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6 Conclusions and Alternative Strategies The preceding chapters of this report have highlighted key issues re- lated to the history and organization of vaccine finance in the United States, as well as the many factors that influence vaccine access and avail- ability. This chapter reviews those prior discussions and summarizes the committee's conclusions. It also describes the alternative strategies the committee considered in formulating the recommendations presented in Chapter 7. In developing its conclusions and recommendations, the committee sought to devise a set of financing strategies that could achieve the twin goals of (1) assuring access to recommended vaccines and (2) sustaining the availability of vaccines in the future. At present, these two goals are addressed through a fragmented system of separate programs: payments by some private health care insurance plans (which distribute the costs to consumers and employers through premiums), personal out-of-pocket payments, public vaccine purchase programs (such as Vaccines for Chil- dren [VFC] and state universal purchase programs), and public health care finance arrangements (such as Medicare). Government efforts to as- sure access to recommended vaccines have evolved incrementally and in separate policy arenas. The cumulative impact of these efforts is that fed- eral purchases now exceed 50 percent of the childhood vaccine market through the VFC and Section 317 programs. The government pricing strat- egy has focused on obtaining deeply discounted vaccine prices. These strategies have worked reasonably well in assuring access for children. Yet these same strategies have been blamed, in part, for reduc- ing the financial incentives for private investment in the production and 145

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146 FINANCING VACCINES IN THE 21ST CENTURY licensing of vaccines. Firms have abandoned vaccine products or left the vaccine business completely, and unprecedented vaccine shortages oc- curred in 2001 and 2002. In addition, health care providers are increas- ingly concerned about the inability to recover payment for their costs of purchasing and administering vaccines to children and adults. Private- sector providers, who currently administer over 80 percent of childhood vaccines, continue to refer patients to public health clinics for vaccina- tions, creating missed opportunities that can delay or prevent immuniza- tion and reduce overall immunization rates for vulnerable populations. It is in this context that the committee presents the following conclusions, which in turn form the basis for the recommendations in Chapter 7. CONCLUSIONS The introduction of new vaccines in the coming decades will impose additional and sometimes unexpected financial burdens on public and private health care plans, providers, and consumers. These burdens are offset by the value of these new vaccines, including financial savings that result from decreased medical expenditures, enhanced quality of life, re- duced care-giving burdens, and gains in productivity associated with the prevention of infectious disease. Vaccines for contagious diseases have strong spillover effects, given that immunization interrupts the disease transmission process and re- duces the likelihood that an infection will harm others. Current and po- tential new vaccines that protect against contagious diseases are the stron- gest candidates for public investments in vaccine assurance efforts, since the spillover effects of these vaccines are substantial (Pauly and Cleff, 1995~. But not all future vaccines will have the same level of spillover effects. Some future vaccines will prevent specific noncontagious diseases, such as certain forms of cancer and immune system disorders, rather than inhibiting the spread of contagious disease (see Box 2-1 in Chapter 2~. The committee views vaccines that do and do not have these spillover effects quite differently. There is a more compelling rationale for strong federal intervention in the case of vaccines with spillover effects, since they are the ones most likely to be undervalued in the market and therefore to require subsidization. iThe manufacturer removed the tetanus vaccine from the federal contract, claiming that the government price cap was too low to sustain its production. In presenting the fiscal year 2004 federal budget, President Bush proposed amendments to the VFC legislation to remove price caps; this action would allow the tetanus and diphtheria vaccine to be restored to the VFC program.

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CONCLUSIONS AND ALTERNATIVE STRATEGIES 147 This distinction is viewed as increasingly important since the propor- tion of vaccines in the pipeline that do not address highly contagious dis- eases is growing. Although all vaccines share certain public-good proper- ties in terms of basic research and development, the spillover effects in consumption of vaccines provides the key rationale for broad public sup- port of vaccine financing. The rationale is less compelling in the case of vaccines without these spillover effects, except in certain cases where the public benefits of the vaccine are exceptionally high. Burdening the national immunization system with the financing of a new generation of expensive vaccines without substantial spillover effects would divert resources away from vaccines that benefit the public more broadly. The committee sought to design financing strategies that could re- solve the tensions among growing public-sector demand for vaccines; higher vaccine expenditures; and the economic incentives that influence the development, production, and administration of vaccines. Conclusion 1: Current public and private financing strategies for immunization have had substantial success, especially in improv- ing immunization rates for young children. However, significant disparities remain in assuring access to recommended vaccines across geographic and demographic populations. Current efforts have not achieved the Healthy People 2010 goal of im- munizing 80 percent of all 2-year-old children. One in four young chil- dren is not up to date in receiving recommended immunizations. Sustain- ing current levels of immunization (about 74 percent) and achieving future immunization goals are threatened by predictable financial pressures in the coming decade as new and more expensive vaccines are added to the recommended schedule for children and adults. Immunization rates for adults aged 65 and older have improved (66 percent for annual influenza and 50 percent for pneumococcal vaccine in 1999) since the inclusion of influenza and pneumococcal vaccines in Medi- care benefits, and more than doubled in the period 1988-1995 (GAO, 1995~. However, morbidity and morality rates for both diseases remain significant in this population. Immunization rates for high-risk adults aged 18-64 are especially poor. Most working-age adults with chronic illness (including such disorders as heart and lung disease and diabetes), who are at particular risk for vaccine-preventable disease, have not received the recommended immunizations. In 1999, only 31.9 percent received an annual influenza vaccination, while only 17.1 percent had ever received a pneumococcal vaccination (NCHS, 2000~. The difficulties asso- ciated with risk-based strategies (i.e., based on health conditions) for adults have caused many providers within the health profession to shift

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148 FINANCING VACCINES IN THE 21ST CENTURY to an age-based strategy. One example is the recent Advisory Committee on Immunization Practices (ACIP) guideline for influenza vaccine, which recommends immunization of all adults over age 50 (replacing the earlier guideline of 65 and older). The relationships among cost barriers, access to recommended vac- cines, and immunization status are uncertain. Immunization rates are highest among young children (aged 5 and under) and adults (aged 65 and older), who have the broadest access to vaccines through govern- ment-supported vaccine purchase programs. Immunization rates remain low among the high-risk adults aged 18-64 years, for whom no dedicated vaccine finance programs exist apart from those who are enrolled in Med- . . calc it. In addition to uneven immunization rates at the national level, sub- stantial variation (almost 20 percent) in immunization rates currently ex- ists within and across states. Some large urban centers, in particular, have difficulty achieving high immunization rates for children aged 19-36 months. The causes of these disparities are not well understood, but low levels of immunization are commonly associated with areas characterized by a concentration of poverty and groups that frequently move in and out of safety net programs. The disparities in vaccine-preventable disease burden between children and adults are especially troubling. Conclusion 2: Substantial increases can be expected to occur in pub- lic and private health expenditures as new vaccine products become available. While these cost increases will be offset by the health and other social benefits associated with these advances in vaccine development, the growing costs of vaccines will be increasingly burdensome to all health sectors. Alternatives to current vaccine pricing and purchasing programs are required to sustain stable in- vestment in the development of new vaccine products and attain their social benefits for all. Although the costs associated with purchasing and delivering vac- cines have historically been small, new vaccines will be priced at higher levels reflecting the scale of investment necessary to bring new products through the licensing and production processes. The addition of new vac- cines to the recommended schedule and the higher costs associated with newer vaccine products have placed tremendous stress on safety net pro- grams that are already straining to achieve public health goals. Higher vaccine prices can be expected to exacerbate such problems as uneven distribution patterns, delays in the vaccine price negotiation processes for federal and state contracts, and continued fragmentation in the scope of vaccine benefits included in public and private health plans. An increased

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CONCLUSIONS AND ALTERNATIVE STRATEGIES 149 burden on public health clinics also occurs when private health plans re- duce reimbursements for recommended vaccines in the face of higher costs. This burden places substantial stress on public health budgets and interferes with the ability to provide vaccines to traditional safety net populations, as well as those who lack vaccine benefits within their health plans. It should be noted that vaccines provide a net long-term savings in health care costs. Over time, vaccines should lead to a diminution in what would otherwise be spent on health care. But certain sectors (such as state and federal health agencies) will bear substantial short-term costs of ac- .. . . . qulrmg ana ae~ lvermg vaccines. Increases in the budgets of government vaccine programs should be seen as acceptable, indeed desirable, insofar as new vaccines can offer substantial public health benefits. What is missing in the array of current vaccine purchasing programs is a clear and deliberate strategy that the government can use to stabilize and assure adequate rates of return on future private investments in vaccine development. While the true costs of innovation remain unknown, government pricing systems and bulk purchases alone appear to provide insufficient incentives, according to industry sources, given the higher production costs and uncertainties as- sociated with vaccine development and the tendency to push down prices in the public sector. Conclusion 3: Many young children, adolescents, and high-risk adults have no or limited insurance for recommended vaccines. Gaps and fragmentation in insurance benefits create barriers for both vulnerable populations and clinicians that can contribute to lower immunization rates. Many individuals (referred to as "underinsured") have private health insurance that does not include coverage for vaccines. Estimates of under- insured children vary from 5 to 14 percent of all children. Others have insurance policies that require individuals to cover vaccine costs in the form of high deductibles and copayments. Still others, such as Medicare beneficiaries, are covered for certain vaccines but not others. Persons who face such financial barriers are less likely to receive routine immuniza- tions in their medical homes and may fail to receive certain immuniza- tions at all. Although most large public and private health plans include vaccine benefits, signs of slippage are occurring within the scope of vaccine ben- efits offered by small businesses and other large subscribers, such as pub- lic employee health plans. The omission of or limitations on vaccine ben- efits in health plans, coupled with increasing deductibles and copayments,

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150 FINANCING VACCINES IN THE 21ST CENTURY create gaps that existing safety net programs cannot easily fill. The result is increasing fragmentation and administrative barriers that interfere with the timely delivery of vaccines within routine health care services. The multifaceted eligibility determinations associated with the cur- rent fragmented system of public and private vaccine benefits represent a serious barrier to immunization by imposing substantial burdens on phy- sicians and other health care providers. Clinicians must determine whether the costs of purchasing and administering recommended vac- cines are reimbursable under the terms of a wide variety of insurance plans and entitlements, including VFC, the State Children's Health Insur- ance Program (SCHIP), Section 317, Medicare, and multiple private health insurance plans. These administrative barriers can result in missed op- portunities for immunization and frequent referrals of underinsured pa- tients to public health clinics for routine vaccines, which in turn ultimately contribute to shortfalls in immunization rates. Conclusion 4: Current government strategies for purchasing and as- suring access to recommended vaccines have not addressed the re- lationships between the financing of vaccine purchases and the sta- bility of the U.S. vaccine supply. Financial incentives are necessary to protect the existing supply of vaccine products, as well as to en- courage the development of new vaccine products. Tensions exist in the vaccine supply system between the need to con- trol the current costs of vaccine purchases and the need to spend more money for innovation and the production of present and future vaccines. The desire to maximize short-term savings in purchasing current vaccine products and to maintain price caps is directly opposed to the goal of creating financial incentives for commercial firms to develop new vaccine products. Policy efforts to resolve recurring tensions among escalating vaccine costs, tighter health budgets, and the desire for sustainable and competitive markets in the vaccine industry have been limited to a series of stopgap measures and policy proposals in recent years (Fairbrother and Haidery, 2002~. Thus, federal and state governments currently lack a coherent policy that can assure an appropriate balance among these ob- jectives. The result is uncertainty among both producers and purchasers, which in turn reduces incentives for future vaccine development and threatens to exacerbate current disparities in immunization rates among insured, underinsured, and uninsured populations. Conclusion 5: The vaccine recommendation process does not ad- equately incorporate consideration of a vaccine's price and societal benefits.

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CONCLUSIONS AND ALTERNATIVE STRATEGIES 151 The recommendations of ACIP and its counterpart groups within the American Academy of Pediatrics and the American Academy of Family Physicians have significant implications for public and private expendi- tures. For example, ACIP recommendations directly affect vaccine prices and supply, such as the addition of vaccine products to the recommended vaccine schedule, the inclusion of vaccines in the VFC entitlement pro- gram, the standard of care for the Medicaid vaccine schedule, and the universal purchase guidelines for many states. Yet the ACIP decision- making process requires the formulation of recommendations before the government purchase price of a vaccine product is known. In addition, ACIP has no mechanism for distinguishing vaccines with strong spillover effects, such as those that prevent highly contagious diseases, from vac- cines that do not, such as tetanus and therapeutic vaccines (such as cancer vaccines) that are in development. The lack of a capacity to address these variables is a serious impediment to a coherent finance strategy for vac- cine purchases in the national immunization system. ALTERNATIVE STRATEGIES In framing its recommendations, the committee focused its analysis on seven alternative approaches, which included market-oriented, gov- ernment intervention, and incremental strategies. Each approach was con- sidered in terms of its impact on both access to vaccines and incentives for the production and development of vaccines in the private sector. In addi- tion, the committee sought to design a strategy that would maintain a reasonable budget for vaccine purchases for children and adults in the public and private health sectors. The committee evaluated dozens of proposals for changes to the immunization system that had been devel- oped by congressional committees, professional and industry associations, government agencies, advocacy groups, and experts before focusing its efforts on seven alternative strategies (including the current system).2 Each proposal was considered in light of the following goals: Eliminate individual financial barriers to immunization. Increase incentives to the industry to invest in R&D and produc- tion capacity. Reduce provider burden and improve provider compensation. 2Some of these approaches were summarized in background papers prepared for the com- mittee, including Fairbrother and Haidery (2002), Hay and Zammit (2002), and McGuire (2003~. Others were included in recent reports on vaccine supply by GAO (2002) and NVAC (2003~.

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152 budgets. FINANCING VACCINES IN THE 21ST CENTURY Minimize fragmentation of financing and delivery. Maintain existing community and provider relationships. Control escalation of costs and increasing fiscal burden on state There are several tensions among these objectives. For example, in- creasing incentives to industry, if achieved through higher prices, could conflict with controlling costs. Higher vaccine prices would also increase costs to providers, further fragmenting delivery, and to state budgets, thereby increasing fragmentation of financing. In addressing these con- flicts, the question of increasing or decreasing government involvement emerges as a key factor. A universal government purchase program would address most of the above objectives. However, the committee views the growing share of government in vaccine purchasing as a dis- couragement to vaccine investment. Indeed, the committee determined that no single alternative can satisfy every objective; each involves trade- offs, assumptions, and perhaps ideological orientations. The following analysis of alternatives is meant to illuminate these trade-offs so they can be clearly understood. The final recommendation formulated by the com- mittee combines elements of several different approaches to balance com- peting objectives. The committee considered the following seven alternative ap- proaches: roes. 1. Maintain the current system. 2. Expand the VFC program to include additional eligibility catego- 3. Provide universal coverage through federal purchase and supply of all recommended vaccines. 4. Provide a federal block grant to the states for vaccine purchase. 5. Use public vouchers to purchase recommended vaccines for disad- vantaged populations. 6. Create an insurance mandate that would require public and pri- vate health plans to cover all recommended vaccines. 7. Combine features of the insurance mandate and voucher alterna- tives into a new funded mandate system. These approaches are described below, along with the merits and de- ficiencies of each. They are further summarized in Table 6-1.

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CONCLUSIONS AND ALTERNATIVE STRATEGIES Alternative 1: The Current System DescriptioniDesign Options 153 The current system is based primarily on the VFC entitlement, which provides free vaccines to approximately 10 million safety net children through private office-based practices and community health centers. The program is supplemented by Section 317 grants to states and state-funded programs. Through VFC, the federal government assures access to the vaccines that prevent 11 diseases3 for certain categories of children (aged 0-18~: all uninsured and Medicaid-eligible children, Native Americans and Alaska Natives; and children who receive recommended vaccines in federally qualified health centers (FQHCs).4 The federal government also assures access to vaccines against influenza and pneumonia for all adults over age 65 through the Medicare program. In addition, younger adults (aged 18-64) who receive Medicaid benefits have access to certain vac- cines if recommended by their physician as part of a treatment plan. Vaccines are purchased under a federal contact negotiated by CDC for the states on behalf of the eligible populations of children and adults. VFC does not include provider fees, which are typically paid with Section 317 or state funds. Program growth will result from the increasing num- bers of the eligible population (mainly uninsured and Medicaid children), the addition of new vaccines that are likely to be recommended for chil- dren in the next two decades, and higher prices of new vaccines. Advantages There are some advantages to maintaining the current system. In nearly a decade of experience, VFC has been successful in enhancing pub- lic insurance coverage among children and improving their immuniza- tion rates. Public health advocates have indicated that the presence of a federal entitlement has provided stable and certain funding not subject to the fiscal budgetary pressures faced by discretionary programs. 3Diphtheria, tetanus, pertussis, measles, mumps, rubella, polio, haemophilus influenzue type b, hepatitis B. varicella (chickenpox), and invasive pneumococcal disease. 4The VFC entitlement was initially restricted to FQHCs. In January 2003, President Bush announced his intention to seek legislation that would amend the VFC legislation to include all state and local health clinics as access sites (U.S. Department of Health and Human Ser- vices, 2003~.

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54 FINANCING VACCINES IN THE 21ST CENTURY TABLE 6-1 Summary of Alternative Strategies for Vaccine Purchases 1. VFC 3. Universal (Current 2. Expanded Federal 4. Federa Features System) VFC Purchase Block Grc Description Federal entitlement Continuation of Federal government In lieu of that provides free central features of purchases all states reck vaccines to participating VFC entitlement. recommended vaccines funds for public and private and gives vaccines to immuniz. providers. Expands VFC to states for distribution (amounts include to providers. amount o CDC purchases vaccines immunization of VFC pure for distribution to the underinsured Replaces VFC and states. children in other state purchases. States alla health care settings funds to ~ (not just FQHCs). Providers/insurers immuniz; may not charge (e.g., vice patients for the free purchase, vaccines. infrastruc investment Requires that all special pi insurers cover administration fees for States me recommended vaccines, federally with some level of immuniz; discretion. (state-spe face pena of the gra Eligibility Children (aged 0-18) All children eligible All children and adults. Determin who are for VFC;plus all individuz Medicaid-eligible underinsured Uninsured children, regardless American Indian or of health care Alaska Native setting; plus all Receive vaccines in uninsured and FQHCs. underinsured adults with high-risk health conditions, regardless of health care setting.

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CONCLUSIONS AND ALTERNATIVE STRATEGIES Bases 155 4. Federal 5. Public 6. Insurance 7. Funded Block Grant Vouchers Mandate Mandate nment In lieu of vaccine, Health care providers All public and private All public and states receive federal purchase vaccines health plans are private health plans 1 vaccines funds for for uninsured required to reimburse are required to cines to immunizations persons and receive health care providers reimburse health ribution (amounts based on reimbursement from for costs of all care providers for amount of current the federal recommended replacement costs VFC purchases). government. vaccines. of all 2 and recommended es. States allocate federal Voucher pays Insurers must report vaccines. funds to support providers a fixed levels of vaccine curers immunization efforts amount for coverage and Health plans ge (e.g., vaccine immunization cost-sharing fees to receive payment he free purchase, (payment to cover the federal from the federal infrastructure purchase cost and government. government to investment, and administration fee cover vaccine costs all special programs). for each vaccine). Applies only to and provider fees r vaccines that have on a periodic basis. n fees for States must meet Federal government low coverage rates 1 vaccines, federally determined sets amount of 5 years or more after Voucher subsidy is ret of immunization goals voucher for each being introduced used for uninsured (state-specific) or vaccine teased on a (e.g., more than5% patients. face penalties or loss calculation of social of target population of the grant. benefit. remains uninsured Health plans and for the vaccine). providers can keep the difference between the subsidy and the actual vaccine purchase price. and adults. Determined by Alluninsured Allpersons (children All children and individual states. children and adults, and adults) enrolled adults. regardless of legal in public and private status. health care plans. continued

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72 FINANCING VACCINES IN THE 21ST CENTURY capacity and R&D; however, it could have adverse short-term impacts on states, programs, and providers. Alternative 7: Funded Mandate Description/Design Options The funded mandate alternative combines elements of the voucher approach and the insurance mandate. The mandate requires that both public and private insurers provide coverage for all insured children, all adults over age 65, and certain designated populations, such as adults aged 18-64 who are at particular risk for the consequences of vaccine- preventable disease because of certain health disorders. The insurers' costs of providing this mandated coverage are reimbursed in full by the federal government. Insurers purchase vaccines directly and receive reimburse- ment at the subsidy rate. Health plans are required to reimburse their providers the full replacement cost of the vaccine up to the subsidy amount, plus the full administration fee. If the health plan or provider can obtain vaccines at a price below the federal subsidy amount, they can keep the difference. Patients who are uninsured receive a voucher for im- munization as described under alternative 5 above. The amount of the federal subsidy is some percentage of a vaccine's calculated social benefit, announced in advance of the release of the vac- cine to stimulate the pace of development. A method for determining a price in advance based on the calculated societal benefit is described by McGuire (2003) (see Box 6-1~. Societal benefit, as defined by the commit- tee, is a measure of the total benefits provided by a vaccine, including both private benefits to those who receive the vaccine and public benefits that accrue to the rest of society. These benefits include direct medical costs saved because the disease was prevented, as well as such benefits as increased length of life and improved quality of life. Under this alterna- tive, prices of current vaccines are determined based on some combina- tion of calculated social benefit and past prices. Advantages This approach shares many of the advantages of the voucher and mandate alternatives. It would increase incentives for the development of new vaccines by providing manufacturers with assurance of adequate pricing and returns. Furthermore, the assurance of a price subsidy based on societal benefit would steer innovation toward the most socially ben- eficial vaccines. An additional advantage of this approach to setting a price subsidy is that it would require no reference to industry cost data.

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CONCLUSIONS AND ALTERNATIVE STRATEGIES 173 Funding the insurance mandate would maintain the insurer's role in immunization, avoid disruption of existing infrastructure, preserve es- tablished community networks, and prevent referrals from physicians to public-sector providers. It would create market mechanisms by allowing insurers and physicians to keep savings they might obtain, and thereby stimulate efficiency and competition among vaccine producers, who would enjoy competition in multiple markets physicians, institutions, states, and purchasing cooperatives. This approach would eliminate gov- ernment purchasing and the concomitant delays and uncertainties in re- imbursement. A key difference between the subsidy approach and a universal pur- chase approach is in the way prices are determined. Currently, the price of a vaccine is determined in two ways. In the private sector, it is based on "what the market will bear." In the public sector, it is based on a negotia- tion between CDC and the manufacturers, usually resulting in a substan- tial discount. To stimulate additional investment in R&D, each of the al- ternative approaches considered by the committee seeks to increase the rate of return on vaccine products within reasonable limits. The ap- proaches pursue this goal in different ways. Under a universal purchase approach (alternative 3), the government would purchase all vaccines. It could raise prices to stimulate investment, or it could drop prices if they were too high. The fact is, however, that government would have no basis for raising or lowering prices because there would no longer be any mar- ket reference price for comparison. Absent such a benchmark, pricing would become a political process, which would create uncertainty regard- ing future prices and likely reduce industry investment in R&D. The case of a genetically engineered protein that helps reduce anemia in dialysis patients is instructive with regard to the potential for politicization of pricing. This product is covered under Medicare for all individuals (including those under age 65~. There is some evidence that the initial price of the new product provided a very high return on R&D to the manufacturer, as well as a high benefit-cost value for society. Its initial price was negotiated between the Health Care Financing Adminis- tration (HCFA) and the manufacturer and subsequently codified in legis- lative amendments (with discretion on the part of HCFA to adjust prices for inflation). Subsequently, the product was the subject of several favor- able benefit-cost studies by economists. But the Clinton Administration and several congressmen thought that expenditures exceeded budgets, and congressional action decreased the price. Similar approaches to vac- cines that reflected arbitrary government pricing would be devastating to vaccine R&D. Under a subsidy approach, individual providers or health insurance plans would purchase vaccines and would then be reimbursed by gov-

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74 FINANCING VACCINES IN THE 21ST CENTURY

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CONCLUSIONS AND ALTERNATIVE STRATEGIES 175

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176 FINANCING VACCINES IN THE 21ST CENTURY

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CONCLUSIONS AND ALTERNATIVE STRATEGIES 177

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178 FINANCING VACCINES IN THE 21ST CENTURY ernment payments at a certain percentage of their cost. In many cases, the price of the vaccine would shift to the subsidy amount, which would be set at a level that would encourage manufacturers to invest in R&D. There could be differences, however, between the subsidy amount and the price paid. Manufacturers could charge more than the subsidy, although doing so would remove the vaccine from the mandate. Manufactures could also charge lower prices in response to the negotiating leverage of large pur- chasers or buying cooperatives. But even if prices stayed at the subsidy level, manufacturers would still be able to compete on the basis of quality, service, and product enhancements. Thus, while the subsidy might equal the market price in many cases, it would preserve some aspects of the market. This alternative would also provide a formula-based method for setting the subsidy that would be less subject to political manipulation than pure government purchasing. While no strong evidentiary base clearly establishes the relative superiority of different approaches to set- ting such a subsidy, a government purchase approach would be unten- able to manufacturers. Disadvantages By combining features of the voucher and insurance mandate alterna- tives, this strategy some of the disadvantages of each. The most serious of these is the complexity of having two separate administrative and regula- tory functions one to administer the voucher and one to monitor and enforce the mandate. This approach could also be expected to increase federal expenditures for vaccines at least as much as and probably substantially more than any of the other alternatives. Higher costs would result from both expanded public coverage and higher prices. One of the key practical issues would be how to determine a subsidy amount that would encourage vaccine development without allowing expenditures to increase more than neces- sary. While this approach would preserve a private market for vaccines, using a subsidy based on the calculated societal benefit of a vaccine could stimulate prices to increase substantially to subsidy levels. As McGuire (2003) explains, if a subsidy formula allows prices to rise to the level of the calculated societal benefit, no benefit will remain for the consumer. The calculation of societal benefits and of subsidy amounts based on those benefits presents a variety of technical challenges and could require po- litically difficult legislative decisions regarding key assumptions used in the calculations. Finally, implementation of this alternative would require substantial amendments to established law in numerous areas (e.g., Employee Retire- ment Income Security Act, Public Health Act, Medicare, Medicaid,

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CONCLUSIONS AND ALTERNATIVE STRATEGIES 179 SCHIP). A comprehensive legislative strategy would be necessary to re- duce the risk of an incremental and uneven approach. WEIGHING THE ALTERNATIVES Each strategy outlined above has certain advantages and disadvan- tages in addressing the two key objectives addressed by the committee: (1) assuring access to recommended vaccines and (2) sustaining the avail- ability of vaccines in the future. The decision process used by the commit- tee in selecting among these alternatives was an exercise in identifying and making difficult trade-offs that often involved direct conflicts between these objectives. For example, two of the approaches expanding the eli- gibility categories for VFC and moving to a universal purchase system- address primarily the access objective by eliminating underinsurance and reducing incentives for providers to refer patients away from their rou- tine source of care for immunizations. But both approaches expand gov- ernment involvement in the purchase of vaccines, and thus potentially undermine investment in production capacity and the development of new vaccines by the vaccine industry. In contrast, the block grant ap- proach emphasizes the importance of a decentralized, pluralistic market that would likely encourage competition and investment in the vaccine industry. But the block grant approach could be detrimental to access by fragmenting eligibility and funding streams, and creating multiple stan- dards that would limit federal oversight and control in the event of a multi-state outbreak. Other approaches involve more practical problems. Vouchers, for ex- ample, would foster pluralistic markets in which government interven- tion would be limited to subsidizing the purchase of vaccines. Vouchers would both encourage vaccine industry investment and improve access by relieving clinicians of the burden of checking eligibility requirements for vaccine purchases. But using vouchers as the principal mechanism for financing immunization for children and eligible adults would require the creation of an enormous administrative infrastructure for a relatively small benefit. The alternatives examined by the committee vary substantially in their complexity in terms of both legislative and implementation requirements. A straightforward expansion of VFC, for example, would be both legisla- tively simpler and easier to implement than other alternatives. Moreover, an alternative to implementing a new policy immediately is to wait for the results of new research and demonstration projects, and certain as- pects of the alternative approaches are more amenable to research and demonstration than others. For example, a demonstration of a voucher system implemented in a few sites would likely reveal much about the

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180 FINANCING VACCINES IN THE 21ST CENTURY system's practicality, acceptance, cost, and effectiveness. Conversely, a demonstration of changes in the federal purchasing system would not succeed because the desired market effects on pricing and industry in- vestment could not be tested in selected locations. Nevertheless, evalua- tion research would be valuable during the implementation phase of any of these alternatives to monitor its impact and permit midcourse adjust- ments to fine-tune the policy.

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Box 7-2 Calculating the Societal Benefits of Vaccines The calculation of societal benefits for a vaccine in advance is based on a highly clevelopect cost-benefit/effectiveness/utility research literature (IOM, 2000a; Miller ant! Hinman, ~ 999~. While technical issues must be addressed, the feasibility of the cost-benefit approach has been established through a wide range of economic studies involving vaccines and other medical interventions (Jacobs and Meyerhoff, 2001; McGuire, 20034. The committee's notion of societal benefit includes three type of benefits: ~ .. . . in, Medical costs that are averted by reducing the incidence of disease Nonmonetary benefits, such as years of life and quality of life Indirect benefits, such as increased productivity Calculating meclical costs requires estimates of the disease incidence without the vaccine ant! the health care expenditures that would result from treatment of the disease, such as hospitalizations, physicians visits, home health visits, nursing home stays, and drugs. For diseases currently without a vaccine, substantial data exist on treatment costs and disease . . nclc "ence. The calculation of nonmonetary benefits can ciraw on a substantial literature that suggests monetary values for years of life gained. Quality-of-life ant! disability measurements are also standard in the literature. Using a common stanciard across each analysis is critical so that comparisons can be made across different vaccines. Finally, indirect benefits inclucle such factors as increased productivity and reduced burclen on family caregivers. Certain costs, such as adverse reactions to vaccines or the additional time costs associated with vaccination, should be subtracter! from the total benefits of vaccines. Also, the stream of future benefits and costs must be discounter} to the present. The final net benefit amount divided by the number of people to be vaccinated is the calculated societal benefit on which the subsidy would be basest. Issues and controversies abound in the calculation of these values. A number of these issues are summarized in the report of the Panel on Cost-Effectiveness in Medicine and Health (Gold et al., 1 996. Assumptions required by the calculatione.g., variables to inclucle; valuations of life, disability, and morbidity; and the discount rate must be macle by a consensus pane! or regulatory body with a substantial degree of expert input. 7-24

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