Monday, December 08, 2003

Supply & Demand: Vaccinating the Marketplace

Today’s Wall Street Journal offers an explanation for this year’s shortage in flue vaccines—anticompetitive conduct by the government:
The report by the [Institute of Medicine], an arm of the National Academy of Sciences, noted that there has been a steady erosion in the number of vaccine producers over the past three decades. In the 1970s, there were 25 vaccine makers; today—because of slim profit margins and legislative and liability issues—there are just five. With such a small number of producers, shortages can develop quickly as a result of manufacturing problems or a bad guess on the expected demand.

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For makers of all types of vaccines, the Institute of Medicine’s report traced the decline in manufacturers’ interest to the fact that the U.S. government—predominantly through the Vaccines for Children program run by the CDC—buys slightly more than 50% of the vaccines in the U.S. and keeps prices low.
The CDC program “negotiates” discounted vaccine prices with manufacturers, then the CDC makes that price level available to states to provide free vaccinations to uninsured children. This sounds like a perfect program if you’re a leftist or a “compassionate” conservative, but ultimately the system is designed to fail. For one thing, as the Journal points out, vaccines lack a solid distribution network. The government’s purchasing dominance makes it impossible for a thriving private market to develop, and vaccine manufacturers are consequently unable to respond to regional shifts in demand; this means some areas are left without vaccines during critical periods.

A second problem is that most vaccination costs are borne by health care providers, especially doctors and clinics. I spoke to a health care manager last year who told me physicians in her network lost money for each vaccination, since the insurance companies deliberately reimbursed physicians below cost. Of course, the doctors could get together and confront the insurers, but then they would be subject to antitrust prosecution by the FTC.

(Incidentally, note the name of the CDC’s program—“Vaccines for Children.” The name is intended to preempt any debate over the program’s objectives or function; after all, what pragmatist politician wants to be seen attacking “Vaccines for Children”).

All of this should give Bush administration apologists pause when they tout the recently passed Medicare bill. The President essentially wants to run the entire pharmaceutical market the way the CDC runs the vaccine market. It doesn’t matter whether it’s the CDC or government-subsidized HMOs doing the purchasing; when you introduce the element of coercion into the market, the market will cease to function properly. You wreck the very supply-and-demand mechanism that’s essential to the market’s survival.

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