CHAI's Approach to Cost Plus Negotiations with Aaron Patillo

At the time, we were doing what felt like and certainly was just kind of pioneering a what-if idea.

And this was really an idea that was hatched by Aira.

The fundamental premise of it was let's go to these suppliers, work with them directly, Demand that we have transparency around their actual costs, right? And we'll map this very detailed, right, to understand their kind of full cost structure and understand how that may change with fixed costs and variable costs and how demand might impact that.

And then really use that as this basis upon which we would negotiate a final ceiling price for these on an individual drug basis.

So I remember hearing that initially and thinking my first thought and coming from the private sector was like, there's no way anyone is going to be willing to do that.

I mean, you're essentially saying open the books and we'll use that information and effectively negotiate with you on that.

That was really the beginnings of like the playbook we started to put together on the supply side, which is where I was primarily focused.

But there was a whole component to this on the demand side as well.

The idea of like aggregating demand together and having some forward based pricing and having payment commitments.

A lot of the things I'd say that, you know, would be done in the private sector, but bringing these to bear on kind of public service goods in a marketplace where those kind of things weren't happening.

Now, during the course of the work together, I mean, you were instrumental in cutting a couple of those early deals with suppliers that implemented ceiling prices at a lower price point than was traditionally available in the developing world.

And that started this cycle of volumes going up and prices coming down.

And the whole idea of even starting this work, as you pointed out to me just now and at other times, was like, why? Why would a supplier open their books? Why would a supplier drop the price of a drug? Why would they do that? But can you give me a couple insights and a couple stories maybe from the work we've done of things that to many people would be like, no, that's not possible, but were really important in helping bring the price of critical life-saving medicines down?

Yeah.

So the first deal that I worked on with our first supply partner in China, this was a company called Emchem.

Again, we sort of approached them with this playbook of full transparency and we'll model all the costs and steps and we'll use this to negotiate a price.

This wasn't a short process.

I mean, we really got in, we rolled up our sleeves, we understood everything.

all of the data on this and mapped it all in a way that, frankly, some of these, especially some of the suppliers in China, were not even doing at that level.

So, you know, it was a months-long process.

We were, like, knee-deep in data.

We're building these complex models.

We realized also it wasn't just technical, right? We're doing this in the backdrop of cultural and personal components to this.

And I remember relying on one woman in particular, who was kind of the company representative and our real lifeline to MCAM, wonderful woman named Jennifer Hsiao.

I remember this moment after we'd had umpteen like requests for more data from her and clarifications and she would get frustrated with it.