Americans have been shocked to learn a flu-vaccine shortage will keep many of them from getting their flu shots this year. They shouldn't be. What they are experiencing is the effect of the most basic law of economics. Guess what? When it ceases to be profitable to make a vaccine (or a prescription drug, or anything else), companies stop making it.
Litigation, regulation and government pricing have hammered vaccine makers during the past two decades, chasing them out of business. Democrats "have a plan" -- as John Kerry would put it -- in response to the flu-vaccine debacle, which is to bring the same model of failure to the prescription-drug market and make it just as unprofitable. Then there will no longer be any of those "greedy" pharmaceutical companies. Problem solved!
In the 1980s, many vaccine makers were driven out of business by litigation costs. Congress eventually passed legislation protecting vaccine makers from out-of-control lawsuits. But the damage had been done. Once a company gets out of the business, it is difficult to get back in because it loses its manufacturing capacity and its expertise.
Another blow came from Hillary Clinton. She championed getting the government into the pediatric vaccine business in a big way in the 1990s. It now buys 60 percent of pediatric vaccines, dictating cut-rate prices that have dried up vaccine-manufacturing capacity. More regulation inevitably accompanied the government purchases. "It's a snowball effect of more and more regulation over the past decade, driving more and more vaccine makers out of business," says Grace-Marie Turner, president of the free-market-oriented Galen Institute.
On top of these regulations, the flu-vaccine business has its unique hurdles. As Scott Gottlieb of the American Enterprise Institute points out, the vaccine for each flu season needs to be set a year in advance because the vaccine is developed in chicken eggs in a cumbersome, dated and very expensive process. Just as with pediatric vaccines, there's a lot of government purchasing, which keeps prices low.
Companies have to sell tens of millions of doses to make a profit. Since the entire U.S. market at its maximum is about 150 million doses, it means there is room for only two or three suppliers, and therefore no margin for error. Worse, vaccine makers have to take back any unused vaccines (usage can vary widely year to year), eating the production costs and exposing themselves to millions of dollars in annual losses. The setup is based on the idea that manufacturers are doing a public service by providing the flu vaccine, considerations of profit be damned.
"It's a market that hasn't been allowed to make a profit and not allowed to innovate," says Gottlieb. Without innovation, vaccine makers can't engage in premium pricing based on changes that make their product better than the competition. Everyone is stuck with the same old method.
Flu-vaccine makers could move to a more efficient process involving monkey or human cell lines instead of chicken eggs, but the Food and Drug Administration -- which imposed new regulations in 1999 that drove several flu-vaccine makers out of the business --has been nervous about approving the new techniques. Rather than more government intervention, what vaccine manufacturers need is the government's permission to innovate so they can move beyond the inefficiencies of the current system.
The vaccine market is a harbinger of what could happen to the prescription-drug industry if Democrats get their way. They are agitating for the government to be able to negotiate -- read: mandate -- low drug prices as part of the new Medicare prescription-drug benefit. And the push for re-importation of drugs from Canada is really a way of importing Canada's price controls into this country.
But when the government vanquishes profits, it vanquishes the incentive to create new drugs, vaccines and technologies in the first place. This year's flu season might be a brutal, unfortunate reminder of that fact.