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What is the right price for a Vaccine ?

Thousands of people in India are dying due to COVID-19. Or better to say a lot of these deaths are a result of lack of medical infrastructure caused by central, state and city government’s meddling in healthcare infrastructure.

One of the biggest ironies of our times is that while people of all political orientations agree 100% that governments are mostly corrupt and inefficient, they have an unusual zeal to put the government in charge of our life and healthcare. It is a bit like you absolutely know that aunt of yours to be a poor judge of character as she herself has been divorced 4 times but then you go on and insist that she find a groom for your daughter.

One of the established facts of India’s covid response is that India despite being world’s largest vaccine maker is unable to ramp up the production to the level that is needed to control the disease. It is also clear that Indian government did not place enough orders for the vaccine to keep the vaccine maker like SII interested. While Indian government did not place any order itself, they also prevented SII from selling the vaccine in the open market. This probably led to reduced interest from the entire pharma sector to make vaccines on war footing.

But that is a topic for another day. In this article we are going to ask what is the right price for a vaccine?

A lot of people think price on an object has something to do with the cost of making that object. What is the price one should pay for the taxi that you are hiring to travel 100 kms? A lot of people think it has something to do with the fuel users or distance travelled or time spent. It is simply untrue.

Price of any item depends on what an individual is willing to pay for it. Same item can cost more depending on the buyer and a million other factors very unique to that specific transaction. Imagine you have a flight to catch and you need a taxi. The missed flight will cost you thousands of dollars. Do you mind paying 2x the price for your taxi to make sure you reach on time? Of course, you do. But if you are just travelling to hangout at a park, it is a different story.

Is healthcare any different? A lot of people have naive ideas that there is no value we can put on a life or healthcare is a right etc. Such ideas are untrue. We put a price on our life and life of our loved ones all the time. A lot of people buy cheaper cars that do not have airbags. These people have determined that extra Rs 50,000 is simply not worth the additional safety for themselves and their family. These people have put a price on the life of their family. Does this make them evil? Not at all. After all a car without airbags is still safer than travelling with 4 people on a two-wheeler. For a person buying that simple car, the choice may not be between buying that car and a luxury car but to ride a two-wheeler.

It is also very common in India for old people to refuse to take treatment that prolongs their misery in hospital. A lot of people would rather die peacefully in their home than spending months in a hospital and raking a huge bill. It is also a smart thing to do.

Trade-offs are one of the fundamental concepts in economics, it is also a concept politician are completely ignorant of. Individuals are extremely aware of trade-offs in their own trade but are extremely ignorant of the same trade-offs when it comes to issues beyond their expertise. That is why people who will happily send their kids to an expensive private school will demand that the government punish the same school for charging more fees. They understand that paying that extra fee is actually worth it but at the same time fail to see it as something that enables school to be better than the government school.

Coming back to the vaccines

Covid virus has wreaked havoc in the world. The cost of lockdowns and death is far too much. One solution is to vaccinate the entire population as fast as possible. Given that India is a poor country, there is not too much money that Indians can spend on vaccines. Even if the vaccine is priced at say Rs 500, there will be plenty of people who would rather risk their lives than spend that much money.

Thus it makes perfect sense for us to subsidize the cost of vaccines for others around us. Unlike ordinary medicines, vaccines for contagious diseases like covid have positive externalities. Which means that when I buy a vaccine, I not only benefit myself, I also benefit others around me. It makes sense for others around me to subsidize my vaccine.

So what would be a good price for a vaccine and who should pay for it? The answer to this question is very simple. SII and all other vaccine makers should be free to sell it to others at whatever price they want. There should not be any restrictions on the vaccine manufacturing or pricing at all.

Initially vaccines would be very expensive and only the rich would be able to afford it. But as the rich pay huge sums to purchase the vaccines, the vaccine company would make a lot of profits. These profits will help them secure more raw materials, hire more people, build better distribution networks and so on.

India has only maybe 1% of the population that can be called very rich. No vaccine manufacturer can simply target these to make a lot of money. They have to expand to the rest 99% of the population and for that to happen they have to reduce the costs.

In many cases individuals themselves might find the vaccine expensive. A maid who earns Rs 5000 a month might find Rs 1000 for two doses far too high. But her employers might be happy to pay it because it protects their own families.

Large employers such as Airlines, Delivery services, Railways, SBI, TCS etc. have strong incentive to get their employees vaccinated so that they can resume their operations. They can negotiate bulk discounts with the vaccine manufacturers. Many of these employers are so large that they can import vaccines from other countries as well.

All this creates incentives to increase capacity and reduce prices further to the point that an average middle-class person can afford it.

Freedom to set prices also has another beneficial side effect. People who pay more for the vaccine are those who need it the most. People who go out often, people whose job requires them to travel out etc. will pay for the vaccine more than those who just stay at home. As a consequence, they will get the vaccine more quickly. A young person who has some comorbidity might be willing to pay more than someone who is very healthy. All this results in making sure the neediest people get the vaccine before those who don’t need it as much.

As individuals buy vaccines with their own money from the hospitals at mutually agreed price, it frees up capacity and money for government hospitals to provide vaccines for free for truly needy and absolute poor people.

Even today the most expensive vaccine in the world costs around Rs 7500 for two doses. This is already well within affordability of a middle-class family.  A family of four who relies on a single earning member can easily spend this money to ensure that the key member of their family is safe. It is also a ridiculously small amount for large companies to spend on their employees given the alternative of lockdowns.

Ability to charge whatever they want also enables manufacturers to look for other alternatives for raw materials and outbid other industries. For example (for argument’s sake), one of the items needed for vaccines is glass. There are dozens of other industries who are competing for glass. The most profitable venture can bid more than others. Let us say that a very profitable venture is a soft drink company who can outbid a vaccine maker for glass. Would that make sense? it won’t but if the vaccine prices are fixed too low, there is nothing the vaccine maker can do to import more glass.

India’s fate was sealed the day Indian government put itself in charge of vaccine manufacturing and set the prices to Rs 150. Rs 300 for two doses is a ridiculously low amount for the kind of benefit it imparts to the society. A lot of people would have voluntarily and happily paid more. But instead, the government decided to signal virtue on this very critical issue and ended up killing thousands of people. Indian government tried to defend its move for a few weeks but then later did a so-called “reform” where it allowed states to negotiate a price. But that reform was not sufficient.

At the current rate of vaccinations it should take India around 300 days to vaccinate a critical mass of population to kill COVID’s virality. But given the vaccine is effective only for a few months, this circus will be in town again next year.

In conclusion, what is the correct price of a vaccine? The answer whatever the market decides. Any interference in this mechanism is likely to cause more deaths than otherwise.

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