Healthy profits have healing powers

AH, BARN DOORS being closed after the horses are roaming the countryside. Consider the recent White House meeting among President Bush, top administration officials and the major vaccine producers. The purpose was to speed preparations for a possible -- but unlikely -- flu pandemic caused by a potential breakout of avian flu among human populations.

A similar 1918 outbreak killed 30 million to 50 million people worldwide. So why are those greedy pharmaceutical producers not moving mountains in anticipation of this huge potential need, with all of the dollars that would follow?

Well, let us begin with the saga of Cipro, an antibiotic effective against airborne anthrax. When the potential terrorist use of anthrax became a serious concern in 2001, the Centers for Disease Control and Prevention asked Bayer Pharmaceutical (the producer of Cipro) to obtain Food and Drug Administration approval to label the drug for treatment of anthrax. Bayer did so at its expense, and then donated 4 million doses to the federal government.

The feds then demanded another 1 million doses at a discounted price. When Bayer balked, the government threatened to suspend the patent on Cipro and thus forced Bayer to sell the additional doses at one-quarter of the market price. Other major purchasers of Cipro then demanded that same price. Moreover, Bayer enjoyed no liability protection against potential lawsuits stemming from any side effects of Cipro. Inside the Beltway, it is no mere cliche that no good deed goes unpunished.

This government theft, by the way, was orchestrated by those pro-business, pro-free enterprise, pro-capitalism Republicans.

The federal government also purchases almost two-thirds of the childhood vaccines used in the U.S., at a mandated discount of 50%. The National Academy of Sciences has concluded, not surprisingly, that the result is “declining financial incentives to develop and produce vaccines.” Combined with the liability problem, the effect has been a fall in the number of vaccine producers from 25 in the mid-1970s to five today.

Vaccine producers must attract capital from investors far more interested in doing well than doing good, but interest-group politics has created a game of “heads I win, tails you lose.” If they make the enormous investments needed to develop, produce and stockpile the requisite vaccines and no major outbreak occurs, they will be stuck with the costs. Fair enough: That’s life under capitalism. But if the outbreak does occur, the short-term incentives of bureaucrats and politicians to reduce budget costs and to transfer wealth to their constituents, combined with inevitable accusations of profiteering, will prevent the producers from earning high returns on these risky investments.

Some argue that the drug companies are hugely profitable, so if they lose money on a few vaccines, what’s the problem? That “huge profitability” (which is less clear when adjusted for investment risk) is irrelevant. No business will make large investments that are likely to be confiscated by government, because investors will not allow it.

The larger question is whether vaccine producers have a moral responsibility to accept large losses in order to save lives in the here and now. Those who respond with an unqualified “yes” commit two errors: They argue in the name of compassion that government ought to confiscate unlimited amounts of other people’s money (products), and they ignore the future lives that will not be saved because of an artificial decrease in incentives to develop new and improved medicines. Yes, pharmaceutical producers have a moral responsibility to those in need. All of us who are more fortunate have that same responsibility, which therefore should be fulfilled through the public budget without confiscation of private property. After all, the 5th and 13th Amendments to the Constitution prohibit takings and involuntary servitude precisely so that political majorities may not impose losses upon unpopular groups.

Because there are no free lunches, the decline of the vaccine industry now means taxpayers must finance preparation for a potential pandemic. Can anyone believe that such government spending will be as efficient as a private-sector investment program undistorted by political pressures?

Nor should anyone believe that such perverse effects are limited to vaccines, which are expensive to produce. Ordinary pharmaceuticals require huge upfront investments but then are cheap to produce. The long-run effect of price controls -- the importation of “cheap” drugs from overseas or price “negotiations” (coercion) by the federal government -- on pharmaceuticals will be the same as that on vaccines: reduced investment in the future alleviation of human suffering. Such are the fruits of government compassion.