Infectious viral diseases are not the dreaded killers and cripplers they were a half-century ago, but they still exact a huge toll. Year after year in this country, influenza kills between 10,000 and 100,000 and requires the hospitalization of at least hundreds of thousands. During the past two years, the mosquito-spread West Nile virus has caused more than 11,000 serious illnesses and about 300 deaths. Almost four million Americans have been infected with Hepatitis C virus, and there are 25,000 new cases annually. Outbreaks of gastroenteritis caused by Norwalk virus continue to bedevil cruise ships, prisons, dormitories and other institutions.

American drug and biotech companies should be burning the midnight oil working on vaccines to prevent such diseases, but flawed public policy has discouraged vaccine development to such an extent that supplies of life-saving vaccines even for common infectious diseases are in jeopardy.

The fundamental problem is that vaccines are undervalued by society, and on several fronts government policies discourage companies from investing aggressively to develop new vaccines. Producers have abandoned the field in droves. From 1967 to 1984, the number of U.S. vaccine manufacturers fell from 37 to 15, while the number of FDA-approved vaccines declined from 380 to 88. There are now only four major producers and a few dozen products. Only two companies were producing injectable flu vaccine -- at least until earlier this month, when contamination problems with Chiron's product cut the number to a single manufacturer. As a result, the country has recently experienced dangerous shortages of several essential vaccines, and some school systems have been forced to waive immunization requirements because there aren't enough vaccines available. There is near-hysteria now throughout much of the nation, as even high-risk persons are unable to find a source of flu vaccine.

Vaccination to prevent viral and bacterial diseases is modern medicine's most cost-effective intervention. Economists have concluded that the costs of vaccines are fare lower than the cumulative expenses of treatment, hospitalization, loss of working days by patients and their caretakers, and so on. The measles, mumps and rubella (MMR) vaccine saves approximately $16.34 in direct medical costs for every dollar spent, and the diphtheria, tetanus and pertussis (DTP) vaccine saves $6.21 for every dollar spent. In the absence of sufficient supplies of flu vaccine, if the disease is widespread this year, flu could significantly reduce the nation's productivity.

Vaccines are widely acknowledged to have high "social value," but compared to therapeutic drugs, their "economic value" to pharmaceutical companies is low.

Why this discrepancy? Largely because of vaccines' traditionally low return on investment and exposure to legal liability. The entire worldwide vaccine market, estimated at approximately $6.5 billion annually, represents only about 2 per cent of the global pharmaceutical market, an amount roughly equivalent to the sales of one blockbuster ulcer drug.

These problems are largely the result of wrong-headed public policy: Federal bureaucrats seem not to understand the concept of carrots and sticks. For example, the U.S. Centers for Disease Control, the largest domestic purchaser of vaccines, uses its buying clout to compel deep -- often extortionate -- discounts for purchases.

Another related problem is that there are gaps in funding for both vaccine purchase and the infrastructure needed for administration.

Arbitrary and excessive regulation also blocks progress. Consider, for example, the FDA's position on a vaccine to prevent meningitis C, a bacterial illness that infects thousands of Americans and kills hundreds each year. No state-of-the-art vaccine against this infectious disease is approved for use in the United States, although three excellent products are available in Canada and Europe. The safety and efficacy of these vaccines have been amply demonstrated, with over 20 million doses administered. Yet the FDA refuses to recognize the foreign approvals, although reaching agreement on such "reciprocity" of approvals is supposed to be a high priority for regulators. When asked about the extent of the FDA's cooperation on this issue, a senior European regulator answered, "It's like discussing the Thanksgiving dinner menu with the turkeys." FDA officials don't want to "outsource" their work, and run the risk that they'll become redundant.

Moreover, the FDA has a history of removing safe and effective vaccines from the market because of mere perceptions of excessive side effects -- a prospect that terrifies manufacturers.

Finally, the potent trial-lawyer lobby opposes changes in vaccine liability that would reduce the frequency of huge, unwarranted judgments.

What can we do about the current flu vaccine crisis, and more important in the long run, to make vaccine development more attractive? In the short-term, the CDC and FDA should perform clinical tests to see whether the injectable vaccine is effective when diluted. If, as previous evidence suggests, the vaccine is still effective when diluted by a factor of two, that would make available another 54 million doses. We could have those results within a month. That would, in effect, make a dire threat to public health disappear.

Second, the FDA should make it clear that although the labeling for FluMist, a non-injectable nasal flu vaccine, indicates that it is intended for recipients aged 5 to 49 years, it will likely also be effective in those younger or older.

Finally, government health officials should make it clear that even if there are shortages of vaccines, there are orally administered drugs that can prevent - and treat - flu.

Federal bureaucrats, who seem not to understand the concept of carrots and sticks, can do much to encourage greater production of more and better vaccines long-term. We need a fundamental change in mind-set: The rewards for creating, testing and producing vaccines must become more commensurate with their benefits to society, as is the case for therapeutic pharmaceuticals. The flu vaccine debacle this year has led some commentators to call for more government involvement, but it is naive and short-sighted to believe that the same bumbling bureaucrats who caused our current difficulties can solve them.

There are a number of actions that our government can take. For the most part, they involve getting out of the way of competition and free markets.

First, accept reciprocity of vaccine regulatory approvals between the United States and the European Union. This would cut development costs significantly.

Second, stop public agencies from demanding extortionate prices for vaccines.

Third, give companies tax credits to defray research and development costs.

Fourth, fund "proof of concept" research on gene-splicing technology to produce a new generation of flu (and other) vaccines. This would vastly improve our ability to ramp up supply in response to acute demand, and enable us to choose vaccine candidates later in the year. (We now select vaccine strains in the Spring for the following Winter's flu season.)

Fifth, give a vaccine developer a specified period of marketing exclusivity for a product of choice other than the vaccine. In other words, so that other potential vaccine producers would not be excluded from entering and competing in the marketplace, marketing exclusivity would have to be transferred to another kind of product(s) -- say, an arthritis or ulcer drug. This is a valuable perk that could be sold or bartered.

Sixth, get health care insurers to exempt vaccination from requiring the insured to pay "first dollar" healthcare costs -- in other words, from deductibles -- an arrangement that discourages consumers from opting for discretionary, preventative medical interventions.

Finally, establish a regulatory-compliance defense against lawsuits for damages caused by vaccines. Such a defense stipulates, in effect, that after a manufacturer meets the rigorous regulatory requirements for vaccine approval, any mishap from use of the product is considered to be non-culpable, and damages would be compensated by the government.

These needed reforms won't come easy. Getting the government to adopt them will be about as easy as dragging a child to the doctor for a painful shot.

Dr. Miller, a physician, is a fellow at the Hoover Institution and the author of "The Frankenfood Myth: How Protest and Politics Threaten the Biotech Revolution" (Praeger, 2004). He headed the FDA's Office of Biotechnology from 1989 to 1993.