Considerations for Value-Based Drug Pricing During COVID-19

Even in a public health crisis, value-based drug pricing warrants consideration, according to arecent Health Affairs analysis reviewing alternative pricing options for COVID-19 treatment.

Daniel O’Day, CEO of Gilead, explained that there is no playbook for pricing drugs in a pandemic. And many pharmaceutical companies have accepted that they might not make any profit from their products during this public health crisis. 

But researchers from Tufts Medical Center argued specific pricing models may be feasible during the pandemic, including cost-recovery models, monetary prizes, and advanced market commitments. 

A cost-recovery approach reimburses product manufacturers for their production and distribution costs. Top agencies, such as the Department of Defense (DoD) and CDC, have followed a “cost-reimbursable” arrangement. 

This has allowed health systems to provide access to treatments and manufacturers to receive revenues without risking operating losses.

But one downfall to this strategy is the lack of experience in the US, as well as the limitations that cost recovery models present. 

For example, the models require an estimation of costs that can be difficult to calculate. And paying manufacturers for costs incurred, instead of benefits conferred, rewards higher costs and inefficient processes, researchers explained.

Overall, cost-plus pricing does little to incentivize future innovation.

Driving innovation with monetary prizes may also be a pricing option during COVID-19.

Under this prize model, a company would receive a one-time large reward for developing a drug or vaccine. Once FDA approved, the drug could go generic and immediately become affordable.

But similar to a cost-recovery approach, monetary prices have drawbacks because the one-time payments may be hard to generate and are subject to the “whims of government appropriations,” researchers said. 

There are unanswered questions with this approach as well, such as if generic drug manufactures that do not participate in the prize system can still produce copies of the drug for sale in other countries. 

The last pricing option that researchers covered was driving production with advanced market commitments (AMCs).

With this approach, pricing is generally tied to research and development costs with an assumed profit margin. 

For example, at the end of July, HHS and the DoD announced an agreement with Pfizer for large-scale production and nationwide delivery of 100 million doses of its COVID-19 vaccine for $1.95 billion.

The appeal of an AMC approach is that they mitigate risks for manufacturers while also ensuring the widespread availability of products once FDA approved, researchers said. 

But a downside of AMCs is that it is a large financial obligation for a new vaccine or treatment could limit availability of funding in the future. Additionally, the government may only purchase doses of treatment of vaccine and not the patent associated with it. 

Therefore, manufacturers would have control over pricing. 

In a public health crisis, hybrid approaches to product pricing are needed, but value-based pricing and cost-effective analyses are important as well. 

These analyses are generally conducted from both a health system and societal perspective, researchers explained. And they can provide important information and help policymakers consider the full costs and benefits of specific products.

But the Institute for Clinical and Economic Review (ICER) has voiced concerns about value-based prices that incorporate societal impacts because there is a lack of data to support the estimates.

“Although estimating the full value of a drug for COVID-19 is difficult, the pandemic’s economic impact leaves little doubt that it would be substantial,” researchers said. 

“However companies are paid, aligning prices with the value conferred by drugs, vaccines or diagnostics can encourage firms to produce what people want—products that improve health and well-being—and thereby further stimulate appropriate innovation,” they concluded.