Private-Public Partnership in Fighting Covid-19

Mitigating the Covid-19 pandemic is a public health campaign that requires the joint efforts of both the private sector and the government.  Private enterprises provide creative solutions to a host of problems encountered in the pandemic, whereas appropriately placed government interventions take a social perspective in the fight against Covid-19.
 
Private sector efforts in a free market not only earn profits for businesses and enrich their stakeholders, but also improve the welfare of society as a whole, absent any external effects outside the market mechanism.  These private actions can also be relied upon to provide much of the containment efforts in the current situation. It is a regrettable fact that CDC’s initial monopolization of virus testing greatly impeded the early U.S. response to the pandemic. However, soon after the FDA loosened diagnostic test restrictions in late February, many health systems in the country began to develop and use their own Covid-19 tests instead of relying on the CDC or public health labs for testing.  This greatly encouraged private sector innovations on Covid-19 testing and led to a wide variety of tests.  Efficiency also improved:  Within a few weeks, the tests went from delivering results in several days to delivering results on site in just a few minutes.  For instance, Abbott Laboratories created a test that is able to deliver positive results in as few as five minutes and negative results in as little as 13 minutes.  There have been issues raised regarding test accuracy, and there are some tests on the market that generate too many false positives or false negatives.  False positives may divert resources away from patients who actually have the virus, and false negatives could be even worse, giving people false reassurance.  Nevertheless, the market has proven to be efficient in revealing the true quality of these products, and the flawed tests can be expected to be weeded out over time by competition.  In the meantime, the FDA has put in place new rules for testing, including requirements for manufacturers to submit performance data, which will complement the market’s push for high quality testing.

Another bottleneck in fighting Covid-19 was the shortage of personal protective equipment, including medical-grade facemasks.  Again, the private sector stepped up.  For instance, an Ohio-based company, Battelle, developed a decontamination system to clean and reuse N95 respirator masks.  The system is capable of processing 80,000 masks per machine, per day.  With this cleaning technology, an N95 facemask can be reused up to 20 times without losing its protective efficacy.  In all these efforts, the main motivation of companies might be self-interest or profits, but the result is that they contributed to the efforts to contain Covid-19.   
 
The government has an important role to play, as Covid-19 is extremely contagious and an infected individual can easily endanger others.  This is what economists call an externality – an individual’s actions imposing costs on others that the individual does not himself bear and may not take into account when making decisions.  Externalities can be dealt with in different ways, and they do not necessarily involve government actions. But the existence of externalities does sometimes justify government intervention in the private sector. 

An externality inherent in the risk of contagion justifies government rules regarding vaccinations, and in the specific case of Covid-19, justifies government rules regarding facemasks and social distancing.  Consider facemasks: facemasks may not be much help to the wearer in terms of avoiding infection, but they help protect others from an infected individual.  Individuals may not want to bear the cost or discomfort that comes from wearing a facemask that only protects others, and hence there is an externality.  The government regulation is a blunt but perhaps necessary response to individuals refusing to take actions that help slow the spread of their infection to others.

There are other examples as well.  A person without health insurance or who has a considerable copayment may choose not to take a Covid-19 test even when experiencing symptoms.  This may be individually rational, but it is certainly socially undesirable.  From a public health perspective, it pays to know whether a person is infected.  Governments can lower the cost to individuals of obtaining a test by lowering the dollar cost of the test itself, even to the point of making tests free to the individual.

That the private-public partnership can work wonders is probably best seen in the race to develop a safe and effective vaccine for Covid-19.  Developing a successful vaccine is a multiple stage process, full of risk at each stage, and profit-seeking firms normally wait until the successful completion of each stage of the approval process before taking the costly step of moving to the next stage.  There is considerable risk associated with each stage of the process, and some estimate that only about one in every six vaccines that reach clinical trials eventually achieve full approval and make it to the market.

In the current situation, however, a strong case can be made for starting mass production of a promising Covid-19 vaccine now, when it is still undergoing the early stages of human trials.  Suppose that mass-producing a potential but as-yet unapproved vaccine now could get the vaccine to the majority of the population two months earlier.  What is that extra speed worth to society?  If we assume that the mortality rate due to Covid-19 is 2,000 deaths per day, 120,000 lives could be saved by having a vaccine two months earlier.  Using the value of a statistical life used by the Environmental Protection Agency and other federal government agencies, about $9 million, and taking into account the age distribution of those who would die in those two months, the dollar value of those lives saved is $540 billion.  In addition, the economic cost of social distancing and other actions to “keep the curve flattened” might be 10% of normal output, so ending these actions two months early could result in a gain of approximately $330 billion.  Given the one-in-six chance of success, if the cost of taking a chance by mass-producing the vaccine early is less than one sixth of $870 billion, or $145 billion, then investing in such early and risky mass production would be justified from a social perspective, a fair bet, as it were.

One of the most promising vaccine projects currently under development is an mRNA vaccine from the company Moderna, which reached human trials in March.  We might not expect a profit-seeking company such as Moderna to invest its own money to ramp up production capacity while the eventual approval of its vaccine is still in considerable doubt, but there is a way forward thanks to the private-public partnership.  According to a recent Wall Street Journal interview with philanthropist Michael Milken, founder of the Milken Institute, Moderna already secured a federal grant of up to $483 million to produce millions of doses a month by year end.  Recently Moderna’s CEO told Mr. Milken that Moderna is seeking additional grants to reach a capacity of one billion doses.[1]  This $483 million seems trifling small compared to $145 billion, and compared to the trillions spent on the CARES Act.  If there was ever a time to engage in a risky government project, this would seem to be the time, and the project on which to take the risk.

[1] Mene Ukueberuwa, “What Would You Risk for a Faster Cure?” Wall Street Journal, Saturday/Sunday, May 2-3, 2020.

Posted: May 18, 2020 by Dennis W. Jansen, Liqun Liu