Why are (private) vaccine prices far below the prices for drugs that are much less effective?
When I first posed and attempted to answer this question last week I said I had some more reading to do. I’ve now done it, but I didn’t find a complete answer — nothing more substantial than what I provided in my post. As best I can tell, this is not a question fully addressed in the scholarly literature. (If you know otherwise, point me to a source.)
I did learn a few thing from my additional reading, however:
- Though childhood vaccination may be cost saving — and is certainly cost-effective — newer vaccines for adolescents are not all as cost-effective and not cost saving.
- The number of vaccine suppliers in the US has dwindled over the years, from 26 in 1967 to 12 in 2002. Of the eight childhood vaccines recommended in 2005, five had only one source. This contributes to supply shortages and suggests that the prices of vaccines are too low. Concentrated demand from government programs, which purchases over half of vaccine doses at discounted prices, explains the low level of competition in the market.
- On the one hand, vaccine markets are limited in size to the number of kids. They’re not like maintenance drugs, taken regularly for years, and their target population cannot be expanded (as, for example, can cholesterol-lowering drugs through guideline changes). Due to licensing regulations and varying guidelines, vaccine markets tend also to be limited geographically, with different suppliers in different countries. Lower prices outside the US do not offer market-expanding opportunities for US-focused manufacturers. On the other hand, vaccine market size is highly predictable. The revenue constraint is price.
- Vaccines represent 1.5% of all pharmaceutical revenue.
- Relatively low profit potential, as compared to other drug products, limits investment in vaccines. The concern about potential litigation if a vaccine (or batch of one) should cause harm may also deter investment.
- Apparently, employers, who manage most of the structure of private health insurance benefits for the vaccine-relevant population, will not pay for vaccines at their social value. Or, perhaps its the consumers (workers) who won’t do so.
- One explanation for low flu vaccine prices is the prospect that, should a shortage arise, the government will direct limited supply toward the highest risk patients. Therefore, a purchaser willing to pay more in response to insufficient supply (or in anticipation of it) is thwarted. The price signal is broken.
As you can see from these facts and ideas, many others have identified issues in vaccine markets stemming from low prices (e.g., too little entry, supply disruptions). It’s well understood that government programs play a role in reducing (government) prices and concentrating demand. But why are private prices low too?
The government backstop is my best answer. If providers of vaccines raise private prices too high, insurers may stop covering them; their enrollees who cannot afford them could obtain them through government programs. The Affordable Care Act breaks this logic, since vaccines must now be covered. Unless my explanation is wrong, we should see their private prices rise.