Last week, on this site, Christian Brugger, the Culture of Life’s Senior Fellow in Ethics, discussed the disturbing and disheartening facts surrounding the lack of an Ebola vaccine, despite the disease’s relatively long and deadly history. If you haven’t read that essay, you really should, as it provides much of the history of the disease and its current iteration, and gives both reasonable and morally-defensible voice to the frustration that many people worldwide feel at the lack of progress in treating this deadly scourge. As Christian notes, there is a very real and very disillusioning economic aspect to this particular story, one that implicates much of the West for its general indifference to Ebola.
As the Culture of Life’s Fellow in Culture and Economics, I wanted to add a few thoughts to Christian’s and thus to try to flesh out the enormity of the problem facing the West, not just with respect to Ebola, but to infectious disease and potential global pandemics more broadly.
Several months ago, in a piece on former U.S. House Majority Leader Eric Cantor and his primary election defeat, we discussed the matter of incentives in public policy and the effect that government processes can have on individual and group behavior. With respect to immigration reform specifically, we noted the following:
[I]n the case of public policy, the devil is in the details, which is to say that the implementation of an unobjectionable idea in theory is often quite objectionable in practice. And so it is with immigration reform.
The biggest mistake that both Cantor and the Conference of Bishops make in their assessment of the immigration problem is one of the classic mistakes in the formation of policy, namely ignoring the incentives the policy creates.
As it turns out, the contemporary evidence indicates American policy and its attendant incentives have a far greater impact than almost anyone – Cantor included – has heretofore been willing to acknowledge.
In brief, then, incentives matter. And when the government – any government – enacts public policy, that policy affects the behavior of the covered constituencies and thereby produces consequences, both intended and unintended. Health care policy, in particular, provides some very real, very tangible, and very unfortunate examples of the unintended consequences that can result from poorly-designed reforms and the incentives they create.
Consider, for example, the vaccine industry, which is most relevant today in the fight to stem the spread of Ebola. In 1975, there were roughly 25 companies formulating, manufacturing and distributing vaccines in the United States. By 2003, that number had been cut by 80%, with only five manufacturers remaining, and those five struggling mightily to stay afloat. A big part of the problem in the vaccine industry – according to a report by the National Academies of Sciences Institute of Medicine – was the fact that over the course of those three decades, the federal government became by far the largest purchaser of vaccines, establishing a near monopsony position in the purchase of these companies’ wares. And the government, true to its mission, used its position to drive down the price of vaccines, to drive down the profits of vaccine companies, and to turn the industry into one of the riskiest and least profitable in all of health care.
The destruction of the vaccine industry, we should note, was largely the product of a single policy, a policy that seemed not only unobjectionable in theory but downright compassionate: the Vaccines for Children Act of 1993. In a 2003 editorial, the Wall Street Journal explained:
The [National Academy of Sciences] panel of doctors and economists issuing a report on vaccines last week was too polite to mention the former First Lady by name. But they identify as a fundamental cause of the problem the fact that the government purchases 55% of the childhood vaccine market at forced discount prices. The result has been “declining financial incentives to develop and produce vaccines.”
The root of this government role goes back to August 1993, when Congress passed Mrs. Clinton’s Vaccines for Children program. A dream of Hillary’s friends at the Children’s Defense Fund, her vaccines plan was to use federal power to ensure universal immunization. So the government agreed to purchase a third of the national vaccine supply (the Clintons had pushed for 100%) at a forced discount of half price, then distribute it to doctors to deliver to the poor and the un- and under-insured.
The result is a cautionary tale for anyone who favors national health care. Already very high in 1993, childhood vaccination rates barely budged. A General Accounting Office report at the time noted that “vaccines are already free” for the truly needy through programs like Medicaid. Meanwhile, however, the Hillary project dealt the vaccine industry another financial body blow.
As it turns out, producing vaccines – like the production of all new pharmaceuticals – is an exceptionally costly and hazardous business. Not only do manufacturers have to recoup the time, resources and manpower they invested in the successful vaccine, they also have to recoup the costs invested in the countless unsuccessful products produced along the way, the latter figure being several orders of magnitude higher than the former. Additionally, pharmaceutical manufacturers have to recoup investments at a higher rate-of-return than other, less risky investments, lest they lose their access to investment capital. All of which means that any project that cannot promise investors at least some meaningful chance of some significant profit is a project that simply will not be funded. Period. And when government policy slashes potential profits by more than half on the bulk of the product produced, then companies have an exceptionally-hard time staying in business, much less finding the resources necessary to see new projects through to fruition.
Unfortunately, all of this is just the tip of the proverbial iceberg with respect to government disincentives respecting the formulation of new vaccines and other pharmaceuticals. In the United States, FDA approval – which necessitates several rounds of operative testing – takes roughly 30 months. That is more than FOUR TIMES the average for other developed nations. Add in the new economic disincentives created by the Affordable Care Act (ACA), and it’s a wonder anyone is still making medical devices or pharmaceuticals in the United States at all. Indeed, given the ACA, it’s not entirely clear that anyone WILL be manufacturing medical products in this country for much longer. In a recent op-ed contribution to the Wall Street Journal, Scott Atlas, a physician and a senior fellow at Stanford University’s Hoover Institution, noted the “anti-innovation” effect of the nation’s new health care “reform.”
[S]mall and large U.S. health-care technology companies are moving R&D centers and jobs overseas. The CEO of one of the largest health-care companies in America recently told me that the device tax his company paid last year exceeded his company’s entire R&D budget. Already a long list of companies—including Boston Scientific, Stryker and Cook Medical—have announced job cuts and plans to open new centers for R&D, manufacturing and clinical trials overseas….
Since the signing of the Affordable Care Act in 2010, private-equity investment in new U.S. health-care startups has also diminished. Annual capital investment has decreased to $41 billion in 2013 from $61 billion in 2011, according to quarterly reports by the accounting and audit firm McGladrey LLP. Similarly, the Silicon Valley-based law firm Wilson Sonsini Goodrich & Rosati reported in its semiannual [The] Life Sciences Report[,] decreases from the first half of 2010 through the second half of 2013 in deal closings and capital raised for startups in biopharmaceuticals, medical devices and equipment, and diagnostics….
Given the deadliness of the Ebola virus, one should hardly be surprised the National Institutes of Health (NIH) is working to develop a vaccine for the disease. Given the instability inherent in the American health care system these days, one should also not be surprised by the fact that the pharmaceutical company with which the NIH is partnering on this project is GlaxoSmithKline, a BRITAIN-BASED multinational. For large American pharmaceutical companies, there is simply no possible reward that makes the risks of such a venture viable. Small companies, of course, can still make a go of it. But the big boys cannot. And that’s not just a matter of profit, but of survival. Government policy – benign and beneficent though it may seem superficially – has driven most pharmaceutical companies, and vaccine manufacturers in particular, out of the business of curing the erstwhile incurable.
In closing, we think it worth noting that this is NOT just an Ebola problem. The very same concerns were voiced in 2001, after the anthrax attacks raised awareness of biological terrorism. Likewise, the same concerns were voiced in the wake of the 2003 Influenza Type A epidemic, the 2009 H1N1 global flu pandemic, and the repeated near-outbreaks of Avian Flu. The fact of the matter is that the world doesn’t have enough vaccine innovation. And a big part of the reason for this is that in the United States – the home of the overwhelming majority of global health innovation – the government has unwittingly (we presume) made the business nearly impossible to sustain.
There is no question, as Christian Brugger noted last week, that money is a large and unfortunate consideration in the potential manufacture of an Ebola vaccine. The worry, however, is not so much the greed of the pharmaceutical manufacturers, but the very viability of their industry, given government disincentives.