It is traditionally argued that the existence and use of vaccines creates a positive externality, meaning that vaccination not only prevents the inoculated individuals from getting sick; it also reduces the likelihood that any non-vaccinated individuals around them will get sick.15 While this is a beneficial characteristic of vaccination, it also creates two unfortunate side effects. First, individuals may have an incentive to “free ride”; in other words, they may count on their neighbors getting vaccinated to decrease their chances of getting sick rather than getting vaccinated themselves. Second, a private decision-maker considering whether or not to consume or produce a vaccine will likely only consider the private (personal) costs and benefits of vaccination rather than taking this broader social benefit into account. As a result, society as a whole will tend to under-consume vaccines.
At the individual consumer level, people have proven largely unwilling to pay for higher priced vaccines out-of-pocket. This may be due in part to a failure among consumers to recognize the value of a vaccine in preventing periods of suffering and lost productivity due to infectious illness (Kaper, Rappuoli, & Buckley, 2005). Instead of paying to avoid an uncertain event, people may prefer to take their chances and bear the costs of treatment if and when they become sick. Additionally, many doctors and consumers believe, based on past experience with childhood vaccines, that vaccination should be cheap, which is not often the case with newer products (Kaper, Rappuoli, & Buckley, 2005). Lack of insurance coverage for vaccination is also problematic; for example, those for whom vaccination is not covered by private insurance would have to pay over $240 for the recommended four doses of pneumococcal conjugate vaccine, a sum that exceeds many people’s willingness to pay for illness avoidance (Sloan, Berman, Rosenbaum, Chalk, & Griffin, 2004). Insurance reimbursement has been key to the market success of the latest generation of higher-priced vaccines.
Under requirements of the Affordable Care Act of 2010, insurers will pay for vaccines recommended by the Advisory Committee on Immunization Practices (ACIP). Producers of newer vaccines may face demand-related challenges and manufacturers of vaccines are more likely to cease production if their vaccines are not recommended by ACIP. In addition, sales potential for specialized vaccines such as those for anthrax, cholera, rabies, and plague can be quite limited (Scherer, 2004).16 For instance, production of the vaccine for Lyme disease was discontinued when the market proved to be significantly smaller than the manufacturer originally estimated (Kaper, Rappuoli, & Buckley, 2005). For other important vaccines, the market is sizable (e.g., roughly $700 million in U.S. sales for influenza) (Scherer, 2004); however, the longer the period over which a vaccine is effective, the smaller the demand (Danzon, Pereira, & Tejwani, 2005). Furthermore, in comparison to other product lines that vaccines may compete against within a company—particularly drugs taken daily by patients with chronic illnesses such as high cholesterol or high blood pressure—low profit margins and high financial risk often render vaccine development an unattractive option (Layton & Lenfestey, 2005).
15 By contrast, antibiotic resistance is a negative externality; individual consumption of antibiotics contributes to the development of resistant strains and reduces the drugs’ effectiveness for society as a whole.
16 It should be noted that the recent successful vaccine introductions, such as the HPV vaccine, could overturn this conventional wisdom from the previous 30 years.