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Financing Vaccines in the 21st Century: Assuring Access and Availability (2004)

Chapter:6 Conclusions and Alternative Strategies

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Suggested Citation:"6 Conclusions and Alternative Strategies." Institute of Medicine. 2004. Financing Vaccines in the 21st Century: Assuring Access and Availability. Washington, DC: The National Academies Press. doi: 10.17226/10782.
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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

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.

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

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

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,

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.

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~.

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.

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~.

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.

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

156 TABLE 6-1 Continued FINANCING VACCINES IN THE 21ST CENTURY 1. VFC 3. Universal (Current 2. Expanded Federal 4. Federa Features System) VFC Purchase Block Grc Who purchases CDC purchases and CDC purchases and CDC purchases and State-dett vaccines? distributes VFC distributes VFC distributes allvaccines vaccines. vaccines. for both public and private health care sectors. Who pays Public sector: Federal for it? government and some states purchase vaccines; administration fees are paid by Medicaid, SCHIP, and state budgets. Private sector: Insurers have discretion as to level of coverage for vaccines and administration fees. Public sector: Same Public sector: Same as VFC. as VFC. Private sector: Same Private sector: Same as VFC. as VFC. Public sec purchase as needec federal fat supplemc discretior state funs Private set costs and fees paid discretior state.

CONCLUSIONS AND ALTERNATIVE STRATEGIES 157 4. Federal 5. Public 6. Insurance 7. Funded Block Grant Vouchers Mandate Mandate es and State-determined. Private providers or CDC continues to Providers purchase . vaccines their insurance plans purchase public- all vaccines except ic and purchase vaccines. sector vaccines. for bulk purchases care by large insurers States purchase Providers and seeking discount vaccines on behalf of insurers purchase prices. public clinics. vaccines for their enrollees and Insurers (public patients. and private) reimburse providers, and are themselves reimbursed by federal vaccine payments. Same Public sector: States Public sector: Federal Public sector: Public Public sector: purchase vaccines government health care finance Health care as needed with reimburses providers programs (e.g., providers, federal funds, for cost of vaccine; Medicaid, SCHIP) reimbursed by supplemented by possibly partial cover vaccine costs, health plans or discretionary contribution by the supplemented by federal vouchers. state funding. states. state funding. Same Private sector: Vaccine Private sector: Insurers Private sector: insurers Private sector: costs and related have discretion as to are required to pay Health care fees paid at the level of coverage for for vaccines and providers, discretion of the vaccines and fees. administration fees. reimbursed by state. health plans or federal vouchers. continued

158 TABLE 6-1 Continued FINANCING VACCINES IN THE 21ST CENTURY 1. VFC 3. Universal (Current 2. Expanded Federal 4. Federa Features System) VFC Purchase Block Grc Pros Federal entitlement Same as VFC. Eliminates eligibility Allows en assures coverage of questions for all select the eligible populations in Targets the most patients and providers. approach most cases. critical coverage to its nee. gaps: underinsured Reduces referrals to 10-year history associated children and the public sector. with rises in vaccine uninsured and coverage levels. underinsured high-risk adults. Maintains vaccine delivery in medical home. Eliminates crowd-out. Reduces referrals to the public sector. Enables exper~me determine mixes 01 1 (e.g., vact purchase. programs registries, cost shard Fosters ef focusing Creates n market fc purchase. producer . ·, in wide r. market cc

CONCLUSIONS AND ALTERNATIVE STRATEGIES 159 4. Federal 5. Public 6. Insurance 7. Funded Block Grant Vouchers Mandate Mandate gibility Allows each state to Eligibility determined Targets the most Improves all select the financing at point of issuing critical coverage incentives for the Providers. approach best suited voucher,not et point gap underinsured. development of to its needs. of service. new vaccines. rats to for. wd-out. Enables experimentation to determine optimal mixes of tactics (e.g., vaccine purchases, targeted programs, fees, registries, education, cost sharing). Reduces provider burden in meeting the needs of the uninsured. Eliminates eligibility problems associated with government purchase of vaccines. Fosters efficiency by Reduces referrals to focusing on outcomes. the public sector. Creates multifaceted market for vaccine purchases; encourages producers to compete in wide range of market configurations. Facilitates state and federal budget Eliminates planning by government stabilizing the purchasing of population receiving vaccines. private-sector vaccines. Eliminates Reduces referrals to public sector clinics. Reduces provider burden in determining eligibility. Maintains existing Eliminates crowd-out. community insurer-provider Reduces public relationships in market share, immunization. enabling the producers to compete Administration fee in larger private is assured. market. Protects consumers from high vaccine costs. provider burden in determining eligibility- everyone is covered. Facilitates rapid uptake of new vaccines by removing government purchasing delays and health plan reimbursement uncertainties. Producers compete in multiple markets. continued

160 TABLE 6-1 Continued FINANCING VACCINES IN THE 21ST CENTURY 1. VFC 3. Universal (Current 2. Expanded Federal 4. Federa Features System) VFC Purchase Block Grc Cons Encourages private requirements create gaps insurers to drop in safety net coverage. immunization Encourages private insurers to drop . . . mmunlzahon coverage (crowd-out). Fragmented financing system fosters missed opportunities and provider burden. Government purchasing is inefficient; lack of pricing rationale and contracting delays ~ . . c .lscourage vaccme industry participation and R&D. No private-sector benchmark for pricing. coverage (crowd-out). Government is sole customer in vaccine market. Expands public- sector market share Supply problems may of vaccines, discouraging vaccine industry participation and R&D. Continues fragmented vaccine coverage (creates provider burden). Continues problems associated with of government . . purchase prlcmg uncertainty and contract delays. occur as vaccme producers choose to exit the market or limit production. States un' and politi pressure funds fro immuniz; programs States ma limited cat respect tc insurers, I ERISA. Federal g. has limits intervene ineffectiv Requires for deters grant aw' performs measures History 0 funding s many sm' cannot no reasonab] vaccine S1 Disadvantages The two principal disadvantages of the current VFC system are its reliance on government purchase of vaccines and its fragmentation of vac- cine financing. As noted earlier, government purchase, which is growing as a share of the total vaccine market, tends to discourage industry invest-

CONCLUSIONS AND ALTERNATIVE STRATEGIES 161 4. Federal Block Grant 5. Public 6. Insurance 7. Funded Vouchers Mandate Mandate actor . . Ir prlcmg. is sole accine ems may one rose to et or ion. States under fiscal and political pressure may divert funds from immunization programs. States may have limited controls with respect to private insurers, such as ERISA. Federal government has limited ability to intervene if ineffective. Requires benchmarks for determining grant awards and performance measures. History of Section 317 funding suggests that many smaller states cannot negotiate reasonable prices with . vaccme supp. Hers. A new federal role and information system investments are required to develop and administer voucher and billing systems. Cost will be passed to A new federal role the employer and consumer in the form of higher premiums. Requires monitoring, oversight, and enforcement at both A substantial burden federal and state is involved in levels. locating and tracking changes in eligibility. Reduces the federal share of the market, Providers may dislike possibly reducing delays in federal negotiating reimbursement leverage. associated with vouchers. Pricing the vouchers requires calculation of the social benefit 01 vaccines. and information system investments are required to develop and administer voucher and billing systems. A substantial burden is involved in locating and tracking changes in eligibility. Providers may dislike delays in reimbursement associated with vouchers. Pricing the vouchers and reimbursement plan requires calculation of the social benefit of vaccines. Requires monitoring, oversight, and enforcement at both federal and state levels. ment in production capacity and new vaccine R&D. The government price negotiation process itself leads to delays, inefficiencies, and uncertainty about reimbursement among clinicians. The eligibility limitations of VFC increase the burden on clinicians for eligibility determination; create funding inequities between entitlement

162 FINANCING VACCINES IN THE 21ST CENTURY and discretionary funding streams (e.g., VFC, Section 317, and state gen- eral funds); and fragment the financing and delivery of services, resulting in missed opportunities, scattered records, and fewer children immunized than would otherwise be the case. Moreover, VFC does nothing to help high-risk adults who are either uninsured or underinsured. The separa- tion of vaccine purchases and fees further fragments funding, and results in referrals even of covered children to public-sector clinics. Finally, the VFC financing structure encourages the erosion ("crowd-out") of private coverage because of the existence of public financing. Alternative 2: Expanded VFC Description/Design Options This approach maintains the central features of the current system, and does not change the structure of the VFC program, but expands VFC to include immunization of underinsured children within their medical home. As a result, children who previously could obtain free vaccines only in FQHCs an estimated 2.7 million children nationwide would be able to receive vaccines in their medical home. This approach also ex- pands VFC to cover adults who are either under- or uninsured and who are at high risk as defined by CDC. Advantages The advantages of the expanded VFC alternative are that it maintains VFC, a time-tested and well-funded program, while making improve- ments to strengthen coverage. The expanded coverage targets the two most critical coverage gaps: underinsured children and high-risk adults (both uninsured and underinsured). Implementing this alternative would somewhat, but not totally, alleviate eligibility problems that result in missed opportunities and reduce the number of referrals by private pro- viders to the public sector. Among options for changing the current sys- tem, this approach would also be the easiest to implement. Disadvantages The principal disadvantage associated with the expanded VFC ap- proach is that it maintains and even expands the government's role in purchasing vaccines, potentially discouraging industry investment in pro- duction capacity and the development of new vaccines. Furthermore, while the expansion of coverage would reduce fragmen- tation, it would not eliminate it; and the burden of eligibility determina-

CONCLUSIONS AND ALTERNATIVE STRATEGIES 163 lion on clinicians would remain unaddressed. Crowd-out would be exac- erbated, and the separation of vaccine purchases and fees would continue to encourage referrals even of covered children to public-sector clinics. Disparities between entitlement and discretionary program would con- tinue if some states chose to supplement VFC categories with state-pur- chased vaccines. The public costs of expanding coverage to include the 3.5 million underinsured children aged 0-5 would be substantial. A national entitle- ment program is obligated to meet funding levels once eligibility has been established. Hence, the VFC budget grows to meet demand. CDC's fiscal year 2000 budget for immunization was $1.6 billion. This figure includes $990 million for the VFC program and an additional $250 million for Sec- tion 317 vaccine purchases (the remaining portion consists of discretion- ary funds to support state immunization programs). Immunization would increase among families that could not or would not pay the extra (uncovered) charge for obtaining the vaccine from their private practitioner and who did not have access to a public health clinic for free treatment. How large is this group? Freed et al. (1999) studied the effects of a new universal purchase vaccine program in North Carolina on immunization rates by insurance status. This program provided coverage to the underinsured in much the same way as would the payment plan proposed here. Freed found that the percentage of children who were up to date in immunizations did increase among both those with periods of underinsurance and those with partial coverage (from 80 percent to 86.5 percent for the former and from 85.3 percent to 90.9 percent for the latter, measured at the 24-month point), although his study probably understates the effect since his "preprogram" data were actually collected shortly af- ter the program had begun. There was also some decline in the percent- age receiving immunizations at public health clinics, although a signifi- cant proportion continued to use the latter facilities.5 That is not surprising since private physicians would still charge for the visit, even if the vaccine were provided free of charge. Freed et al. (1999) suggest that increased immunization rates can oc- cur when health professionals and public officials make a big effort to move children into private care. Despite some success, however, it ap- pears that coverage alone does not guarantee these outcomes. It is pos- sible that other factors, such as parents' education, can help explain much 5Following implementation of the program, the uninsured continued to have the highest usage of public health clinics for vaccinations (52 percent). Public health usage was 35 per- cent for those with private insurance but partial well-child coverage, 35 percent for those with Medicaid, 43 percent for the underinsured (private insurance, no well-child coverage), and 14 percent for those with private health insurance and full coverage for well-child care.

164 FINANCING VACCINES IN THE 21ST CENTURY of the differentially lower rates of vaccination and higher rates of use of public health clinics among subgroups with different types of coverage. Alternative 3: Universal Federal Purchase Description/Design Options Under this approach, the federal government purchases all routinely recommended childhood vaccines. These vaccines are distributed by the states through existing VFC mechanisms. All children are vaccinated with publicly acquired vaccines, regardless of their health insurance status or care setting. All children from birth through 18 years of age are covered under this approach; adult vaccines could be covered as well. CDC would continue negotiate a contract price for each vaccine. But in contrast to the current method, CDC would calculate a value for the societal benefit of each vaccine and set a price as some percentage of that amount. Provider administration fees could be mandated as an option, and states could use Section 317 funds to support payment of those fees. Advantages This approach has many advantages. All children would be covered under all circumstances. Eligibility determination would be eliminated, and providers would no longer have to maintain multiple stocks of vac- cines. No children would have to be referred from private to public clinics because of ineligibility to receive the vaccine on hand. Children could remain in their medical homes for immunization services. Because states would be expanding their childhood vaccine distribution system, the con- tact between public health departments and private providers could be enhanced, likely promoting improvements in immunization-related ac- tivities, such as participation in population-based immunization registries. A price based on societal benefit might be higher than a price based on such factors as the market power of the purchaser. However, it would express the maximum amount that society would be willing to pay for the vaccine, and provide a more adequate incentive for R&D and assure a continuous supply of those vaccines that are developed and marketed. Disadvantages The principal disadvantage of this approach is the continuation and expansion of the government purchase system. If government were to utilize its additional monopsony power to reduce prices, such action could lead to further shortages, exacerbate market exit, and choke off R&D. Even

CONCLUSIONS AND ALTERNATIVE STRATEGIES 165 if the proposed pricing model yielded higher prices, the risk of future price reductions could make investment in R&D appear less attractive. The industry's uncertainty about future pricing is one of the key issues associated with any government-funded program. If the private market for vaccines were virtually eliminated, there would be no theoretical basis for determining appropriate prices; and industry would be at risk for a change in government procurement policy, for example, as part of a fed- eral-deficit reduction initiative. The public costs of this alternative would be quite substantial possi- bly doubling the federal government's vaccine budget, even at current prices. Congress has consistently rejected universal, single-payor pro- grams, although a single-payor approach for vaccines may be more palat- able in this case given that these services have strong public-good proper- ties and are a small component of overall health spending. Vaccine manufacturers are also likely to oppose a universal purchase proposal. Although manufacturers are used to universal government purchase pro- grams through their western European operations, they rely on the U.S. market as a source of profits to support R&D. Only indirect evidence exists in support of this approach. For ex- ample, many other countries that have universal government acquisition of vaccines have higher vaccination levels than those of the United States. In those states that have implemented their own versions of universal purchase arrangements, however, significantly higher childhood immu- nization rates have not been achieved as compared with states that rely exclusively on the current less-than-universal federal government pur- chase programs.6 Other concerns include the erosion of long-standing community and health plan relationships that have evolved as a result of the mixed pub- lic-private system; the continued separation of vaccine purchases and fees; and the potential windfall to health plans, which might not adjust premiums immediately despite the elimination of vaccine costs. Alternative 4: Federal Block Grant Description/Design Options Under this approach, states receive annual grants for immunization from the federal government. The government calculates the grant using 6Between 1997 and 2001, average immunization rates for the 3:4:1:3 series increased as follows: 74.1-77.3 percent in VFC-only states, 74.2-77.8 percent in enhanced-VFC states, 78.7- 80.9 percent in limited universal purchase states, and 78.0-78.1 percent in universal pur- chase states (CDC, 2002a; CDC, 1998; calculations by the committee).

166 FINANCING VACCINES IN THE 21ST CENTURY a formula based on current VFC funding and other variables. States must meet certain immunization targets to avoid penalties, including loss of the grant. The states have broad discretion in how they allocate the funds among the various immunization-related activities, such as purchasing vaccines, investing in infrastructure, paying administrative fees, conduct- ing targeted immunizations, enhancing registries, and providing educa- ~ ~ . ~ ~ . ~ ~ ion and outreach services. States also determine eligibility for public pro- ,rams. Advantages This approach has two principal advantages. First, it would encour- ~ge innovation by allowing states to try different approaches and combi- ~ations of inputs (e.g., vaccines, infrastructure, education) to optimize Heir program. Second, this approach would allow programs to be cus- ;omized to the particular needs and environment of each state, which vary onsiderably. The focus on outcomes would reinforce the opportunities Or experimentation. This approach would also create a decentralized, nonfederal market Or the purchase of vaccines, which would enable vaccine companies to ompete across states and across a range of product and service configu- ~ations. The impact on prices cannot be predicted: the loss of federal ~onopsony power would result in increased prices, all else being equal; cut this might be balanced by the development of large purchasing con- ,ortia and the higher degree of price sensitivity of states. Disadvantages The principal concern with regard to block grants in general- ~hether maternal and child health, education, or other social service pro- ,rams is the possibility that states would find ways to divert the funds ;o other purposes, especially when faced with pressure to reduce their Total budgets. Clearly designated outcomes and performance measures ould help prevent such diversion of funds, but enforcement might be difficult and highly political. Moreover, the level of block grant funding, being discretionary, could be threatened from year to year and would be subject to jockeying for advantage among the states. Block grant formulas Ire widely perceived as being notoriously difficult to make truly equi- ;able. For example, states could find a wide range of vaccine prices based an their size and negotiating clout, resulting in an inequitable cost burden across states and exacerbating disparities in immunization rates. In addition, despite regional differences, infectious disease control may be better suited to management by regional or national authorities.

CONCLUSIONS AND ALTERNATIVE STRATEGIES 167 Immunization's public-good characteristics are national in scope epi- demics do not respect state borders and states could become "free-rid- ers," particularly in times of fiscal stress. The elimination of program- matic funding through federal agencies could impair tracking and consistent enforcement, adversely impact federal-state collaboration, and make it difficult for the federal government to provide guidance or to intervene should a state program fail to meet minimum targets. By adopt- ing very different approaches, states could lose the ability to draw useful comparisons or to coordinate effectively in case of regional outbreaks. Alternative 5: Public Vouchers for Vaccine Purchase Description/Design Options As in alternative 4, the voucher approach devolves vaccine purchasing from the government to insurers, states, and providers. Under this ap- proach, a voucher is given to each eligible person (including both chil- dren and high-risk adults) to cover some percentage of the cost of each vaccine and the associated provider fee. The person can then spend the voucher at any provider of his or her choice. In their basic design, these vouchers are similar to food stamps. The amount of the voucher is set in advance and may cover all or part of the vaccine purchase price. Vaccines can be purchased directly by providers or purchased by states, clinics, hospitals, insurers, or other entities and supplied to providers. If the voucher is set at an amount below the total of the purchase price and administration fee, the provider can bill the patient for the difference. The voucher as envisioned by the committee covers all uninsured children and adults. The committee considered many specific design alternatives: · Providing universal coverage versus means testing the voucher. · Setting the voucher amount to cover the full cost of vaccines or less than the full cost. · If less than the full cost, means testing the cost sharing, or not. · Using an electronic card system, paper vouchers, or simply physi- cian billing for each vaccine administered. There are trade-offs involved in all of these approaches. For example, covering all children would be expensive, but would be the easiest ap- proach to administer. Means testing the voucher, on the other hand, would require a significant administrative apparatus to enroll children in the voucher program, establish eligibility, and monitor and pay claims. Preserving some consumer responsibility through the use of cost sharing,

FINANCING VACCINES IN THE 21ST CENTURY reward families for seeking out low-cost providers, to contain the costs of the system. h insurance, the eligible person would receive a voucher the annual actuarial value of vaccinations provided; this ted to cover any direct premium or to offset lower wages mployer-provided insurance or signed over to the em- toyer or union tnat manes the payment tor tne Sammy s Insurance. ~ ne Purpose of this provision is to avoid an incentive to employers and eli- ,ible employees to drop coverage in order to be eligible for a voucher (i.e., o avoid "crowd-out"), to permit administrative cost economies derived from having a single insurer administer all types of medical care for em- loyment-group members at all income levels, and to achieve equitable reatment of those who obtain insurance coverage that substitutes for di- ~ect vouchers. If the administrative cost of instituting insurance vouchers Or recommended immunizations were high in absolute terms and rela- ;ive to the value of the voucher, the direct payment mechanism might be extended to those currently having coverage as well. Crowd-out would Hen be expected but would be tolerated in the interest of administrative simplicity. Advantages A principal advantage of the voucher approach is that eligibility is Determined at the time the voucher is issued, not at the point of service, hus relieving providers of this onerous and difficult administrative task. Vouchers would also eliminate the clinician's uncertainty about eventual reimbursement (aside from government reimbursement delays). Since Providers would themselves decide where and how to purchase vaccines, here would be no need to segregate vaccine supplies for different catego- ~ies of patients. The voucher approach would probably result in fewer ost opportunities for vaccination by reducing referrals away from the atient's medical home. The voucher approach would also promote efficiency by putting pur- hasing power directly in the hands of the needy population, giving the recipient free choice of a provider. The federal government would no anger purchase vaccines or negotiate vaccine prices, except perhaps for vaccines with only a single seller. State governments could elect to pur- hase vaccine supplies for resale to physicians in the state, especially if the state believed it could negotiate a favorable price. The electronic voucher card option would facilitate the development If a central registry. Having such a registry would assist in surveillance, Educe missed opportunities, and prevent duplicate vaccinations that can occur when charts are not available at the point of service. 168 however, woulc thereby helping For those wit or credit equal to credit could be u associated with

CONCLUSIONS AND ALTERNATIVE STRATEGIES 169 There is also considerable flexibility in the way a voucher system can be designed, and its payment structure can be manipulated easily from a central point. For example, to provide extra incentives for vaccination in special circumstances, such as outbreak control or difficult-to-reach cat- egories of children, the value of the voucher could be set higher than the outlay cost; for example, a family in a rural area could receive an addi- tional payment to reflect greater travel costs. Vaccine companies would likely support a program that reduced fed- eral purchasing and enabled them to compete. There has also been experi- ence with successful government voucher programs such as food stamps and college loans through the GI bill and other federal programs that could provide guidance in setting up a vaccine voucher system. Disadvantages The principal disadvantage of the voucher approach is its administra- tive complexity and cost of implementation, particularly with regard to investments in information technology and the workforce required to es- tablish eligibility for the vouchers. Tying the program to existing pro- grams, such as Medicaid, would simplify its implementation. Also, some of these problems would be considerably reduced with a universal voucher. A voucher system would be a new program, with attendant costs of set-up and education. Many design details would have to be addressed, including eligibility; enrollment systems; and computer linkages for cards, doctors' offices, and reimbursement centers. Particularly challenging would be determining a voucher price that would balance providing suf- ficient return on investment to the vaccine industry to encourage contin- ued supply and investment in R&D; protecting taxpayers from exorbitant increases in vaccine prices; and avoiding significant increases in patient cost sharing, which can present a barrier to immunization. The administrative disadvantages of the voucher system could be minimized, however, through alternative approaches. A magnetic card or paper voucher, like a food stamp, would give the consumer full control of the purchase decision and the ability to shop for the best quality and price. At the same time, it would ensure that the provider would accept the voucher by making it simple to use and redeem. The provider would not need to assess eligibility possession of the voucher would be sufficient. An essential difference exists, however, between food stamps and vaccines. Because medical providers have established procedures for sub- mitting claims for services rendered, they could easily integrate a paper voucher into their billing system. Thus, a physical voucher might not be necessary in the case of vaccines. For example, providers could immunize

170 FINANCING VACCINES IN THE 21ST CENTURY a patient and submit a bill to the federal vaccine authority, which would reimburse the provider for all vaccine claims on a regular basis, allocating the payment to the appropriate program based on the patient's eligibility. While there are certain advantages to the paper or electronic card version of the voucher approach, its administrative complexity would be enor- mous. A substantial disadvantage of a voucher system that excluded adults not at high risk is that many adults with high-risk indications would go unrecognized and, as a consequence, would remain unvaccinated. The voucher approach would require that high-risk adults be identified as such in advance for the purpose of obtaining the voucher, so that the voucher would be available when needed. But physicians could have a difficult time identifying patients with high-risk indications for immuni- zation. Alternative 6: Insurance Mandate Description/Design Options This approach requires that all insurers, both public and private, pro- vide coverage to all enrollees, with limits on the deductibles, copayments, and coinsurance they can require. While 28 states have already imposed mandates on state-regulated insurers, this approach involves a federal requirement that applies to both state- and federally-regulated insurers and employer plans (AAP, 2003~. Insurers would be required to report on vaccine coverage and cost sharing to the government. The mandate would apply to any vaccine that has low insurance coverage rates (i.e., more than 5 percent of the target population remains uninsured for the vaccine) 5 years after the introduction of the vaccine or after the initiation of the program. This approach is contingent on a redesign of the ACIP recommenda- tion process. ACIP's decisions have enormous private- and public-sector financial implications. Given the rising costs of vaccines, combined with the less-favorable cost-benefit profiles of some current and pipeline vac- cines, ACIP has a responsibility to make economic considerations central to its recommendation function. Under this approach, ACIP would estab- lish multiple tiers for vaccine recommendations. One tier would include vaccines with strong spillover effects because of the highly infectious na- ture of the diseases they prevent. The mandate would apply principally to these vaccines. The committee's proposed approach with respect to ACIP is described fully in Chapter 7.

CONCLUSIONS AND ALTERNATIVE STRATEGIES Advantages 171 The mandate approach targets the most important coverage gaps- underinsured children and high-risk adults (both underinsured and un- insured). In addition, by eliminating crowd-out and reducing referrals from private to public providers, the approach would add stability to the immunization system and enhance the ability of federal and state govern- ments to estimate needs and plan accordingly. Reduced referrals would result in less fragmentation of care and thus fewer missed opportunities and duplicate immunizations. The mandate approach would also allevi- ate the provider burden by greatly reducing the problem of eligibility de- termination. The emphasis on tier-one vaccines would foster a more stable and predictable growth in vaccine costs over time and send clear signals to the industry about the societal priorities for vaccine development. The re- duced public market share would appeal to producers because it would enable them to compete in a larger private market. Disadvantages The principal disadvantage of an insurance mandate is that the costs of increased coverage are likely to be passed on to either consumers, in the form of higher copayments and deductibles, or their employers, in the form of higher premiums. Although vaccines represent a relatively small share of insurer costs, that share is expected to increase substantially with the addition of new vaccines to the schedule. Mandating coverage could drive companies to drop coverage altogether, particularly in a weak economy, thereby increasing the number of uninsured. Moreover, while the burden on providers for determining eligibility would be alleviated by the elimination of the distinction between those who are fully insured and those who are underinsured within the insured population, determi- nation of eligibility within public programs would remain burdensome. Furthermore, while the mandate would technically eliminate insur- ance crowd-out, referrals of privately insured patients to the public sector for immunizations could increase nonetheless. Past experience with both VFC maintenance-of-effort laws and state mandates suggests that sub- stantial investments in regulatory infrastructure could be required to en- sure compliance with the mandate and to control the rate of referrals from the private to the public sector. The government's market share in vaccine purchases would decrease under this alternative, reducing the monopsony power of the government and its ability to negotiate steep discounts. The committee views this lift- ing of pressure on prices positively in terms of investment in production

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.

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-

74 FINANCING VACCINES IN THE 21ST CENTURY

CONCLUSIONS AND ALTERNATIVE STRATEGIES 175

176 FINANCING VACCINES IN THE 21ST CENTURY

CONCLUSIONS AND ALTERNATIVE STRATEGIES 177

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,

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

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.

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 calculation—e.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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The national immunization system has achieved high levels of immunization, particularly for children. However, this system faces difficult challenges for the future. Significant disparities remain in assuring access to recommended vaccines across geographic and demographic populations. These disparities result, in part, from fragmented public–private financing in which a large number of children and adults face limited access to immunization services. Access for adults lags well behind that of children, and rates of immunizations for those who are especially vulnerable because of chronic health conditions such as diabetes or heart and lung disease, remain low.

Financing Vaccines in the 21st Century: Assuring Access and Availability addresses these challenges by proposing new strategies for assuring access to vaccines and sustaining the supply of current and future vaccines. The book recommends changes to the Advisory Committee on Immunization Practices (ACIP)-the entity that currently recommends vaccines-and calls for a series of public meetings, a post-implementation evaluation study, and development of a research agenda to facilitate implementation of the plan.

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