“Copays” to Shape the Vaccine Market to Reduce Global Poverty: Q&A with Nobelist Michael Kremer, Gates Professor of Developing Societies at Harvard

Michael Kremer is a 2019 co-recipient of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, awarded for his “experiential approach to alleviating global poverty.” Kremer was lead economist in an effort by the global health community to overcome the private sector’s underinvestment in vaccines for diseases of the poor. In early 2007, five countries and the Bill & Melinda Gates Foundation made a $1.5 billion advance market commitment to pharmaceutical companies to provide copays for vaccine use if the companies developed vaccines against diseases such as bacterial pneumonia.

What is the pneumococcal vaccine advance market commitment?

Although individuals in developing countries are most likely to suffer from pneumococcus, this market does not offer high enough expected business return for any drug developer to service the need for a safe and effective vaccine.

I was a member of a working group of economists and public health experts formed to identify how to drive funding toward both incentivizing the development of the pneumococcal vaccine and facilitating delivery of it to individuals most likely to suffer from the disease.

We designed and oversaw the implementation of an advance market commitment with a guaranteed minimum price per dose for a given volume that would motivate the players in the market to finish development and build production capacity for the vaccine. Five countries and the Gates Foundation jointly committed $1.5 billion for the AMC, with the understanding that funding would be distributed to any company as a “copay” of $7 per dose each time a dose was purchased. In the end, Pfizer and GSK both developed a safe and effective vaccine.

The vaccine has now been used widely, with experts estimating that the AMC will save the lives of 7 million poor children in developing countries over the next 20 years. (Learn more about how the pneumococcal AMC works.)

How did you get involved in the pneumococcal vaccine AMC?

I have always been interested in achieving socially desirable outcomes by overcoming the misallocation of resources. I began thinking a lot about the patent system because patent protections are an example of attempting to improve resource allocation.

On the positive side, patent protections increase the incentives for private actors to produce innovations that often have high fixed costs to develop and that, without patent protection, could too easily be replicated by competitors, thereby suppressing profits. But patents may also have negative effects, because once innovations are developed, the property rights typically increase the price and decrease access to the innovations. I considered creative ways our patent system could be modified to offset its negative effects, and also developed ideas on new institutions that could exist on top of the patent system to reallocate resources for better outcomes.

Shaping markets with AMC initiatives emerged from this interest, because market shaping is one way to improve outcomes by influencing incentives.

Why focus on a vaccine?

As noted, pharmaceutical companies are not likely to front the high costs of developing vaccines if the customers are predominantly poor. (For example, the research on an HIV vaccine is targeted on treatments for HIV strains seen in rich countries, and minimal resources go to treatments for strains seen in developing countries.)

Once we began learning more about research and development spending by pharmaceutical companies, we became more convinced that vaccines for diseases of the poor would be a good market shaping target.

We decided to design an incentive package to get us over this development gap and get a new vaccine into the hands of people who could benefit from it. We developed the AMC with a guaranteed minimum price per dose, when purchased at a given volume, that would motivate the players in the market to finish development and build up production capacity to make the vaccine available to purchase. This design is also appealing because it has a built-in market test. The extra funding was given only if consumers purchased the vaccine, which ensures donor money was spent only on dosages for people who expected to benefit from them.

What role did economic theory play in developing the vaccine AMC?

We used a lot of economic theory in the design of the AMC, notably in identifying the per-dosage “copay.” The economists in the working group first pointed out that we face uncertainty, so we were unlikely to find the exact right price. Instead, we needed to weigh the costs and benefits of setting the price too high and too low. We showed that the higher the price, the better the incentive for companies to enter, and that any price lower than the marginal cost to produce a dosage would result in no entry. Thus, the cost of too low a price would be not getting the drug into people’s hands, while the cost of too high a price would be overpaying for the vaccine. We all felt that we would rather err on too high a price because overpaying for a working vaccine was preferable to not seeing a significant reduction in mortality.

The economists also proposed that the goal of the AMC should be to get only a few pharmaceutical firms to pursue the pneumococcal vaccine. Given the high fixed cost of drug development, if many firms entered we would get to our desired outcome inefficiently, wasting resources that could be valuable elsewhere.

Considering what you learned by working on the AMC, would you change anything about the AMC design?

I would advocate for a different approach for selecting the vaccine. One of the first tasks of the working group was to select the AMC target. We were given a list of five different disease areas to consider and we selected a pneumococcal vaccine. We then collected relevant information, and at this point the drug companies and other key players had incentives to overstate their costs, which complicated the AMC design.

Next time, I would like to see a mechanism to involve more competition in the initial selection of the disease area. Our deliberation at the selection stage could include a competition between the different potential disease targets in which advocates for each potential target demonstrated why the disease would make an ideal target. This would elicit better information on the areas and improve our ability to design the AMC. The particular characteristics of the vaccine market ended up mattering a lot in the AMC design, so this initial choice was critical.

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With writing help from Erin Fahrenkopf and Krysten Hommel.