In 2022, there was an outbreak of mpox/monkeypox in Western countries. One response was to give people who seemed at risk of catching mpox the smallpox vaccine because the smallpox vaccine also works against mpox. This was possible because many governments stockpile vaccines and other medical goods for cases like this.

In the United States, there’s the Strategic National Stockpile, a federally managed stockpile of vaccines, therapeutics, PPE, and medical equipment that exists to be dispatched during public health emergencies. During the COVID- 19 pandemic, the SNS was used to provide ventilators, masks, and other supplies to respond to the outbreak. 

There’s a government body (Public Health Emergency Medical Countermeasures Enterprise) that is supposed to advise the government on what supplies should be stockpile. The department in charge of the stockpile (HHS) does follow these recommendations, kind of.

According to GAO, HHS buys the supplies it’s advised to, according to the but in far smaller quantities than recommended because it just doesn’t have the money. One solution would be for Congress to just give SNS more money. I think this is a good idea, definitely an improvement over the status quo.

But there are a few problems with just relying on this.

1. Even after the most recent pandemic, Congress doesn’t love spending money on medical stockpiles.
2. Predicting what supplies are most valuable to stockpile is hard. I’m sure the experts at PHEMCE are smart and credentialed but I’m not sure that putting a single body of government experts is the best way to manage supply.
3. In practice, SNS prepares for future emergencies largely by buying products that already exist when the best preparation for future pandemics might be producing and stockpiling new products. SNS and the federal government does do some development of new products, there’s a fund within SNS for funding the development of new products as well as an agency called BARDA which does the same.

Arguably it would be better for there to be a market for emergency medical stockpiles. Relying on private stockpiles might seem to have important advantages. Profit-seeking firms would have strong incentives to forecast demand for products. Firms could stockpile more inventory than the federal government. Large firms routinely make investments that exceed annual federal spending on the SNS. In contrast to the current SNS structure where SNS purchases existing goods based on PHEMCE recommendations, firms could develop new products, stockpile them in case of public health emergencies, and recoup their investment by selling these goods at a profit-maximizing price during peak demand. 

And in theory, corporations might even be willing to prepare for unlikely future pandemics since if they were the monopoly provider of a live-saving drug or vaccine they could charge huge rates for it, they could price-gouge.

But this could never happen. During a major pandemic, no pharma company could get away with this. They would face legal jeopardy. Even if their behavior was technically legal, they might face political repercussions. Companies might, for ethical reasons, refuse to contemplate price-gouging and without the prospect of these high expected returns refrain from building their own stockpiles.

Even if firms were willing to create such stockpiles and sell supplies at a profit-maximizing rate during emergencies and society and governments were willing to let them, there would still be downsides to relying on private inventories. The profit-maximizing price might be too high for many to afford so some people might die due to lack of ability to pay. Or if the seller was really good at price-discrimination they might charge each individual the maximum they were willing to pay, saving their lives but driving them into bankruptcy. Furthermore, contagious diseases are a classic example of negative externalities and the amount an individual is willing to pay to avoid infection with such a disease is less than the social value of an averted infection. Likewise, the value of providing this product to critical medical personnel might exceed their willingness to pay. 

A Market-Based Stockpile Model

A major expense of the Strategic National Stockpile is replacing expired products (CRS, 2023). This cost has been partly mitigated by the SNS’s embrace of vendor-managed inventory (VMI) where some portion of the supplies in the Strategic National Stockpile are managed by the supply vendors who are permitted to sell expiring products and replenish the SNS with newer products. But vendor-managed inventory only works when there is a meaningful commercial market for supplies held within the SNS. Even if vendor-managed inventory were expanded many products would still expire. Currently, 10% of SNS contracts allow for VMI (CRS, 2023). This is higher than prior to the COVID-19 pandemic because the SNS had abandoned the use of VMI contracts in 2017, before returning to their use during the COVID- 19 pandemic. ( CRS, 2023, GAO, 2022) 

But if the SNS expanded in size, even if only to meet the recommendations of PHEMCE, the amount of expiring products and the amount of money meant on expired supplies would increase. This might pose a political challenge-Congress might be hesitant to appropriate larger and larger amounts of money on supplies that might never be used. 

The ideal national stockpile strategy would solve the problems of stockpile underfunding, incentivize the creation of new medical countermeasures that could then be stockpiled and provide strong incentives to accurately predict future public health emergencies and which medical countermeasures would be in demand in future public health emergencies. Ideally, the strategy would also avoid not just political favoritism, but also its appearance, and would reassure taxpayers that public funding of such stockpiles is not wasteful. 

What if instead of just letting companies manage some of the stockpile, companies were able to determine at least some of the stockpile’s contents? The Strategic National Stockpile could be reformed to incentivize private firms to predict what medical countermeasures will be most needed in the future, and to develop and supply them. To avoid the downsides of price-gouging, the SNS should remain in charge of the distribution of supplies in the case of public health emergencies. 

SNS could allow vendors to supplement the supplies already purchased and managed by SNS through a vendor-determined inventory. In this program, suppliers could predict what supplies would be most helpful in future public health emergencies, transfer such supplies to SNS management, and retain the right to sell and replace expiring inventory. If SNS chose to dispense such supplies, it would pay the vendors at a premium, reflecting the value of the supplies as well as the risk the vendor incurred by providing supplies which might never be used or paid for. The supplier would receive no compensation from SNS unless its supplies were used. 

This would encourage the development of new products that might be relevant in a public health emergency. If a supplier predicted a new therapeutic or vaccine might be useful in future public health emergencies, it could develop such a product and store such a product as part of the vendor-determined inventory. The SNS would now provide emergency critical supplies and provide an effective subsidy to medical R&D.

The program as envisioned would only pay for products that are disbursed by the SNS. Thus, no taxpayers’ dollars would be spent to pay for ineffective or unneeded supplies. This program would shift risks to the suppliers. However, firms have many ways to manage financial risk. So long as the premium paid for these products was sufficiently high, firms would still have an incentive to participate. 

Large established firms, naturally diversified across many product lines and markets, might simply dedicate some of their capacity to preparing for future public health emergencies. Small start-ups might participate. Conceivably, a start-up that thought a particular therapeutic was undervalued or a public health risk underestimated might exist to provide a single supply to the SNS and might be funded by risk- tolerant venture capitalists. Existing finance models can handle the development of high-risk high-reward products. 

When there are multiple suppliers of the same good, like some N95 masks, suppliers could tell SNS the lowest price they would accept and SNS could disburse those supplies, exhausting supplies from the cheapest vendors first.