Covid-19 has disrupted much of human
life, but Operation Warp Speed has drastically mitigated the costs of the
virus. The $10 billion federal program launched in April 2020 encouraged and
accelerated the development and mass manufacturing of COVID-19 vaccines,
streamlined Federal approval for vaccines and their manufacture, and provided
Federal funds for private vaccine research and advance-purchase orders. COVID-19 vaccines are currently being
administered to the general public at least six months earlier than expected. Vaccinating the population against COVID-19
six months earlier was worth about $1.8 trillion to the U.S. alone
in terms of lives saved and accelerating the return to normal schooling, work,
socializing, etc. (Mulligan and Philipson 2020).
Operation Warp Speed is a historic milestone for economic research on medical innovation that occurred over decades on the University of Chicago campus. Chicago’s research results, traditions, and emphasis were brought to the federal government in 2017 by several of its faculty and alumni. In the three years before COVID-19 came to the United States, that economic team showed the President of the United States how federal policy reforms were delivering real value to consumers by encouraging innovation in healthcare industries. Also before the pandemic, the team prepared and published a blueprint for vaccine innovation during a pandemic that would become the intellectual foundation for Operation Warp Speed. This document tells the story of the program’s University of Chicago origins. The document traces the economics of the program back to underlying UChicago economic principles on regulation generally and health economics specifically, following the contents of a recent video conversation I had with University of Chicago colleagues Kevin M. Murphy, Tomas J. Philipson, and Robert H. Topel.
UChicago
on Regulatory Barriers in Healthcare
Operation Warp Speed, especially its
economic elements, emerges from a large body of UChicago
research centered around the unintended consequences of health regulation. Many
economic frameworks developed in the Chicago price theory tradition allow for
both quantitative work and application across various industries. An early
piece by Milton Friedman and George J. Stigler, Roofs or Ceilings? found that housing regulation exacerbated
housing problems rather than making them better (Friedman and Stigler 1946). Stigler would dedicate much of his career to
developing the economics of regulation, including the famous “regulatory
capture theory.” As Stigler put it in
his 1971 paper, “as a rule, regulation is acquired by the industry and is
designed and operated primarily for its benefit … regulatory policy will often
be so fashioned as to retard the rate of growth of new firms” (Stigler 1971).
A famous 1973 paper by Chicago’s Sam Peltzman applied the entry-barrier theory specifically to
the regulation of drugs, vaccines, and medical devices. He observed that the U.S. Food and Drug Administration’s
(FDA) approval procedures amounted to industry entry barriers, concluding that “consumer
losses from purchases of ineffective drugs or hastily-marketed unsafe drugs
appear to have been trivial compared to their gains from innovation” (Peltzman 1973). Peltzman’s approach was appreciated throughout the
profession,[1] including a book from M.I.T. Professor Peter Temin also concluding that FDA
delays were too long (Temin 1980). More
recently, Tomas Philipson and Chicago alumnus Eric Sun concluded that FDA pre-market
regulation and post-market tort liability acted as a double tax on product
development (Philipson and Sun 2008).
With Eric Sun and other coauthors, Philipson conducted cost-benefit
analyses of the tradeoff between speed and safety, concluding in 2008 that FDA
was putting too much weight on safety.
This work influenced FDA deregulation efforts during the Bush Administration,
although that administration continued to be frustrated by the fact that FDA
“steadily disregarded many of the [] provisions” of laws intended to get FDA to
move faster (Gottlieb 2010).
Regulate or
Deregulate?
Philipson joined the Trump Administration
in 2017 and Mulligan in 2018, both in its White House Council of Economic
Advisers (of which Philipson would ultimately become Acting Chair). These issues arose immediately in connection
with President Trump’s campaign promise to lower prescription drug prices. He appointed FDA Commissioner Scott Gottlieb,
who had been critical of FDA
delays.
Trump’s economic team, which included Chicago economists Anna Wong, Don Kenkel, Eric Sun, Kevin Corinth, Paula Worthington, Rich Burkhauser and Troy Durie, predicted that deregulation
would reduce drug prices because reduced FDA barriers would result in more new
drugs and more manufacturers
of existing drugs to compete for consumer dollars. On the other side was Health and Human Services
(HHS) Secretary Alex M. Azar II, who proposed a “drug pricing
blueprint” that would add regulations on
everything from television advertisements to business-to-business
price controls.
Although deregulation was a pervasive theme in his administration, the
President was no ideologue but rather just looking for results.
In
a 2018 report that was little noticed at the time (Council of Economic Advisers
2018), CEA laid out and updated Peltzman’s case that
FDA regulations are entry barriers that reduce entry and raise prices. It showed
that Gottlieb’s deregulation was in fact increasing entry of generic drugs and
predicted that lower prices would follow.
The CEA received their first sense of progress on January 10, 2019, with
the confidential advance release of the Consumer Price Index (CPI) report for
December 2018. It showed that 2018 was
the first calendar year since 1972 that retail prescription drug prices
actually fell even though consumer prices generally were increasing. The CEA composed a message to be posted on
the President’s Twitter account the next day.
But this message had to be approved by HHS, which was loathe
to release something so contrary to its perceived “need for regulatory action”
in the face of purported “prices of existing drugs [that] have been rising in
the United States much more rapidly than warranted by inflation or costs” (United
States, Department of Health and Human Services). Mulligan convinced the President’s
communication team that the CPI is reliable and is telling us something
important. The President would brag
about the result in everything from impromptu press
briefings to his State of the Union address. Although none of us knew what 2020 would
bring, the President was also getting valuable experience at, and witnessing
results from, removing barriers to medical innovation, especially at the FDA.
The Value of Medical
Innovation during a Pandemic
UChicago’s Tomas J. Philipson
and Richard A. Posner founded the field of economic epidemiology, which
emphasized that the costs of a contagious disease are not limited to the health
losses of those who contract the disease because many others upend their lives
in order to stay healthy (Posner and Philipson 1993). In 2006, Kevin M. Murphy and Robert Topel’s “Value of Health and Longevity” assessed the
valuation of improvements in health expenditures and their policy implications
(Murphy and Topel 2006). This study calculated the value of
innovations that occurred in the past, the potential value that can occur in
the future from reducing the incidence, and the mortality of various
diseases. They even looked at the value
of innovation to reduce mortality from contagious respiratory diseases, of
which COVID-19 proved to be an example. Gary
Becker, Tomas Philipson, and Rodrigo Soares estimated the health component of
economic growth associated with the value of health improvements (Becker,
Philipson and Soares 2015). Part of
Becker’s UChicago course on human capital looked at
the value of preventing a worldwide pandemic (Jaffe, Minton, Mulligan and
Murphy 2019).
Chicago’s
emphasis on medical innovation profoundly influenced the White House economic
team. Judging from the 74 Economic
Reports of the President (ERPs) published since the Truman Administration, no
economic team gave so much attention to medical innovation. The 2018 ERP had a full chapter about the
health sector, half of which was about "Improving People’s Health through
More Access to Medical Innovations" and "Encouraging Innovation, and Making It Affordable." The 2019
ERP (p. 18) cites FDA deregulation as one of the highlights of the year and
devotes twelve pages to how FDA reforms increased competition and reduced
prescription drug prices. The same report also looks at the possible
negative innovation effects of a proposed Federal ban on for-profit
healthcare.
The
2020 ERP updated the status of the FDA reforms in its chapter about
deregulation, its chapter about healthcare, and its chapter about competition
policy. It also cited the new Right to Try law and relaxed regulatory
barriers to treating chronic kidney disease (Council of Economic Advisers
2020).
In
order to continue to add to the formidable intellectual capital stock of
Chicago economics, Tomas J. Philipson and Casey B. Mulligan have developed a
new initiative supporting economic research on healthcare markets and medical
innovation. The initiative takes the unique approach of addressing issues
specific to health care through a broader economic lens, applying insights from
industrial organization, macroeconomics, finance, labor economics, and other
fields. Some of the key focus areas investigated so far are FDA hedges,
financial health engineering to support medical research, the effects of
reference pricing on market entry, and innovation incentives and disincentives
in NIH funding. In April of 2020, Mulligan published a report on the excess
burden of COVID-19 and the value of medical innovation that assesses the total
cost of COVID-19 in the U.S. (Mulligan 2020). Later, Mulligan and Philipson estimated
that Project WARP Speed was worth $1.8 trillion due to getting COVID-19
vaccines at least six months before anybody expected. The initiative is
currently planning a conference in the Spring of 2021 around the many issues of
technological change in healthcare, including the measurements and determinants
of these innovations.
Although COVID-19 would not arrive in
the U.S. for two more years, Trump’s CEA was also being asked by the National
Security Council’s biodefense team to look at the economics of vaccine
innovation during pandemics. This was an
opportune time to bring the Chicago tradition on regulation together with its
results on epidemiology and the value of medical innovation. In a report published in September 2019, CEA
concluded that “…improving the speed of vaccine production is more important
for decreasing the number of infections than improving vaccine efficacy” and
emphasized the need for large-scale manufacturing and the possible advantages
of public-private partnerships” (Council of Economic Advisers 2019).
Presidential Human Capital
The
CEA vaccine report prompted a President’s Executive Order, also before the
current pandemic, noting that “viruses emerge from animals … that can spread
efficiently and have sustained transmission among humans.” President Trump concluded that “vaccination
is the most effective defense….” As two
of Trump’s former senior staff members put it “when COVID-19 emerged, the White
House was ready and expeditiously applied the report's deregulatory and fiscal
lessons to streamline FDA approval for vaccines and their parallel
manufacturing on a large scale” (Grogan and Philipson 2020).
Mulligan
and Philipson were in the Oval Office with the President and his economic team
in February 2020 (when COVID-19 cases just were beginning to spread in the U.S.,
and before Operation Warp Speed). His
staff continued to worry that the FDA would not be interested in removing any
more approval barriers. But the
President was confident, telling them that “I’ve done it before and will do it
again … bring the FDA management in here.”
He and his administration not only knew why approval barriers needed to
be removed but knew from prior experience how to do it. By the end of that calendar year, two vaccines
were approved, produced, and beginning to be delivered to the American
population.
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