March 20, 2020 · 4 min read
Funding Rules Everything Around Me
I keep seeing, again and again, the crucial importance of funding models as a driver of innovation and production.
Right now, for instance, we are facing a once-in-a-century pandemic, COVID-19 (colloquially, “corona”). With everyone in the US now aware of the threat, a major focus is on ramping up hospital capacity to deal with the rising tide of cases that threatens to overwhelm intensive care units. In particular, there is a critical shortage of ventilators, machines that can help a patient breathe by moving air in and out of the lungs. Roughly 5% of corona patients require ventilation, and without it, most of that subset will die. The US has around 200,000 ventilators available at most, including obsolete ones that could be brought back into service, and a small emergency stockpile held by the federal government. Around a million patients might need ventilators in a widespread epidemic, and even though they won’t all be in the ICU at the same time, we could easily run out of capacity. (See this report for more.)
But as far as I can tell, we’re not manufacturing more ventilators. Why? Hospitals aren’t ordering them. Why? There may be multiple reasons—for one, ventilators aren’t the only critical resources; they require trained staff to operate and are useless without them—but one key factor seems to be funding. From a Washington Post article:
Hospitals are holding back from ordering more medical ventilators because of the high cost for what may be only a short-term spike in demand from the coronavirus epidemic, supply chain experts and health researchers say, intensifying an anticipated shortage of lifesaving equipment for patients who become critically ill.
“It’s a challenge for states, local governments and hospital administrators to allocate tens of millions of dollars to something when they don’t know if they need it or not,” said Chris Kiple, chief executive of Ventec Life Systems, a small ventilator manufacturer in Washington state. “But if they don’t do it, they are going to be caught flat-footed, and facilities are going to be faced with not enough ventilators to meet demand.”
Ventilator manufacturers could achieve, within a few months, a significant boost in production from about 50,000 units a year currently, said Julie Letwat, a health-care lawyer with McGuireWoods in Chicago who is monitoring the industry. Orders have not flooded in, she said, because most hospitals can’t afford to increase inventory of expensive equipment for what could turn out to be a short-term event.
“The risk is that they’ll never be used, and hospitals can’t eat the cost,” she said. “Most hospitals in this country are not profitable.”
Right now people seem to be waiting on the government to place an order. But why do we have to?
A ventilator costs $25,000 to $50,000, according to that article. The chance that I, personally, will need one is probably less than 1%. But I would happily pay $250 to $500 now to make sure a ventilator was there if and when I needed it. I would pay extra to train the nurse or other provider to operate it, and to keep them on standby.
In other words, the funding model is broken. Right now, hospitals can only recoup their investment from these machines if they use them on patients. But demand is hard to predict right now. And even if they wanted to be prepared, they may not have the cash on hand to make these investments. This isn’t about greedy hospitals who won’t save people’s lives unless they can profit—many hospitals are non-profit. It’s the simple fact that no one can spend an unlimited amount of money with no return.
Health insurance in the US is so highly regulated that I’m pretty sure it’s illegal to offer coronavirus insurance, or general pandemic insurance, on terms like I described above; or if not illegal it would take so long to get regulatory approval that the pandemic would be over. But with a freer and more agile market, we might be able to quickly re-allocate resources in intelligent ways like this.
A related example is vaccines. Coronaviruses have been around for a while and have caused epidemics before: SARS (2002) and MERS (2012). Why don’t we have a coronavirus vaccine, or at least a SARS or MERS vaccine that could be adapted to COVID-19? There is a similar problem: it’s impossible to predict demand, and there’s no funding without a way to recoup investment. And there’s no R&D without funding.
Planet Money recently interviewed Rick Bright, with the Biomedical Advanced Research and Development Authority:
BRIGHT: With something like an emerging infectious disease such as Zika or MERS or SARS or this novel coronavirus, there’s really no long-term promise of a revenue stream for those vaccines.
GONZALEZ: Here’s why—outbreaks go away, sometimes on their own—right?—like SARS in 2003. That was a coronavirus, too, also probably from bats. SARS came then went.
BRIGHT: Unfortunately, when the virus disappeared, the funding tended to disappear with it. And the companies that were making a SARS virus vaccine lost interest and shipped it back to their more profitable vaccines.
(See their podcast on this topic as well.)
I don’t know how much a vaccine would cost to develop, but a reasonable order-of-magnitude estimate is a billion dollars. After SARS and MERS, how much would you personally pay to make sure there was a vaccine in a future coronavirus epidemic? At least $100 perhaps? Could we find 10 million people to “pre-order” a coronavirus vaccine for $100 each? There are 47 million people with a net worth of over $1 million. It seems to me you could raise a billion for a vaccine, again through some sort of insurance scheme. Given that the economic impact of pandemics can run into the tens of billions, maybe the financial sector alone could find a way to fund this.
There’s probably some hindsight bias here, but I don’t think that’s the full explanation. Here’s an article from over a year ago talking about the need for vaccines to prevent a pandemic, and specifically calling out funding as a blocker.
So what prevents these sorts of things from happening? Why do we need to rely on government alone—and leave ourselves at the mercy of a centralized decision-maker, who will inevitably be wrong sometimes? Is it insurance regulations? A coordination problem? Or what?
In any case, the general pattern here, as with all economic development, is that funding is required up front, long before a benefit is received, and even if the demand never materializes. This requires (1) accumulated capital (2) in the hands of people who think long-range, and (3) mechanisms for them to recoup their investment and ideally make a profit, at least on average.
The modern world has plenty of accumulated capital, and in general it is in the hands of people who think long-range. Where we could improve, it seems to me, is in mechanisms for deploying the capital towards worthy ends, and profiting from the investment.
Social media link image credit: Wikimedia / James Heilman, MD
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