The economic case for federal investment in COVID-19 vaccines and therapeutics remains strong
April 1 2022

Editor’s Note: This analysis is part of the USC-Brookings Schaeffer Initiative for Health Policy, which is a partnership between Economic Studies at Brookings and the University of Southern California Schaeffer Center for Health Policy & Economics. The Initiative aims to inform the national health care debate with rigorous, evidence-based analysis leading to practical recommendations using the collaborative strengths of USC and Brookings. This work was supported in part by Arnold Ventures.

Vaccines and therapeutics have greatly reduced rates of severe illness and death from COVID-19. On March 2, the Biden administration formally requested an additional $22.5 billion in COVID-19 response funding, most of which would have supported additional investments in the development, manufacturing, and procurement of COVID-19 vaccines and therapeutics. The Biden administration subsequently stated that, without new funding, it would have to wind down most federal efforts related to the production and procurement of COVID-19 vaccines and therapeutics. Congressional negotiations are ongoing and appear on track to produce a much smaller package of funding, if any new funding is approved at all.

While the health and economic costs of the pandemic appear to be receding, sustaining this progress will depend on the continued, broad availability of safe and effective vaccines and therapeutics. This will require continued development of new products that are effective against new variants, maintenance of the manufacturing capacity needed to quickly produce both existing and new products at scale, and measures to guarantee that these products remain broadly accessible and affordable.

We argue that there is a strong economic case for continued federal investment in COVID-19 vaccines and therapeutics. In brief, the private sector on its own will invest too little because COVID-19 vaccines and therapeutics generate enormous benefits for public health and the macroeconomy that private firms can only very partially capture. Preexisting uninsurance and underinsurance, especially among vulnerable populations, also hinder access to preventive measures and treatment. Direct federal investment in development, manufacturing, and procurement of vaccines and therapeutics—and in ensuring affordable access to these products—has been key to overcoming these challenges to date and will remain important in the future. Over the longer term, policymakers could consider assigning the health insurance system a larger role in paying for these activities, but doing so in a sensible way will take time and require legislative changes.

Lessons from Two Years of Responding to the COVID-19 Pandemic

Two years of hard experience with COVID-19 have taught several critical lessons about the pandemic. These lessons bear directly on the choices before policymakers today.

Lesson #1: The social benefits of effective COVID-19 vaccines and therapeutics are enormous and only very partially captured by the private sector, leading to underinvestment

Perhaps the clearest lesson from the pandemic is that the social benefits of effective vaccines and therapeutics are enormous. Alongside nearly one million deaths, the pandemic brought massive social and economic disruption as people curtailed interactions with others to protect themselves. The social costs of the pandemic in the United States are measured in the trillions of dollars.

The arrival of safe and effective vaccines and, to a lesser degree,  therapeutics has greatly mitigated these costs, generating benefits that also measure in the trillions of dollars. One study estimated that the rollout of COVID-19 vaccines has averted 1.1 million deaths in the United States through November 2021—and still more during the subsequent Omicron wave. The reduced risk of contracting a serious case of COVID-19 has also made it safer for Americans to engage with others, which has helped drive the rapid economic recovery and allowed governments to remove most remaining COVID-19 restrictions.

But manufacturers have captured—and will continue to capture—only a modest portion of these social benefits. Indeed, Pfizer, Moderna, and Johnson & Johnson’s revenue from selling their COVID-19 vaccines in the United States totaled only $14 billion through the end of 2021, a small fraction of the trillions in benefits generated.[1] Similarly, while accelerating vaccine and therapeutic availability has large social benefits, manufacturers can capture only a small fraction of the benefits of coming to market faster. In this environment, private firms are likely to underinvest in development and manufacturing capacity.

It is also worth noting that one person’s access to effective COVID-19 vaccines may generate significant benefits for others since vaccination reduces disease transmission, reduces strain on hospitals during surges by reducing disease severity, and may make people more willing to engage with others, ameliorating pandemic-related economic disruptions. This may cause insurers to offer overly restrictive coverage for vaccines, with the result that too few people receive them. (Access to therapeutics can also help reduce strain on hospitals during surges and may generate economic benefits by making people more willing to engage with others; on the other hand, increased engagement with others could increase disease transmission, a cost that must be weighed against these benefits.)

Lesson #2: The pandemic is dynamic, and what works today will not necessarily work tomorrow

A second lesson is that pandemic is dynamic, and what works today will not necessarily work tomorrow. There may once have been hopes that a one-time vaccine rollout would produce durable herd immunity against COVID-19 in the United States, causing COVID-19 to fade into the background or disappear completely. It is now clear that will not be the case. Existing vaccines, while highly effective, wane in effectiveness over time, so periodic booster doses will likely be needed for the foreseeable future; indeed, older US adults are now being encouraged to receive a fourth dose. Moreover, the emergence of the Omicron variant showed that changes in the virus pose a serious threat to the effectiveness of existing vaccines and therapeutics: existing vaccines are less effective against Omicron, and some monoclonal antibody therapies are entirely ineffective. This means that developing and manufacturing new vaccines and therapeutics—and ensuring continued easy access to existing ones—remains an urgent need.

Lesson #3: Quickly manufacturing vaccines and therapeutics at the needed scale is challenging

A third lesson is that quickly manufacturing vaccines and therapeutics at the scale needed in a pandemic is a major challenge. The production of COVID-19 vaccines and therapeutics has offered multiple examples of supply delays and interruptions. Supply limitations were a major constraint for months after the Pfizer and Moderna vaccines were authorized by the Food and Drug Administration (FDA). Therapeutics have also seen periods of short supply following FDA authorization, as have both newer and older drugs during surges. Supply of vaccines and therapeutics have been even tighter in much of the rest of the world.

We have also seen high-profile manufacturing failures. Perhaps the most salient example is the case of Emergent Biosolutions, whose plant manufacturing Johnson & Johnson’s vaccine was closed in Spring 2021 by the FDA because of product contamination, inadequate staffing, and weak quality control processes. The result was that over 60 million doses of Johnson & Johnson’s vaccine intended for the U.S. market were destroyed. The Emergent shutdown also interrupted production of the AstraZeneca vaccine, which resulted in fewer vaccine doses being shipped abroad.

While some of the challenges during the pandemic reflect the scale and speed of pandemic-era production efforts, some reflect persistent industry challenges. The vaccine and therapeutic manufacturing supply chains are complex and fragmented, which has offered some efficiencies, but also increased the risk of supply interruptions. A recent report documented that many of the drugs used to manage COVID-related hospitalizations were in short supply prior to the start of the pandemic. More generally, hospitals faced shortages in numerous essential drugs, largely older sterile injectables, even before the pandemic.

This experience highlights that when considering where private firms may underinvest, policymakers should look beyond the development process and consider the manufacturing process as well. It also drives home the value of building redundant capacity that can cushion disruptions. The consequences of getting the “right” amount of capacity are asymmetric: if we have too little capacity to respond to an emerging threat, the health and economic costs can be enormous, while excess capacity can be repurposed to some degree, such as by using unused domestic capacity to serve the world market.

Lesson #4: The pandemic environment is replete with uncertainty

A final lesson is that the pandemic environment is replete with uncertainty. There is tremendous uncertainty about the likelihood that new variants will emerge, how quickly that will occur, and the biological properties of emerging variants. Individual manufacturers face additional uncertainty about how successful their—and their competitors’—research efforts will ultimately be. This uncertainty can magnify the problems created by the fact that manufacturers capture only a portion of the benefits generated by their products (and from bringing their products to market sooner) by encouraging them to “wait and see” when planning development and manufacturing investments.

Public Funding Still Has a Major Role to Play in COVID-19 Vaccines and Therapeutics

The lessons catalogued above point to several important roles for the public sector, roles that the federal government has filled during the pandemic through Operation Warp Speed and other initiatives, and that the federal government can and should continue to fill in the future given sufficient funding.

Role #1: Support development and manufacturing through direct investments and purchase commitments

The federal government made many types of investments to smooth vaccine and therapeutic development and manufacturing through Operation Warp Speed and other initiatives.[2] First, it made direct investments in product development, including funding larger trials that could deliver definitive results faster. Second, the federal government made direct investments in manufacturing, including investments in facility capacity and in ensuring an adequate supply of key inputs, like glass vials, syringes, and stoppers. Third, the federal government made significant advance purchase commitments to manufacturers, reducing uncertainty about whether they would face inadequate demand and strengthening their incentives to invest in both development and manufacturing. In order to ensure continued supply, the federal government also entered into additional procurement contracts after products came to market. 

While definitively establishing what would have happened absent these investments is challenging, the arrival of COVID-19 vaccines was extremely fast in historical terms, and there is good reason to believe that these measures were a major contributor to that outcome. This point was clearly made by Richard Nettles, the Johnson & Johnson Vice President who oversees vaccine development:

“Finally, I want to note that the U.S. government’s support has been an important contributor to Johnson & Johnson’s ability to develop our vaccine on an accelerated pace…In addition, last summer, the government and Janssen entered into an agreement for the demonstration of large-scale manufacturing and delivery of up to 100 million doses of the vaccine by June 30, 2021. This commitment to purchase our vaccine, if authorized by the FDA, was important for our ability to invest in the increased production capacity that will enable us to bring millions of vaccine doses to Americans in the coming months.”

The basic economic case for these types of investments remains strong. New vaccines and therapeutics will be needed to meet the challenge of new variants, yet private incentives to invest in the development and manufacturing capacity needed to create them will continue to be far below their social value.

Role #2: Ensuring affordable access to COVID-19 vaccines and therapeutics

Federal policy has also played an important role in promoting broad and equitable access to COVID-19 vaccines and therapeutics. To date, the federal government has purchased millions of COVID-19 vaccines and therapeutic doses directly from manufacturers and then made them available to health care providers at no cost. The federal government has also funded COVID-19 vaccination and treatment for the uninsured. Together with requirements placed on private insurance plans and public programs, this set of arrangements has ensured that vaccination is free for anyone who wants it and that patients seeking many therapeutics will, at most, only pay cost-sharing related to their administration.

It clearly remains appropriate to limit the costs that families incur to access these products, whether via continued federal procurement or via the health insurance system. There is little reason to worry that COVID-19 vaccines or therapeutics will be overused. Indeed, in the case of vaccines at least, underuse is the main concern given the benefits of vaccines in reducing disease transmission. Moreover, for therapeutics, the costs involved can be large enough that they are hard for families to bear on their own.

In the near-term, continued federal procurement of vaccines and therapeutics is the most natural way to ensure that patients can continue to affordably access these products. Over the longer term, policymakers could also achieve this outcome while beginning to rely more heavily on the health insurance system to finance access to vaccines and therapeutics in the domestic market; however, as we discuss in more detail later in this piece, doing so would take time and require certain legislative changes.

While this piece largely focuses on the domestic market, the United States has also played a major role in supplying COVID-19 vaccines to low- and middle-income countries. These efforts have an obvious humanitarian rationale and serve to limit transmission that also affects Americans. Such efforts can also burnish the United States’ reputation as a responsible global citizen and promote larger goals of global cooperation against emerging biosecurity threats. Looking ahead, vaccine demand in the rest of the world is likely to remain strong for the same reasons that it is likely to remain strong in the United States. For the United States to continue to support humanitarian efforts and exert “soft power” related to COVID-19 vaccines requires sustained commitment and adequate funding.  

Role #3: Continued support for basic research and repurposing of existing products

There are also a variety of research and development activities that private firms are particularly unlikely to undertake. Much of that work is at the basic research stage; at present, a particularly important area for investment is vaccines that would maintain effectiveness across a broader array of variants.

Public funding will also continue to have a central role to play in the repurposing of existing drugs. Repurposing frequently involves products where patents have expired and thus for which there are, at most, limited claims to intellectual property. For example, one of the drugs used in the treatment of former President Trump, which turned out to be highly effective, was a steroid that has long been on the market, dexamethasone. Fluvoxamine, an older generic antidepressant, also appears to have significant effectiveness in treating COVID-19. Since these drugs’ profit potential is limited, realizing their therapeutic benefits requires public support for trials and related research.

Opportunities to Reduce the Role of Public Funding Going Forward

Over the long term, there are reasonable arguments for shifting more of the burden of financing COVID-19 vaccines and therapeutics for the U.S. population onto the health insurance system, including private health insurance plans and public programs like Medicare and Medicaid. This may be a political necessity; if the debate over the current funding package is any guide, there is no guarantee that appropriated funds on the needed scale will be approved in the future. Reducing reliance on short-term appropriations could also facilitate long-term planning and thereby help public and private officials make better decisions.

But if policymakers do choose to move toward using the health insurance system to finance COVID-19 vaccines and therapeutics, that transition will need to be executed thoughtfully. A smooth transition will take time, as payers will need time to contract with manufacturers and establish coverage policies. Congress will also need to make some changes in law for this approach to work well.

At a minimum, policymakers should ensure that COVID-19 vaccines continue to be available to everyone at no cost and that insurers can cover COVID-19 therapeutics on the same terms as other types of health care. To achieve those outcomes, four legislative changes would be needed:

  • Facilitate Medicare and Medicaid coverage of items available under emergency use authorizations (EUAs): The FDA has made many COVID-19 vaccines and therapeutics available via EUAs rather than its regular approval process. While the base two-dose series of the Pfizer and Moderna vaccines for adults now have full FDA approval, booster doses and vaccines for children are only available under EUAs. Monoclonal antibody therapies, Pfizer’s Paxlovid, and Merck’s molnupiravir are also available only under EUAs. Furthermore, when new COVID-19 vaccines or therapeutics are developed in the future, it is likely that they will first become available under EUAs.

    However, both Medicare and Medicaid face legal obstacles to covering items available under EUAs. Medicare Part D plans are generally not allowed to cover drugs that lack full FDA approval. Additionally, while Medicare Part B is currently covering COVID-19 vaccines available under EUAs (including the cost of administering the vaccine, all without patient cost-sharing), it is unclear whether that can continue after the federally declared public health emergency ends.

    In Medicaid, drugs available under EUAs fall outside Medicaid’s ordinary rules governing drug coverage, which, roughly speaking, require state Medicaid programs to cover all FDA approved drugs and require manufacturers to pay rebates under a statutory formula. Importantly, these rules do not apply to vaccines, so lacking full FDA approval does not jeopardize a vaccine’s coverage in Medicaid, although other features of the Medicaid landscape may prevent coverage, an issue we return to below. At present, other provisions of law require state Medicaid programs to cover all COVID-19 therapeutics, including those available solely under EUAs; however, that requirement will end after the federally declared public health emergency ends. At that point, there is a risk that some states, facing the prospect of paying full price for these products, would pare back their coverage beyond what would be permitted for drugs with full FDA approval.

    To avoid this, Congress could specify that COVID-19 products available under EUAs be treated as having full FDA approval for the purposes of the Medicare and Medicaid programs.

  • Require Medicaid coverage of COVID-19 vaccines without cost-sharing: Under the status quo, all insured patients can access COVID-19 vaccines at no cost. In private plans and Medicare, that would continue even if the federal government stopped buying vaccines because both types of insurance coverage must cover vaccines at no cost (assuming lawmakers adopted the changes to facilitate Medicare coverage of vaccines available under EUAs that were described above).

    In Medicaid, however, some enrollees might be left without vaccine coverage. States must cover vaccines without cost-sharing for children and for the Affordable Care Act Medicaid expansion population. However, a similar requirement does not apply to other Medicaid adults, and some states do not provide comprehensive vaccine coverage to these adults. For the time being, states are subject to a temporary requirement to cover COVID-19 vaccines without cost-sharing, but that requirement will end after the federally declared public health emergency ends.

    Policymakers could ensure access to COVID-19 vaccines for all Medicaid enrollees in many ways, but one sensible approach would be to extend vaccine coverage rules similar to those that apply to the Medicaid expansion population to other Medicaid adults. The House-passed Build Back Better Act would have done this for all vaccines (including COVID-19 vaccines).

  • Create a permanent program to cover COVID-19 vaccines for the uninsured: A glaring weakness of relying on the health insurance system to finance COVID-19 vaccines is that 31 million people lack health insurance. While policymakers could continue to finance vaccines via continued periodic appropriations for the temporary program established under the Health Resources and Services Administration, a better approach would be to create a permanent mandatory program to cover vaccines. One model is the Vaccines for Children program, under which the federal government procures vaccines and makes them available to states for distribution to health care providers. The President’s Fiscal Year 2023 Budget proposes a similar program that would cover all vaccines (including COVID-19 vaccines) for adults.
  • Create a permanent federal role in negotiating the prices of COVID-19 vaccines: As noted above, private insurance plans are already required to cover COVID-19 vaccines (and administration) without cost-sharing. If and when the federal role in procuring COVID-19 vaccines ends, this may allow manufacturers to demand excessive prices for their vaccines since an insurer that rejected a manufacturer’s terms would violate this coverage mandate; this problem generally does not arise for other drugs because private plans typically retain some ability to say “no.” State Medicaid programs would likely encounter similar problems in negotiating vaccine prices.[3]

    Indeed, COVID-19 vaccine manufacturers are already publicly discussing raising prices of their products when direct federal purchases end. Inflated prices in private insurance would ultimately be reflected in premiums, which would be borne by some combination of enrollees, employers, and the federal government, while inflated prices in Medicaid would be borne by a combination of state and federal governments. Inflated prices in private plans would also spill over into Medicare (to the extent that Medicare was covering COVID-19 vaccines) since the prices Medicare Part B pays for vaccines would be tied to private prices. Policymakers could avoid this outcome by retaining a federal role in negotiating vaccine prices, even if payment for the vaccines ultimately came from the health insurance system.

Additionally, policymakers should preserve the federal government’s ability to make advance purchase commitments for COVID-19 vaccines and therapeutics, which the federal government has used to encourage investment in development and manufacturing, as well as to secure adequate domestic supplies. This would require preserving a federal role in purchasing these items.

One way to preserve a federal purchasing role while shifting most of the financing burden onto the health insurance system would be to adopt a “revolving fund” approach. Under this approach, the federal government would continue to purchase vaccines and therapeutics but be reimbursed by private insurers and public programs when those products are used. This approach would require an upfront appropriation to fund an initial round of purchases, but subsequent rounds could be funded, at least in part, from payments that private insurers and public programs made in prior rounds.

A final question for policymakers is what to do about coverage of COVID-19 therapeutics. As described above, the federal governments’ current approach has made many therapeutics available to all people without cost-sharing (although some patients may face cost-sharing for administration). Absent other policy changes, this would no longer be the case if the federal role in procuring therapeutics ended. Under current law, large employer plans face no requirements to cover COVID-19 therapeutics; individual and small group market plans would likely need to offer some coverage to comply with the Affordable Care Act’s essential health benefits requirements but could apply cost-sharing. Private plans’ decisions with respect to other types of COVID-19 care suggests that private plans would, in practice, likely apply meaningful cost-sharing. Similarly, Medicare Part D plans would likely impose their ordinary cost-sharing, and Medicare Part B would generally be legally required to apply cost-sharing.

Since overuse of these products may not be a significant concern, there is a rationale for legal changes that would require private plans and public programs to cover them without cost-sharing and for creating some mechanism that would cover this care for the uninsured. However, this approach would increase premiums in private plans and have meaningful fiscal costs (both in public programs and from the federal government’s role in subsidizing private insurance plans). While those costs are clearly worth bearing for vaccines given vaccines’ extremely large benefits, policymakers might conclude they are not worth bearing for therapeutics. If policymakers did mandate coverage for these products, this would necessitate a continued federal role in negotiating prices for therapeutics, just as requirements to cover COVID-19 vaccines necessitate a federal role in negotiating vaccine prices.

In closing, we offer a few comments on what relying more heavily on the health insurance system would not achieve. This approach would reduce federal spending on COVID-19 vaccines and therapeutics but would not directly reduce combined public and private spending on these products; rather, it would simply shift spending from the public sector onto the private sector. Additionally, this approach would not completely eliminate the need for appropriated funds. Basic research on COVID-19 would still likely need to be supported with appropriated funds, as would certain types of investments in product development and manufacturing capacity. Support for international COVID-19 vaccination and treatment efforts would also likely continue to rely on appropriated funds. Nevertheless, an approach that relied more heavily on the health insurance system would still greatly reduce the amount of federal funding—and particularly appropriated funding—that would be needed, which policymakers may find appealing.

[1] We focus on revenue that vaccine manufacturers have earned within the United States primarily because these estimates are readily available and because the rest of the piece focuses primarily on the United States. From the perspective of assessing incentives to invest in development, it is more relevant what fraction of the global benefits of vaccines are captured by private firms. On the other hand, for the purposes of assessing incentives to invest in manufacturing capacity, country-specific estimates may be more relevant. In any case, the basic point that vaccine manufacturers are capture a small fraction of the social benefits generated by vaccines is clearly true whether viewed from a global perspective or from the perspective of the United States alone.

[2] These investments sit on top of ongoing federal investments in basic research, regulation, and liability protections that act to support private sector product development.

[3] There is already a federal role in negotiating vaccine prices for Medicaid-enrolled children through the Vaccines for Children program, but not for Medicaid-enrolled adults.

Acknowledgements:  We thank Louise Sheiner for thoughtful comments and Caitlin Rowley for excellent editorial and web publishing assistance. All errors are our own.

About the Authors

Susan Athey

Susan Athey

The Economics of Technology Professor – Stanford Graduate School of Business
Rena M. Conti

Rena M. Conti

Co-Director – Technology Policy & Research Initiative, Boston University School of Law
Matthew Fiedler

Matthew Fiedler

Fellow – Economic Studies, USC-Brookings Schaeffer Initiative for Health Policy
Richard G. Frank

Richard G. Frank

Director – Economic Studies, USC-Brookings Schaeffer Initiative for Health Policy
Jonathan Gruber

Jonathan Gruber

Massachusetts Institute of Technology

Disclosures: The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.

Jonathan Gruber has received financial support from Sarepta Pharmaceuticals. The authors did not receive financial support from any firm or person for this article or, other than the aforementioned, from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.