Manhattan Institute Issues Report Entitled 'Pandemic Preparedness – What Role for the Private Sector'
The brief was written by
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Executive Summary
The severe effects of the Covid-19 pandemic on
The neglect of pre-Covid warnings of a coming pandemic shows that better surveillance and monitoring and reporting of pandemic threats will not by themselves be sufficient. To spur better preparedness actions, the federal government and private industry should first work to develop credible estimates of the probability of a pandemic of given severity by a given date. Such estimates could be developed through structured expert judgment methods, a new collection, synthesis, and analysis of big data on viruses in animal and avian species around the globe, and the development of robust prediction or event contract markets. In addition,
Introduction
The severity of the Covid-19 pandemic should prompt a thorough review of preparedness for the next one./1
As of
Preparing for the next outbreak is, however, not an easy task. One reason is that the Covid-19 pandemic may be atypical and thus a poor guide to average or expected pandemic-related losses. Many years can pass with no new infectious disease being reported; in other years, new diseases--such as Middle East Respiratory Syndrome (MERS)--which emerged in 2012 and is also caused by a new coronavirus, spread slowly and are controllable through traditional public health measures. A 2018 report in the Bulletin of the
Another complication is the multitude of viruses that may infect humans and the variety of animal species that can host them. A 2012 study published by the
Small nocturnal flying mammals that defecate on other animals and food sources are not the only concern. Avian influenza A of subtype H5N1 infected both wild birds and poultry flocks and killed dozens of people annually in
In 2014 and 2015, some 44 million birds were culled from poultry flocks in the Midwest to prevent the spread of a "highly-pathogenic" bird flu of subtype H5N2, thought to originate in wild birds migrating from
Viruses that can threaten public health can originate in several wild and domesticated species of mammals and birds and can involve reassortment (a genetic mixing) of various virus species in ways that are hard to predict or monitor. In 2009, a flu pandemic of subtype H1N1, also called a swine flu, killed more than 10,000 Americans./16 That subtype emerged from pigs in
One lesson of Covid overlooked to date was that it has flourished not because people were unaware of the threat, but because they lacked actionable information necessary to justify appropriate investments in safety. However, there is no mention of crucial subjects such as using insurance-linked securities or other private-sector contracts to help reduce pandemic-related financial risks. The neglect of these areas is troubling. First, most risks, both natural and those associated with engineered systems, entail financial losses that can be reduced by strategies involving insurance policies or specialized financial instruments. Insurance for fires, motor vehicle accidents, floods, crop loss, and loss of life all serve to mitigate losses to families and businesses. To the extent that the prices of such insurance are driven by risk, insurance can drive private risk-reduction efforts. The challenge--which, this paper will argue, is not insurmountable--is that financial losses from infectious disease have generally been seen as uninsurable, leaving families and businesses exposed to these risks./19
Second, the performance of federal actors in the fight against the pandemic has been disappointing. Despite an abundance of high-tech capabilities and a national strategic stockpile/20 of medical products to support preparedness for public health emergencies, the
Indeed, the agency's deployment of a faulty diagnostic test hobbled local detection efforts at a key moment in the spread of Covid.
Third, without new mechanisms for private-sector risk-sharing, another pandemic would likely lead to an unacceptable worsening of federal indebtedness. In its annual Long-Term Budget Outlook, the
Finally, private organizations--for-profit and nonprofit--employ most American workers. Inducing these organizations to take sensible steps to prepare for the next pandemic will require market signals about the different types of pandemic risk that different organizations face. Such signals do not currently exist, and EO 13987 does not address how to foster their development. The remainder of this paper provides background information on pandemics, analyzes why the general awareness that a pandemic was likely in the near term did not lead to greater action before the Covid-19 outbreak, and makes recommendations for the assessment, prevention, and management of risks posed by pandemics. The federal government should take steps to promote periodic structured expert judgment studies of pandemic risks, and greatly increase surveillance and prevention activities conducted in a revised PREDICT program under the US AID. Crucially, it should examine and correct all regulatory and legal obstacles impeding the growth of robust prediction markets for pandemics and pandemic-related catastrophe bonds, including measures to allow such bonds to be traded on secondary markets.
Warnings Ignored
Years before Covid-19, there were many predictions that the
To be sure, significant pandemic prevention efforts predate Covid-19. Since its creation in 2009, the
Several international organizations have also sought to prepare for and respond to pandemics.
Agencies other than
Nevertheless, it has become clear that the prevention efforts of
The origins of Covid-19 are unclear. A
At this point, no reservoir of the novel coronavirus has been reported among wildlife in
A team of scientific experts assembled by
Pandemic Predictions: The Public Policy Paradox
In retrospect, there appear to be several reasons for
First, consider the scarcity of information about the likelihood of a new pandemic. Before the recognition of the Covid-19 pandemic in 2020, there was no quantitative estimate of the risk that one might occur in a given year. I am unaware of a published model that projected, for example, the odds of a pandemic in 2020 killing at least 300,000 Americans,/45 or ruled out that such odds were, say, less than one in a thousand.
Public health experts agree that future pandemics are unpredictable.
"Biological threats are increasing," the administration's new report on pandemic preparedness states, "whether naturally occurring, accidental, or deliberate, and the likelihood of a catastrophic biological event is similarly increasing." The claim that the likelihood of a catastrophic event is increasing seems bold, since if it is not quantified or quantifiable, how does one know it is increasing? Indeed, before Covid-19--and with the exception of HIV/AIDS, which is now a serious disease with multiple safe and effective treatments--
Another problem: precise estimates of the current number of infected individuals--and consequently, the chance of a major outbreak in the future--cannot be inferred from data on symptomatic cases alone./50 Instead, an accurate prediction of whether an epidemic will occur requires that records of symptomatic individuals be supplemented with data on the true infection status of apparently uninfected individuals. Timely acquisition of such data early in outbreaks of emerging disease is daunting, however, because reliable diagnostic tests are so scarce at that point.
Finally, the course of novel infectious diseases involves nonlinear dynamics, with positive feedback loops driven by the fact that the biggest risk factor for acquiring an infection is the presence of infected individuals./51 Put differently, small uncertainties in initial conditions, such as the number of infected individuals, have large implications for the eventual size of the outbreak.
Emerging diseases and pandemics may also be unpredictable because of the intrinsic complexity of processes governing exposure to and movement of domestic and wild mammals and birds, as well as mutation and reassortment of viruses. A 2017 report for the
Second, consider the paradox created by modern performance-based management practices. For decades, federal agencies seeking congressional appropriations have been asked to justify their requests for funding with performance commitments--that is, quantifiable improvements in outcomes that matter to voters and taxpayers. For the
The responsibility for pandemic preparedness in the
In 2017, HHS claimed that it had "made substantial progress in pandemic influenza preparedness since the 2005 Plan was released." It spoke of "the successes and remaining gaps in our preparedness and response activities for pandemic influenza. Most significantly, HHS efforts in pandemic influenza preparedness now are closely aligned with seasonal influenza activities, harnessing expanded surveillance, laboratory, vaccine, and antiviral drug resistance monitoring capacity."/55 Curiously, the report focuses exclusively on pandemic influenza preparedness without mentioning the possibility of non-influenza pandemics, even though two different coronaviruses had recently caused international outbreaks of two new deadly infectious diseases, SARS and MERS.
The tone--substantial progress, successes, and remaining gaps--is professional, avoiding alarm, although alarm was fully merited. Here, it is important to see that, in the absence of information about the likelihood of an emerging disease of a given infectiousness or lethality, there was little basis for
To see the difficulty, consider instead a sundry environmental health risk--such as illness from eating contaminated leafy greens or drinking improperly treated tap water. In that instance,
A third major explanation for Garrett's lament is the lack of private-sector financial instruments to signal changes in risk or to protect households and businesses. No bonds or other insurance-linked securities are known to exist for outbreaks of a new infectious disease or pandemic. Without financial instruments to provide information to policymakers or business leaders about how markets viewed relevant risks, conventional business planning decisions-- whether to develop or expand contingency plans for telework, for example, or to stockpile personal protective equipment--were handicapped by the lack of market benchmarks. In addition, the lack of such instruments makes it more difficult to make money by developing better means of predicting pandemics--limiting such efforts to those funded by government agencies and philanthropists.
Recommendations
The greater involvement of the private sector in pandemic preparedness will require taking additional steps toward predicting their occurrence, as well as reducing and sharing the risks to the economy and society.
First, there needs to be a reasonably credible estimate of the probability that a pandemic of a given severity will occur by a given date. If a quantitative risk assessment is developed and published periodically, upward trends could be noted at an early stage. Such estimates could help provide an empirical basis for deliberations over congressional funding for federal pandemic preparedness. Information about the probability of a pandemic occurring could also be useful to businesses and households for long-term financial planning. For example, a small retail business might think about the need for high cash reserves differently if the probability of a moderately severe pandemic in three years is 3% as opposed to 1%. Similarly, a firm making residential window fans or outdoor home furniture may consider differently a potential investment in additional production capacity if the probability of a moderately severe pandemic in three years is 3% instead of 1%. A family seeking additional care for an older grandparent might think twice about a move to assisted living if told the moderately severe pandemic might occur with a probability of 3% instead of 1% over the next five years. Today, as in 2019, no such pandemic forecast is available to policymakers, let alone heads of businesses large or small.
Second, there need to be financial instruments to allow firms and households to protect against the financial risks of pandemics. Service industries--including airlines (and aircraft manufacturers), hotels, restaurant chains, cruise lines, and the travel industry generally--were very hard hit by the pandemic. So, too, were manufacturers and distributors of business apparel for men and women. At the same time, the pandemic made winners of private enterprises making goods or services that could aid people and businesses. Apart from vaccine developers and makers of personal protective equipment, such winners included the tech giants offering telecommunications hardware and software including Apple, Google, and Microsoft. Other winners included makers of UV lighting systems capable of zapping coronaviruses, medical-grade indoor air-filtration systems, and lumber mills trying to meet unanticipated growth in demand for residential construction. The disparate effects of the Covid pandemic across different industries, coupled with the adverse effects of the legislative response on federal indebtedness, suggest that private-sector risk-sharing mechanisms deserve another look.
There are several complementary approaches to implementing these recommendations. The approaches differ in terms of their cost and technical feasibility, as well as how much time they may take to implement. They focus on ways to develop estimates of the probabilities of new outbreaks of emerging diseases or pandemics and to motivate reduction or sharing of losses from such events. These approaches include:
* Periodic structured expert judgment
Many technical questions involving substantial uncertainty, including power plant safety and earthquakes,56 have been addressed through the use of structured expert judgment studies./57 Such studies involve asking recognized experts specific, carefully crafted questions that are of interest to decision-makers and very hard to answer using any other method. For example, experts might be asked to consider a hypothetical new respiratory disease with the same efficiency of human-to-human transmission and the same fatality risks as measles. They might be asked how many deaths would occur within 12 months among people
Expert judgment methods can incorporate uncertainty by presenting a probability distribution rather than a single point estimate./59 In addition, some expert methods weigh the judgments of various experts by how well they answer questions with knowable answers that are closely related to the research question at hand. These methods reduce the sensitivity of results to the identities of participating experts./60 Finally, the convenience and low cost of such methods may permit their repeated use at regular intervals to identify trends.
* Collecting, organizing, and synthesizing big data
A big data early warning system approach, as was sketched in the
PREDICT would need a major modernization to go beyond updating the cataloging of first occurrences of emerging infectious disease outbreaks that
The administration's new pandemic preparedness report mentions early warning goals: early warning systems that would consist of improved viral threat detection in clinical settings and through environmental monitoring of wastewater, aggregation of public health information, and the creation of early warning networks to better share data internationally. The proposed budget for these goals, or perhaps simply progress towards them, is
* Prediction markets
Prominent economists, including Nobel Prize winners
A prediction market allows interested parties to make a bet--say,
A 2016 study of prediction markets created in
In this country, CFTC regulates prediction markets for such bets, called "event contracts." It prohibits event contracts that deal with or refer to "terrorism, assassination, war, gaming, or an activity that is unlawful under any State or Federal law."/68 Any entity desirous of running a prediction market must file with CFTC to become a Designated Contract Market (DCM), which will then operate much like a traditional futures exchange./69
A technical challenge with prediction markets for pandemics is ambiguity about what exactly is a pandemic. Definitions based on public reports of the number of confirmed cases of a new infectious disease may be impractical because of inconsistent definitions of a confirmed case, a shortage of diagnostic tests, and incomplete reporting by relevant government authorities. To illustrate, on
* Insuring Pandemic-Related Business Interruption Risks.
Regardless of how pandemics are defined, the lost revenues and profits from pandemic-related interruptions of business activities are widely seen as very hard to insure, and extant business interruption insurance policies generally exclude disease outbreaks from coverage./75 Losses can hit (nearly) all insured parties concurrently, or at least in the same one- or two-year period. Losses, which are difficult to measure, are not determined entirely externally but result partly from management decisions to close and largely from government shutdown and lockdown orders. Losses from moderately severe pandemics may be so large as to threaten the solvency of many insurers. In addition, estimating the probability of pandemics (or outbreaks of emerging infectious disease) of a given level of severity is currently beyond the capabilities of published models. Thus, premiums in this environment may be unaffordable./76 Unsurprisingly, witnesses at a recent House subcommittee hearing, including an economic expert/77 and a representative of Chubb (the largest
A 2020 white paper by
Another approach to insuring business interruption risks, which might be feasible with minimal government support, is catastrophe bonds (cat bonds), a type of insurance-linked security. Cat bondholders bear the risk of catastrophes--they would lose some interest payments and/or principal--in exchange for coupon (interest) payments higher than would be the case without that risk. A cat bond requires a "trigger," i.e., an uncertain future event, that is promptly and objectively verifiable and that--if it occurs--would initiate a particular contractual provision. Triggers can be based on either a loss of a pre-specified amount, or an objective and easily verifiable event. According to the Lloyd's report, the global reinsurance industry has an opportunity to work with the capital markets to provide parametric protection for pandemics and non-damage business interruption through devices such as catastrophe bonds. Cat bonds may be attractive because the value of capital markets is estimated to be
Unfortunately, most cat bond activity appears to occur in
The federal government should examine what regulatory or legal impediments may exist for the greater use of cat bonds in the
Conclusion
The pre-Covid awareness of a pending pandemic that happened without adequate preparations has led the Biden administration to an assessment of how to ensure that preparations are more thorough before the next such disaster. This paper urges that the government take additional steps with an eye toward increasing private-sector involvement in assessing, mitigating, and sharing such risks. This means promoting periodic structured expert judgments of pandemic risks, greatly increasing the surveillance and prevention activities conducted by a revived PREDICT program under the auspices of
Acknowledgment
The author is grateful for the excellent research assistance of
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Endnotes
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6/ M. Szmigiera, "COVID-19: Forecasted Global Real GDP Growth 2022," Statista,
7/ Relief measures enacted in FY2020 are projected to raise deficits over the following 10 years by
8/ Fitch Ratings, "US Stimulus Will Boost Growth at a Cost of Higher Deficits, Debt,"
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12/ Ibid.
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18/ "American Pandemic Preparedness: Transforming Our Capabilities," whitehouse.gov,
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26/ CRS, "Federal Deficits, Growing Debt, and the Economy in the Wake of COVID-19,"
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47/ See
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49/ Ibid.
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54/
55/ HHS, "Pandemic Influenza Plan: 2017 Update," 2017, p. 5.
56/
57/ See
58/
59/ Cooke, "The Science of Forecasting."
60/ Ibid.
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62/ Ibid.
63/
64/
65/ According to the
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69/ CFTC, "Designated Contract Markets (DCMs)," n.d.
70/
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72/
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74/ "NIH Study Offers New Evidence of Early SARS-CoV-2 Infections in
75/
76/ Kuhlmann, "Insuring Against a Pandemic."
77/
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79/ Lloyd's, "Supporting Global Recovery and Resilience for Customers and Economies: The Insurance Industry Response to COVID-19," 2020.
80/
81/ Lloyd's, "Supporting Global Recovery."
82/ Tobias Gotze and
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