State Policy Responses to Supply Chain Shocks in Moments of Crisis

The success of a supply chain can be dictated by its robustness to supply and demand-side shocks. A supply-side shock to a supply chain occurs when an event results in an unforeseen increase or decrease to the availability of a product or service. Negative supply-side shocks are characterized by a decrease in availability of a product. Because these shocks result in a lesser amount of product, the value of said product increases. Positive supply-side shocks are characterized by an increase in the availability of a product, resulting in the devaluation of said product. Demand-side shocks occur when an event results in the unexpected increase or decrease in demand of a particular product. Positive demand-side shocks are characterized by increases in demand for a product, leading to that product’s price to increase. Negative demand-side shocks are characterized by a decrease in demand for a product, leading to that product’s price to decrease along with the demand.

The coronavirus pandemic, which has threatened the lives of Americans across the country, has created numerous demand-side economic shocks and supply-side economic shocks for pharmaceutical supply chains. One example of this can be found with the albuterol drug. Albuterol is a quick-relief medication for asthmatic people and can be the difference between life or death during an asthma attack. Being that COVID-19 is a virus which can cause respiratory issues, it is imperative that diagnosed patients with asthma have access to albuterol (Cook, pars. 5–6). The coronavirus pandemic in this instance is a positive demand-side shock as it has increased the demand for albuterol amongst hospitals and pharmacies.

It is not realistic to expect companies which produce albuterol medication to scale up production due to the coronavirus pandemic as it may not be in their best interest economically. The party which is tasked with ensuring more albuterol medication is available in times of great demand is the government. The government is also responsible for solving the supply-side pharmaceutical shocks that a coronavirus pandemic presents as it must ensure production of these necessary drugs and medical supplies is optimized. Pharmaceutical companies do not have the responsibility of keeping American citizens alive, but the U.S. government does. Small shocks within the supply chain for drugs such as albuterol will cause severe pain for people across the country so it is imperative that the government step in to address these shocks and act as a big insurance mechanism for its citizens. This does not mean that companies will not play a role in the addressing of drug shortages as the state and the free market must be complementary in addressing the situation because the government alone can not meet the soaring demand of these pharmaceutical supply chains in a timely manner. This same idea is true for the responding to negative supply-side shocks as the government and pharmaceutical companies must work together in order to increase the availability of crucial pharmaceuticals.

There are three main methods which the state can employ to meet supply chain shocks for drugs like albuterol and medical supplies in a time in which many pharmaceutical supply chains are undergoing positive demand-side shocks or negative supply-side shocks. These methods are the Strategic National Stockpile (SNS), the Defense Production Act (DPA), and providing companies which produce drugs and medical supplies in high demand with tax incentives in order to encourage the production of more of these products while mitigating the financial issues of scaling-up production for these companies. These methods each have their are all ways in which the government can assist with the production or distribution of medical supplies and pharmaceuticals should there be a positive demand-side shock or a negative supply-side shock to the medical economy such as the coronavirus pandemic.

The Strategic National Stockpile (SNS) is a stockpile within the United States which is meant to act as an insurance mechanism for any public health threat. Its function is to supplement state and local supplies such as pharmaceuticals and other medical gear. The drugs and supplies act as “short-term buffers” when the immediate supplies of these products is not sufficient (U.S. Department of Health and Human Services, 2020).

During the coronavirus pandemic, the SNS has been employed to satisfy the needs for some drugs and medical supplies. Due to the stockpile’s purpose of being a “short term buffer”, it has been unable to fully satisfy the ongoing medical needs of the public. This is shown by the stockpile’s inability to provide a sufficient supply of N95 masks to the public and its essential workers (Khazan, 2020). Issues like these with the SNS arise due to the unpredictability of health pandemics. The government has no way of predicting when or how health crises will arise, and for this reason they are not fully effective in stocking up on an ideal number of products which will be needed down the road.

Another reason for the ineffectiveness of the SNS during the coronavirus pandemic is that Congress never provided them with the money which would be required to successfully stock up on goods in high demand. Due to the fact that the SNS is government run, its supplies are dictated by how much Congress decides its function is worth (Khazan, 2020). The expectation that the SNS should have been able to meet the soaring demands for pharmaceuticals and medical goods is completely unrealistic. The purpose of the SNS, as stated by the U.S. Department of Health and Human Services, is to act as a short-term buffer, not to meet the long term needs of products whose supply chains were affected by supply-side or demand-side economic shocks. As a result, the SNS is effective only when used to respond to supply or demand shocks in the short term. In the case of a negative supply-side shock to a pharmaceutical supply chain, the SNS can temporarily fill the void left by the lack of supply of a certain product; however, the SNS can not sustain this practice. The same can be said in the case of a positive demand-side shock to a pharmaceutical supply chain as the SNS can only supply the heightened demand until its stockpile runs out. Clearly, the SNS is extremely advantageous in scenarios which require short term supplies of pharmaceuticals; however, the SNS is incapable of providing a sustainable supply of these products, meaning that it is not effective for responding to supply and demand shocks like the coronavirus which need a continuous supply for an extended period of time.

The Defense Production Act (DPA) is a law which allows the president of the U.S. to direct private companies to prioritize orders from the federal government. The president also has the ability to distribute these products under this law (Antos, 2020). During the coronavirus pandemic, the DPA has already been employed by President Trump in order to “prioritize the production of medical supplies and pharmaceuticals” (Gibson Dunn, 2020). President Trump has established voluntary agreements with industries to help in ramping up production of necessary products. For example, Trump announced he was invoking the DPA to require GM to “accept, perform, and prioritize” federal contracts for ventilators.

The DPA can be effective at producing necessary products when manufacturers are able to ramp up production after receiving DPA invocations; however, the process of ramping up production for these private companies can often take two to three months. Past examples of the DPA being invoked have shown that a learning curve is present when private companies are made to make new products. The most efficient way of getting necessary products manufactured in the timeliest manner would be to rely on experienced manufacturers who already have the processes and infrastructure to ramp up production of whatever goods are deemed necessary by the state (Ganz, 2020). Although the DPA is not extremely effective in satisfying supply or demand shocks in the short term, it can be effective when such a shock should cause an elongated increase in demand or lack of supply as once private companies are provided with sufficient time to begin ramping up production, they will be sufficient manufacturers of whatever pharmaceuticals or medical supplies are deemed necessary by the state.

Unfortunately, in a situation similar to albuterol’s, with heightened demand due to the coronavirus pandemic, more albuterol was necessary almost immediately following the introduction of the virus within the country. Two to three months is far too long a time period to wait for an influx of life-saving pharmaceuticals as they are needed immediately when a life-threatening pandemic arises within the country. In conclusion, the DPA can be effective when employed to solve negative supply shocks or positive demand shocks in the long term; however, the DPA is ineffective when needed to solve an immediate shortage of pharmaceuticals or medical supplies resulting from such economic shocks to supply chains.

The state can also utilize tax incentives in order to have companies which already manufacture the drugs and medical supplies needed by the state. This method allows for these companies to scale-up their production while also mitigating the financial risks through tax incentives from the government. This method can be efficient in responding to both supply-side and demand-side economic shocks to a supply chain. It is a significantly more efficient process than the DPA as there is no expected period of time where manufacturers will need to ramp up production, making this method efficient in responding to supply and demand shocks both in the short term and the long term.

A notable example of this method being implemented is the Insulin Price Reduction Act. This legislation gave the country’s three makers of insulin an incentive in order to reduce their current price of insulin. The average price of this drug had more than quadrupled in thirteen years and was becoming less accessible to the less wealthy Americans. In order to appease the companies involved in this legislation, it made it so that insulin makers would not have to offer additional rebates in order for their products to be covered by insurers. It also stated that health insurers could not refuse to cover any insulin product whose price had been reduced under the bill (American Diabetes Association, 2019). In this instance, it was not a demand-side shock to the insulin supply chains, but rather a negative supply-side shock as massive drug rebates had driven up the cost of this drug significantly. Tax incentives were useful in this scenario as they were able to lower the price of insulin through mitigating the drug rebates for the drug.

Tax incentives given to private companies are also able to be utilized in order for the state to respond to positive demand-side shocks. The state can incentivize companies who manufacture the goods in a state of heightened demand to scale-up their production. This would allow for such manufacturers to ramp up their production of necessary pharmaceuticals but at the same time be protected from the potential economic consequences of this action from the state. This method can be effective in responding both to supply and demand shocks within pharmaceutical supply chains in the short term and long term.

This paper has displayed the three key methods in which the government can assist in increasing the production and distribution of essential pharmaceuticals and medical supplies such as albuterol in response to a positive demand-side shock or negative supply-side shock such as the coronavirus: the Strategic National Stockpile, the Defense Production Act, and providing companies which produce the drugs and medical supplies in high demand with tax incentives in order to encourage the production of more of these products while mitigating the financial issues of scaling-up production for these companies.

At times when the demand around the world for medical supplies and pharmaceuticals is so high, it is especially crucial that countries do not lockdown their trade but that they partake in global free trade in order to increase the accessibility to these necessities to people around the world. If countries lockdown their trade during a pandemic, critical sectors of the medical economy will be starved. If the relationship between the state and free market is optimized, supply chains of medical supplies and drugs which are undergoing supply chain shocks will be able to have production scaled-up with government assistance within the free market and successfully meet the demands of people in need of these products.

Works Cited

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