Performance Improvement 1995. A Study of the Economic Underpinning of Vaccine Supply



This study addressed issues related to the economics of production and distribution of vaccines including models of vaccine purchases, effects of scientific advances on vaccine development and distribution, and the merits of alternative distribution systems. It found that States that supply vaccines at low prices to physician offices and encourage parents to have their children vaccinated have somewhat higher rates of immunization. These findings have been applied by the Centers for Disease Control and Prevention (CDC) in negotiating lower prices from manufacturers and have broad utility for policy and legislation.

Purpose Healthy People 2000 targets having more than 90 percent of the Nation's children vaccinated for all recommended diseases by their second birthday and eliminating domestic cases of measles, polio, and rubella. Meeting these targets requires a continuous supply of safe and effective vaccines at stable prices.

In response to concerns about the safety and stability of the U.S. vaccine supply, the National Vaccine Program Office and the CDC investigated the vaccine environment in the United States, focusing on the economics of vaccine supply and purchase and its implications for public health policy.

Background Vaccinating children against infectious diseases is one of the most effective means of preventing disease. Vaccinations for nine diseases are recommended for healthy children. While the United States does an excellent job of vaccinating school-age children, only about 37 to 56 percent of 2-year-olds are fully immunized against preventable childhood diseases, well short of the goal of at least 90 percent. Currently, only two domestic firms and two State laboratories manufacture and sell vaccines for nine childhood diseases. Three of the recommended childhood vaccines--OPV, HBV, and MMR[2]--are each produced by only one domestic firm. The shelf life of a vaccine is short (10 to 18 months), and vaccine production time can range from 7 to 13 months. As a result, the loss of even one manufacturer can result in a vaccine shortage. When shortages occur, vaccine prices escalate.

Methods This study consisted of several policy papers that analyze the economic and commercial aspects of ensuring an adequate supply and distribution of vaccines. Specifically, the study investigated (1) alternative models for the purchase and distribution of vaccines; (2) the effect of scientific advances on research, development, and purchase of vaccines; (3) the application of economic theory to the vaccine market; (4) comparisons of vaccine distribution systems administered by vaccine manufacturers and State agencies; and (5) the implications of purchasing vaccines from foreign firms. The papers developed for the project were presented at the Annual Meeting of the American Academy of Pediatrics held in Washington, D.C., in November 1993.

Findings In 1992, all doses of DTP[3], oral polio, and MMR needed to vaccinate a 2-year-old cost about $95 in the private sector, a 12-fold increase since 1977. Vaccine suppliers attribute the price increases to increases in their costs, but others believe the strong market power of U.S. vaccine manufacturers is at least partly responsible.

In 1986, Congress passed the National Childhood Vaccine Injury Compensation Act, which provided no-fault compensation to persons injured by DTP, MMR, or oral polio vaccines, with the compensation paid from excise taxes collected on the covered vaccines. The year this legislation was enacted, the price per dose more than doubled. In 1992, for example, the DTP excise tax of $4.56 accounted for nearly one-half of the total price per dose.

Sizable fixed costs associated with entry in the vaccine production industry were found to arise in two areas: technological and regulatory. Costs per unit are higher when vaccines are produced in small batches and are minimized if all vaccine is produced at one facility. Beyond some limits imposed by the batch production nature of vaccine technology, it can be costly or nearly impossible to make more vaccine available. Restrictions on entry into the market (in terms of required size and time of entry) may permit existing firms to earn above normal returns. However, production by a single firm raises issues of economic efficiency and market stability.

Recently, there has been substantial and renewed interest in the development of new vaccines or techniques to manufacture substitutes for existing vaccines. This change is the result of advances in biotechnology and higher prices and presumably higher profits involved in the production of current vaccines. Alternative but substitutable products may introduce a modest amount of competition. If the alternative products turn out to be medically superior, the vaccine industry would likely return to a configuration of one or two firms producing virtually all of the output.

In 1983, to meet temporary interruptions in vaccine supply, CDC received funds from Congress for a vaccine stockpiling program. The stockpile includes up to a 6-month rotating inventory of the recommended childhood vaccines. CDC has used the stockpile at least five times since 1983. Congress did not reappropriate funds for the stockpile in 1992 or 1993. The stockpiling program provides relatively inexpensive insurance against supply interruptions but may require more stable funding.

Although there may be a role for public ownership of a standby bottling and filling facility, public financing of a more elaborate standby production facility appears inadvisable. Such a facility would be inflexible and costly and would inevitably have to compete directly with private manufacturers of vaccine.

About one-half the childhood vaccine supply in the United States is purchased by the private sector, one-fourth by the Federal Government, and one-fourth by State governments. The contract prices negotiated by CDC, the largest single purchaser, are about one-half the price paid by physicians who purchase vaccines directly from the manufacturers. CDC could exploit its growing market power to obtain better prices for vaccines. Bulk purchases could also lower the costs of establishing a domestic distribution network.

Private market supply to the government is likely to work more efficiently and with greater assurance when the government's acquisition behavior is predictable and trustworthy. Another alternative is to have the government as the sole source of vaccine, with the entire supply purchased by the government under the usual (or some modification of the usual) government competitive bidding process.

The role of foreign suppliers in meeting either the supply assurance or pricing goals in the near term is likely to be limited. Thus far, entry into the U.S. market by established foreign vaccine producers holding U.S. licenses has had little discernible effect on prices, although the poor quality of available data makes this conclusion highly provisional. Moreover, the potential role of foreign suppliers in meeting domestic interruptions in U.S. vaccine supplies is severely constrained by licensure considerations. These considerations are also likely to make emergency procurement of vaccines from international public health agencies or their vaccine suppliers infeasible.

States that supply vaccine at low prices to physician offices, whether from their own production or by bulk purchase, appear to achieve somewhat higher rates of immunization. Low acquisition cost for the private physician is not the only aid to high rates of vaccination; efficient and convenient distribution, as well as State activities to encourage parents to have their children vaccinated, are also effective.

Use of Results The study has provided the Public Health Service (PHS) with fundamental knowledge about vaccine pricing over the past 20 years. This knowledge has placed PHS in a better position to negotiate contracts with vaccine manufacturers, a role that has been enhanced as a result of 1993 legislation giving CDC the authority to negotiate prices for States participating in the CDC State Immunization Grant and Vaccines for Children programs. These two programs were designed to eliminate price as a barrier to immunization for selected groups of usually low-income children.

As a result of this evaluation, the National Vaccine Program Office has commissioned further studies to examine particular vaccine manufacturers and the costs incurred in vaccine development and production. Other recommendations concerning bidding practices and bulk purchase are also under consideration.

Publication The National Vaccine Program Office and CDC plan to publish the manuscript in 1995 under the working title "A Study of the Economic Underpinning of Vaccine Supply."

Agency sponsor: National Vaccine Program Office

Federal contact: Stephen Sepe
National Vaccine Program Office
Centers for Disease Control and Prevention
1600 Clifton Road NE, MS D-24
Atlanta, GA 30333
(404) 639-4450 Fax: (404) 639-6036

Principal investigator: Craig Thornton, Ph.D.
Mathematica Policy Research, Inc., Princeton, NJ

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