It's fashionable to complain that drug prices are too high. But they're relatively low for some of them most effective drugs we have — vaccines. That may be the cause of shortages.
Compared to other medications that are far more effective, vaccination is cheap. All childhood vaccines together run about $2000, at most, a fraction of the price of some cancer drugs. Yet, while some cancer drugs only extend life by a few weeks and are nowhere near cost effective, vaccines are among the most cost effective treatments in medicine. In fact, several studies have concluded that they're cost saving.
But, from time to time, vaccines are in short supply. Theory predicts that when prices are too low, shortages occur. Over half of all childhood vaccine doses are purchased at a discount by two federal programs, Vaccines for Children (VFC) and Section 317. Under the VFC program, administered by the Centers for Disease Control and Prevention, manufacturers awarded vaccine supply contracts may adjust prices monthly, but only downward. For some vaccines, the program will not permit yearly prices to rise faster than overall inflation. Commercial market vaccine prices are above government ones by about 70%, on average.
Perhaps if we paid more for vaccines and permitted greater (warranted) upward price adjustments to incentivize more reliable production, shortages could be avoided.
In a recent paper published in Health Affairs, David Ridley, Xiaoshu Bei, and Eli Liebman explored the relationship between vaccine prices and shortages. They used IMS Health Inc.'s MIDAS database from 2003-2012 for vaccine wholesale revenue and dose data — the ratio of which provides a price level close to transaction prices because markups over wholesale prices are low to zero. And they used 2004-2014 shortage data from the University of Utah Drug Information Service. These data include shortage timing and reason, whether due to manufacturing disruption, lack of raw materials, supply/demand mismatch, or unknown.
Over 2004-2013, vaccine shortages were the exception, yet still fairly common. Among the 186 vaccine-years the authors examined, 24 had shortages, or 13%. The predominant reason for vaccine shortages was a disruption in manufacturing. Because doses did not rise during shortages, that further rules out increased demand as a source of shortages. A typical shortage lasted 510 days.
Most vaccine prices are very low by pharmaceutical standards — $50 per dose on average. With only a few exceptions, one only needs 2-4 doses of these vaccines in a lifetime. That makes the lifetime total price a few hundred dollars per vaccine, a far cry from the lifetime expense of many other common drugs. (I've probably spent more than that on Ibuprofen alone.) Vaccines priced higher were much less likely to experience shortages. Likelihood of shortage fell by one percentage point for each ten percent increase in price, according to the study.
Naturally, we can't run a randomized trial to demonstrate that low prices increase chance of vaccine shortages. We must reason from economic theory and observational studies, such as the the one by Ridley et al. Given the evidence, they conclude that
[Financial] incentives matter for encouraging current manufacturers to continue to invest in manufacturing quality and reliability.When prices are low, manufacturers have little incentive to invest in quality [which includes reliability of supply] or to stay in the market when other opportunities arise.
It would be interesting to know what other opportunities vaccine manufacturers invest in with resources that could otherwise be used to produce vaccines. If it's other, more profitable pharmaceuticals, then an argument could be made that vaccine prices aren't too low in absolute terms, but too low relative to other drugs. That is, it isn't so much that vaccine prices are too low, but that other drug prices are, in general, too high.
Austin B. Frakt, PhD, is a health economist with the Department of Veterans Affairs, an Associate Professor at Boston University’s School of Medicine and School of Public Health, and a Visiting Associate Professor with the Department of Health Policy and Management at the Harvard T.H. Chan School of Public Health. He blogs about health economics and policy at The Incidental Economist and tweets at @afrakt. The views expressed in this post are that of the author and do not necessarily reflect the position of the Department of Veterans Affairs, Boston University, or Harvard University.