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2 Origins and Rationale of Immunization Policy The national immunization system is the culmination of public health legislation and traditions dating to the early 1800s, which include the par- ticipation of state and federal governments as well as the private sector. The immunization system today benefits from substantial government support, including federal support for basic research and development (R&D) through the National Institutes of Health (NIH); federal and state funding for public health outreach, infrastructure development, and vac- cine purchase; and regulation of the quality of vaccines through the Food and Drug Administration (FDA) (see Table 2-1~. Government also supports vaccination in some special ways. For ex- ample, state governments mandate and enforce immunization through school entry requirements, and a few WIC agencies ask parents to pick up food stamps more frequently until their children are up to date on immu- nizations. With the passage of the Vaccines for Children (VFC) program in 1993, Congress enacted a major new federal health care entitlement. This program guarantees federally purchased vaccines to more than 10 million children nationwide (Wood, 2003~. More than 14 states now have universal immunization programs that provide all or most vaccines to every child in the state, regardless of insurance coverage (Freed and Cowan, 2002~. (State financing systems are listed in Table 3-3 in Chapter 3.) iEligible populations include children in Medicaid, uninsured children aged 18 and un- der, Native Americans and Alaska Natives, and all children vaccinated in federally qualified health centers (FQHCs). 39

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40 FINANCING VACCINES IN THE 21ST CENTURY TABLE 2-1 Government Roles in Immunization Government Role Functions Agency/Program Supporting R&D Regulating safety Promoting, monitoring, and enforcing . . .. mmumzarlon Purchasing vaccines Promoting and regulating adequate vaccine supply Basic research programs, support of clinical trials Vaccine approval Safety monitoring Recommending the vaccine schedule Monitoring Enforcement Direct federal purchase Grants to states State purchase Stockpiles Coordination Protecting suppliers from liability Government production NIH, National Institute for Allergy and Infectious Disease (NIAID) FDA Center for Biologics Evaluation and Research (CBER) CDC Vaccine Adverse Events Reporting System (VAERS), CDC Vaccine Safety DataLink Advisory Committee on Immunization Practices (ACIP) CDC disease surveillance, CDC National Immunization Survey (NIS), CDC grantee reporting and evaluation process, registries State school entry laws, state nursing home requirements, state child day care requirements, travel requirements VFC, Veterans Administration Department of Defense/ CHAMPUS CDC Section 317 grants to states State employee coverage, universal purchase programs, other state purchases National stockpile program Linking producers, state health officials, providers, CDC National Vaccine Injury Compensation Fund Massachusetts vaccine production program

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ORIGINS AND RATIONALE OF IMMUNIZATION POLICY TABLE 2-1 Continued 41 Government Role Functions Agency/Program Infrastructure Direct investment in and States, CDC Section 317 development Regulating insurance coverage operation of public health grants to states delivery systems Setting reimbursement rates for vaccines and administration fees Supporting registry development Supporting state universal purchase programs Establishing physician participation in Medicaid/VFC Medicare Resource-Based Relative Value Scale (RBRVS) rates, state Medicaid programs CDC Section 317 program CDC CDC VFC maintenance-of-effort CDC/states law State insurance requirements States The federal government uses its substantial purchasing power to negotiate discounted vaccine prices for these federal and state programs. Between VFC, the Veterans Administration, the Department of Defense, and state governments, the public sector purchases the majority of vaccines sold in the United States. This deep public involvement in the national immunization system is based in part on the public-good properties and spillover effects that char- acterize vaccines (see Box 2-1~. Because of these properties, the enormous benefits of vaccines are likely to be undervalued by society, and both the rates of immunization by the public sector and the levels of private in- vestment in new vaccine R&D are likely to be lower than desirable with- out additional incentives. At the same time, these properties of vaccines make the case for public support of immunization very strong. This sup- port is reflected in federal and state programs designed to encourage im- munization, such as VFC and CDC Section 317 grants to states. It also includes inducements to industry, through the patent system, to invest in production and research. Government policy regarding stimulation of vaccine R&D, however, is inconsistent. While the government encourages such investment through the patent system, it also discourages that same investment by using its purchasing leverage, its legislative power, and the imposition of price caps to secure substantial price discounts for exist- . . 1ng vaccines.

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42 FINANCING VACCINES IN THE 21ST CENTURY

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ORIGINS AND RATIONALE OF IMMUNIZATION POLICY 43

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44 FINANCING VACCINES IN THE 21ST CENTURY

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ORIGINS AND RATIONALE OF IMMUNIZATION POLICY 45 The compelling public interest in a strong and effective vaccine sys- tem has been well served by the national immunization system. But the assumptions and traditions guiding immunization policy have changed, and the worsening economic landscape has put additional pressure on the system. It is unlikely that this system can effectively serve the public in the future without undergoing substantial change. As context for the remainder of the report, this chapter examines the legislative origins of the current system, explains the shared federal and state responsibility for financing of vaccine purchases and the shared public and private respon- sibility for immunization coverage, describes public and private immuni- zation delivery systems, reviews private vaccine production, and summa- rizes the process used for setting national vaccine policy. LEGISLATIVE HISTORY OF VACCINE POLICY The historical roots of the current U.S. immunization system reside in a federal-state-private-sector partnership that has evolved through a se- ries of responses to infectious disease crises.2 Although the scale of effort has expanded significantly over the past 50 years, the federal government's role remained relatively unchanged from the mid-1950s to the early 1990s. The earliest federal legislation pertaining to vaccines was the Virus Serums and Toxins Act, passed by Congress in 1902 "to regulate the sale of viruses, serums, toxins, and analogues productions..." in interstate and foreign commerce. The laboratory of the Public Health Service was subse- quently authorized to conduct inspections and to ensure the safety of vac- cine products. The regulatory authority for both of these functions was eventually transferred to NIH in 1948 and in 1972 was transferred again to FDA. In addition to its regulatory and licensing role, the federal govern- ment has provided financial support to state and local health departments for maternal and child health programs since the 1920s (Orenstein et al., 1999~. These programs, funded by block grants authorized under Title V of the Social Security Act, represent a federal-state partnership that has been in place for more than 60 years. Title V embedded immunization services into a comprehensive safety net system for children and their 2Much of the descriptive information in this section is taken from Johnson et al. (2000~. See also Fee and Brown (2002) and Lumpkin and Richards (2002) for discussions of the history and future of public health. Orenstein et al. (1999) provide a good overview of the immuni- zation system.

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46 FINANCING VACCINES IN THE 21ST CENTURY mothers. When the polio vaccine was licensed, Congress quickly passed the Poliomyelitis Immunization Assistance Act of 1955 to expedite the state purchase of vaccine for susceptible children and pregnant women by circumventing the ponderous Maternal and Child Health grant pro- cess. A total of $53.6 million was appropriated in 1956 and 1957 for state purchase of vaccines (Freeman and Robbins, 1991~. The successful effort to halt polio epidemics stimulated interest in identifying opportunities to prevent other childhood diseases. In the early 1960s, the Kennedy Administration launched the Immunization Assis- tance Act of 1962, which provided federal support to state and local im- munization programs using oral polio vaccines, as well as diphtheria, per- tussis, and tetanus (DPT) vaccines. The legislation established a federal presence in the financing of childhood vaccines but not direct purchase. Beginning in 1965, substantial changes occurred in federal immuniza- tion policy that continued over the next decade. The first bulk purchases of vaccines under a federal contract occurred in fiscal year 1966, when the federal government purchased polio and measles vaccines under consoli- dated contracts and provided them in lieu of financial grants to state and local public health agencies. The purpose of this policy change was to offset the costs incurred by state and local public health agencies, since the bulk purchase of vaccines under a federal contract led to substantial price reductions. Additional vaccines, including the rubella and combined measles-mumps-rubella (MMR) vaccines, were added to the federal vac- cine contract between 1969 and 1975. Even as late as 1982, however, diph- theria and tetanus toxoids and whole-cell pertussis (DTP) vaccines were not being purchased under the federal contract because their prices were low, and limited savings could be achieved by bulk purchases. In addi- tion, Congress enacted Section 317 of the Public Health Service Act in 1972 to provide grants to state and local governments for immunization infrastructure development and vaccine purchases. By the late 1980s, childhood immunization rates had achieved record highs. Nevertheless, measles outbreaks occurred in several parts of the United States during 1989 and 1990, catching public health officials off guard. The outbreaks resulted in over 55,000 cases of measles, 130 deaths, 11,000 hospitalizations and 44,000 hospital days, and an estimated $150 million in direct medical costs (Shalala, 1993~. The traditional shared fed- eral-state responsibility for infectious disease control was challenged by the variability of state efforts and the inability of states to marshal suffi- cient funding to respond to the outbreaks. Increased federal funds be- came available to fill the gaps, and the Department of Health and Human Services (DHHS) undertook a study of federal and state acquisition and reimbursement policies for vaccines (Kelly et al., 1993~. The study identi- fied systematic barriers to access as the key limiting factor for immuniza-

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ORIGINS AND RATIONALE OF IMMUNIZATION POLICY 47 lion rates and suggested the elimination of fragmentation and conflicting rules among government programs. In 1994, the VFC program was launched as part of national health care reform efforts during the Clinton Administration. The centerpiece of the program is an entitlement that provides free vaccines to children aged 18 and younger who are uninsured, Alaska Native or Native American, or who eligible for Medicaid, or receive their vaccines in a federally quali- fied health center (FQHC). A key goal of the program is to enable children receiving public assistance to be immunized within their medical home rather than in a public health clinic. The result has been a massive shift of safety net immunizations from approximately 3,300 public clinics to well over 40,000 private providers. This program has also expanded the public share of vaccine purchases from roughly 35 percent to 52-55 percent of all childhood vaccines (Orenstein, 2002a). Under the program, CDC negoti- ates the prices of vaccines, which are then ordered by the states at the federal contract price. Today the federal government is active in virtually every aspect of immunization from basic research to the purchase of vaccines (Schwartz and Orenstein, 2001~. The National Institute of Allergy and Infectious Dis- eases (NIAID) within NIH supports basic research and clinical trials. Safety and efficacy are regulated by FDA's Center for Biologics Evalua- tion and Research (CBER), which reviews new vaccine applications; re- views clinical trials; and licenses new vaccines, production facilities, and each lot of vaccine that is produced. Postrelease safety is monitored through the CDC Vaccine Adverse Event Reporting System (VAERS) and the Vaccine Safety DataLink (VSD). VSD is a CDC program in which eight health maintenance organizations (HMOs) across the United States com- bine data on immunizations so that potential rare adverse events that may be associated with some vaccines can be identified and evaluated. CDC also monitors immunization rates through its annual National Immunization Survey, conducts ongoing disease surveillance, and moni- tors state and metropolitan grantees. CDC negotiates federal contracts for the public purchase of vaccines for the VFC program and state purchase, which account for more than half of childhood vaccines sold in the United States. CDC also determines Section 317 funding to state grantees, main- tains the national vaccine stockpile, and supports state immunization pro- gram offices. SHARED FEDERAL AND STATE RESPONSIBILITY FOR FINANCING Despite the deep federal involvement in immunization, states and lo- calities retain primary responsibility for providing public health services,

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48 FINANCING VACCINES IN THE 21ST CENTURY including the maintenance of a public health infrastructure. States develop and fund a public vaccine delivery system including facilities, equip- ment, drugs and supplies, health professionals, and administration that provides a broad safety net for the underserved. States are largely respon- sible for enforcement of immunization through school entry, nursing home, and day care laws. Many states maintain or are developing a state- wide registry to track both immunization status and eligibility. States also enforce mandates for state-regulated health insurance plans, although this responsibility excludes self-insured employer plans that are exempt un- der the Employee Retirement and Income Security Act (ERISA). In addi- tion, states conduct continuous outbreak surveillance, maintain registries, pay providers, carry out planning activities, forecast vaccine demand, and perform public outreach. States rely heavily on federal assistance to maintain this delivery in- frastructure. The Section 317 program provides grants to states for both vaccine purchase and infrastructure. The national immunization system has historically been based on an assumption of shared federal and state responsibility for immunization financing. Over the last decade, however, the state role in financing immunization has waned. Today, fewer than half of the states contribute more than 10 percent of government vaccine expenditures, and only 10 states contribute more than half (Federal Funds Information for States, 2002; Freed and Cowan, 2002~. The erosion of the state role accelerated with the passage of the VFC program. VFC was intended to enhance, but not supplant, state funding for immunization; between the introduction of VFC in 1994 and 2002, however, state spend- ing on immunization lagged well behind federal spending. States contrib- uted an estimated $340 million to immunization in fiscal year 2000, of which $109 million was for vaccine purchase (IOM, 2000a). VFC funding has increased substantially. Many states have allowed these new federal dollars to partially replace (or crowd out) state funds in meeting the state's vaccine needs (Academy for Health Services Research and Health Policy [AHSRHP], 2001~. This crowd-out is a natural result of the structure of VFC and state funding streams: as a federal entitlement program, VFC has assured funding, whereas state funding depends upon the discretionary legislative process. The current fiscal crisis in most states exacerbates the pressure for crowd-out. Despite the general trend toward diminished state support of vaccine purchase, some states have increased their immunization budgets. Start- ing in the early 1990s, a handful of states established universal purchase programs that use state funds to purchase vaccines for all citizens, regard- less of insurance status. Fourteen states now have such programs, al- though several have excluded the most expensive vaccines. Given the cur-

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ORIGINS AND RATIONALE OF IMMUNIZATION POLICY 49 rent economic outlook for many states, the expansion of universal pur- chase programs is unlikely (National Health Policy Forum, 2001~. The long-standing assumption that the federal government and the states will share responsibility for financing of vaccine purchases appears to be challenged, then, by the trends of the past decade. An erosion of shared federal and state responsibility has two potential downsides. First, it reduces the ability of federal and state agencies to distribute the burden of increasing vaccine expenditures and respond to sudden needs or bud- get shortfalls. Second, the key historical assumption that public health is a state and local activity derives from the need for flexibility and local knowledge and special conditions that defy a one-size-fits-all federal ap- proach. This is particularly true for vaccines because of local conditions that could foster outbreaks, the need for coordinated and interdiscipli- nary community responses, and concerns regarding public acceptance and enforcement. To the extent that federal vaccine purchasing could limit local flexibility, it might be considered detrimental to public health. In practice, however, increasingly federalized financing for vaccines may have enabled states to focus their resources away from vaccine purchase and toward infrastructure, surveillance, and targeted immunization cam- paigns. States continue to perform the public health and administrative functions associated with immunization (Freed and Cowan, 2002~. SHARED PUBLIC AND PRIVATE RESPONSIBILITY FOR COVERAGE Prior to the last several decades, employer-based private insurance provided limited coverage for preventive services, including immuniza- tion. Until recently, the public sector played a highly active role in immu- nization, particularly during the early polio vaccination campaign of the 1950s. Coverage of preventive services increased, however, with the growth of HMOs, which have traditionally emphasized such services. Eventually, the private sector assumed responsibility for immunizing more than half of the population, and the public role became focused al- most exclusively on the safety net function that is, providing basic health services for underserved and disadvantaged populations. The introduc- tion of the VFC program in 1994 did not fundamentally change this rela- tionship. In fact, a key assumption of the VFC program was that the pri- vate sector would continue to share the burden more or less equally with the public sector, and the law included a maintenance-of-effort provision that required private insurers to maintain the childhood immunization benefits they had in place before VFC. In addition, 27 states have imposed separate immunization coverage mandates on state-regulated insurance

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52 FINANCING VACCINES IN THE 21ST CENTURY source of payment. In addition, problems in the timing of vaccine release and VFC contract negotiations may leave providers with gaps in invento- ries that result in missed opportunities and high costs associated with patient recall programs. Also, since VFC does not cover clinician fees for administering vaccines, those fees remain even more fragmented than vaccine purchase. These issues contribute to a high rate of referrals of patients to the public sector, even with VFC (Zimmerman et al., 1997~. PRIVATE VACCINE PRODUCTION Government is not merely a purchaser of vaccines; it works closely with the vaccine industry in several ways. The government supports ba- sic vaccine research through NIH, enforces patent laws that influence the profitability of the industry, regulates the production of vaccines through the FDA, recommends vaccines for the childhood and adult schedules (thereby determining market size and funding streams), and negotiates contracts for more than half of the childhood vaccines purchased in the United States. Massachusetts and Michigan have even engaged in vaccine production. In Box 2-2, public-private collaboration in the supply of vac- cines is illustrated through the history of the DTaP vaccine. The industry-government relationship has for the most part been highly collaborative and constructive, despite normal tensions between a regulator and a regulated entity. Examples of issues that have created tensions include the need for protection from lawsuits over vaccine in- jury, which resulted in the adoption of the National Vaccine Injury Com- pensation Program; the removal of thimerosal (a mercury-based preser- vative) from recommended vaccines; the passage of VFC, which resulted in a larger public share of vaccine purchases and lower average prices; the introduction of the FDA's Team Biologics regulatory regime, which in- creased the burden of regulatory compliance for producers; the higher industry pricing model for new vaccines, such as varicella and pneumo- coccal conjugate; unprecedented vaccine shortages; and the increasing burden of proof required for vaccine approval and entry into the U.S. market. While industry-government conflicts are typically resolved amicably, the changing landscape could exacerbate future conflicts. Given the lim- ited number of vaccine producers left in the market and the risk of even further exit (see Chapter 5), the government has little leverage or room for negotiation on key issues. The increasing number of recommended vac- cines and higher prices of new vaccines, along with the changing cost- benefit profiles of newer and combination vaccines, tend to elevate eco- nomic considerations and politicize vaccine policy. Most important, these issues increasingly involve government policies that are at cross-purposes. For example, a key approach for alleviating the fragility of supply-

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ORIGINS AND RATIONALE OF IMMUNIZATION POLICY 53

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54 FINANCING VACCINES IN THE 21ST CENTURY

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ORIGINS AND RATIONALE OF IMMUNIZATION POLICY 55

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56 FINANCING VACCINES IN THE 21ST CENTURY reducing barriers to entry for foreign producers conflicts with desires to protect the quality of the vaccine supply and to assure safety for the diverse U.S. population. Despite some recent interest in the development of government pro- duction or government-owned, contract-operated production (often re- ferred to as "GoCo") of vaccines (IOM, 2001; NVAC, 2003), a broad con- sensus has emerged that only a thriving private vaccine industry has the production and R&D capacity to meet the nation's growing vaccine needs (IOM, 2000a). A diminished role for private industry could result in peri- odic shortages, total loss of supply of certain vaccines, price instability, and decreased investment in R&D. ' 1 THE SETTING OF NATIONAL VACCINE POLICY The vaccine enterprise has experienced unprecedented turmoil and change in areas ranging from pricing and shortages to globalization and technological developments. Thus, the validity of key assumptions that have guided national vaccine policy to date is eroding. Vaccine policy has been essentially static, operating as if these changes have not occurred. New policies and strategies are necessary to guide the national immuni- zation effort over the coming decades. How will this guidance emerge, and is the current planning apparatus up to the task? Planning authority for vaccine policy resides in numerous agencies and independent bodies that have separate areas of responsibility. Con- flicts can emerge among the objectives, plans, and regulatory decisions of these different entities. Looking to the future, questions of vaccine policy include which vaccines will be developed and produced, how safe and effective they will be, who should receive them, how much they are likely to be worth, how much they will cost, who should pay for them, and how they will be supplied to the public. Such questions are addressed in an uncoordinated fashion by multiple agencies with very different perspec- tives: National Institute of Allergy and Infectious Diseases (NIAID). NIAID is the NIH institute responsible for establishing basic research funding pri- orities for immunization, which in turn influence the development of fu- ture vaccines. Private industry also plays an independent role in vaccine development, bringing vaccines from basic research to commercial devel- opment according to its assessment of which vaccines represent the most viable markets. Food and Drug Administration (FDA). The FDA influences which vaccines come to market, the timing of releases of new vaccines, and the competitive structure of the industry. Moreover, through its impact on

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ORIGINS AND RATIONALE OF IMMUNIZATION POLICY 57 regulatory and production costs, the FDA indirectly influences prices and company returns on investment, which affect vaccine supplies and inno- vation. The FDA's broad regulatory influence hinges on two key policy levers the standards it sets for efficacy and safety, and the manufactur- ing and administrative costs of compliance. National Immunization Program (NIP). The NIP is the entity within CDC responsible for developing and implementing public health policy regarding vaccines. Its roles include negotiating federal vaccine contracts, providing grants and assistance to states, conducting immunization sur- veillance, studying vaccine safety, and coordinating public health pro- grams nationally. Advisory Committee for Immunization Practices (ACIP). ACIP is an advisory committee that determines which vaccines will be recommended for inclusion in the schedule of recommended vaccines. The schedule in- fluences the accepted national standards of care for immunization. In ad- dition, ACIP determines which vaccines will be included in the VFC en- titlement. ACIP recommendations resulted in a virtual doubling of federal expenditures on vaccines (from $500 million to $1 billion) with the ap- proval of the pneumococcal conjugate vaccine. National Vaccine Program Office (NVPO). NVPO is an office within DHHS that conducts strategic planning for the NIP and provides liaison with the major immunization stakeholders, including other federal agen- cies, states and municipalities, providers, manufacturers, and consumers. While charged with performing a centralized planning and coordination role, NVPO has yet to demonstrate its ability to reconcile the competing interests both within and outside the government, perhaps because of in- adequate resources. National Vaccine Advisory Committee (NVAC). NVAC is an advisory committee to NVPO on matters of research, availability, safety and effec- tiveness, and public health associated with vaccines. ACIP currently plays the pivotal role in this regulatory scheme, a role that bridges the supply side of the market (the industry and the FDA, which regulates it) and the demand side (the market for vaccines); the government programs that pay for vaccines; and CDC, which negotiates their prices and fosters public access (see Figure 2-1~. ACIP not only makes recommendations for the use of vaccines by children and adults but also determines whether a vaccine will be pro- vided free to children through the VFC program. ACIP also has substan- tial influence on sources of payment since it controls billions of federal entitlement dollars. It is sometimes criticized for creating unfunded man- dates to state and private insurers without sufficient consideration of the consequences for these stakeholders (France, 2000~.

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58 SUPPLY R&D Production Safety and Efficacy Availability Marketing and Distribution FINANCING VACCINES IN THE 21ST CENTURY Advisory Committee on Immunization Practices \ (ACIP) / FIGURE 2-1 Central role of ACIP in vaccine policy. DEMAND Public and Private Purchasing Providers Payment Systems Pricing Access The recommendation process begins with FDA approval for licensure of a new vaccine product. ACIP then begins considering whether and under what circumstances the vaccine should be recommended for use by the public. The American Academy of Pediatrics (AAP), through its Com- mittee on Infectious Diseases (also known as the Redbook Committee), coordinates closely with ACIP in order to provide direction to the AAP professional membership that is consistent with ACIP's recommenda- tions. The American Academy of Family Physicians (AAFP) also coordi- nates its recommendations with ACIP. The recommendations of both the AAP and the AAFP become standards across the medical community. ACIP is a 15-member panel of experts appointed to 4-year terms by the DHHS Secretary (CDC, 2001a). Appointees must undergo a thorough conflict and bias review to determine their eligibility. ACIP includes sci- entific and medical experts in relevant fields of medicine and biology, as well as a consumer representative. The committee also has 19 nonvoting liaison members, who represent medical professional societies and other key groups, and 8 ax-officio members representing other federal agencies. Nonvoting members may participate in workgroup meetings, where a great deal of the actual work of ACIP is conducted. They may also be allowed to vote in specific cases designated by the ACIP executive secre- tary, such as when conflicts of interest exclude voting members. The com- mittee is staffed by CDC; the executive secretary, who coordinates the committee, is a member of the CDC staff. ACIP holds three regular meet- ings each year, plus meetings of emergency consultation workgroups when necessary.

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ORIGINS AND RATIONALE OF IMMUNIZATION POLICY 59 Issues considered by ACIP in making its recommendations include safety, efficacy, cost-effectiveness, feasibility, and risk-benefit ratios. Back- ground work leading to the committee's recommendations is conducted by ad hoc workgroups, which can include voting and nonvoting mem- bers and CDC staff. Consultants and vaccine company representatives may provide data and technical assistance. The last step in the recommen- dation process is approval by the CDC director and publication in CDC's Morbidity and Mortality Weekly Report. ACIP reviews each recommenda- tion at 5-year intervals to assess the need for changes. In addition to its full recommendations, ACIP can make permissive recommendations in the form of suggestions for the use of vaccines when the committee can- not clearly define the group at risk for the disease the vaccine is designed to prevent. ACIP does more than simply make recommendations; it wields power beyond its mission, design, or authority. By default, it plays a pivotal role in vaccine policy by determining the market for vaccines, influencing prices, and setting a benchmark of sorts for the cost-benefit threshold for new vaccines. But this is a role for which ACIP may not be particularly well suited because it is not structured to perform such a broad public policy function. ACIP exhibits two principal limitations in this regard. 1. Lack of authority beyond CDC. ACIP is influential, but its statutory reach is limited. For example, its planning horizon for new vaccines is limited because it cannot anticipate the timing of FDA approvals. As soon as a vaccine has been approved by FDA, however, a 90-day clock starts ticking; and once it runs out, states are required to provide approved vac- cines through Medicaid. In contrast, in the overall VFC program, vaccines need be provided only once a federal contract price has been negotiated. If ACIP is able to approve a new vaccine within this window and further approve its inclusion in VFC, CDC must still negotiate a contract before the vaccine will be covered by VFC. An expensive vaccine, such as pneu- mococcal conjugate, can create a burden for states, which must purchase the vaccine directly and must do so without benefit of the discounted federal contract price. State legislative action may also be required to se- cure additional funding for vaccines. If state funding is delayed, some private providers may need to purchase the vaccine at high prices and without assurance of compensation. In the case of pneumococcal conju- gate vaccine, ACIP delayed publication of its recommendation until a price could be negotiated with the manufacturer; as a result, states and providers were financially responsible for vaccine purchases (Fairbrother and Haidery, 2002~. Private insurers may also face difficulties in paying for new vaccines not included in their annual budgets or premium calculations. They may choose to defer coverage until the next contract period or provide cover-

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60 FINANCING VACCINES IN THE 21ST CENTURY age at a loss. Provider groups that are globally capitated by health plans may face the same problem but with fewer resources to enable them to provide the vaccines at a loss (IOM, 2003a). For vaccines included in the VFC program, only a few state Medicaid programs will reimburse private clinicians for the use of privately pur- chased vaccine that is available under the federal contract, even in the case of shortages when publicly purchased vaccine may not be available. However, most Medicaid programs will reimburse clinicians for needed vaccine for which no federal contract price exists (e.g., tetanus-diphteria, adult pneumococcal, meningococcal), although others will not (Freed and Cowan, 2002~. To address these problems, AAP has recommended closer coordina- tion of licensing, approval, and purchasing, with a target of 60 days after licensure for establishment of public and private price. AAP has also rec- ommended that the federal government provide emergency funds with fixed annual appropriations to buy newly licensed vaccines for public pro- grams in the interim between a recommendation by ACIP, AAP, and AAFP and incorporation of the expenditures in the regular budget cycle. Once ACIP has issued a new vaccine recommendation and the fed- eral contract for that vaccine has been negotiated, states must begin pro- viding the vaccine through the VFC program. States may want to provide the newly recommended vaccine to non-VFC-eligible children for whom they provide other recommended vaccines. Doing so is becoming increas- ingly difficult, however, because of the high prices of recently recom- mended vaccines (Freed and Cowan, 2002~. The issuance of a new recommendation can be particularly problem- atic financially if the recommendation is released (and the federal con- tract negotiated) after federal and/or state funding decisions have already been made. Even when recommendations are anticipated before funding decisions have been made, these decisions are based on projections of need and uptake, which may not be accurate. Several states have noted, for example, that the annual federal funding decisions did not adequately account for the rapid uptake of pneumococcal conjugate by providers in the funding awards to states (Freed and Cowan, 2002~. 2. Needfor appropriate economic decision-making expertise, data, and crite- ria. Studies on the cost-effectiveness of vaccines imply that vaccines rep- resent one of the best investments in public health. But vaccines are not inherently cost-beneficial; their cost-effectiveness depends on the price charged Jacobs and Meyerhoff, 2001~. In the existing system, ACIP has the responsibility for determining whether it is in the interests of the na- tion to utilize and pay for a vaccine, based on its cost and benefit to soci- ety. Cost-effectiveness is considered, but ACIP usually assesses the data without advance knowledge of the federal contract price or the costs of

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ORIGINS AND RATIONALE OF IMMUNIZATION POLICY 61 production. In the case of pneumococcal conjugate vaccine, cost-effective- ness studies reviewed by ACIP underestimated the actual price. In the context of supply shortages, industry exit, and disincentives to innovate, ACIP's limited consideration of cost may represent an overly narrow per- spective. Furthermore, the composition of the committee infectious dis- ease experts, physicians, and public health officials may be ill suited to such economic analysis. As a result, ACIP may be poorly equipped to deal with vaccines that are likely to emerge in the future. Vaccines are increasingly being intro- duced at higher prices. Also, there is a trend toward vaccines that target conditions other than contagious diseases and thus do not possess the traditional spillover effects characteristic of the majority of vaccines that prevent highly contagious diseases. Some new vaccines may have less- favorable cost-benefit profiles, and new combination vaccines may have costs and benefits not captured in traditional cost-benefit analysis. For example, lacobs and Meyerhoff (2001) argue that the ACIP decision on pneumococcal conjugate vaccine did not meet conventional standards for cost-effectiveness. Regardless of whether this assessment is correct, it sig- nals a major change in thinking about vaccines that will likely require new models of assessment and regulation. FINDINGS Government is deeply involved in the immunization enterprise, a role that reflects the public-good and spillover characteristics of vaccines. Government policy toward vaccine R&D is inconsistent: it both promotes and discourages the development of new vaccines. While states continue to take principal responsibility for immuni- zation infrastructure and delivery, it can no longer be assumed that they will share responsibility for vaccine purchase with the federal govern- ment. It cannot be assumed that private insurers will continue to share responsibility for covering immunizations. The assumption of a stable supply of vaccines produced by a healthy private sector can no longer be made. The current approaches to vaccine prioritization and immuniza- tion system planning are inadequate, as currently structured, to deal with the changing nature of vaccines and vaccine economics.

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