Homeland Security

In July 2004, President Bush signed the BioShield Act to encourage private companies to develop vaccines and drugs against bioweapons.  Proposals for a second, BioShield II statute are currently pending in Congress.

To date, no clear strategy has emerged.  The original BioShield legislation simply appropriated $5.6 billion to spend on new vaccines if and when they appeared.  Such "boosted demand" strategies have been effective in the past.  During the 1990s, for example, three vaccines were developed after the UK government announced that it would pay for a successful meningitis vaccine.

Despite this, BioShield has elicited very little investment so far.  Part of the problem may lie with federal agencies administering the program.  For example, some agencies have refused to say whether they will purchase a vaccine until after R&D is complete.  Economists have long known that such arrangements deter investment.  It is not too late to design more sophisticated strategies that avoid these pitfalls. 

Despite this, many observers think that the original BioShield incentives are simply too small.  According to Sen. Joseph Lieberman, the basic problem is finding out what incentives are needed.  Companies, he insists,

     "...will not say what package of incentives would be sufficient to persuade them to take up      biodefense work.  They feel besieged by the current drug import debate, pressure from CMS over drug prices, and the debate over generic biologics.  While I understand these fears, we simply have to know what it would take in the way of incentives to establish a biodefense industry.  If the incentives in BioShield or BioShield II are not sufficient, we need to know what incentives are sufficient... And only industry can give us a clear answer to these questions.  We cannot have a dialogue on these urgent national questions without the government listening and the industry speaking."

Yet persuading industry to specify a reward is only half the battle.  Congress must also be able to verify that industry is telling the truth.  This is hard.  In general, Congress's ability to prevent overpayment will depend on whether uses "pull" or "push" incentives:

Pull Programs.  The proposed BioShield II legislation would establish a broad mix of incentives including guaranteed purchase prices for new vaccines, "wild card" rights that would allow companies that produced bioweapons vaccines to extend their patents on other products, and tax incentives for companies that invest in bioweapons research.  As Senator Lieberman's testimony implies, the main problem is estimating how many incentives are actually needed to jump-start R&D.  For example, most estimates of how large potential drug markets have to be to elicit investment are uncertain by forty to sixty percent. This implies sponsors will normally overpay by twenty to thirty percent for any given level of effort.  This is a substantial cost penalty

Push Programs.  Government agencies have historically developed bioweapons vaccines in-house or else hired private partners to do the work.  Since the 1970s, for example, the US Army has developed a variety of vaccines against Argentine hemorrhagic fever, Venezuelan equine encephalitis, Rift Valley fever, and tularemia.  The question is whether a similar strategy should be used today.  On the one hand, government vaccines eliminate the danger of over-rewarding commercial companies that develop drugs.  In effect, they "cut out the middleman."  On the other hand, Congress is much less likely to de-fund wasteful or unsuccessful programs than private sector investors.  Some claim that this has been a problem for recent Pentagon and NIH programs aimed government programs aimed at developing bioweapons vaccines.

These are profound choices.  To date, however, debate has consisted almost entirely of  lobbyist input and/or ad hoc analogies to existing programs.  ITHS believes that policymakers can do better.  Our students are currently asking what modern innovation theory has to say about designing cost-effective incentives for new vaccines and other urgently needed homeland security technologies.  Innovation economics will remain at the center of our research agenda for the foreseeable future.

On-Line Video Lecture

S. Maurer, The Bioshield Dilemma (2005)

Papers

S. Scotchmer, Innovation & Incentives, (MIT Press 2004).

S. Maurer, "The Right Tool(s): Designing Cost-Effective Strategies for Neglected Disease Research," (2005).

Links

Sen. Joseph Lieberman, "Creating a BioDefense Industry: BioShield II," (Oct. 6 2004)