Truck and Barter

Well, let's hope not. It's just that I've had limited time, and -- to my great delight -- the vaccine post below has generated a bit of discussion that I feel the need to mention.

Many thanks to the folks that have hit the post with a Trackback, including those where the discussion is most pominent including The Knowledge Problem and Catallarchy.

Let's restate the argument I did make: government purchasing policies, codified into law, have helped, in large part, to create the vaccine shortage we're all hearing so much about. The argument I purposefully did not make is that the government is 1) buying all vaccines "below cost", 2) forcing companies to sell to other buyers at their discount or "below cost", or 3) the sole and entire cause of the shortage.

First, the "below cost" thing. This is actually a possibile reality. In the discussion presented by the IOM, the drastic die-off of vaccine producers occurs at around the same time as the US changing policies over purchasing. Now, correlation not implying causation of course, there might well be evidence that the price the US government dictated was, in fact, below what it cost some vaccine producers to generate their stock of the goods. Of course, some of these companies could have been in trouble to begin with, some might have been bought up, or any number of things. I have no evidence on this, and made no claims that it was so. However, the limited number of companies able to produce these vaccines (actually 2 for flu; I mention 5 below, but those are for the range of childhood vaccines mentioned in the IOM report and the news articles) means that there are at least two companies for whom costs do not exceed revenue.

My point was about a "shortage", not a total absence of the good. Companies can still produce some of the good at a certain price and make money; no one's saying they can't. If no company could make money with these vaccine products, we'd expect either complete exit from the market, or government subsidies to keep them afloat. But that there are companies producing the good also doesn't mean that there is enough to go around. A cap on the price that can be charged for the vaccine means a company will make only a certain amount. This all seems uncontroversial.

Forced discounts work largely like a cap on prices. When the US government is the majority buyer of the good, pulling down the price that they will pay will dramatically limit the amount of profit the company can pull in. Production will shift to reflect this. With over 50% of sales going to the USG, this, in effect, makes them a price-giving entity. The other 50% is made up of other governments, private institutions and individuals. With some goods, it would be possible to charge the other 50% a higher price and make back some of what was lost when the government decided that it didn't like the price it was getting. (Well, it's not that simple, but we'll keep it neat for now.)

What complicates this is that vaccines have characteristics that make one type of consumer a poor substitute for another. The usage of vaccines is effectively controlled through the regulation of their delivery; medical professionals are the ones that can purchase and use them, for the most part. (I've still not seen information on the legality of someone calling up Chiron and ordering themselves a truckload of childhood vaccines; I'll be happy to adjust my thoughts accordingly depending on the information.) So if the government buys them to sell to doctors and hospitals at lower costs, and then says other people aren't allowed to do the same, there is a big restriction on the rest of the market for such vaccines. And because many of the people who would buy them (doctors in the US, in this case) suddenly have a low-cost supplier (the USG), the company is again unable to capture new customers to help generate better returns. Why buy from the maker when the middleman is selling them for cheaper?

More confusing to me is the argument that vaccines aren't produced in larger quantities because there is a lower return on them, so having your majority buyer pay drastically less doesn't matter. Such a practice makes slim margins lower, and creates incentives to bring the amount supplied down even further, which isn't good policy regardless of the level of return prior to the discount. But why do we think that the low return would persist in a more open market? If the demand were growing year by year, I would tend to expect vaccine producers to raise prices to make it worth their time to produce. Clearly the demand for these things is strong (though, I admit, it is at least partially driven by the cheap price the government offers); the natural incentive would be, it seems to me, to find a price that does make a decent return and to find ways to produce more for lower costs. Companies don't just ditch products that make lower returns than their big sellers. Again, as I said below, the demand is there every year, and every year we talk about shortages once again.

Now, as people have rightly pointed out, vaccines are not just an assembly line product. The flu mutates, and every year the vaccine has to be a little different. However, I sincerely doubt that these researchers have no idea what the necessary vaccine might be until, say, Oct 12 every year, and cannot start production until sundown on that day. Investment in R&D might extend the timeline for production, which in turn could drive down costs (assuming that high-paced research costs more in manpower and hours worked overall). But it doesn't appear that we're seeing that. Also, the other childhood vaccines that are in short supply don't exhibit such a high rate of mutation, and so could be planned for on a longer horizon. The controlled delivery mechanism (having to sell to licensed distributors like doctors) would still restrict supply to some extent, but in the long run I believe the supply would better match the demand than the situation we have now.

(Sidenote: as to the nature of vaccines, they are far from being a public good. Clearly they are both rival and excludable. If they weren't this whole discussion would be moot since we could all have some at no cost to giving it to the next person. Now, a healthy populace might be more along the lines of a public good, but the vaccine itself strikes me as a way to make a public bad rival. But that's off-the-cuff and possibly a bit tangential, unless we want to discuss the reasons the government might be inclined to subsidize vaccine production.)

Compounding this is the traditionally horrendous job government does at estimating demand. The government could, of course, place a bigger order than it did last year. The reports from the post below, however, indicate that the federal government bases its estimate on the estimates from the states. So now you have to introduce the attempts to estimate demand from 50+ (does the US Virgin Islands participate? etc.) states with the constraints of a politically driven budgeting process. Will this year be worse than last year? Better? What happens when ordering becomes counter-cyclical? (That is, last year the USG had too much because it was a "down" year, and thus buys less this year, which just so happens to be a huge flu year.) If the government shouldn't be picking how many cars to make every year, why the hell should we trust it to decide how many flu shots are needed in your neighborhood?

Perhaps I take it too much as an article of faith that capping prices reduces supply, and government intervention introduces large inefficiencies. But I think in this case it's clear that by taking on the major purchasing role only to force a reduction in prices, and then regulating/affecting in other ways the potential pool of consumers for the vaccine producers, the government is drastically hurting the production and sales process of these companies, resulting in a shortage that is leaving people not only sick, but vulnerable to life-threatening disease should the unfortunate soul be old, young, or have a weakened immune system.