Economics of Flu Vaccines

In the last few months, the H1N1 influenza virus, or “swine flu,” has been dominating the news, and many people are worried about access to flu vaccines or “flu shots.” (That is, unless you work for Goldman Sachs, who got first dibs. But don’t they always?)

Unlike other viral diseases, flu viruses constantly mutate, or change into new “strains.” A vaccine that works to protect against a specific strain one year will probably not work to prevent against a new strain the next year. Because of this, hundreds of hours of lab work are devoted each year to identifying specific flu strains, developing a vaccine against them, and then producing that vaccine in large enough quantities to distribute to the population.

This year, the efforts of flu vaccination labs have been split, with only some of the labs producing vaccines against the “regular” flu, and the rest working on vaccines against the specific H1N1 swine flu strain. Because of this, the supplies of both of these types of vaccines are greatly reduced this year in comparison to previous years.

Given the scarcity of both traditional and swine flu vaccines, how should the existing vaccine be distributed? If the goal is to maximize societal health, the flu vaccine should first be given to those whose health would benefit from it the most, who are people at risk of complications and death from the flu, including young children, the elderly, and the immuno-compromised. On the other hand, if the goal is to minimize the cost of the flu to an economy, the most productive and important members of society should get the first vaccine.

To a certain extent, extreme examples on both ends are small in number and easy to take care of. For example, health care employees are at greater risk of contracting any disease and, consequently, of infecting those whose health is vulnerable. So it’s clear they should be the first in line to get the vaccine. But what about people who don’t have such critical jobs (and keep in mind that you probably qualify as one of these people)? This topic relates not only to the health of the economy, but your personal health as well.

Discussion Questions:

1. Do you think that the goal of those who control flu vaccine policy should be to get the best health outcome, to minimize the cost to GDP, or some combination of the two? What public health policies would achieve your preferred policy goal?

2. Assume that society does want to maximize productivity in dollar terms rather than health outcomes. Now, take into consideration the fact that those who do get sick might require expensive medical treatment, the cost of which will be partially borne by society. How does this alter the analysis of who should receive the vaccines?

3. Economists often are fond of markets as allocation mechanisms because the forces of supply and demand determine a price that allocates goods to those who are willing to pay for them the most. How would a market for flu vaccine work? Why is it different from a market for non-life-affecting goods and services, like books or cars?

4. Firms (especially ones with high-productivity employees) value their employees’ health. It is estimated that that the total yearly economic cost of the flu in the U.S. is over $80 billion. Many companies have started to recognize this and have made attempts to protect their own economic interest by paying for or providing flu vaccines to their employees. As a result, employees who otherwise may not have been vaccinated (since the unsubsidized cost exceeds the expected health benefit) are more likely to accept the free vaccine. Is this efficient? Is it equitable?

5. Vaccines have a limited shelf-life – that is, they can only be used for a particular period of time if they are to be effective. For this reason, the timing of development, production, and distribution of flu vaccines in the United States is largely based on the pattern of the flu season in previous years. Go to Google Flu Trends to see a graph comparing the incidence of flu activity in the United States this year with previous years. How does the current flu season differ from previous years? If you were in charge of setting production policy for 2010, what might you change in order to produce the correct amount of vaccine for each strain of flu at the appropriate time?

Krugman vs. Mankiw on Health Care

Two of the bestselling economics textbooks are by Paul Krugman of Princeton and Greg Mankiw of Harvard. Reading the textbooks, it’s not abundantly clear that the authors would disagree about much: both illustrate supply and demand, the gains from trade, the deadweight loss caused by taxes, the market failure that results from the existence of externalities.

So what could these two very smart men possibly disagree on? As it turns out, a lot.

Mankiw’s blog and Krugman’s New York Times op-ed column have become the sources of economic talking points for conservatives and liberals, respectively. As Brandon noted in a previous Aplia Econ Blog post, Mankiw recently wrote a column about American health care problems that are, in his opinion, overblown by some proponents of a national health insurance program. Krugman responded in his column a few days later. You can read Mankiw’s original article here, Krugman’s response here, and a rebuttal Mankiw wrote to his critics here. There’s plenty of blog chatter from both economists and non-economists as well.

There are several reasons why economists can disagree about public policy. These disagreements can be broadly categorized as follows:

1. They may disagree as to which economic theories are valid and which are not. This is fairly rare. Theories start with assumptions and derive conclusions from them. As long as they are mathematically accurate, most theories are valid for the assumptions on which they are based.


2. They may disagree as to which theories are best suited to addressing a particular problem. Another way of thinking about this is that since different theories are based on different assumptions, economists may disagree as to the validity of certain assumptions when applied to a particular problem.


3. They may disagree on a normative level rather than a positive one. Even if economists agree about the nature of a problem and which economic theories are most relevant, they may have different normative perspectives. For example, two economists may agree on a particular tradeoff between efficiency and equity, but one may prefer the more efficient outcome, while the other may prefer the more equitable one.

Discussion Questions

1. Which of the arguments made by Mankiw and Krugman do you find to be strongest? Which do you think are weakest? Why?

2. Based on the categories above (or any others you may come up with), what do you think is the nature of the disagreement between Mankiw and Krugman? How does each of them portray their differences with the opposing viewpoint? Why is there a disconnect between the true nature of their argument and the motives they ascribe to their opponents?

3. Mankiw and Krugman clearly have strongly held viewpoints based in part on differences in political ideology. What impact do you think this has on their teaching and research? For an academic economist, what is the appropriate level of ideology?

Tricky Truths in the Health Care Debate

Economist Greg Mankiw recently took aim at three misunderstood truths in the health care debate. Consider the truths:

1. Canada, a country with national health insurance, has a longer life expectancy and a lower infant mortality rate (measured in deaths per 1,000 births) than the United States.

2. Forty-seven million Americans lack health insurance.

3. Health care costs account for an ever-growing share of American incomes.

Whether the U.S. health care system should look more like Canada's is a big open question. Mankiw asks us to look at these three truths more closely to see how much clarity they actually add to our national debate on health care. Read his column to learn more.

Discussion Questions

1. According to the column, how do the incidences of accidents, homicide, and obesity in the United States help to explain the differing life expectancies in Canada and the U.S.? How would changing the U.S. health care system address the incidence of accidents, homicides, and obesity in America? Can you think of alternative policies that might close the life expectancy gap by reducing the incidence of accidents, homicide, or obesity?

2. According to Mankiw, the prevalence of low-birth-weight babies in the U.S. contributes to its relatively high infant mortality rate (infant mortality is universally higher among low-birth-weight babies than it is among babies born at normal weights). What factors explain the higher rates of low-weight births in the United States? Will an overhaul of the U.S. health care system address the number of low-weight births in the U.S.? What alternative policies might reduce the number of low-weight births in America?

3. Approximately 47 million Americans (of about 300 million total) lack health insurance. For what reasons does Mankiw argue that this number significantly overstates the problem of the uninsured in the United States? How do uninsured people receive care under the existing health care system? What policies might provide insurance to the group of American citizens who simply cannot access health insurance? How would national health insurance change the pool of the uninsured and the cost of treating them?

4. Why do we spend a larger share of our incomes on health care than previous generations? Clearly, health care is a normal good (increases in income lead to increases in the quantity of health care we demand). But is it also a luxury good (increases in income lead to relatively large increases in quantity demanded)? Is the growing share of income that we devote to health care a bad thing? In what way are increasing health care costs associated with increasing health care benefits? Read this David Leonhardt column for more on this topic.

5. Hopefully, a closer look at the three truths above will help to clarify the debate over health insurance in the United States. That said, understanding how a change to our health insurance system can or cannot influence these outcomes doesn't point to a specific policy prescription. What do you think?

The Doctor Will See You Now. Seriously. Right Now.

Where smoothly functioning markets exist, they generally do an efficient job of answering the fundamental economic questions—what gets produced, how it gets produced, and who receives it. Not everyone will be happy with those answers, but there is efficiency in the sense that to make any person better off would require making at least one other person worse off.

Such grandiose notions of efficiency may seem quaint when you're waiting, say, two months for a doctor's appointment. The market does not allocate when each patient is seen by a doctor—that scheduling is done by someone in the doctor's office, or (shudder) a bureaucrat working for the government or an HMO. No wonder, then, that scheduling nightmares are common.

But even when markets cannot be brought in to answer questions—do you really want to have to bid to see a doctor in a timely manner?—other systems can be designed to achieve better efficiency. In a recent article in Slate, Marina Krakovsky discusses innovations in the way doctor's appointments are allocated among patients. In particular, a new system called "open access" or "same-day scheduling" reserves a large chunk of each doctor's time for patients who want to come in on the same day.

If you were just starting a medical practice, using this new system would be easy. But the transition from the old system, which was plagued by weeks of waiting, is difficult. In economic terms, it means switching from an inefficient equilibrium to an efficient equilibrium. What does this mean? Well, think about the normal supply and demand model: strong market forces pull the system toward the equilibrium where supply and demand intersect. Similarly, trying to shift away from an equilibrium in which patients wait for months in advance means overcoming powerful forces. It means working overtime for several months to work down the backlog, and potentially turning away patients that would otherwise have been seen.

Discussion Questions

1. Suppose you ran a small medical practice and read this article. How would you go about deciding whether the benefits of the new, more efficient system would be worth the cost of transitioning to that system?

2. In a blog post about this article, Joshua Gans points out that "the no-waiting equilibrium is also fragile unless you have sufficient slack in the system—that is, on average more slots available than there is demand. This is because if you have a bad day, that creates a backlog, and this can feed back on itself so that waiting times slowly increase." What kind of "slack" can medical practices build into their system? How could they go about finding the optimal amount of slack?

3. The discussion of shifting from a system with a backlog to one without a backlog is somewhat applicable to the case of Social Security. The way Social Security works is that employees pay Social Security taxes, which go directly to retirees; the money isn't saved for the employee's own retirement. Many people believe that it would be more efficient to have individuals own personal retirement accounts. As in the doctor's office example, though, this would entail massive transition costs—the equivalent of all doctors working overtime to reduce their wait times, but on a much larger scale. Even if we assume that it would be better for people to have personal retirement accounts, how could we measure the benefits of increased efficiency against the transition costs?