public and private sectors, and between federal and state governments, and rising vaccine costs are causing private insurers to drop immunization coverage and increase patient cost-sharing. Growing numbers of the uninsured also slow the progress toward greater nationwide immunization. While immunization rates rose following the introduction of the Vaccines for Children's Program (VFC), data suggest that they are now leveling off.

The greatest problem on the supply side is the narrow industry on which we rely for our vaccines. In the United States, only four manufacturers produce vaccines, intensifying the consequences of any supply disruptions at the firm level. The industry's size is severely limited by the regulatory costs imposed on vaccine manufacturers. Research and development (R&D) are healthy, and there are major prospects in the pipeline. However, the vaccine market may be too small and the incentives too few to bring these potential therapies to market. The federal government is a monopsony purchaser and derives considerable leverage in pricing determinations from its stake in 55 percent of vaccine sales.

The IOM committee treated vaccine shortages not as isolated events but as persistent problems. We considered vaccines public goods with positive externalities but acknowledged that the spillover effects vary across therapies. We assumed also that the cost data available was relatively poor and that government purchase generally discourages investment in new vaccines.

Alternative approaches to the current immunization system include expanding the VFC to other groups, namely adults; guaranteeing universal coverage through federal vaccine purchase; giving states a federal block grant with which to administer vaccine programs; awarding vouchers to needy populations; enacting an unfunded insurance mandate; or funding an insurance mandate with vouchers for the uninsured. The committee recommends the last of these strategies.

The committee's first recommendation calls for a government mandate, subsidy, and vouchers. All private insurance plans should be required to cover certain vaccines with considerable externalities. The subsidy would be a reimbursement to insurance plans based on the immunization's estimated societal benefit. If the value were deemed higher than the subsidy, the reimbursement would act as a price floor. Finally, the government would give vouchers equivalent to the subsidy to uninsured individuals.

Secondly, the committee recommends that the Advisory Committee on Immunization Practices (ACIP) expand its membership and revise its procedures to more closely associate vaccine coverage decisions with the social benefits and costs of the therapies. Current determinations capture scientific considerations but largely omit economic analysis. The ACIP board should include representatives from other disciplines to ensure explicit cost-based analysis of vaccine coverage. A final recommendation is to bolster stakeholder deliberations, prescribe an evaluation plan in five years, and establish the framework for a research agenda.

Mark V. Pauly
University of Pennsylvania

IOM reports typically advise that a body of experts make decisions and that the federal government spend more money. While this committee reached the same conclusion, the report lends more economic guidance than most others have. First among four valuable economic insights is that vaccination decisions cannot be left to the free market because of huge positive externalities. Second, the report links vaccine coverage decisions to economic analysis of their social costs and benefits. The committee concludes also that it is possible to pay too little for vaccines. Prices below some level will be inadequate to sustain the industry and keep the vaccine supply uninterrupted. To avoid this, the pricing of new vaccines should be set in advance as a function of their predicted societal value. This price, or prize, would serve as incentive for the therapy's development. Estimating a vaccine's eventual value is undoubtedly difficult, but even a target range would encourage R&D.

Sarah Rosenbaum
George Washington University

This IOM committee was unique for the varied disciplines it brought together-economics, public health, medicine, and law-a mix representative of the policy dialogue here in Washington. As we considered the barriers to immunization efforts, we were forced to accept on rather thin evidence that cost impedes access to vaccines.

While the committee addressed issues of vaccine financing, it largely overlooked the importance of infrastructure in increasing immunization rates. Behavioral issues, such as clinicians maintaining adequate vaccine supplies at their practices, were lost under our approach. The VFC program is a success for its attention to both financing and delivery. While delivery strategies are often omitted from the discussion, they must be central to any future programs.

Carmella Bocchino
AAHP/HIAA

The IOM's investment in such an important public health issue is commendable. The American public seems to have forgotten about the tremendous public health benefits of immunization and focuses instead on the side-effects of the therapies. This report reminds us of the great social value of vaccines.

Health plans have helped to increase immunization rates by increasing their coverage standards. They also remind patients of vaccination schedules in bulletins and do valuable research on barriers to immunization. It is hard to understand how a federal mandate on vaccine coverage would increase immunization rates. First, health plans tend to associate mandates with rising costs and will in this case too, despite the qualification that this mandate be funded. Evidence from state mandates does not suggest that they will even work. Six states have immunization mandates in place, and their average immunization rate is 77.6 percent. This is virtually indistinguishable from the national average-77 percent. This is perhaps because health plans are increasingly leaving decisions on preventive services to patients. Plans are also removed from the purchase of vaccines, which is now left largely to providers.

A government subsidy is unlikely to be a strong incentive for R&D. Any funding would quickly enter the congressional appropriations debate, and plans would never receive the full funds. The committee's recommendation to change ACIP's composition to integrate more cost-effectiveness analysis is sound. The economic considerations in current immunization efforts are largely theoretical but must be put into practice. Opening the dialogue to all stakeholders is essential to this reform.

John E. Calfee
AEI

The Food and Drug Administration's (FDA) role in achieving wider immunization is critical. Its new vaccine approval process is unnecessarily slow and cumbersome, often far slower than the European Union's system. After vaccines are approved, the regulatory burden on manufacturing can be onerous. FDA regulations inhibit American manufacturers from using the best new technology, raising both costs and risks. A comprehensive strategy to boost immunization rates must address FDA approval and regulatory standards.

The IOM report distorts the meaning of insurance, particularly when it characterizes lack of immunization coverage as "underinsurance." Insurance protects against risk, but vaccination is for the most part predictable. Vaccination coverage is prepaid medical care.

The IOM proposal to base subsidies for new vaccines on estimated social value would encounter intractable problems. The initial plan would apply only to vaccines involving "herd" immunization, but the extent of the herd effect can be difficult to predict in advance. Other social costs and benefits can also defy easy measurement and may prove wildly inaccurate after marketing commences. Even if we could accurately estimate the social value of a vaccine, there is no scientific basis for setting the size of the subsidy itself. Political considerations could strongly influence the attempt to establish sufficient consumer surplus to ensure that people get vaccinated, combined with the right producer surplus to encourage R&D.

This debate has significance beyond the vaccine market because it illustrates how the government, acting as a large, bulk purchaser, can substantially reduce the incentives to develop new products. That is exactly the issue that was debated in the Medicare drug legislation. If Medicare becomes the dominant purchaser, it will significantly reduce the supply of all pharmaceuticals, not just vaccines.

Christine Grant
Aventis Pasteur

The IOM report is salient for acknowledging for the first time financial disincentives in the vaccine market. The worldwide revenue for all vaccines is less than the earnings from the top cholesterol-lowering drug. The IOM committee also demonstrates the merits of an inclusive policy dialogue. In particular, manufacturers need to be a part of any constructive discussion.

We cannot restrict our attention to financial strategies for raising immunization rates. Infrastructure truly matters. Manufacturers must keep routine stockpiles to cushion supply shocks and accommodate shifting priorities in immunization. However, we must also find ways to bolster demand and avert losses such as the destruction of seven millions vaccine doses in 2002. This cannot be accomplished with solely economic tools. Cost-effectiveness analysis has become largely a political tool, and despite its merits, must be complemented with tactics that strengthen the infrastructure of vaccine delivery. The government subsidy proposed by the committee threatens to create a new price control scheme, one with major disincentives for R&D. In the meantime, the pharmaceutical industry still awaits the lifting of price caps on vaccines.

AEI research assistant Ximena Pinell prepared this summary.