Unexpectedly Intriguing!
April 20, 2005

It would appear that the U.S. federal government has solved the problem of what to do with all the vaccines for childhood diseases it is required to stockpile for emergencies - it can regulate the stockpile right out of existence! (Reference: Washington Post, Sunday April 17, 2005 Pediatric Vaccine Stockpile at Risk.)

I am, of course, being facetious. The depletion of the stockpile did not come about as the result of a carefully designed plan to achieve this goal, but rather as the unintended consequence of government regulations that seek to combat potentially deceptive accounting practices.

The Backstory

Prior to 2000, vaccine makers were allowed to recognize the revenue from the sale of their vaccines to the government at the time they completed their production. The manufacturers would then hold the stockpile vaccines on behalf of the government in their own warehouses and deliver them when required. In December of 1999 however, the Securities and Exchange Commission (SEC) issued new regulations that changed when all companies could recognize revenues from the sale of their products, seeking to eliminate the potential booking of "phony, theoretical or incomplete sales," the "revenues" from which could make companies appear to be more profitable in their financial statements than would actually be the case.

The new SEC regulations affect when companies may claim the proceeds of the sale of their vaccines to the government as revenue. According to the rules now in place, as applied to the producers of pediatric vaccines, the companies that are contracted to produce the vaccines may not claim the revenue from the sale of their drugs until the government calls for them to be delivered in times of emergency. In the meantime, these companies must bear the costs of their manufacture as well as the costs of storing the vaccines in their facilities, while not being able to offset these costs on their books with the actual revenue they earn by having sold them to the government in the first place. As a result, the regulation of when the companies may claim the revenue from the sale of their vaccines has created a powerful disincentive to produce and maintain the stockpile at mandated levels. The Washington Post article describes the current state of the stockpile:

Created by Congress in 1983, the stockpile is supposed to contain enough vaccine to supply the nation's needs for six months. Its virtual collapse is an acute embarrassment to the Department of Health and Human Services, the Centers for Disease Control and Prevention, and the vaccine makers.

The stockpile has never reached its full target amounts, but its depleted state now means the nation could not easily weather another big vaccine shortage, potentially putting the health of millions of children at risk. Only two vaccines -- measles, mumps and rubella (MMR), and varicella (chickenpox) -- are warehoused in the desired amounts.

The situation is so bad that support for regulatory relief is coming from unlikely quarters. Representative Henry A. Waxman (D-CA), someone not known as a booster for reducing burdensome regulations, has proposed selectively loosening the accounting requirement for the drug makers:

The ranking Democrat on the Committee on Government Reform, Waxman said he is willing to sponsor legislation to carve out a legal exception that would allow companies to "recognize" revenue from sales to the vaccine stockpile -- if such a radical step becomes necessary.

The Real Solution

Representative Waxman's suggested selective approach to regulatory reform is wholly inadequate. This approach will only lead to the further complicating of the already complicated existing regulations, which have led to the present situation and will also do the following:

  1. Lead to more unintended consequences.
  2. Create market distortions by picking "winners" and "losers" through the cherry-picking of who is affected by the government's regulatory power.
  3. Spur lobby groups from other industries to pursue similar benefits.

When it comes to regulations, the government should not be in the business of picking winners and losers - that's the function of the government's contracting process. Regulations should instead be designed to apply to businesses across the board and should also seek to mitigate their costs of compliance. In the case of the pediatric vaccines stockpile, a more carefully considered approach to developing the government's accounting regulations could have avoided the depletion of this essential emergency resource.

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