RECENT PUBLICITY about the nationwide shortage of vaccines makes it timely to remind laboratory executives and pathologists about the important role that economics plays in providing goods and services to the healthcare marketplace.
After all, good management strategy must incorporate an accurate assessment of market trends. Every laboratory’s business plan must accurately anticipate the factors which affect its financial stability.
In the past few months, eight of 11 vaccines deemed critical for pediatric health are in short supply, including vaccines for whooping cough, diphtheria, and chicken pox. But the story doesn’t stop there. Also in short supply are a number of adult vaccines, forcing waits upon patients who want to be immunized.
Source Of The Shortage
The remarkable shortage of vaccines in the United States provides an opportunity to illustrate how certain economic concepts can either bring consumers better quality products at ever-lower prices or create “artificial” shortages that reduce choice and increase costs. It all depends upon the way society and the government control or decontrol the marketplace.
Here’s the set-up to the vaccine shortage. In 1967, there were 37 vaccine manufacturers in the United States, producing 380 licensed vaccines. By 2001, only ten manufacturers remained. The number of licensed vaccines fell to 52. This reduction in both suppliers and vaccines is counterintuitive. The explosive growth in medical technology during the past 20 years would lead one to expect an increase in the number of licensed vaccines over the 380 produced in 1967.
Moreover, not only has the number of licensed vaccines fallen to an incredibly low number, but the supply is insufficient to meet patient demand. Why is this happening in United States? If there is strong demand, why won’t companies provide the supply to meet this demand?
The answer is rooted in the economic disincentives that the government has fostered over the past 35 years. First, government regulations have become increasingly complex. This has raised the costs of companies willing to develop new vaccines, gain regulatory approval, and then sell these vaccines in the healthcare marketplace.
The second problem is the increasing risk of litigation, much of it frivolous. When the costs of anticipated legal costs are added to the sales price of individual vaccines, they become prohibitively expensive for consumers (patients).
But the third key factor is fascinating. It is the use of arbitrary buying power by a “monopoly buyer”—the government—to drive down the price it pays for vaccines. During the 1990s, the Centers for Disease Control and Prevention (CDC), under a new government program instituted by the Clinton Administration, has become the purchaser of more than half of all vaccines used in this country. The CDC, backed by its clout and buying power, is paying less than half of what is paid by the private sector for many vaccines.
Factors Discourage Makers
The cumulative impact of these three factors has been to discourage vaccine manufacturers from investing in research to develop better vaccines. It also gave manufacturers a reason not to expand their capacity to produce greater quantities of vaccines to meet the growing demand within our healthcare system.
As a result, our healthcare system faces the visible dilemma today of inadequate supplies of licensed vaccines for children and adults. But it also faces the “invisible” dilemma of wonder-vaccines that might have been, but were never developed because of the economic disincentives in today’s economy.
Here’s an example. After a decade of development work, Wyeth Corporation last year brought a remarkable new children’s vaccine to market for pneumonia and meningitis. When it established a price of $58 per dose, it was soundly criticized for price-gouging by the public health lobby. The CDC beat the price down, and currently pays $46 per dose.
Is A Fair Return Possible?
Not surprisingly, the triple-disincentives of complex regulations, unreasonable litigation costs, and heavy-fisted government purchasing philosophies (based on “social justice”) have combined to make it nearly impossible for any company to earn a fair return from investments in vaccine development, manufacturing and distribution.
Still not convinced? I offer you the example of socialized economic systems in Europe and their impact on the pharmaceutical industry.
Many European nations force drug companies to sell their products at an artificially low price. In the short term, that saves money. But the long term effect is becoming visible. In recent years, a growing number of European pharmaceutical companies have shifted research and development activities out of Europe and into the United States.
In the United States, it is still possible for these companies to sell new drugs at a price that allows them to recover costs and earn a profit. But as we all know, in recent years the amount of money spent on prescriptions in the United States has increased rapidly. This is stimulating cries by politicians and consumer groups for regulation and price controls on drugs.
Same Trends In Drug Sector
If that happens, and there is much evidence that it may, will this be good for the American healthcare system? I offer the example of vaccines as an answer. In 35 years, the number of companies, the number of products, and even the supply of the remaining products, have all dwindled. It is likely the same thing will happen to pharmaceuticals.
I believe it is important for laboratory administrators and pathologists to understand the economic principles which create these situations. Used properly, they create incentives, better products, and lower costs. Used improperly, they create disincentives, reduce the quantity and quality of products, and increase costs.
Although I have used the examples of vaccines and pharmaceuticals in this story, laboratory testing can certainly be affected in the same way. Medicare’s manipulation of routine test panels during the 1990s demonstrates how regulation and arbitrarily low reimbursement can stifle both innovation and the availability of quality lab tests.