[Congressional Record (Bound Edition), Volume 145 (1999), Part 17]
[Senate]
[Pages 24922-24928]
[From the U.S. Government Publishing Office, www.gpo.gov]



          STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

      By Mr. BOND (for himself, Mr. Breaux, Mr. McCain, Mr. Baucus, and 
        Mrs. Lincoln):
  S. 1717. A bill to amend title XXI of the Social Security Act to 
provide for coverage of pregnancy-related assistance for targeted low-
income pregnant women; to the Committee on Finance.


           mothers and newborns health insurance act of 1999

 Mr. BOND. Mr. President, I rise today to introduce a bill that 
I believe is vitally important to the health care of children and 
pregnant women in America. The goal of this legislation is simple--to 
make sure more pregnant women and more children are covered by health 
insurance so they have access to the health care services they need to 
be healthy.
  The need is great--on any given day, almost 12 million children and 
almost half a million pregnant women do not have health insurance 
coverage. For many of these women and children, they or their family 
simply can't afford insurance. Many others are actually eligible for a 
public program like Medicaid or CHIP, but they don't know they are 
eligible and are not signed up.
  Lack of health insurance can lead to numerous health problems, both 
for children and for pregnant women. A child without health coverage is 
much less likely to receive the health care services that are needed to 
ensure the child is healthy, happy, and fully able to learn and grow. 
An uninsured pregnant woman is much less likely to get critical 
prenatal care that reduces the risk of health problems for both the 
woman and the child. Babies whose mothers receive no prenatal care or 
late prenatal care are at-risk for many health problems, including 
birth defects, premature births, and low birth-weight.
  The bill I am introducing--along with Senators Breaux, McCain, and 
Baucus--deals with this insurance problem in two ways.
  First, it allows states to provide prenatal care for low-income 
pregnant women under the state's CHIP program if the state chooses.
  Through the joint federal-state Children's Health Insurance Program, 
states are currently expanding the availability of health insurance for 
low-income children. However, federal

[[Page 24923]]

law prevents states from using CHIP funds to provide prenatal care to 
low-income pregnant women over age 19, even though babies born to many 
low-income women become eligible for CHIP as soon as they are born.
  As many as 45,000 additional women could be covered for prenatal 
care. There are literally billions of dollars of CHIP funds that states 
have not used yet, so I would hope that most states would choose this 
option. This provision will not impact federal CHIP expenditures 
because it does not change the existing federal spending caps for CHIP. 
Babies born to pregnant women covered by a state's CHIP program would 
be automatically enrolled and receive immediate coverage under CHIP 
themselves. It is foolish to deny prenatal care to a pregnant mother 
and then--only after the baby is born--provide the child with coverage 
under CHIP. Prenatal care can be just as important to a newborn baby as 
postnatal care, and the prenatal care is of course important for the 
mother as well.
  Second, the bill will help states reach out to women and children who 
are eligible for--but not signed up for--Medicaid or CHIP. 358,000 
pregnant women and 3 million children are estimated to be eligible for 
but not enrolled in Medicaid. Millions of additional children are 
eligible for but not yet enrolled in CHIP. When Congress passed the 
welfare reform bill back in 1996, we created a $500 million fund that 
states could tap into to make sure that all Medicaid-eligible people 
stayed in Medicaid. The problem is that only about 10 percent of that 
fund has been used, and most states are about to lose their 3-year 
window of opportunity to use these funds. My bill would allow states 
continued access to these funds by eliminating the 3-year deadline, and 
it would give states more flexibility to use the funds to reach out to 
both Medicaid and CHIP-eligible women and children.
  This legislation is a smaller piece of a bill I introduced earlier 
this year called Healthy Kids 2000. By extracting it from the larger 
bill, we get a chance to show the widespread support I believe exists 
for these measures. I believe this is crucial legislation, and urge my 
colleagues to join me in support of it so that we can pass this 
bill.
 Mr. BREAUX. Mr. President, I rise today to join Senator Bond 
in introducing the Mothers and Newborns Health Insurance Act of 1999. 
This is important legislation regarding our children's health.
  More than 12 million women of childbearing age--one in five--lacked 
health insurance in 1998, according to the Census Bureau. Lack of 
insurance leads to bad outcomes for pregnant woman and the children. 
Pregnant women without health insurance face barriers to care and do 
not receive the medical attention they need to have healthy babies. The 
Mothers and Newborns Health Insurance Act could provide insurance 
coverage to virtually all pregnant women in the United States. Such 
coverage will have an enormous impact on the health of children in our 
nation, by ensuring pregnant women have access to prenatal care and 
automatically enrolling their babies in their State Children's Health 
Insurance Program.
  In the United States, 7.6 out of 1000 babies die before their first 
birthday. Our nation is ranked 25th, in the world for our infant 
mortality rate. The statistics in my home state are even more 
disheartening; in Louisiana where 24.7% of childbearing age women are 
uninsured, there are 9.8 deaths per 1000 births. Many of these deaths 
are preventable, and good prenatal care is the first step to ensuring 
that babies see their first birthday.
  The Mothers and Newborns Health Insurance Act of 1999 addresses these 
concerns in three ways. One, it would amend Title XXI of the Social 
Security Act to give states the options to use Children's Health 
Insurance Program (CHIP) funds for health insurance coverage of 
uninsured low income pregnant women. Two, it would automatically enroll 
newborns to CHIP eligible women in CHIP for one year. And three, our 
bill would provide states additional opportunities to tap into a $500 
million fund created by the 1996 welfare reform act to help expand 
Medicaid outreach efforts. This bill would allow the fund to be used 
for any Medicaid or CHIP outreach initiatives.
  This Act could provide insurance coverage to 95% of currently 
uninsured women, by both increasing outreach efforts to pregnant women 
eligible for Medicaid and by giving states the option to extend CHIP 
coverage to low income pregnant women over the age of 18. Since the 
enactment of the welfare reform law, many people who are eligible for 
Medicaid or CHIP coverage do not realize it and remain unenrolled. It 
is estimated that 358,000 pregnant woman and 3 million children are 
eligible for but not enrolled in Medicaid. Millions of additional 
children are eligible for but not yet enrolled in CHIP.
  This legislation has the potential to lower healthcare costs and keep 
our babies healthy. By removing barriers to prenatal care access and 
automatically enrolling babies in their State Children's Health 
Insurance Program, we can give our children a head start on good 
health. Research shows that access to appropriate prenatal care 
improves the outcome of pregnancy. According to the March of Dimes, 
prenatal care--especially among lower income women--reduces the risk of 
low birth weight threefold and results in decreased infant mortality 
rates and healthier babies. According to the Institute of Medicine, 
each dollar spent on prenatal care for women at high risk, saves $3.38 
in medical care costs for low birth-weight babies.
  This legislation is an important step to ensuring our children have 
bright and healthy future. I thank Senator Bond for his leadership on 
this bill, and I urge my colleagues to join us in supporting the 
Mothers and Newborns Health Insurance Act of 1999.
                                 ______
                                 
      By Mr. KERRY (for himself, and Mr. Durbin):
  S. 1718. A bill to amend the Internal Revenue Code of 1986 to provide 
a credit for medical research related to developing vaccines against 
widespread diseases; to the Committee on Finance.


               LIFESAVING VACCINE TECHNOLOGY ACT OF 1999

  Mr. KERRY. Mr. President, I rise today to introduce the Lifesaving 
Vaccine Technology Act of 1999 with my friend and colleague from 
Illinois, Senator Durbin.
  Mr. President, each year malaria, tuberculosis and AIDS kill more 
than 7 million people, disproportionately in the developing world. Each 
of these diseases is potentially preventable by vaccination.
  A recent column in the Boston Globe by David Nyhan sums up the 
situation facing the developing world succinctly.
  Tuberculosis causes more deaths than any other infectious disease, 
killing 3 million people annually. One hundred thousand children die 
from TB each year. The World Health Organization estimates that between 
now and 2020, ``nearly one billion more people will be newly infected, 
200 million people will get sick, and 70 million will die from 
tuberculosis, if control is not strengthened. Tuberculosis is not just 
an issue for some faraway countries; in the United States, more than 
19,000 cases of tuberculosis are reported annually and increasingly we 
are seeing drug-resistant strains of tuberculosis in this country but 
especially in the states of the former Soviet Union where, according to 
one CDC doctor, an epidemic is taking place of ``the worst situation 
for multidrug resistant tuberculosis ever documented in the world.'' 
Other areas of the world, such as central India, Bangladesh, Latvia, 
Congo, Uganda, Peru are also experiencing near-epidemic tuberculosis 
crises.
  According to the World Health Organization, malaria kills more than 2 
million people every year, and the disease is an important public 
health problem in 90 countries inhabited by almost half of the world's 
population. Each year, one million children under the age of five die 
from complications associated with malaria. Again, Mr. President, 
malaria is a disease we tend to associate with foreign exotic lands, 
and overlook the fact that in this country, more than one thousand 
people are stricken by malaria each year. Researchers at the National 
Institute of Allergies and Infectious Diseases contend that 
``conventional control measures . . . appear increasingly inadequate. . 
. As a result of drug-resistant

[[Page 24924]]

parasites and insecticide-resistant mosquitoes, fewer tools to control 
malaria exist today than did 25 years ago.''
  Last year, the human immunosuppressant virus took the lives of 2.5 
million, of which more than 500,000 were children under the age of 15. 
In the United States, almost one million are currently living with HIV-
disease and 40,000 are newly infected each year. In Zimbabwe and 
Botswana, as many as 25 percent of the adult population is infected 
with HIV. In Zambia, 72 percent of households contain a child orphaned 
by AIDS. South Africa, which was largely isolated from HIV during its 
apartheid years, is now home to 10 percent of the new infections in 
Africa, and in the country's most populous province, KwaZulu-Natal, 
one-third of adults are HIV-infected. Analysts claim that India is an 
AIDS disaster-in-waiting: half a million people in one of India's 
smallest rural states (Tamil Nadu) are HIV-positive, as are fifteen 
percent of the women in one of India's more populous states 
(Maharashtra).
  While AIDS is entirely preventable in this country and abroad, and 
while behavioral interventions for HIV have proven effective at 
reducing infection rates, many factors, including political obstacles, 
insufficient prevention funding, forced sexual encounters, and the 
difficulty of maintaining safe behavior over a lifetime, mean that a 
vaccine will be required for control of this worldwide epidemic.
  And, yet, Mr. President, biotechnology and pharmaceutical companies 
in the United States, the home of the most innovative research and 
development in the world, are not working on vaccines to the world's 
largest killers. Market disincentives--especially the lack of a viable, 
cash-rich market--play against investment into these vaccines. Private-
sector scientists and chief executive officers have a difficult time 
justifying to their boards an investment in developmental research 
toward these vaccines as long as other pharmaceutical research and 
development into products appealing to the developed world, like anti-
depressants or Viagra, present more attractive investments.
  This market failure and the need for incentives is shown most 
dramatically by last year's survey by the Pharmaceutical Research and 
Manufacturers of America. Of the 43 vaccine projects found to be in 
development by the survey not one was for HIV, malaria or tuberculosis. 
To find vaccines for the biggest infectious disease killers in the 
world, both the private and public sectors must be engaged in a bolder, 
more creative and dramatic way.
  Mr. President, with that in mind, we are introducing the Lifesaving 
Vaccine Technology Act, which establishes an income tax credit for 30 
percent of the qualified expenses for medical research related to the 
development of vaccines against widespread diseases like malaria, HIV 
and tuberculosis, which according to the World Health Organization, 
cause more than one million deaths annually.
  This bill also declares that it is the sense of Congress that if the 
vaccine research credit is allowed to any corporation or shareholder of 
a corporation, the corporation should certify to the Secretary of the 
Treasury that, within one year after that vaccine is first licensed, 
the corporation will establish a good faith plan to maximize 
international access to high quality and affordable vaccines. In 
addition, the bill expresses the sense of Congress that the President 
and Federal agencies (including the Departments of State, Health and 
Human Services, and the Treasury) should work together in vigorous 
support of the creation and funding of a multi-lateral, international 
effort, such as a vaccine purchase fund, to accelerate the introduction 
of vaccines to which the vaccine research credit applies and of other 
priority vaccines into the poorest countries of the world. Lastly, the 
bill expresses the sense of Congress that flexible or differential 
pricing for vaccines, providing lowered prices for the poorest 
countries, is one of several valid strategies to accelerate the 
introduction of vaccines in developing countries.
  Mr. President, this legislation has received the support of the 
American Public Health Association, the Global Health Council, AIDS 
Action, the AIDS Policy Center for Children, Youth and Families, the 
International AIDS Vaccine Initiative and the AIDS Vaccine Advocacy 
Coalition. And, I am especially pleased that the Clinton Administration 
has signaled their approval of our approach. At his most recent speech 
before the General Assembly of the United Nations, President Clinton 
committed ``the United States to a concerted effort to accelerate the 
development and delivery of vaccines for malaria, TB, AIDS and other 
diseases disproportionately affecting the developing world.''
  This bill is highly targeted: it will cost relatively little to 
implement but would have a profound impact on America's response to 
international public health needs. And it would complement--certainly 
not supplant--current federal efforts at USAID, the NIH and other 
federal agencies to assist developing countries and to bolster vaccine 
research.
  Mr. President, this legislation is a companion to a bipartisan bill 
introduced in the other body by my friend and colleague from San 
Francisco, Congresswoman Nancy Pelosi, and 36 co-sponsors. Over the 
years, I have had the honor to work with the distinguished 
Congresswoman on various pieces of legislation. The nation is in her 
debt for her tenacity and her overwhelming sense of duty to country. 
Her constituents benefit daily from her leadership, and I am pleased to 
be associated with her again today.
  I am hopeful that the positive response Congresswoman Pelosi has 
found in the other body is replicated in the Senate and that our 
colleagues join the Senator from Illinois, Senator Durbin, and I in 
passing the Lifesaving Vaccine Technology Act as quickly as possible.
  Mr. President, I ask unanimous consent that the Nyhan column, an 
article which appeared in the Albany Times-Union about the market 
difficulties of developing an AIDS vaccine, and a Congressional 
Research Service study of the bill be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                 [From the Boston Globe, Oct. 1, 1999]

       It's Mostly Bad News for the Poorest People on the Planet

                            (By David Nyhan)

       Human nature being what it is, the hawkers of news prosper 
     more off what arouses the customer than that which accurately 
     informs.
       That's why you get more sizzle than steak, particularly 
     when matters ``foreign'' are addressed. Pictures of a boy 
     dragged from the earthquake's rubble or a riot squad in 
     action are more compelling than footage of some middle-aged 
     bureaucrat rattling on about poverty statistics. But today 
     we're holding the sizzle and serving you teak in the form of 
     speeches made in Washington this week before the annual 
     meeting of the World Bank and the International Monetary 
     Fund, two outfits that have become punching bags for a lot of 
     people who are convinced they know what's wrong with the 
     planet.
       What is really going on here on Spaceship Earth?
       Some good things: Life expectancy, on average, has gone up 
     more in the last 40 years than in the previous 4,000. The 
     Internet means near-universal access to information. Then 
     there are the not-so-good trends, World Bank chief James 
     Wolfensohn said Tuesday:
       ``Per-capita incomes which will stagnate or decline this 
     year in all regions except East and South Asia. . . . with 
     the exception of China, 100 million more people living in 
     poverty today than a decade ago. In at least 10 countries in 
     Africa, the scourge of AIDS has reduced life expectancy by 17 
     years. More than 33 million cases of AIDS in the world, of 
     which 22 million are in Africa. Some 1.5 billion people still 
     lacking access to safe water, and 2.4 million children who 
     die each year of waterborne diseases. Some 125 million 
     children still not in primary school. . . . A world where the 
     information gap is widening. And the forests are being 
     destroyed at the rate of an acre a second.''
       These statistics are almost impossible to believe. In the 
     time it takes to sneeze, three acres of forest are burned. 
     And everything revolves around money. It is poverty that 
     holds half of mankind in chains.
       Next month the planet's ridership surpasses 6 billion human 
     beings. How do they live now? Half of humanity gets along on 
     the equivalent of $2 a day or less. Half of that half lives 
     on less than $1 a day. When a child

[[Page 24925]]

     born today reaches the age of 25, there will be 2 billion 
     more people fighting for air, water, food, space, roofs, 
     jobs, schooling, roads, sewers, farmland. Only development 
     will spare them a life of perilous poverty.
       As the earthling more responsible than any single 
     individual, perhaps even more obligated than the President of 
     the United States, for the well-being of mankind and the 
     development of economic structures to make mankind's future 
     more secure, Wolfensohn asked: ``What have we learned about 
     development?''
       ``We have learned that development is possible but not 
     inevitable, that growth is essential but not sufficient to 
     ensure poverty reduction.'' And it is essential to help poor 
     people with local institutions, controlled by them, insulated 
     against the corruption, both petty and grand, that turns so 
     many cops and bureaucrats in poor countries into petty 
     despots or grand thieves on the scale of the Baligate thieves 
     who sacked the treasury of Indonesia and pitched the world's 
     fourth-largest nation into anarchy.
       He quoted from a massive World Bank study, ``Voice of the 
     Poor,'' distilled from 60,000 poor people in 60 countries: 
     ``Poverty is much more than a matter of income alone. The 
     poor seek a sense of well-being--which is peace of mind.''
       Here's the bulletin: The poor of the planet are just like 
     us cozy Americans. What they want is what we've got. ``It is 
     good health, community, and safety. It is choice, and 
     freedom, as well as a steady source of income.'' He quoted 
     the old African woman: ``to live in love without hunger''; 
     the Eastern European survivor of communism: ``to be well is 
     to know what will happen to me tomorrow''; the mother in 
     Southeast Asia: ``When my child asks for something to eat, I 
     say the rice is cooking until he falls asleep from hunger. 
     For there is no rice.''
       The day after Wolfensohn laid out the challenge, President 
     Clinton showed up to announce cancellation of that portion of 
     the debt owed the United States by 36 of the poorest 
     countries that had not already been forgiven. The Pope and a 
     number of celebrities had been agitating for debt 
     forgiveness.
       The Clinton administration had already written off about 90 
     percent of that debt, and this final write-off of what once 
     totaled nearly $6 billion will encourage the campaigners of 
     Jubilee 2000 to press other lender nations to follow suit. 
     Clinton has been a very good President, all things 
     considered, for the poorest people of the planet. He alluded 
     to the high-priced lobbying that goes on in the jousting 
     between agricultural haves to carve out more elbow room at 
     the trough of market share: ``Because we want to fight over 
     who sells the most food . . . are we supposed to accept the 
     fact that nearly 40 million people a year die of hunger? 
     That's nearly equal to the number of all the people killed in 
     World War II.''
       He had more good lines, such as ``the wealth of nations 
     depends upon the health of nations.'' But you get the idea. 
     We rich nations are our brother's keeper; sister's too.
                                  ____


              [From the Albany Times Union, Mar. 14, 1999]

          Drug Makers Still Reluctant to Invest in HIV Vaccine


  scientific uncertainty, drug economics combine to discourage efforts

                          (By Eric Rosenberg)

       Washington.--Soon after the AIDS epidemic exploded in the 
     1980s, Dr. Donald Burke, a senior researcher at Baltimore's 
     Johns Hopkins University, began work on a vaccine against 
     HIV, the virus that causes the deadly disease.
       Burke made progress but knew he needed the financial 
     backing and laboratory firepower of a pharmaceutical 
     manufacturer in order to succeed.
       ``I went to all the major companies that were involved in 
     AIDS work at the time,'' said Burke, now the director of the 
     university's Center for Immunization Research. ``I couldn't 
     get anybody interested and I was shocked.''
       Burke's experience highlights the fact that, with a few 
     exceptions, the pharmaceutical industry has been reluctant to 
     commit resources toward such a goal, despite worldwide demand 
     for a vaccine to protect against a disease that afflicts 35 
     million people and infects 16,000 more people daily.
       According to the Pharmaceutical Research and Manufacturers 
     of America, a trade organization that represents prescription 
     drug makers, companies are sinking research dollars into 101 
     new treatments for people infected with HIV.
       These include new classes of antiviral drugs to suppress 
     the HIV virus once a person is infected; medications to fight 
     AIDS-related diseases such as Kaposi's Sarcoma; and drugs to 
     fend off opportunistic infections that attack when the immune 
     system is suppressed by HIV.
       Although President Clinton has made development of an AIDS 
     vaccine a top priority and Congress has budgeted nearly $200 
     million this year alone for the effort, companies are 
     investing in only 12 experimental vaccine proposals.
       Nearly 20 years after the disease erupted, only one AIDS 
     vaccine has received Food and Drug Administration approval 
     for widespread human testing. That vaccine is under 
     development by VaxGen, a small, 52-employee biotechnology 
     firm, of South San Francisco, Calif.
       More than 90 percent of the world's vaccines against other 
     diseases are produced by five companies: Merck & Co., of 
     Whitehouse Station, N.J., SmithKline Beecham and Wyeth-
     Lederle of Philadelphia, Pasteur Merieux Connaught of 
     Swiftwater, Pa., and Chiron Corp. of Emeryville, Calif.
       All are involved to varying degrees in AIDS vaccine 
     research. For example, SmithKline Beecham has only a small 
     AIDS vaccine effort underway. ``At this point it's not one of 
     the major efforts in our vaccine programs,'' said Richard 
     Koenig, a SmithKline spokesman.
       Pasteur, on the other hand, has aggressively pursued an 
     experimental vaccine that is nearing government approval for 
     a large-scale human study.
       Other companies started, but then curtailed, AIDS vaccine 
     programs. They include Bristol-Myers Squibb, British Biotech 
     and Immuno AG.
       Dr. Donald Francis, president of VaxGen and a former AIDS 
     specialist at the federal Centers for Disease Control and 
     Prevention, said that if VaxGen and Pasteur fail, ``There's 
     nothing five years behind us. That's it in the AIDS vaccine 
     field.''
       Lagging science and drug economics are the two 
     considerations underlying the modest corporate interest in 
     AIDS vaccines.
       Scientists have made strides unlocking the mysteries of how 
     the virus operates after it infects a person. While the 
     knowledge has been key to making new drugs that slow or halt 
     the disease's deadly progression, it doesn't point to the 
     discovery of a vaccine that would render a healthy person 
     immune to HIV.
       Dr. Peggy Johnston, the assistant director for AIDS 
     vaccines at the National Institute for Allergy and Infectious 
     Diseases, said company officials worry that not enough is 
     known about how HIV works to warrant a large vaccine 
     investment.
       ``There are enormous challenges that AIDS presents that are 
     unparalleled compared with other viruses,'' said Johnston.
       For example, HIV is proving more resilient than other 
     viruses. Vaccines typically fend off disease by stimulating 
     the body's production of antibodies which in turn destroy an 
     invading virus. However, HIV appears to defend itself with a 
     kind of sugar-based shield to fend off antibodies.
       Another problem is that different strains of HIV exist in 
     the West and in Africa and Asia. So a vaccine to protect 
     against the North American variety might not work against 
     other strains.
       The economics of vaccines also are daunting.
       The average vaccine costs about $100 million to develop. 
     But because the scientific understanding of HIV is murky, a 
     company could commit the resources and more than a decade of 
     work and still fail to invent a vaccine.
       In order to make a profit on vaccines, which are typically 
     priced in the $1 to $5 per shot range, a drug maker must sell 
     millions of inoculations. While industrialized countries 
     could easily afford the price, much of the developing world, 
     which is the largest potential market for an AIDS vaccine, 
     would have difficulty.
       The profitability issue is fueling a proposal by the 
     International AIDS Vaccine Initiative (IAVI), an advocacy 
     group based in New York, that is pressing wealthy nations to 
     create a $1 billion AIDS vaccine purchase fund for the Third 
     World, effectively assuring profit to a successful 
     manufacturer.
       ``We think the fund would provide a very strong incentive 
     for industry,'' said Victor Zonana, a vice president at IAVI. 
     ``The companies would know that in addition to their markets 
     in industrialized countries, they would have a guaranteed 
     paying market in developing countries.''
       But pharmaceutical executives believe that even with such a 
     fund in place, a vaccine won't be as profitable as are AIDS 
     therapeutic drugs, which are taken for the lifetime of a 
     patient as opposed to only a few times, as are vaccines.
                                  ____


                               Memorandum

                                   Congressional Research Service,


                                          Library of Congress,

                                  Washington, DC, October 6, 1999.
     To: Hon. Nancy Pelosi and Hon. John Kerry; attention: Chris 
         Collins and Ryan McCormick.
     From: Gary Guenther, analyst in business taxation and 
         finance, government and finance.
     Subject: Effectiveness of the proposed tax credits for 
         vaccine research in H.R. 1274.
       Responding to your request, this memorandum assesses the 
     likely effectiveness of the proposed tax credits for vaccine 
     research in H.R. 1274. Effectiveness in this case signifies 
     the likely rise in domestic investment in vaccine research 
     and development (R&D) in response to the tax credits. This 
     method of assessing the proposed credits' effectiveness boils 
     down to comparing the additional vaccine R&D induced by one 
     dollar of tax credit claimed, which is a way of analyzing the 
     benefit-cost ratio for the credit. The proposed credits also 
     raise the issue of whether

[[Page 24926]]

     such a subsidy can be justified on economic grounds. This 
     issue is discussed briefly in the final section.
       Two noteworthy conclusions emerge from the analysis 
     presented here. One is that the proposed tax credits can be 
     expected to spur increased investment in vaccine R&D by the 
     private sector, by both increasing expected after-tax returns 
     on this investment and improving the access of small startup 
     firms to equity capital for investment in vaccine R&D. The 
     second conclusion relates to the economic rationale for the 
     proposed tax credits: they are justified on economic grounds 
     to the extent that they attempt to correct failures in the 
     market for vaccines that result in economically inefficient 
     levels of domestic investment in vaccine R&D.
       If you have any questions about this analysis, please call 
     me at 7-7742.


                  The Economics of Vaccine Innovation

       Vaccines are among the most cost-effective weapons in the 
     arsenal of modern medicine against the spread of contagious 
     diseases, lethal and non-lethal. By strengthening an 
     individual's immune system to resist a wide range of 
     infectious diseases, they offer a relatively inexpensive 
     means of lowering a society's overall cost of medical care. 
     While historically vaccines have been used to prevent a 
     variety of diseases, intensive efforts are being made to 
     develop vaccines that can treat certain diseases--mainly 
     cancer and AIDS--after an individual contracts them.
       On the whole, the development of new vaccines is a long, 
     costly, and risky process. It typically takes 10 years and 
     requires outlays of $100 million to bring a new vaccine from 
     the research laboratory to the medical marketplace.\1\ In 
     addition, firms seeking to develop new vaccines face a 
     considerable risk of failure. A 1989 study estimated that 
     only 3 out of 10 vaccines that enter clinical trials end up 
     being approved for general use.\2\ For the most part, vaccine 
     development passes through the same stages as the development 
     of new therapeutic drugs: a period of basic research or 
     discovery, followed by the filing of an investigational new 
     drug application with the U.S. Food and Drug Administration 
     (FDA), followed by three stages of clinical trials. Vaccine 
     development, however, departs from the path of new drug 
     development during the third phase of clinical trials, when a 
     firm developing a new vaccine must file both a product 
     license application and an establishment license application 
     with the FDA; firms developing new therapeutic drugs only are 
     required to file a new drug application at this stage. Once 
     the FDA is satisfied that the vaccine is safe and effective 
     and that the plant where it is produced meets the FDA's 
     stringent standards for purity, cleanliness, and quality 
     control, the vaccine can be marketed in the United States. 
     This means that the FDA requires vaccine firms to construct 
     and start up manufacturing facilities for new products 
     several years before they can gain marketing approval--and 
     thus begin to earn a return on the funds invested in their 
     development.
---------------------------------------------------------------------------
     Footnotes at end of document.
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       The economics of vaccine innovation has important 
     implications for the structure of the vaccine industry. High 
     fixed costs for research, production setup, and obtaining and 
     maintaining FDA marketing approval result in marginal vaccine 
     production costs that are significantly below average vaccine 
     production costs. Such a cost structure is not conducive to 
     the existence of multiple sellers of the same vaccines. As a 
     seller's output expands, its average costs decline; and as 
     those costs fall, its ability to underprice its competitors 
     and still cover its costs grows.\3\ The degree of competition 
     in the world vaccine industry seems to confirm this crucial 
     point. Vaccine production in the United States and the rest 
     of the world has been highly concentrated: in 1994, four 
     firms (Institut Merieux, Merck, SmithKline Beecham, and 
     American Cyanamid) accounted for between 65% and 80% of world 
     sales of vaccines; and in 1993, the same four firms produced 
     nearly all the pediatric vaccines purchased in the United 
     States.\4\
       In the United States, the federal government finances the 
     lion's share of basic research in vaccines, where the 
     emphasis is on understanding the fundamental mechanisms of 
     infectious disease and the immune system. Once a vaccine 
     research project advances to the level of applied research 
     and development, where the emphasis is on producing and 
     testing specific products with commercial potential, the 
     private sector takes the lead in financing. Near the end of 
     the development cycle for vaccines, the federal government 
     becomes more involved again by helping fund clinical trials 
     to test the safety and efficacy of new vaccines.\5\ According 
     to one estimate, the federal government provided $500 million 
     (or 36%) of the $1.4 billion spent on U.S. vaccine R&D in 
     1995, and the private sector contributed the remaining $900 
     million (or 64%), with the lion's share coming from four 
     large, established sellers of vaccines: Merck, the Wyeth-
     Lederle division of American Home Products, SmithKline 
     Beecham, and the Pasteur Merieux Connaught division of Rhone 
     Poulenc.\6\
       In the past decade, the private sector has shown a vibrant 
     interest in vaccine innovation, and investment in vaccine R&D 
     has risen accordingly. While a number of factors have come 
     together to spur this interest, a key driving force has been 
     the revolutionary advances in the understanding of the 
     molecular basis of the immune system and disease engineered 
     by biotechnology. Recombinant technology is now being used to 
     improve existing vaccines and to produce new ones, to design 
     more efficient combinations of existing vaccines, and to find 
     better ways of delivery than a shot in the arm. Moreover, 
     most vaccine industry executives are convinced that the new 
     vaccines developed through the application of recombinant 
     technology will gain patent protection, unlike traditional 
     vaccines which are derived from naturally occurring organisms 
     and thus not eligible for patent protection. Patented 
     vaccines tend to command much higher prices in private 
     markets than those lacking patent protection. By one account, 
     as of May 1998, at least 50 biotechnology firms had joined 
     the large, established producers of vaccines in the search 
     for new vaccines, and about 75 new vaccines were in various 
     stages of development worldwide.\7\ The economies of scale in 
     vaccine production, however, make it unlikely that many of 
     small startup firms now engaged in vaccine R&D will grow into 
     large, independent producers. Although public data on vaccine 
     R&D are sparse and not systematically collected, figures on 
     pharmaceutical R&D reported by the Pharmaceutical Research 
     and Manufacturers of America (PhRMA) appear to underscore the 
     renewed interest in vaccine R&D in the pharmaceutical 
     industry. In its latest profile of the U.S. pharmaceutical 
     industry, PhRMA reports that domestic R&D investment in 
     biologicals, a product class that is dominated by vaccines, 
     rose from $274 million (or 4.7% of domestic pharmaceutical 
     R&D) in 1989 to $716.8 million (or 5.3% of domestic 
     pharmaceutical R&D) in 1996.


intended purpose of h.r. 1274, the lifesaving vaccine technology act of 
                                  1999

       The central aim of H.R. 1274 is to boost U.S. investment in 
     the development of vaccines for diseases that kill large 
     numbers of people each year, especially in developing 
     countries. Its chief policy instrument for achieving this 
     objective is a tax credit equal to 30% of qualified vaccine 
     research expenses in a tax year. Under the bill, qualified 
     vaccine research expenses are defined as a firm's in-house 
     and contract research expenses related to the discovery and 
     development of vaccines for malaria, tuberculosis, HIV, or 
     any infectious disease that kills over one million persons 
     annually, as determined by the World Health Organization. The 
     definition of qualified research expenses under H.R. 1274 is 
     identical to the definition of research expenses that qualify 
     for the research and experimentation (R&E) tax credit, with 
     one significant exception: the proposed vaccine research tax 
     credit would apply to 75% of qualified contract research 
     expenses, whereas the R&E tax credit applies to only 65% of 
     such expenses--except in the case of contract research 
     performed by certain research consortia, where 75% of the 
     expenses qualify for the credit. Like the R&E tax credit, 
     public or private grants for vaccine research are ineligible 
     for the credit. In addition, any research expenses claimed 
     for the vaccine research credit cannot also be claimed for 
     the R&E tax credit, although qualified vaccine research 
     expenses could be used to calculate the base amount for the 
     R&E credit; and with the exception of expenses for human 
     clinical testing conducted abroad, no credit is available for 
     foreign vaccine research. H.R. 1274 also specifies that the 
     proposed vaccine research credit would become part of the 
     general business credit and thus subject to its limitations; 
     any portion of the vaccine research credit that cannot be 
     used in the tax year in which it is earned could be carried 
     forward to a succeeding tax year, but the unused portion 
     could not be carried back beyond the year in which the credit 
     was enacted. Finally, like the R&E credit, qualified research 
     expenses that are deducted under section 174 of the Internal 
     Revenue Code (IRC) must be reduced by the amount of any 
     vaccine research credit claimed. This requirement has 
     important implications for the marginal effective rate of the 
     credit, because whatever vaccine research credit is claimed 
     in effect is taxed at a firm's marginal corporate income tax 
     rate.
       H.R. 1274 would also create a less direct tax subsidy for 
     vaccine R&D. This subsidy is targeted at investors and is 
     intended to make it easier for small firms involved in 
     vaccine R&D to raise money in equity markets. Specifically, 
     the bill would grant individuals or firms that purchase the 
     ``qualified research stock'' of small firms undertaking or 
     funding qualified vaccine research a tax credit equal to 20% 
     of the amount they pay for the stock, provided two conditions 
     are met. First, the firm whose stock is bought must use the 
     proceeds within 18 months of the date of purchase to pay for 
     research that qualifies for the vaccine reseach credit. 
     Second, the firm must waive its right to claim a tax credit 
     for the vaccine research funded by the stock purchases. Under 
     H.R. 1274, qualified research stock is defined as any stock 
     issued by a firm that is subject to the corporate income tax 
     and has gross assets of $50 million or less; the stock must 
     be issued after the date the bill is enacted and acquired 
     ``at its original issue in exchange for money or other 
     property (not including stock).''

[[Page 24927]]




             Likely Impact of H.R. 1274 on U.S. Vaccine R&D

       How are the proposed tax subsidies in H.R. 1274 likely to 
     affect vaccine R&D? The answer hinges largely on the effect 
     of the subsidies on two key determinants of business R&D 
     investments: the expected after-tax rate of return on such 
     investments and the availability and cost of capital to 
     finance the investments.
       For firms seeking to develop new or improved vaccines, the 
     decision to invest in R&D is no different in principle from a 
     decision to invest in any other capital asset, such as a new 
     production facility. The key considerations are the expected 
     after-tax returns on the proposed R&D projects, the cost of 
     capital or funds for the projects, and the availability of 
     funds to finance the projects. Small startup firms are more 
     likey than large, well-established firms to have trouble 
     funding R&D projects out of retained earnings or raising 
     funds in debt or equity markets to finance these projects. In 
     theory, a vaccine firm will invest in R&D projects up to the 
     point where the expected after-tax rate of return on a 
     possible project matches the firm's cost of capital. Projects 
     with the largest gap between expected after-tax rates of 
     returns and the cost of capital are likely to receive the 
     highest priority.
       H.R. 1274 can be expected to increase the level of domestic 
     vaccine R&D by both increasing the expected after-tax rates 
     of return on possible research projects and improving the 
     access of smaller, newer vaccine firms to equity markets. The 
     proposed flat 30-percent tax credit on qualified vaccine 
     research would be one of the factors shaping the expected 
     after-tax returns on vaccine R&D investments. Other important 
     factors are the eventual size of the market for the vaccine, 
     the predictability of prices and usage rates for the vaccine, 
     expected production costs, exposure to liability suits for 
     side effects of the vaccine, patent protection, the ease of 
     entry into the market for the vaccine, and the cost of 
     capital.\8\ The proposed credit would increase expected 
     after-tax rates of return. Under current tax law, firms 
     performing vaccine R&D can claim the 20% R&E tax credit for 
     qualified research. But because of the rules governing the 
     use of the credit, the marginal effective rate of the credit 
     is 6.5% or 13% on each additional dollar spent on vaccine 
     research by firms in the 35-percent corporate tax bracket. If 
     H.R. 1274 were enacted, the same firms could claim a tax 
     credit for qualified research with a marginal effective rate 
     of 19.5%; the rate would not be 30% because of the 
     requirement that any credit claimed must be added to a firm's 
     taxable income. All other things being equal, as a firm's 
     marginal effective rate for the vaccine research credit goes 
     up, the after-tax rate of return to this research rises.
       In addition, vaccine firms that are constrained by a lack 
     of funds in pursuing research opportunities could be expected 
     to invest more in vaccine R&D if H.R. 1274 were enacted. 
     Investors would be eligible for a flat 20% tax credit on 
     purchases of common stock issued by small vaccine firms, 
     provided the firms invest the proceeds from the stock 
     purchases in qualified research within 18 months of the 
     purchase. As a result, investors would face lower marginal 
     tax rates on the returns to these investments than on the 
     returns to alternative investments. This difference could 
     lead them to invest more in small vaccine firms than they 
     otherwise would, augmenting their available funds for R&D. 
     Innovation is the main route of entry into the vaccine 
     business for small firms.
       How much is vaccine R&D spending likely to increase in 
     response to the proposed credit? This is difficult to analyze 
     in the absence of reliable estimates of the responsiveness of 
     vaccine R&D to changes in its after-tax price. The proposed 
     credit lowers the after-tax price of qualified R&D, and in 
     theory vaccine firms can be expected to perform more R&D as a 
     result. A variety of studies have estimated that in the 1980s 
     the ``tax price elasticity of total (U.S.) R&D spending'' was 
     unity or even higher, meaning that U.S. firms responded to a 
     1% decline in the after-tax price of R&D by increasing their 
     R&D spending by 1% in that decade.\9\ Assuming vaccine firms 
     exhibit the same tax price elasticity today, a research tax 
     credit with a marginal effective rate of 19.5% could lead to 
     a rise of as much as 19.5% in domestic vaccine R&D spending. 
     However, this estimate cannot be regarded as reliable and 
     could be greatly exaggerated, because it is unlikely that the 
     sensitivity of R&D investment to changes in its after-tax 
     price remains constant over time and is the same for all 
     kinds of R&D projects, and because vaccine firms would be 
     likely to differ in their ability to use the credit in any 
     given year.
       Furthermore, there is some reason to believe that the 
     proposed vaccine research tax credit would eventually be as 
     cost-effective as direct spending by the federal government 
     on vaccine R&D. A number of studies have concluded that the 
     existing R&E tax credit yields roughly a dollar-for-dollar 
     increase in reported R&D at the margin, but that in the early 
     years of the credit firms were not as responsive as they were 
     adjusting to the credit's availability.\10\ In other words, 
     these studies suggest that government spending programs and 
     the R&E tax credit are equally effective in increasing the 
     amount of qualified research performed in the United States.


      Economic Justification for a Tax Credit for Vaccine Research

       Under conventional economic theory, the use of a subsidy 
     such as a research tax credit is justified if its ultimate 
     aim is to correct some sort of market failure. In the case of 
     R&D, the R&E tax credit is one way to offset the tendency of 
     firms to underinvest in R&D because of the gap between the 
     social and private returns to research. Economists argue that 
     in the absence of government support for R&D, firms are 
     likely to invest too little in R&D because they cannot 
     appropriate all the returns to those investments. So the R&E 
     tax credit, by lowering the after-tax cost of qualified 
     research, is intended to spur firms to invest more in R&D 
     than they otherwise would. Ideallly, the added R&D stimulated 
     by the credit is enough to raise domestic R&D spending to the 
     level commensurate with the social returns to R&D. The market 
     failure that the R&E tax credit is attempting to remedy is 
     underinvestment in R&D arising from the inability of firms 
     performing R&D to capture all the profits generated by the 
     investment.
       These considerations raise the issue of whether the 
     proposed tax credit for vaccine research in H.R. 1274 is 
     justified on economic grounds. Is there a failure in the 
     market for vaccines that would warrant the adoption of such a 
     subsidy? As was suggested earlier, there are external 
     economic benefits from controlling the spread of infectious 
     diseases. The cost to society of preventing an outbreak of an 
     infectious disease tends to be much lower than the cost of 
     treating the outbreak that might occur in the absence of 
     immunization. This raises the possibility that private firms 
     invest less in vaccine R&D than its potential social benefits 
     warrant. Partly in an effort to correct for such a market 
     failure, the federal government supports vaccine R&D through 
     its funding of basic research in vaccines and clinical trials 
     for new vaccines. Its research support is also intended to 
     direct vaccine investment to address current and future 
     public health needs. In addition, it offers two tax subsidies 
     for R&D, namely: the R&E tax credit and the expensing of R&D 
     costs under IRC section 174. Although these subsidies are not 
     targeted at vaccine research but are available to all firms 
     that perform qualified research, they benefit vaccine firms 
     by increasing their potential aftertax rate of returns on R&D 
     investments. The proposed vaccine research tax credit would 
     supplant the R&D tax credit for vaccine firms, but its 
     treatment of qualified research would be more favorable, 
     increasing the expected profitability of vaccine F&D 
     investment relative to other kinds of R&D investment.
       Thus, an important policy issued for Congress is whether 
     the current level of domestic vaccine R&D investment is 
     socially desirable or efficient. And if not, would the 
     proposed tax credit in H.R. 1274 be more efficient than added 
     federal funding of vaccine R&D or some other policy measure 
     (such as government grants to international agencies that 
     purchase and distribute needed vaccines in poor countries) in 
     raising total investment to such a level. From the 
     perspective of economic efficiency, the R&D projects that 
     should be promoted are those with the largest gaps between 
     the social and private rates of return. Yet vaccine firms are 
     likely to use any research tax credits to fund first those 
     projects with the highest expected private rates of return. 
     At the same time, there is no certainty that the federal 
     government could do a better job of targeting those vaccine 
     R&D projects with the largest spillover effects. If it is 
     determined that domestic vaccine R&D is less than socially 
     optimal, perhaps a combination of a targeted tax credit like 
     the one proposed in H.R. 1274 and increased government 
     support for basic and applied vaccine research would be more 
     attractive than relying solely on one instrument or the 
     other.
       Another policy issue for Congress raised by the proposed 
     tax credits in H.R. 1274 relates to the external benefits of 
     mass immunizations. The economic benefits to a society from 
     vaccinations far outweigh the benefits to individual 
     consumers, who in deciding whether or not to purchase 
     vaccines for themselves or their children tend to consider 
     only the costs and benefits to themselves and not the 
     potential benefits to others in the community. Even if the 
     market for vaccines were perfectly competitive, it is 
     unlikely that immunization levels would be socially 
     optimal.\11\ Thus government intervention in the development 
     and distribution of vaccines is certainly justified on 
     economic grounds. The proposed tax credits would spur the 
     development of new vaccines, but they would not lessen any of 
     the barriers to the achievement of universal immunization 
     with available vaccines. Low immunization rates are due to a 
     variety of factors, including out-of-pocket costs, parental 
     attitudes and knowledge, access to health clinics or doctors' 
     offices, the perceived efficacy of vaccines, and the 
     perceived risk of contracting diseases for which vaccines 
     exist.\12\ Clearly, other policy initiatives would be needed 
     to address these factors.


                               footnotes

     \1\ Sing, Merrile and Mary Kaye Willian. ``Supplying 
     Vaccines.'' Supplying Vaccine: An Economic Analysis of 
     Critical Issues. Pauly, Mark, et al., editors. Washington, 
     D.C., IOS Press, 1996. P. 61.

[[Page 24928]]

     \2\ Grabowski, Henry G. and John M. Vernon. The Search For 
     New Vaccines. Washington, D.C., American Enterprise Institute 
     Press, 1997. P. 20.
     \3\ Pauly, Mark V. and Bridget E. Cleff. ``The Economics of 
     Vaccine Policy: A Summary of the Issues.'' Supplying 
     Vaccines. P. 7.
     \4\ Sisk, Jane E. ``The Relationship between Scientific 
     Advances and the Research, Development, and Production of 
     Vaccines in the United States.'' Supply Vaccines. p. 181; and 
     FIND/SVP. The World Market for Vaccines. New York, October 
     1995. P. 169.
     \5\ Sisk, Jane E. Supplying Vaccines. P. 177.
     \6\ Marcuse, Edgar K., et. al. ``United States Vaccine 
     Research: A Delicate Fabric of Public and Private 
     Collaboration.'' Pediatrics, December 1997. P. 1017.
     \7\ Vaccines: Big Shots. Economist, May 9, 1998. P. 63.
     \8\ Sisk, Jane E. Supplying Vaccines. P. 175.
     \9\ Hall, Bronwyn H. and John van Reenen. How Effective Are 
     Fiscal Incentives for R&D: A Review of the Evidence. Working 
     Paper 7098. Cambridge, MA, National Bureau of Economic 
     Research, April 1999. P. 21.
     \10\ Hall, Bronwyn H. How Effective Are Fiscal Incentives for 
     R&D? P. 21.
     \11\ Holtmann, Alphonse G. ``The Economics of U.S. 
     Immunization Policy.'' Supplying Vaccine. P. 155.
     \12\ Pauly, Mark V. and Bridget E. Cleff. ``The Economics of 
     Vaccine Policy.'' Supplying Vaccine. P. 12-16.

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