Truck and Barter: It's That Time of Year Again

Fall is here, and that means winter can't be too far behind. As an anyone with a mother knows, that means it's the season for the flu. Fortunately, there's a pretty easy way to protect yourself -- get a flu shot! Sure, needles are no fun, but the vaccine is excellent at making sure you don't get sidelined by one or more really nasty bugs. One quick stick seems worth avoiding the pain and suffering of the flu. This is especially true for the young, the elderly, and those with poor immune systems, when the flu can actually become far more serious a problem. So, go today and sign up for your flu shot.

That is, if there are any left.

What this season once again means is it's time for the country to be inundated with stories about vaccine shortages, and almost no critical thought as to why this keeps happening.

If you have any faith at all in the notion of supply and demand, wouldn't it seem reasonable to think that that at least one of the companies that produces vaccines would see this cycle, and start gearing up production around summertime every year? The demand is certainly there; the government has moved into talk of rationing, fer cryin' out loud. Yet, here we are again.

Why does this happen? Well, here's the CDC's explanation:

In the United States there were recently shortages of many vaccines in the recommended childhood immunization schedule. Some of these shortages were widespread while others were localized. Reasons for these shortages were multi-factorial and included companies leaving the vaccine market, manufacturing or production problems, and insufficient stockpiles. Consequently, some shortages were only specific to one manufacturer.

Hmmm. "Multi-factorial" sounds pretty serious. Lots of things going on, tons of moving parts, too much to explain to the lay person. Well, let's see what non-scientist friendly familydoctor.org has to say:

A vaccine shortage can occur for many reasons. Some of the factors may be:
The company that makes the vaccine is not able to produce the vaccine fast enough.
The company decides to stop making the vaccine for business reasons.

The vaccine's supplier is not able to send out the vaccine quickly enough.

Often, a combination of these factors causes a vaccine shortage in one or more areas of the country.

Well, that seems reasonable. But...hold on. If people need and want it, and it happens every year...why can't you produce it fast enough? Wouldn't a company produce a little more in downtimes knowing that a surge is coming? But this time we get hints of "business reasons".

Unfortunately, that doesn't help me much. Business, to me, implies lots of things. Bad management, accounting irregularities, hostile takeovers, horrendous labor conditions. Maybe the corporation is just inept as well as corrupt, and our health is at the mercy of cold "business reasons."

Let's ask people who should know, like folks who study medicine!

The National Immunization Program of the Centers for Disease Control and Prevention (CDC) administers the vaccine purchase program for the federal government. Each state government has its own immunization program, which estimates the level of vaccines needed to assure access to immunization among underserved groups of children and adults. Vaccines purchased by CDC are shipped to public health clinics and private healthcare providers participating in programs for disadvantaged patients. At present, the U.S. government spends more than $1 billion annually to purchase childhood vaccines alone. Additional public funds are used to reimburse the costs of administering vaccines (through Medicaid and SCHIP payments, for example) and to reimburse physicians and other health professionals who buy vaccines for older adults through Medicare.
CDC negotiates a federal contract for each vaccine product, using large volume purchasesas leverage to obtain discounts on the manufacturer�s list price. The 50 states also rely upon the federal discount price for vaccines purchased with state revenues. In recent years the discount has declined significantly. The discount pricing process also has the effect of deflating payments to pharmaceutical companies, which tends to discourage future investments in vaccine development.

Hold the phone! You mean to say that government purchasing of vaccines at a forced discount has something to do with this? Could these be the mysterious "business reasons" that cause some companies to underproduce vaccines?

I'm shocked. Shocked, I say.

I suppose to anyone who was paying attention when this measure went into place and had a bit of economic sense about them, this is old news. And frankly, the point has been made before. I just think it's worth bringing up again. And again and again until people start to see the connection between government driven health care and undersupply of goods.

Imagine, now, that the government were to do the same thing for x-ray machines, painkillers, MRIs, nurses, obstetricians, and just about everything else. Government need not be the "provider" of health care to make lives worse. It need only be the majority purchaser, dictating prices to companies and potential doctors. Even with a second-tier in the system for those people who want to shell out money themselves for better care (though I have problems with people paying twice and getting one service), imagine the disparity in health care treatment between those who can pay and have access to the advanced care, and those who have to wait in lines hoping their heart murmer isn't something serious. How many doctors are going to choose to participate in the socialized system?

These shortages, that extend well beyond flu shots into treatments for preventable diseases in children are directly caused by government action.

Maybe regulation not only causes crime, it makes people sick, too. The Hechts from that last link put it best:

The flu vaccine shortage is just the tip of the vaccine-storage iceberg. Children (and adults) are endangered by the current situation.

Comments

spencer wrote:

Let me see if I get this right. You are saying it is the governments fault that a private firm sells it product at a loss. Did someone hold a gun to their head and force them to sell the drugs at a loss?

I mean it sound to me you are saying that if I buy an auto from GM at a low price I am responsible for GM losing money.

I'm sorry, my understanding of how the pricing system works and your concept just do not agree.

I see a system where the low cost producer sell the product at a price where that firm makes money but other higher costs firms do not. this drives the other firms out of business and allow the low costs firm to gain market share and make even more money. that is the heart of marginal price theory.

Now you said the government bought the drugs at a forced discount. Would you explain what a forced discount is. It is a term I am not familiar with. It implies that the govt forced a firm to sell at a unprofitable price. Is that right and what is your evidence for that? Falling prices is not evidence in and of itself that it was a "forced discount" if that means that the firm sold it at a loss.

Your comments are not internally consistent.

You may be right that low profits cause a drug firm to do less research and develop new drugs.
But how can it cause a firm to quit producing an established drug when the typical costs function of most drugs is one of very high sunk costs for research and marketing but extremely low variable costs on production. Given this cost function it is profit maximization for a drug firm to sell drugs at any price that covers the variable costs. That is the entire rational for drug firms being willing to sell drugs in Canada at a lwower price than in the US.

Maybe there are some facts I do not know that would make your analysis valid, but at first glance it just does not hold water.

-- October 7, 2004 8:01 PM ∞

Jason wrote:

According to a medical researcher friend of mine, there's another reason for this flu vaccine shortage.

The influenza virus apparently has a very high mutation rate, meaning that there are a variety of different strains of the virus propogating themselves across the globe at any given time. Drug companies like Chiron need time to develop and then produce enough of the vaccine to be effective, but cannot possibly create enough vaccines for every possible strain of influenza that could possibly exist. So, they cook up a batch that's effective against what they believe is most likely to be this season's prevalent strain. However, there's a pretty good chance that the virus will have mutated enough by the time flu season starts that the vaccine won't be effective. Thus, the company really can't "produce a little more in downtimes" despite knowing that there's a surge coming - the vaccine would probably be useless by the time it hit the market.

-- October 8, 2004 1:07 AM ∞

Ian wrote:

I'll keep this kind of breezy.

The price of the vaccine was dramatically lowered for people in the US through the policy adopted by the government. This means that a lot more people will want it.

Meanwhile, the government is now the majority purchaser of the vaccine (a quick read through the links might help make this part clear). The government forces the company to sell at a lower rate. This is the "gun to the head" you mention. After all -- do you know where to pick up a quick vaccine for something? Are you confindent in your ability to administer it to the right people? Or would you rather have it given by a nurse or physician's assistant trained to ask the right questions, put it in the right place, etc? Even those companies that are providing vaccines for the workplace get trained people to oversee the process. (I think it might even be a requirement, but I'm not sure.)

Now, if a company can produce X amount for Y cost, that doesn't mean that every item in X costs the same amount to make. If you have orders that cover only a third of y, it's not always the case that you can then produce 1/3 of X. But even if the relationship is perfectly linear, when the person who buys half of your stock of vaccines every year comes back to you and says "we're only paying you a third of what we did last year", then unless you can find someone to buy the rest at a HIGHER price, your total amount sold is going to change. And since the public buys vaccines in relatively far lower amounts, there just isn't the capacity to make up for the loss in revenue.

I'm not sure why there's a problem with the definition of "forced discount", since it's right there in the Institute of Medicine document. Selling in huge lots is cost effective for a vaccine producer since you reduce all the customer service costs, shipping costs, etc. The government uses this fact to say that, unless the company complies, they'll go to another company to get what they need. And they do it to ALL the companies. (Again, from the PDF linked in the article, there are only 5 big producers of vaccines that we're talking about. The market is pretty damn limited.) The first time the government makes this demand, the company can simply say no and face losing EVERYTHING it spent on those vaccines. Recouping some of the costs is preferable to losing a huge sum. In the next year, however, the company will have a general idea of the budget the government will have to spend with them, and will tend to produce enough to about match the money it will make.

The GM example isn't correct. If you want an analogy, think of it this way: The government buys the vast majority of all Hummers. (Known as HUMMWV for the services.) The public buys a few, but not enough to keep the company around. Now imagine the government went to the Hummer producer and said "We're now paying you only 2/3 of what we did for each of these vehicles. Or we're going next door to get something else." The maker of Hummer has a lot invested in that product, and will most likely not want to give up the customer. But, if it's making only 2/3 of what it did before, I will put cash on the barrelhead to bet that it makes quite a few less Hummers. This is likely to hold even if that 2/3 figure covers most of the costs of the vehicle. Companies don't take reduction in revenue lightly. They're going to respond when a majority customer radically shifts its buying pattern.

I don't understand your point about "falling prices". The links make it explicit that the prices didn't simply fall. In an effort to make vaccines more available and affordable for people in this country, the government started demanding special discounts. Canada does this with pharmaceutical companies when it says "here's the most you can charge -- deal with it."

Perhaps I should have made it explicit in the post, but Jason does a great job of it in his comment. And he just proves my point more. You can't put vaccines on an assembly line and let it run for the next 15 years. These things mutate, and meanwhile researchers are looking for ways to make them more effective and potentially less dangerous (for folks with allergies, for example). The producers of vaccines will continue to need funds to research the potential strains for the upcoming season. With enough funds, vaccine companies might be able to vaccines to fight various strains, keep producing old vaccines so buyers with knowledge about what they need can keep getting access to them, and more. A lot of this is lost when the majority customer dictates prices.

-- October 8, 2004 8:05 AM ∞

Tanner wrote:

Loved reading this post.

A note on spencer's comment: were you like me in taking a quick step back when he mentioned that this is "the heart of marginal price theory?" Oh? The very heart? To be honest, I couldn't state "marginal price theory" in two sentences, so I, for a moment, thought to myself, "well, then this guy must know something of what he's talking about."

I have since reconsidered.

Finally, I think it would be safe to say that any and all shortages of anything are caused by government action. (To understand what I mean by this, it's important to see that by "shortage" I don't mean the same thing as "scarcity".)

-- October 9, 2004 10:17 PM ∞

calmo wrote:

Tanner's mastery of the art of understatement leaves me gasping.
His dis of spencer is as convincing as his contribution.
With reconsiderations like his, we can rest assured that soon we, too, will be savants who can draw mighty distinctions like that between shortage and scarcity.
Pass me my Nobel please.

-- October 9, 2004 10:38 PM ∞

Another Ian wrote:

Whatever the truth about US government purchasing policy Jason's comment is the real point - production has to be deferred as late as possible to ensure that the right vaccine is produced.

This only applies to flu however.

[in passing your submission software thinks my real e-mail address is 'questionable content'!)

-- October 10, 2004 11:57 AM ∞

Kevin Brancato wrote:

Another,

Sorry about that, but the software rejects ~100 spam comments a day, and I have to keep tolerances tight to combat them.

-- October 10, 2004 12:09 PM ∞

Truck and Barter

It's That Time of Year Again

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