Vaccine “Public Option Plan” Has Produced Shortages of Vaccines

With H1N1 flu vaccine shortages looming, now is a good time to reflect on the health care shortages, lack of innovation, and outflow of capital created when a public option health plan transfers too much power from the private sector to the government.

In 1993, the Clinton Administration created the Vaccines for Children (VFC) program. Its goal was to eliminate out-of-pocket payments for vaccines, much like ObamaCare seeks to eliminate out-of-pocket payments for health care.

Then as now, the President implied that profiteering providers made health care too expensive. According to President Clinton, vaccine manufacturers were “pursuing profits at the expense of our children” He publicly condemned a “shocking” rise in the price of vaccines for children, suggesting, according to a March 15, 1993 New York Times article, that the rise was “in part due to the pharmaceutical industry’s huge promotional budget.” Dr. Alan R. Hinman, then the director of prevention services at CDC, agreed. He reportedly said that “we have very little bargaining power” when there is only one manufacturer.

At the time, vaccine cost was said to be a major reason why children in the United States were not adequately immunized. Even though most of the children who were not immunized were already eligible for free immunizations through already existing public programs, Clinton went ahead and created the VFC as a public option to compete with private providers of immunization services.

Rather than issue vouchers directly to patients, the designers of the VFC elected to put government squarely in the middle of the process. The government was to purchase vaccines from manufacturers. Physicians and clinics would apply to the government for vaccines, and it would distribute them as needed.

The federal government was ill-prepared to manage something as complex as vaccine distribution. A 1995 GAO report noted that the program suffered from poor record keeping, poor management, and an inability to detect fraud. While there was no evidence to show that the VFC had increased immunization rates, the GAO did note that it had managed to negotiate a contract for oral polio vaccine. But because the price the VFC demanded was so low, the manufacturer had limited the purchase to a number of doses that was less than the estimated country-wide needs.

The architects of the VFC program were so concerned about using government power to bludgeon manufacturers into low, low, vaccine prices that the original legislation even put price controls on the three vaccines for children that were in use when the legislation was enacted.

By 2002, VFC purchases amounted to 41 percent of the vaccine market. [For more on the vaccine market, see the 2009 NCPA Brief Analysis #655.] Unfortunately, the price caps were so low that no vender would bid on the contract and the tetanus vaccine was removed from the VFC program in 1998.

Had CDC been a business responsive to its customers, the lack of bids would likely have impelled it to revise its price offer. Instead, the government simply stopped providing tetanus boosters for VFC children. Between late 2000 and the spring of 2003, the US had vaccine shortages for 8 of the 11 preventable pediatric diseases before the Bush administration finally addressed the issue.

The focus on using government purchasing power to bludgeon manufacturers has eroded profit margins and destabilized long term vaccine supplies. Alex Tabarrok, writing in an October 14, 2004 post on the Marginal Revolution blog, noted that the federal government “uses its monopsony power and the law to require companies to sell at low prices. Firms have left the industry because they are squeezed on one end by regulation and on the other by low prices.”

After studying the shortages, the National Vaccine Advisory Committee made the following recommendations in a 2003 report:

  1. Provide more funding for government created vaccine stockpiles.
  2. Provide more funding for FDA regulators.
  3. Create a communications program to make it clear that the federal government has the power to prioritize vaccine development and distribution.
  4. Strengthen the Vaccine Injury Compensation Program.
  5. Require vaccine manufacturers to provide advance notice when then intend to leave the market.
  6. Provide the public with a website about current vaccine availability.
  7. Initiate a national campaign to emphasize the “safety and efficacy and great benefit of recommended vaccines for the public good.”

As even government officials could see that none of those recommendations would do anything to increase the actual vaccine supply, the Committee also noted that someone should “convene a multi-disciplinary group to evaluate the nature of appropriate incentives for manufacturers,” and to “streamline and strengthen the regulatory processes and activities of the FDA.”

The call for more stockpile funding ignored the financial problems for vaccine manufacturers that had been created a 1999 Clinton administration SEC policy. As explained by the Wall Street Journal on October 21, 2005, the policy prevented vaccine manufacturers from recognizing vaccine revenue until the vaccine was actually delivered to physicians. So, no matter how much cash the government gave to vaccine manufacturers, they could not “include this money in their official sales until it [was] actually delivered to doctors when and if there [was] a disease outbreak.” This regulation was specifically cited by vaccine maker Aventis when it dropped out of the children’s vaccine stockpile in 2004.

As one would expect, manufacturers left the increasingly hostile vaccine manufacturing environment. In 2003, the Institute of Medicine reported that the number of vaccine producers licensed for the U.S. market had fallen from 26 in 1967 to 4 in 2002. Factors cited for the decline included more stringent regulation, concerns about tort liability, and “poor returns on investment” that were, informed observers contend, a result of regulatory fecklessness and the misuse of the VCP pricing power.

Comments (7)

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  1. Joe S. says:

    Nice health alert, Linda.

  2. Ken says:

    This is a harbinger of what to expect from Obama care.

  3. Brian W. says:

    This is the best explanation of the vaccine program I’ve ever seen.

  4. Larry C. says:

    Shortages are the natural concomitant of price controls. What you have in the case of vaccines is cause and effect.

  5. Charlie says:

    There couldn’t be better proof of what we are in for if the policies being discussed are enacted.

  6. Dan S says:

    A great case study for some present or future macroeconomics course on the outcomes of price controls. Maybe you should link up with Greg Mankiw at Harvard.

  7. What's Really Broken? says:

    Linda, are you sure you didn’t take this from an Ayn Rand novel?!