The Role of Advance Purchasing Commitments in Government Drug Price Negotiations: Lessons From the COVID-19 Response

Among the various approaches to address rising prescription drug costs, one option is to allow the federal government to negotiate prices directly with drug manufacturers. Debates over the appropriate negotiating approach have occurred on several dimensions,¹ including the number of drugs eligible for negotiation, the levers that would be implemented to obtain lower prices, the incentives necessary to ensure that all parties negotiate in good faith, and what specific populations should have access to the negotiated price. In 2019, the US House of Representatives passed the most recent proposal to allow the federal government to negotiate prices—H.R.3, The Elijah E. Cummings Lower Drug Costs Now Act—reflecting policy decisions on many of these issues.²

Underlying most of the debate around policies to allow the federal government to negotiate drug prices was a concern, most notably expressed by the Congressional Budget Office (CBO), that the federal government may be unwilling or lack the necessary mechanisms to obtain discounts greater than what insurers and pharmacy benefit managers can already negotiate. According to the CBO, without mechanisms to effectively exert “some source of pressure” or issue “credible threats” on drug manufacturers, providing negotiating authority to the federal government by itself would be unlikely to have any significant effect on federal spending.³

To satisfy these concerns, in H.R.3, Congress used a combination of external reference pricing and an excise tax to generate savings. We suggest that an alternative mechanism, which could be added to H.R.3 or other future proposals, is to have negotiations involving both price and quantity, for example, through advance purchasing commitments. Such negotiations can provide manufacturers with an incentive rather than a penalty to negotiate by guaranteeing a certain total revenue through the negotiation. We make this recommendation based on recent experiences, having observed the federal government’s response to the COVID-19 pandemic.

RECENT PRICE NEGOTIATIONS IN THE COVID-19 RESPONSE

In response to the COVID-19 pandemic, the federal government has been able to establish several agreements to purchase predetermined quantities of products for negotiated amounts (Table 1). Five different COVID-19 vaccine deals were announced, at prices varying between $4 and $20 per dose.^4–8 A purchasing agreement for a COVID-19 antibody, at prices estimated at $1500 to $6429 per dose, was also announced.⁹ The price variation across these agreements is the result of many different factors specific to each negotiation. All vaccine-purchasing agreements, as well as the agreement to purchase the COVID-19 antibody, were established at the drug development phase, with actual payment depending on whether—and when—each product obtained Food and Drug Administration (FDA) approval.¹⁰ The varying levels of federal investment in many of these products could explain some of the price differentials. There is also the public relations reality of the drug company being perceived as profiteering in a pandemic.

TABLE 1—

COVID-19 Purchasing Agreements Between the Federal Government and Pharmaceutical Manufacturers: May 21–August 11, 2020

COVID-19 Therapy	Manufacturer	Total Price, $	Total Quantity (No. of Doses)	Price per Dose, $
Vaccine	AstraZeneca	1.2 billion	300 million	4
	Novavax	1.6 billion	100 million	16
	Pfizer–BioNTech	1.95 billion	100 million	19.50
	Sanofi–GlaxoSmithKline	2 billion	100 million	20
	Moderna	1.5 billion	100 million	15
Antibody	Regeneron	450 million	70 000–300 000	6429–1500a
Antiviral remdesivir	Gilead	1.56 billion–2.86 billionb	500 000 treatment courses	520c

Source. Authors’ analysis of press releases from the Department of Health and Human Services between May 21 and August 11, 2020, for pharmaceutical purchasing agreements. Excludes purchases of nondrug products, such as personal protective equipment (PPE) and ventilators.

^aThe price per dose was calculated on the basis of the range of number of doses expected to be delivered by the drug manufacturer; the minimum and maximum prices reflect scenarios where the manufacturer delivers 300 000 and 70 000 treatment doses, respectively.

^bThe purchasing agreement announced the number of treatment courses to be delivered by the manufacturer without specifying treatment duration. The price per dose was calculated assuming scenarios where all treatment courses are 5-day regimens (6 doses—minimum price) or 10-day regimens (11 doses—maximum price).

^cPrice per dose for US private purchasers as announced by the drug manufacturer (Gilead).

Although some negotiations involved products that were still under development, the purchase of the antiviral drug remdesivir involved a product that had been previously developed and had demonstrated some clinical effectiveness against the COVID-19 infection when the negotiation occurred—namely, to reduce hospitalization time.¹¹ In this agreement, the Department of Health and Human Services (HHS) secured more than 500 000 treatment courses of remdesivir, representing 100% of the drug manufacturer’s production for the month of July 2020 and 90% for the months of August and September.¹²

Although the federal government negotiated the agreement, it also announced that US hospitals would be in charge of actually purchasing the drug.¹² The federal government allocated quotas of the remdesivir supply to states and territories based on their respective COVID-19 disease burden, with states and territories allocating quantities to specific hospitals.¹² Insurers reimbursed the hospitals, not the federal government. The key is that the government was not actually buying the drug for the private sector, but instead negotiating a maximum price. If the private purchaser could obtain a lower price, then that would become the purchaser’s price.

It was announced that government purchasers such as the Veterans Health Administration and the Department of Defense would pay $390 per vial of remdesivir, the same list price that the drug manufacturer offered to governments of other developed countries.¹³ US hospitals would pay a 33% higher list price: $520 per vial (Table 2).¹³ The remdesivir price negotiations also occurred under special considerations. Gilead, the drug manufacturer, received considerable government support to develop and test remdesivir, and the federal government may have rights to its core patents.¹⁴ The HHS secretary also had the option to utilize Section 1498, a provision of patent law that allows the federal government to procure a patented product from other manufacturers as long as the government provides reasonable compensation to the original patent holder. This approach was proposed in the negotiations with Bayer, the manufacturer of ciprofloxacin, during the anthrax emergency after the 9-11 attacks.¹⁵

TABLE 2—

A Comparison of Pricing Benchmarks for the COVID-19 Antiviral Remdesivir: May–June 2020

Price per 10-d Treatment, $a	Description
Based on manufacturing costsb
10	Estimated cost of raw materials for the drugc
600	Estimated cost of generics produced overseas
1005–1600	Cost-recovery priced
Based on cost-effectiveness analysesb
4580–5080	Traditional cost-effectiveness model assuming reduced hospitalization time plus reduced mortalitye
2520–2800	Model assuming dexamethasone as standard of treatment, with reduced mortality from dexamethasone
310	Model accounting for reducing hospitalization time but no effect on mortality
External reference pricingf
4290	Price set by the manufacturer for governments of all developed countries
US price determined by the manufacturerf
4290	US government purchasers
5720	US hospitals

^aCalculated over a 10-day treatment course, which represents a total of 11 vials of remdesivir for an adult.

^bSource: Institute for Clinical and Economic Review (ICER).²¹ The estimates published by ICER have since been updated. The table reflects the estimated prices at the time that remdesivir price negotiations were taking place.

^cEstimate assumes that research and development costs have already been recouped.

^dEstimate assumes that new, COVID-19–related research and development cost (announced by Gilead to be about $1 billion) would need to be recouped.

^eRemdesivir’s benefit on mortality has not been confirmed.

^fSource: O’Day.¹³

There may also have been commercial reasons incentivizing the manufacturer’s willingness to negotiate. At the time of the agreement, remdesivir was not approved by the FDA and was marketed under an emergency use authorization. Unless it received FDA approval, it could only be commercialized as long as the government kept the COVID-19 emergency status in place. The demand for remdesivir was also likely to diminish substantially if other drugs were found to be more effective and once a successful vaccine became available.

DETERMINING THE APPROPRIATE PRICE

Each of these negotiations occurred under tremendous public scrutiny and in a very short time. There has been public concern that the government was paying too much for some of these products.¹⁶ On the other hand, the investment community has suggested that the negotiated prices were too low.¹⁷

For remdesivir, there was considerable controversy over the negotiated price (Table 2).¹⁸ It has been suggested that a price as low as $10 per treatment might have been sufficient to offset its direct manufacturing costs.¹⁹ The manufacturer had developed remdesivir originally as a treatment of hepatitis C and later successfully launched other drugs to treat this condition; therefore, the “sunk cost” of drug development had likely already been realized long before the COVID-19 pandemic.²⁰ However, the manufacturer committed to making COVID-19–specific investments on research and manufacturing, announced at about $1 billion.¹³ Including those costs into the calculation might have justified a price as high as $1600 per course of treatment.²¹ Industry experts have suggested that a price as high as $12 000 per course of treatment might be justifiable because remdesivir reduced some days of hospitalization time.¹³ However, it is debatable if the drug manufacturer should receive all of the savings from reduced hospitalization spending.

The pricing of remdesivir was occurring when there was uncertainty whether the drug was effective and whether it reduced mortality. An independent evaluation estimated the cost-effectiveness price benchmark for remdesivir at $5080 per treatment, assuming that the drug would decrease both hospitalization time and mortality and assuming a value of $50 000 per each quality-adjusted life year saved.²¹ Further studies found no benefit from remdesivir on mortality, however.²² Without such benefit, remdesivir’s cost-effectiveness price benchmark was estimated at about $310, reflecting the low incremental change to quality of life from a median four-day reduction in hospital stay.²¹

The final announced price of remdesivir to US government purchasers such as the Veterans Administration and Department of Defense was similar to the price to other developed countries and the announced price to US hospitals was 33% above international rates. The United States has a long history of paying, on average, three to four times what other industrialized countries pay for brand-name drugs.²³ Therefore, relative to other industrialized countries, the negotiated price of remdesivir was lower than what price negotiations for branded drugs by US private insurers have typically been able to achieve. If negotiated under H.R.3 provisions, the maximum price would have been set at 20% above the external reference price, which would be slightly higher than the average price obtained if the public and private sector were to use equal amounts of remdesivir.

In addition, the negotiated price of remdesivir was likely substantially lower than what the drug manufacturer could have charged if the company went to market with a profit-maximizing price. A profit-maximizing price would likely result in many people not having access to remdesivir. In 2013, the same drug manufacturer chose to set the list price for its hepatitis C drug Solvaldi at about $84 000 for the course of treatment and made billions of dollars in profit, recognizing that many people with hepatitis C would not be able to afford the drug.²⁰

MAIN LESSONS FOR GOVERNMENT DRUG PRICE NEGOTIATIONS

The experiences with drug purchasing agreements in response to the COVID-19 pandemic have demonstrated that simultaneously negotiating both the price and the quantity of a drug may provide an incentive for drug manufacturers to participate in the negotiations and to offer price concessions in exchange for increased revenue certainty. By agreeing to obtain a large supply of remdesivir, the United States was able to negotiate a lower price than what US private purchasers typically pay for branded drugs compared with other industrialized countries.²³ This experience also shows that the government does not have to actually purchase the drug but can simply guarantee a certain volume of sales. If the committed quantity were not to be realized over the defined time period, the federal government could pay for the remaining negotiated quantity and utilize the leftover amount to provide care for specific programs or populations—such as uninsured patients or the prison system—or to stockpile it for future use. Finally, it allows everyone to have access to the drug at the negotiated price.

Advanced purchasing commitments have been extensively used in other sectors. This model is how large retailers like Walmart are able to obtain lower prices from their suppliers when they guarantee a certain volume of sales. In the pharmaceutical sector, having hospitals guarantee a certain purchasing volume was instrumental in making the nonprofit drug manufacturer Civica Rx viable.²⁴ States have also implemented similar volume agreements in recent initiatives, such as the purchase of hepatitis C drugs by the states of Washington and Louisiana.²⁵ In this case, also called the “subscription” model, manufacturers have agreed to continue supplying drugs in exchange for a certain total revenue.

Advance purchasing commitments could be incorporated into government drug price negotiations. These could be a useful negotiation incentive for drugs without any therapeutic competition—for example, new gene therapies for rare conditions—which are typically the most expensive drugs. Drugs that lack therapeutic alternatives cannot be feasibly excluded from a drug formulary and often cannot be substituted for another drug or therapy. Therefore, the model of using formularies to negotiate with drug manufacturers currently employed by health plans, pharmacy benefit managers, and Medicare Part D prescription drug plans is less viable in these circumstances. A price-and-quantity negotiation could represent an incentive that would motivate manufacturers to provide price concessions on these drugs.

Advance purchasing commitments could also be useful for negotiating prices of drugs with high public health relevance. Such negotiations would provide drug manufacturers with guaranteed levels of revenue and expand patient access. For drugs of public health relevance, this model is preferable to having manufacturers being able to price discriminate and set prices that essentially limit access to certain drugs, or have states and municipalities bid against each other for scarce resources.

The COVID-19 negotiation experiences showed that the federal government does not need to purchase the drugs directly or have a formulary to negotiate a drug’s price. In the COVID-19 response, the federal government showed that it can offer advance purchasing commitments regardless of whether the government will directly buy the drug or the drug will be purchased by the private sector. Advance purchasing commitments could also incorporate provisions that would protect the agreements against failures in the effectiveness, safety, or supply of the drug.

Because the federal government was able to negotiate for COVID-19 vaccines, antibodies, and drugs without a specific legal framework defining the structure of these negotiations, it could be argued that legislation allowing the government to negotiate drug prices is not necessary in the first place. However, the set of circumstances surrounding the recent COVID-19 agreements is extraordinary, and drug manufacturers will want greater certainty to project their research and development plans into the future. Having a sustainable legislative framework that clarifies which negotiation levers will be used, which drugs will be eligible for such negotiations, and which populations will be eligible to access the negotiated prices would increase certainty in the pharmaceutical market and help drug manufacturers make informed choices of where and how to invest their research and development budgets. The focus should be on drugs without competition and those with high public health relevance. Having a defined set of institutional processes would also be important for clarifying administrative and budgetary needs to the federal agencies involved.

Although specific policies have not been announced to date, the Biden administration could incorporate such provisions in a proposal such as H.R.3, which would allow the federal government to still have external pricing benchmarks and excise tax provisions, but would also include an incentive for drug companies to negotiate over price and quantity together. This could be applied to COVID-19 and other conditions of high public health relevance, where, most importantly, it would expand patient access to needed drugs.

CONCLUSION

The COVID-19 experience demonstrates that the federal government can negotiate drug prices in the most extraordinary circumstances, for drugs with high visibility and in situations where limiting drug availability is not a politically viable option. The agreements accomplished a lower price than what the United States typically pays for branded drugs compared with other industrialized countries. Negotiations over both price and quantity guaranteed that the drugs would be available for everyone at the negotiated price.