Has COVID-19 Changed Prescription Drug Pricing Forever?

As the COVID-19 pandemic continues to disrupt our lives and health care system on a historic scale, it is worth considering whether it has also revolutionized drug development and pricing in a profound way. COVID-19 vaccines were produced in record time using a novel approach: Drug makers committed to specific prices before receiving regulatory approvals. This development may have significant implications for California policymakers considering how to make prescription drugs more affordable.

In traditional drug pricing practices, the innovator uses investor capital to run clinical trials over a number of years. If successful, the trials lead to US Food and Drug Administration approval. The federal government grants the manufacturer a monopoly, and the drug maker sets the price. Pharmacy benefit managers, health insurers, health systems, and public payers negotiate price and access for patients. Each payer’s negotiated price is often a secret, and the parties rarely share how they arrived at it. (The current approach to pricing is admittedly more complicated than this. For those interested, please read the Drug Pricing Lab’s primers on the subject.) For many reasons, this pricing process amplifies the dysfunction in the health care system.

For years, state policymakers have been trying to address this problem as they seek to balance budgets while ensuring that residents can obtain the newest innovations in medicines. Recent efforts in California have included a price transparency law, a “bulk purchasing” proposal, and preliminary moves toward a state-run generic manufacturing label. The COVID-19 pandemic has created a new environment for these and other proposals that address the high cost of prescription drugs. In what ways might our experience with COVID-19 vaccines and treatments have changed drug pricing in the US forever? In what ways might things still be exactly the same?

Things Are Different Now

• Drug makers can develop treatments and vaccines quickly, thus upending the argument that high prices are needed to drive investment during an expensive development phase. We have seen treatments for COVID-19 approved over a period of months instead of years. We already have two novel vaccines authorized for emergency use less than a year after COVID-19 was declared a pandemic. Because development can happen in shorter time frames, manufacturers can set one preapproval price for government payers and see a healthy return on investment. This debunks the longstanding refrain from industry that high prices are needed to support lengthy drug development timelines.
• Federal government investment can spur innovation, and companies will respond with rapid development timelines. The US government provided billions of dollars to private industry as an incentive for drug and vaccine development. These incentives included Operation Warp Speed and advance commitments to purchase products. Traditional drug development is predicated on private investment. The use of federal funding to spur such rapid innovation discredits the notion that the capital markets are the only driver of pharmaceutical development. Industry experts will be watching for other mechanisms to incentivize innovation in additional medical fields that need products such as antibiotics. These tools include monetary prizes and advanced market commitments.
• Federal and state governments can ensure that vaccines are provided at no cost to patients. The federal government has secured deals to provide every person in the US with access to a vaccine, and people with employer-sponsored or private insurance will get the shots with no cost sharing. Reams of data show cost burdens on patients reduce their access to care (PDF) and harm their health. With federal and state policies leading to the elimination of cost sharing for vaccines, we may see more proposals aimed at eliminating patient cost sharing for drugs to ensure broader access. Some of those proposals may push for the federal government to use manufacturer subsidies to shield patients from out-of-pocket costs.
• The amount of data required for drug and vaccine approvals can be reduced. FDA emergency use authorizations require less robust data on safety and efficacy than regular approvals. During this pandemic, we have seen more acceptance for using therapies approved after showing signals of efficacy but many unanswered questions about safety and benefit. Manufacturers will push to have drugs for other conditions approved with less data on safety and efficacy in the name of rapid access for patients.

Things Haven’t Changed at All

• The federal government could have required price concessions in exchange for funding, but it chose not to, so the pre-pandemic status quo for pricing and access will persist. Despite an opportunity to tie federal funding for research and development to a framework for reasonable prices, the contracts in Operation Warp Speed did not include specific provisions for price concessions. Some contracts retain the “march-in rights” that exist in most government contracts, which allow one party to license another party’s intellectual property under certain circumstances. But experts have argued that the federal government intentionally chose not to set forth the circumstances under which it would assume ownership of the intellectual property it helped fund. Neither did the feds require a specific framework to set a boundary for the price in order to ensure affordable access for Americans.
• Drug makers need not link their pricing justifications for vaccines and treatments to levels of development funding from the government. While the US government agreed to a price for the Moderna vaccine, $30 for a two-dose regimen (private payers will pay more), neither the feds nor Moderna has explained how that price was set. Some argue that the amount of taxpayer funds used to support research and development should result in a lower price than the “market price” to reflect the public investment. Many of the companies developing vaccines and treatments for COVID-19 received federal support. Moderna received nearly $1 billion from the US government for its vaccine development program. The fact that a broader conversation about fair pricing was not sparked by a pandemic crisis where the nation’s future may depend on a vaccine program is evidence that we can expect the status quo to remain and manufacturers to continue unfettered in picking prices.
• Public scrutiny of drug pricing hasn’t gone away. Americans are losing their jobs and access to employer-sponsored health insurance. Before the pandemic, public outrage at the cost of pharmaceuticals was already high. With the added cost pressures on health systems and individuals, scrutiny of high drug prices will continue. The drug industry’s groundbreaking innovation has won praise but not enough goodwill to eliminate public concerns about pricing overreach. Americans will continue to want policy change that addresses the affordability of prescription drugs.

Whichever arguments you think are most persuasive, it’s safe to say that the conversation has already shifted, including in California, where policymakers see some policy windows opening. Even if COVID-19 hasn’t changed the drug-pricing paradigm, it has created an environment in which increased pricing transparency is seen as a commonsense first step toward understanding the dysfunction of drug pricing in this country. California’s efforts should find fertile ground. Leveraging the insights that transparency yields could help the state identify patented drugs to target with its generic drug manufacturing program or to set financial penalties for unsupported price increases.

Some people believe no price is too high for prescription drugs, because this is what leads to more innovation. There are those who think the main problem is that patients must pay more than their fair share of the costs of new drugs. Others believe that an innovator does not deserve a price that equals all the social benefits the innovation creates. After all, if a drug spurs the economy, that does not mean it is worth trillions of dollars, they would argue.

This tension over pricing will continue. Whether the status quo persists and patients remain unable to access the care they need depends on how policymakers choose to leverage the experience of COVID-19.

Authors & Contributors