Dr. Banafsheh Behzad is an Assistant Professor of Information Systems who studies the application of game theory techniques in public health and social networks. Below is a brief summary of her recent research study.
The Centers for Disease Control and Prevention (CDC) is the primary public health organization in the United States involved in research, analysis and fulfillment of immunization programs for children. To ensure that enough children are vaccinated to prevent disease outbreaks, the CDC launched the Vaccines for Children (VFC) program in 1994, which provides vaccinations to eligible children at no cost. The amount of vaccine administered through the VFC program is more than half (57%) of all pediatric vaccines administered in the United States. Furthermore, the VFC program has expanded the market for the vaccine manufacturers by immunizing the children who would normally have not been vaccinated, because of the cost involved.
This has given the CDC some leverage to negotiate prices for the vaccines they provide. During negotiations with vaccine manufacturers, the CDC is seeking prices that are low enough for them to stay within their federal budget allocation, but high enough for the vaccine manufacturers to make enough profit to remain in the market. This 57% of all pediatric vaccines administered to children at no cost through state and local government health agencies, is referred to as the “public sector” of the market. The rest of the vaccines are sold through the “private sector,” at much higher cost, to those families who can afford to pay. The crucial role of the CDC as a “rational player” in this market has been neglected by the research studying pediatric vaccine pricing.
This study uses optimization and game theory to determine cost-effective immunization of all children in the United States. Our model acknowledges the CDC’s goals of ensuring that all children are vaccinated and vaccine manufacturers do not leave the market, but at minimum cost to the government. This study contributes to existing work by directly including the CDC as a decision maker and a rational player in the market. Furthermore, unlike other studies in the literature, this study examines the roles of both public and private sectors.
Our main findings are as follows: (1) The actual contract prices in the public sector are higher than the prices calculated by our model. One reason could be the financial incentives given by the CDC to the vaccine manufacturers to keep them in the market; (2) manufacturers have a lower chance of leaving the market when they have high production capacities and earn moderate profits; and (3) vaccines that are highly differentiated (in terms of packaging, side effects, etc.) segment the market. Our model indicates that the CDC might save money if it renegotiates public sector vaccine prices more than just once a year, especially when vaccine shortages take place. In other words, updating the contract prices once a shortage occurs, rather than using one set of prices for the whole year (the current CDC approach), can protect the stability of the market while reducing total costs for the CDC.
The following recommendations can be made using our model.
- Financial incentives: To fulfill the market demand, the CDC is required to give some financial incentives to the vaccine manufacturers to maintain market stability. These financial incentives can be interpreted as the price that the CDC pays to prevent a monopoly, which would mean higher costs in the long term.
- Product differentiation: The market is more stable when vaccines are more differentiated. While factors like side effects are harder to control, vaccine manufacturers can control things like packaging, administration method and branding, thereby preventing the public from viewing one vaccine as an “off-brand” of the other.
- Ongoing negotiations: When a shortage occurs in the middle of a contract season, manufacturers currently must continue to sell public sector vaccines at the contract price. Replacing annual price contracts with ongoing negotiations may allow the CDC to reduce cost.
These results indicate that combining the public and private sectors into one optimization model provides realistic and valuable insights for the CDC to use during negotiations. This research establishes a method for the CDC to influence pediatric vaccine prices via public sector contracts.
Cummings, K., Behzad, B., Martonosi, S., Centers for Disease Control and Prevention as a Strategic Agent in the Pediatric Vaccine Market: An Analytical Approach. Manufacturing and Service Operations Management (2020).