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Executive Summary ABSTRACT The public-private partnership that has formed the foundation for purchas- ing and distributing vaccines in the United States over the past 50 years is show- ing signs of erosion. The existing national immunization system has performed well in achieving high levels of immunization for children. But difficult new chal- lenges have emerged, including a growing number of recommended vaccines, higher prices associated with new vaccines, persistent disparities in immunization levels, low levels of immunization for adults with chronic illness, the growing burden of immunization on clinicians, recent shortages in the supply of vaccines, and the increasing investment required to license and produce new vaccines. In addition, the vaccine supply system has undergone radical change. More than 25 companies produced vaccines for the U.S. market in the last 30 years; yet today only 5 companies produce all vaccines recommended for routine use by children and adults. Government purchases now account for more than half of the vaccine market. Government vaccine expenditures are "rowing rapidly;fund- ingfor the Vaccinesfor Children entitlement program jumpedfrom $500 million to $1 billion between 2000 and 2002 with the addition of new vaccine products to the recommended childhood schedule. In diagnosing the problems facing the vaccine financing system, the Insti- tute of Medicine's Committee on the Evaluation of Vaccine Purchase Financing in the United States recognized that a strong relationship exists between the sys- tem for purchasing and administering vaccines and the stability and growth of the U.S. vaccine supply industry. Although vaccines represent important tools for disease Prevention and have significant social value, they frequently generate 1

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2 FINANCING VACCINES IN THE 21ST CENTURY lower revenues than drugs and other health care services, and provide a less at- tractive opportunity for private investment in the pharmaceutical industry. To resolve these tensions, the committee recommends strategic reforms that balance public health goals with the need to provide industry a rate of return that is adequate to supply current products and also develop new vaccines. The committee's principal recommendation is the replacement of existing government vaccine purchasing programs with a new vaccine insurance mandate, subsidy, and voucher plan. The mandate would require that all public and private insur- ance plans include vaccine benefits. Thefederal government would provide a sub- sidy to health plans and providers to reimburse their vaccine purchase costs and administration fees. The federal government would also provide vouchers for un- insured children and adults to support recommended immunizations from health care providers of their choice. In formulating this approach, the committee con- sidered several alternative strategies, which are described in the report. The committee further recommends changes in the composition and deci- sion-making procedures of the Advisory Committee on Immunization Practices, the entity that currently recommends vaccines, to improve the integration of com- peting objectives within the national immunization system. Finally, the commit- tee recommends the initiation of a deliberative process, an evaluation study, and a research agenda to provide data and indicators that can guidefuture policy and practice with regard to vaccinefinancing. This report presents the results of an evaluation of the financing of vaccine purchases. The purpose of that evaluation was to design a fi- nance strategy that can achieve the right balance in assuring access to the social benefits of vaccines while also encouraging the availability of new and future vaccine products within the health care system. The study was prompted by the publication of an earlier Institute of Medicine (IOM) report, Calling the Shots (IOM, 2000a), which examined the financing of immunization infrastructure and recommended a substantial increase ($75 million) in the federal immunization grants program to support in- frastructure development. In framing this new study, the Centers for Dis- ease Control and Prevention (CDC) asked the IOM to examine what is known about current vaccine finance arrangements and to identify strat- egies that could resolve the basic tensions and uncertainties that perme- ate existing vaccine purchasing systems in the public and private health care sectors. The Committee on the Evaluation of Vaccine Purchase Fi- nancing in the United States was formed to conduct this study. The spe- cific charge to the committee, which was based on questions posed by CDC, is shown in Box ES-1.

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EXECUTIVE SUMMARY 3 BACKGROUND immunization represents one of the great triumphs of medical sci- ence, one of the most distinctive achievements of the American health care system, and one of the best investments in public health. Vaccines have acquired a special status within the public and private health sectors because they convey significant benefits not only to individuals who are immunized but also to the community at large. Vaccines create a "herd immunity" that protects those who do not receive the vaccine because of medical conditions, those who may be too young to receive the vaccine, those who are not vaccinated because of parental indifference or religious or philosophical objections to vaccination, and those who face financial or other barriers to immunization services. By interrupting the spread of communicable disease, vaccines reduce the number of persons who be- come infected, diminish the burden of disease, reduce public and private health care expenditures, and improve the quality of life of the general population. The value of a given vaccine is determined by such factors as protec- tive efficacy, disease incidence, disease outcomes, and costs associated with its use. Moreover, the costs and benefits of individual vaccines vary with the assumptions that guide the assessment of financial and social

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4 FINANCING VACCINES IN THE 21ST CENTURY benefits. Some vaccines produce significant benefits in early childhood; others provide protection during adolescence or adult life. Some vaccines are recommended for universal use; others are recommended only for certain jurisdictions or populations that have specific risk characteristics. Studies have shown that the ratios of vaccination benefits to costs can vary substantially from 27:1 for diphtheria/pertussis (i.e., $27 worth of benefit for every $1 spent), to 13.5:1 for measles, 4.76:1 for varicella, and 0.68:1-1.1:1 for pneumococcal conjugate. In general, vaccines are investments that confer significant health and other social benefits. The delivery of recommended vaccines is now a fun- damental component of primary health care services for children, and increasingly for adolescents and adults as well. Record high levels of im- munization have been achieved for young children; for example, 74 per- cent of all children now receive the recommended series of vaccines by age 2. Even so, one in four children under age 2 is not up to date on rec- ommended vaccines. The federal government currently purchases between 52 and 55 per- cent of the childhood vaccines distributed in the United States, primarily for children who are uninsured or Medicaid-eligible. Nearly 20 doses of vaccines against 11 diseases are required for childhood immunization, at a cost of about $400 at the discounted prices available to the public sector (up to $600 at private-sector prices). This investment strains the ability of both the public and private sectors to immunize a daily birth cohort of more than 11,000 babies. Additional funds are required for the adminis- tration of the vaccines, as well as vaccine shipping and storage costs. In the 10-year period between 1988 and 1997, public-sector expendi- tures for vaccine purchases doubled from $100 to $200 per child through age 6. The cumulative public-sector cost doubled again in less than 5 years between 1997 and 2001, from $200 to almost $400 per child. The addition to the recommended childhood schedule of the expensive new pneumo- coccal conjugate vaccine for infants resulted in a doubling of the budget between 2000 and 2002 (from $500 million to over $1 billion in 2000) for the Vaccines for Children (VFC) entitlement the major government vaccine purchase program for disadvantaged children. Continued cost increases can be expected as a result of the array of new vaccines now in development. Health officials in both the public and private health care sectors are concerned about the growing fragmentation of effort within the immuni- zation system, as well as the increasing number of recommended vac- cines and the high prices of new vaccines. These factors contribute to gaps and uncertainties in health plan benefits for immunization, which can lead in turn to missed opportunities for immunization, greater disparities in immunization rates, and possible outbreaks of vaccine-preventable dis-

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EXECUTIVE SUMMARY 5 ease. Moreover, while rates of adult immunization have improved for vaccines that prevent influenza and pneumonia, they are still well below the public health goals established in Healthy People 2010 (U.S. Depart- ment of Health and Human Services, 2000~. Adults with chronic health conditions (such as heart and lung disease or diabetes) that place them at high risk for vaccine-preventable disease have particularly low immuni- zation levels. A public-private partnership has traditionally shared the costs of purchasing and administering vaccines for children, but the private con- tribution to this partnership may be weakening. While most public and private health plans include vaccine benefits, the scope of those benefits varies widely by type of insurance product and type of vaccine. Federal and state regulations have emerged to require certain types of insurance coverage for some vaccines for children and adults, but the regulatory effort is uneven and difficult to administer. Furthermore, government programs that have been created to provide access to vaccines for chil- dren (such as VFC) have not addressed the needs of older adolescents and adults, nor have they created incentives for vaccine administration among health providers. The uneven nature of health plan vaccine benefits and the limited data on insurance practices with respect to immunization create signifi- cant uncertainties in designing national finance strategies for vaccine pur- chases. The population of underinsured those who have health care in- surance that covers major medical expenses but does not include benefits for vaccines is a source of increasing concern and uncertainty. Further- more, some health plans that do include vaccine benefits require out-of- pocket expenses in the form of high deductibles or copayments. While some states assure access to vaccines for the underinsured, oth- ers do not. Some states require immunization coverage in state-regulated insurance plans; others do not. Some states that once had universal pur- chase policies (thus providing vaccines to all children) are now reducing the scope of their benefits. Recent vaccine shortages that were unprecedented in their scope and severity, as well as diminishing numbers of vaccine suppliers for the U.S. market, are early warning signs of other problems that require systemic remedies to assure a healthy and reliable vaccine supply system. While temporary production problems appear to have eased, the potential for disruption remains. The problem of vaccine shortages has raised concerns about the relationships among the size of the government vaccine market, low vaccine prices, and the scale of investment in the production of cur- rent vaccines and the development of new vaccine products. The ability of the government to negotiate low prices for recommended vaccines is important to public health agencies and others that are trying to stretch

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6 FINANCING VACCINES IN THE 21ST CENTURY tight budgets to cover both traditional vaccines and a growing array of new and higher-priced vaccine products. On the other hand, adequate financial incentives are necessary to sustain private investment in the vac- cine production and licensing processes if the vaccine industry is to re- main competitive and have the capacity to innovate within a global vac- cine market. Incremental reforms have been offered to solve discrete aspects of the problems associated with access to and the supply of current vaccines. For example, the proposed fiscal year 2004 federal budget includes pro- posals to increase the scope of the safety net, lift vaccine price caps, and expand the size of vaccine stockpiles. These reforms may provide tempo- rary relief from acute problems, but the nation still lacks a comprehensive finance strategy that can adapt to expected increases in both the number and prices of vaccines, continue to assure access for disadvantaged popu- lations, and also sustain incentives for private investment in the produc- tion and licensing of current and future vaccine products. CONCLUSIONS Routine immunization for recommended vaccines, especially for chil- dren, is achieved through a partnership between public health clinics and private clinicians. In formulating the following conclusions, the committee focused on aspects of the immunization system that represent important sources of stress and tension associated with current vaccine purchase practices. Other aspects of the immunization system (such as concerns about the quality of the public health infrastructure, vaccine safety issues, military vaccines, and the role of vaccines in dealing with bioterrorism) are addressed in other IOM reports (IOM, 2000a,b; 2002a,b,c; 2003). 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. Despite improvements, current childhood immunization levels (about 74 percent of all 2-year-old children) have not achieved the national health goal of 80 percent immunization. One in four young children is not up to date in receiving recommended immunizations. Substantial variation (almost 20 percent) in immunization rates cur- rently exists within and across states. Some large urban centers, in par- ticular, have low immunization rates for children aged 19 to 36 months.

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EXECUTIVE SUMMARY The specific 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 populations that frequently move in and out of safety net programs. In addition, the disparities between children and adults in the burden of vaccine-preventable disease are troubling. Although the reported use of pneumococcal and influenza vaccines among adults aged 65 and older more than doubled in the period 1988-1995, morbidity and mortality for both diseases remain significant in this population. Immunization rates for high-risk adults (aged 18-64) with chronic disease are especially poor: in 1999, 31.9 percent received an annual influenza vaccination, while only 17.1 percent had ever received a pneumococcal vaccination. The difficul- ties associated with risk-based strategies (i.e., based on health conditions) for adults have caused many providers within the health profession to shift to an age-based strategy to encourage vaccination of adults. 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 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.

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8 FINANCING VACCINES IN THE 21ST CENTURY 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- quiring and delivering 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. As noted above, many individuals are underinsured their health insurance benefits do not include coverage for immunization. Estimates of underinsurance among children vary from 5 to 14 percent. Others have insurance policies that require individuals to share the costs of vaccines in the form of high deductibles and copayments. Still others, such as Medi- care beneficiaries, are covered for certain vaccines but not others. Persons who face such financial barriers are less likely to receive routine immuni- zations 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, 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 impose sub- stantial burdens on clinicians. Clinicians must determine whether the

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EXECUTIVE SUMMARY 9 costs of purchasing and administering recommended vaccines are reim- bursable under the terms of a wide variety of insurance plans and entitle- ments, including VFC, the State Children's Health Insurance Program (SCHIP), CDC's Section 317 program, Medicare, and multiple private health insurance plans. These administrative barriers can result in missed opportunities for immunization and frequent referrals of underinsured patients to public health clinics for routine vaccines, which in turn con- tribute 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. Significant tensions exist in the vaccine supply system between the need to control public and private expenditures on vaccines and the need to encourage investment in the production and development of current and future vaccines. While a series of stopgap proposals and measures has emerged in recent years to address recurring tensions, no coordinated strategy exists to balance the goals of assuring access to vaccines and sus- taining the supply of vaccine products. The result is an unstable market that reduces incentives for future vaccine development and threatens to exacerbate current structural problems within the industry. Conclusion 5: The vaccine recommendation process does not ad- equately incorporate consideration of a vaccine's price and societal benefits. The recommendations of the Advisory Committee on Immunization Practices (ACIP) and its counterpart groups within the American Acad- emy of Pediatrics and the American Academy of Family Practitioners have significant implications for public and private expenditures. 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 program, the standard of care for the Medicaid vaccine schedule, and the universal purchase guide- lines for many states. Yet the ACIP decision-making process requires the formulation of recommendations before the government purchase price has been negotiated. In addition, ACIP has no mechanism for distinguish- ing vaccines with strong spillover effects, such as those that prevent highly contagious diseases, from vaccines that do not, such as tetanus and cer-

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10 FINANCING VACCINES IN THE 21ST CENTURY lain therapeutic vaccines that are in development. The lack of a capacity to address these variables is a serious impediment to a coherent finance strategy for vaccine 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 following alternative approaches were considered: 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. Each of these alternatives has certain advantages in assuring access to recommended vaccines. However, the committee concluded that alterna- tive 7 has the greatest potential to assure access while also offering incen- tives for the development and production of vaccines. Incremental re- forms that perpetuate the current fragmentation may help resolve one crisis or strengthen an isolated component of a dynamic and interactive system, but such piecemeal approaches do not foster a coherent strategy that can align national health policy goals with the desired outcomes. It was the consensus of the committee that to maintain the current system without fundamental reforms would ultimately result in deterioration of the immunization system and weaken incentives for future vaccine re- search and production. Requiring insurance coverage for immunization, for example, could lead to higher premiums and cost-sharing practices that might reduce access to vaccines or shift larger numbers of individuals

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EXECUTIVE SUMMARY 11 to government programs. A universal purchase proposal would also be problematic if governmental expansion within the vaccine market led to lower prices and discouraged private investment in new vaccine prod- ucts. Such issues point to the need for close attention to the ways in which escalating costs shift the immunization burden between the public and private health sectors and between individuals and health plans. RECOMMENDATIONS Ultimately, the committee determined that the best strategy would be to formulate a comprehensive plan that can address multiple goals. This plan would encompass a mandated insurance benefit strategy that in- cludes a subsidy for insurers; a decentralized, private market for vaccines; and a voucher program for the uninsured. The committee formulated its strategy in three recommendations. Recommendation 1: The committee recommends the implementa- tion of a new insurance mandate, combined with a government sub- sidy and voucher plan, for vaccines recommended by the Advisory Committee on Immunization Practices (ACIP). The proposed plan, referred to as the vaccine payment system, consists of five core components that should be considered an integrated strategy for achieving the key objectives of access to and availability of vaccines: Federal legislation would be required to establish a vaccination coverage mandate for all public and private health plans. This mandate would apply to both state-regulated insurance plans and self-funded em- ployer plans (which are exempt from state regulation under the Employee Retirement Income Security Act [ERISA]), as well as Medicare, Medicaid, SCHIP, and government health plans for military personnel and civilian employees. The mandate would provide coverage for all insured children; adults aged 65 and older; and certain designated populations, such as adults aged 18-64 who have certain health disorders that place them at higher risk for vaccine-preventable disease. The federal government would create a new federal subsidy to re- imburse public and private health plans and providers for mandated vac- cine costs and associated vaccine administration fees. The federal government would also create a voucher system for vaccines and vaccine administration fees for designated uninsured popu- lations. The insurance mandate, subsidy, and voucher would apply princi- pally to vaccines that have substantial spillover effects as a result of their

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2 FINANCING VACCINES IN THE 21ST CENTURY ability to prevent highly contagious diseases. Vaccines without substan- tial spillover effects, such as therapeutic vaccines, would be considered for inclusion only in cases of exceptional societal benefit. The amount of the subsidy and voucher would be determined both for vaccines currently on the immunization schedule and for vaccines that are not yet available. The subsidy for new vaccines would be based on an estimate of their societal benefit. The subsidy for vaccines already in use would be based on a formula that would take into account both current market prices and the vaccines' calculated societal benefit. The mandate would not apply to vaccines priced above the subsidy amount. Major Features. A government-funded insurance mandate for immu- nization represents a reformulation of a universal vaccine purchase pro- gram and would assure that clinically appropriate immunization services would become a basic and required feature of all public and private health insurance plans. This strategy changes the role of government from one of buying vaccines to one of assuring immunization by mandating insur- ance coverage for recommended vaccines, as well as providing a fixed subsidy adequate to reimburse both vaccine purchase costs and adminis- tration fees for public and private insurers and clinicians. As a universal program, the government vaccine subsidy is extended to all persons within the designated populations. As a payment reimbursement pro- gram, it sustains the role of government in subsidizing the cost of immu- nization and enhances incentives for investment in vaccine products, but it reduces the impact of government purchases on the vaccine market rela- tive to other approaches (such as a universal purchase policy). The prospect of a guaranteed public subsidy for selected vaccines would provide economic incentives that would encourage manufacturers to invest in the clinical trial, licensing, and production processes neces- sary to move a vaccine product from the early stage of discovery to its use in routine medical care. Reducing the financial uncertainties associated with these processes would stimulate the market and encourage the de- velopment of new and effective vaccine products. At the same time, the federal subsidy for vaccines would not provide a blank check for a new vaccine product. The process of establishing a predetermined subsidy for vaccines not yet licensed would offer incen- tives for reliable and innovative vaccine product development while also encouraging efficiency and competition in the production process. Spe- cific advantages and limitations of the recommended strategy are dis- cussed below. Advantages. The proposed vaccine payment plan has several clear advantages. The plan would:

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EXECUTIVE SUMMARY 13 Improve incentives for the development of new vaccines by pro- viding manufacturers with assurance of adequate pricing and returns for those vaccines that confer substantial public benefit. Increase immunization rates by eliminating or reducing barriers to access associated with vaccine costs or health insurance benefits. Create a more pluralistic market for vaccines that would encour- age health care providers and health plans to purchase vaccines best suited to the needs of their patients and subscribers. Build upon the strengths of the current arrangements of public and private health plans and avoid the creation of separate or parallel pro- grams. Eliminate the economic distortions and administrative barriers as- sociated with the direct federal purchase of vaccines. Reduce the role of government in purchasing vaccines and avoid delays now associated with eligibility standards, protracted contract ne- gotiations, price caps, discretionary funding cycles, and discount arrange- ments. Reduce the potential for passing higher vaccine costs on to indi- viduals. Support the administration of vaccines within individuals' medi- cal homes and strengthen the bond between immunization and other pri- mary health care services. Support the rapid uptake of new recommended vaccines and re- duce the disparities and fragmentation now associated with the time de- lays involved in negotiating contracts and budgets for federal vaccine purchases. Sustain the partnership among governments (federal, state, and local), health plans, health care providers, and vaccine companies in achieving the societal benefits of disease prevention. Maintain a market-oriented pricing approach. Disadvantages. Four disadvantages are associated with the proposed vaccine payment system: Federal expenditures for vaccines would increase, primarily be- cause of expanded public coverage for vaccines as a result of the insur- ance mandate. The replacement of a government purchase price with a federal subsidy could result in higher prices for some vaccine products. Setting a subsidy for vaccines not yet licensed based on a calcula- tion of societal benefit, without reference to market forces, would require the development of a consistent methodology to resolve numerous tech- nical difficulties. Controversies could arise in assigning monetary values

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4 FINANCING VACCINES IN THE 21ST CENTURY to life-years and quality of life as part of the societal benefit calculations. Substantial legislative and regulatory guidance, in addition to expert guid- ance and public debate, could be required to resolve these controversies. Implementation of the vaccine payment plan would require sub- stantial amendments to the laws and regulations governing various pub- lic and private health plans (e.g., ERISA, the Public Health Act, Medicare, Medicaid, and SCHIP). A comprehensive legislative strategy would be necessary to reduce the risk of an incremental and uneven approach. Recommendation 2: The Secretary of the Department of Health and Human Services should propose changes in the procedures and membership of ACIP so that its recommendations can associate vaccine coverage decisions with societal benefits and costs, includ- ing consideration of the impact of the price of a vaccine on recom- mendations for its use. The Secretary of DHHS should develop rules that address both the ACIP membership and decision-making process. These rules would modify current practices through administrative action or legislation, where necessary. ACIP Membership. Voting membership in ACIP should be ex- panded to include expertise in health insurance benefit design, public and private health care delivery systems, consumer issues (including concerns regarding vulnerable populations, such as disabled persons, racial and ethnic minorities, and rural populations), health economics and finance, cost-benefit assessment, and vaccine manufacturing. The representation of these perspectives is essential to inform ACIP decision making with respect to the impact of vaccine price and coverage on population groups, providers, payors, and other key stakeholders. At the same time, it is im- portant to maintain the independence and balance that have traditionally guided ACIP recommendation procedures through a rigorous and trans- parent conflict and bias screening process for voting members. Current employees or agents of firms within the insurance and vaccine manufac- turing industries should not participate as voting members, although ac- cess to their expertise is necessary to inform committee deliberations. Immunization Schedule Determinations. ACIP should continue its present practice of recommending current and new vaccines for universal or selected populations within the immunization schedule. These deter- minations should be based on a vaccine's efficacy, safety, cost-effective- ness (reflecting current price information), feasibility, supply, and other considerations. Mandate and Subsidy Determinations. In addition, ACIP should de- termine whether a vaccine has sufficient spillover effects to warrant its

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EXECUTIVE SUMMARY 15 inclusion in the new insurance mandate and subsidy category. The man- date determination for new vaccines would require a judgment about the extent to which a vaccine offers societal benefits beyond its value to the vaccinated individual. An important criterion in determining societal ben- efits should be the extent to which immunization conveys herd immu- nity. The mandate should apply principally to vaccines with substantial spillover effects. However, other vaccines, such as therapeutic vaccines, would be considered for inclusion in cases of exceptional social benefit, such as when disparities in immunization rates between insured and un- insured persons persist for a substantial time after licensure of a vaccine. Once a vaccine had been selected for inclusion under the insurance mandate as discussed in recommendation 1, ACIP would calculate the monetary value of the federal subsidy for reimbursement to public and private insurers. This calculation would be based on a methodology that would assign values to such factors as reduced health expenditures, en- hanced quality of life, and increased labor productivity. The mandate and subsidy process would apply to both current and future vaccines. Future vaccines should receive primary consideration to stimulate the development of new vaccine products. Current ACIP- recommended vaccine components, such as tetanus, could be "grand- fathered" into the mandate and subsidy category to avoid confusion and disruptions to the current vaccine schedule and immunization system. Staff support for these new functions and the redesigned ACIP would require expansion of the supporting responsibilities of the National Vac- cine Program Office and the National Immunization Program within CDC. Recommendation 3: As part of the implementation of recommen- dations 1 and 2, the National Vaccine Program Office should con- vene a series of stakeholder deliberations on the administrative, technical, and legislative issues associated with a shift from vaccine purchase to a vaccine mandate, subsidy, and voucher finance strat- egy. In addition, the Centers for Disease Control and Prevention (CDC) should sponsor a postimplementation evaluation study (in 5 years, for example). CDC should also initiate a research program aimed at improving the measurement of the societal value of vac- cines, addressing methodological challenges, and providing a basis for comparing the impact of different measurement approaches in achieving national immunization goals. Recommendations 1 and 2 represent a significant departure from cur- rent law and practice. A change of this magnitude is warranted to address the fundamental and systemic problems that confront the national immu-

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16 FINANCING VACCINES IN THE 21ST CENTURY nization system. Piecemeal changes are unlikely to solve these problems. Incremental reforms also are incapable of achieving an appropriate bal- ance between access and availability in vaccine financing. In formulating its recommendations, the committee has sketched the broad outlines of long-term strategic reforms. These recommendations do not address all aspects of the shift from the existing vaccine purchase pro- grams to a mandate, subsidy, and voucher plan, nor do they incorporate the comprehensive legislative agenda that would be necessary to achieve these reforms. A major national debate and examination of the committee's proposals among diverse stakeholders is necessary prior to full implementation of these recommendations. The committee therefore urges the National Vaccine Program Office to organize a series of public meetings with key experts and interest groups, including health plans, providers, vaccine industry representa- tives, public health officials, and others, to address how the proposed arrangements might be implemented through a staged roll-out informed by further data and analysis. These discussions should address the fol- lowing topics: What populations should be included in the vaccine payment plan? The federal vaccine payment plan is envisioned primarily as a means of ad- dressing the immunization needs of young children, older adults, and high-risk adults between the ages of 18 and 64. The inclusion of other populations such as all adolescents (under age 21) and all adults, re- gardless of their health condition should be considered as well. The ini- tial purpose of the expanded coverage is to target public finance toward those who are currently underserved. A second goal, which supports the proposal for universal coverage of all children and adults, is to reduce the current fragmentation in vaccine coverage that leads to gaps and admin- istrative burdens in determining eligibility, and to foster efficiency in pro- viding access to vaccines that are delivered primarily in private health care settings. The means by which vaccines would be delivered to and reimbursed for different groups might differ by age, employment circum- stances, and access to health care services. How would the insurance mandate and subsidy system operate? The insurance mandate would apply to all public and private insurers, includ- ing ERISA and ERISA-exempt plans, Medicaid, SCHIP, Medicare, and other public insurance (such as CHAMPUS) and public health programs (such as that of the Indian Health Service). The mandate could extend to all insured persons within these health plans or only to selected popula- tions, such as young children, older adults, and high-risk groups. The voucher system would provide access to vaccines for all uninsured people in these categories. For some programs, current program dollars for vac-

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EXECUTIVE SUMMARY 17 cine purchases and vaccine administration would be replaced by the vac- cine payment system dollars. For example, vaccines administered through Medicaid and SCHIP would no longer be funded through those programs' federal-state matching funds but through the new centralized vaccine system. Medicare would also be included in the mandate; but for pur- poses of administrative efficiency, Medicare vaccination would be paid for by that program's own funds. How should societal value be calculated ? This report defines the soci- etal value of a vaccine as its total benefits, including both the private ben- efits to the person receiving it and the benefits to others. Using this ap- proach, a monetary value is assigned to all benefits associated with a new vaccine that can be determined and measured (for example, future medi- cal costs that are averted, as well as additional life-years and enhanced quality of life). The sum of these values represents the vaccine's societal benefit. As noted above in the discussion of disadvantages, this calcula- tion involves certain technical challenges. Developing a consistent meth- odology and making assumptions explicit for all vaccines would be of value in the decision-making process not only for vaccines but in other spheres of health care as well. Changes in the benefit calculation should be expected as knowledge of a vaccine's immunogenicity and the impact of other therapeutic effects on disease outcomes improves over time. How would the calculated societal benefit be used to determine the sub- sidy amount? The creation of a predetermined subsidy for future vaccines is intended to be an incentive to stimulate private-sector investment in vaccine development. Determining the amount of the subsidy would re- quire a calculation of the societal benefit of each future vaccine, but the value of the subsidy would not necessarily equal the full value of the soci- etal benefit. While the subsidy should not exceed the societal value of the vaccine product, it should also not be so low that it fails to serve as an adequate incentive for research and development. Different approaches might be considered, such as adopting a fixed standard (for example, 90 percent of the societal value) or limiting the range of new vaccine prices to some multiple of current prices. How would the subsidyfor current vaccines be determined ? The calcula- tion of a subsidy for current vaccines would require consideration of both the societal value of the vaccine product and recent market prices. Some vaccines might receive a subsidy significantly higher than current prices if judged to be undervalued in terms of their societal benefit. Adjustments to the value of the subsidy might also be warranted to account for infla- tion, as well as changes in the costs of production or regulatory compli- ance. Who would administer the subsidy and voucher system? The vaccine payment system is designed to serve multiple objectives: to address the

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18 FINANCING VACCINES IN THE 21ST CENTURY vaccine needs of vulnerable populations, to assure a reliable supply of current and future vaccines by diversifying the vaccine purchasing mar- ket, and to relieve clinicians of the administrative burden of determining individual eligibility for vaccines. Ideally, one federal agency within DHHS would be responsible for administering the subsidy and voucher system, as well as overseeing compliance with the insurance mandate for vaccine coverage. Certain responsibilities might be delegated to state agencies (in such areas as insurance regulation and administration of the voucher plan), but a central coordinating strategy would be required to assure consistent eligibility criteria and practices throughout the states. How would the proposed mandate treat deductibles and copayments? While many states have mandated first-dollar coverage for vaccines, im- munization costs might apply toward the general deductible that is cus- tomary practice for health plans. While many current vaccines are inex- pensive, significant price increases can be expected in the future. Cost sharing could encourage consumers to shop for efficient providers and help control inflationary pressures; however, it could adversely affect immunization rates should financial factors become burdensome for the consumer. The extent to which cost sharing should be included in the vaccine payment plan would require further consideration in the imple- mentation process. Evaluation Plan. The magnitude and uncertainties of the changes as- sociated with the recommended vaccine payment system are significant. The committee recommends that an evaluation study be included as part of the implementation plan to address certain key issues. Specifically, this study should include an analysis of the impact of the mandate and sub- sidy in two distinct areas: access to vaccines and the availability of the vaccine supply. In the first area, data should be gathered on how the payment system affects the delivery of vaccines to selected population groups (insured, uninsured, and underinsured), age cohorts (young children and high-risk adults), and geographic settings (rural and urban), possibly through dem- onstration studies aimed at identifying key challenges involved in the implementation process in selected states. The costs of implementation, outreach, education, reimbursement, and oversight should be measured to determine how to gain greater efficiencies in administering the program. In the second area, the impact of the diversified market and predeter- mined subsidy plan should be examined in light of their relationship to private investments in the production and licensing of new vaccine prod- ucts. The evaluation study should consider the assumptions that guide the calculations of social benefit, as well as other data that influence the level of vaccine subsidy and voucher payments.

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EXECUTIVE SUMMARY 19 The positive and negative effects of replacing current safety net pro- grams with the proposed government-funded mandate are unknown and could be significant. The VFC entitlement and Section 317 vaccine pur- chase program have been productive tools in improving immunization levels within the public sector. These programs have a history of strong bipartisan support and effective delivery of vaccines for disadvantaged populations, especially during difficult fiscal times; but they are also asso- ciated with disruptions in supply and a decrease in the number of vaccine manufacturers. Similarly, state-supported vaccine purchase programs are often the foundation of safety net immunization efforts in certain jurisdic- tions. Strategies need to be developed to assure that the payment plan advocated here will at least sustain and ideally improve current immuni- zation rates among disadvantaged populations. Research Agenda. Addressing many of the issues examined in this report will require further understanding of the ways in which basic mar- ket forces interact with access to and the delivery of vaccines to children, adolescents, and adults. Limited data are available to support rigorous examination of such empirical questions as the relationship of insurance benefits to immunization status. More funding is needed to support re- search studies that can monitor the extent to which pricing, supply, man- dates, and other health policy and health finance factors influence the per- formance and outcomes of immunization efforts. Suggested topics for an initial set of research studies include the following: The numbers and characteristics of children and adults having pub- lic or private insurance benefits that include immunization and the types of restrictions on their immunization benefits. The impact of insurance status (both public and private) and cost- sharing arrangements on the timing and setting of vaccine administration and immunization status. The impact of alternative vaccine payment arrangements on clini- cian behavior and referral rates for immunization. The effect of full or partial subsidies on the supply and delivery of childhood and adult vaccines. The relationship between vaccine prices and supplier investments in research and development. The relationship between U.S. and global vaccine production, sup- ply, regulation, and prices. FINAL OBSERVATIONS The findings, alternative strategies, and recommendations set forth in this report provide a blueprint to guide the nation's public and private

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20 FINANCING VACCINES IN THE 21ST CENTURY health sectors in adapting to foreseeable changes in vaccine development in the decades ahead. The public and private partnership that supports the immunization of children and adults in the United States requires vigi- lance and flexibility in assuring that the social benefits of vaccines will continue to be available to all, regardless of ability to pay or health care setting. Assuring access and sustaining incentives that contribute to the availability of safe and effective vaccines are the twin goals that must guide vaccine finance strategies in the 21st century.