A NEW TAKE ON TAKINGS: BIG PHARMA’S CONSTITUTIONAL CHALLENGES TO BIDEN’S INFLATION REDUCTION ACT

By: Marie Lundgren, Volume 108 Staff Member

I. BACKGROUND

In 2003, Congress passed the Medicare Modernization Act, marking the largest expansion of benefits in the 38-year history of U.S. public healthcare.[1] When the Medicare program was first enacted in 1965, it covered hospital stays (under Part A), physician office visits (under Part B), and pharmaceuticals administered in clinical settings.[2] Notably, it did not cover prescription drugs filled at a pharmacy.[3] However, the Medicare Modernization Act changed that when it introduced Medicare Part D.[4] For the very first time, Medicare beneficiaries could receive coverage for outpatient prescription drugs.[5]

However, getting this legislation across the finish line did not come without challenges. To preserve the support of Republican legislators, a key compromise was made: Medicare would not have a legal right to negotiate drug prices with manufacturers.[6] At the time, critics were concerned this undermined the federal government’s bargaining power to lower drug prices for Medicare beneficiaries[7]––and they would be right.

It is no secret that prescription drug prices in the U.S. have soared throughout the past decade.[8] U.S. drug prices are two-to-three times higher than those in peer nations.[9] So how are their programs different? There are generally three approaches peer nations use to arrive at a final drug price. These include setting statutory rebates, maximum prices, and facilitating arbitration between public insurers and drug manufacturers.[10] In sum, public insurers of peer nations have significantly more authority to bargain with manufacturers than the U.S. does, until now.

II. INFLATION REDUCTION ACT AND SUBSEQUENT BACKLASH

In August of 2022, President Biden passed the Inflation Reduction Act (IRA), enabling Medicare to negotiate drug prices for the first time in its 60-year history.[11] The IRA requires the Secretary of Health and Human Services, acting through the Centers for Medicare & Medicaid Services (CMS), to establish the Negotiation Program.[12] Under this program, CMS must first identify an initial set of drugs eligible for negotiation. The number of drugs will be staggered over time, incrementally increasing each year.[13] After selection, CMS and manufacturers are directed to negotiate to reach a “maximum fair price” for that drug.[14]

Under the Negotiation Program, manufacturers have various options. If they successfully negotiate with CMS, the manufacturer will sign an agreement to provide Medicare beneficiaries access to the drug at the final, agreed-upon price.[15] However, if they do not wish to sign such an agreement, the manufacturer can continue selling its drug to Medicare beneficiaries at a non-negotiated price but will pay a significant excise tax.[16] If the manufacturer does not wish to sell their drug at the negotiated price and they do not wish to pay the tax that comes with selling it to CMS at a non-negotiated price, they can do what most sellers do when dissatisfied with a buyer’s offer: take their business elsewhere.[17]

In August of 2023, the Department of Health and Human Services (HHS) announced the first ten drugs selected for price negotiations.[18] The drugs selected have the highest Medicare Part D and B expenditures with no biosimilar or generic competitors for the last eleven years.[19] These new prices will take effect in 2026.[20] While the manufacturers of all ten drugs have agreed to negotiate, the provisions of the IRA are by no means safe from litigation.

In courts across the country, pharmaceutical companies have filed several lawsuits against HHS and CMS, including many of those whose drug was selected for initial price negotiations.[21] These lawsuits suggest that the overly-burdensome government regulation will stifle innovation by reducing profits of pharmaceutical companies and thus deter investments in future research and development.[22]

However, arguments by pharmaceutical companies favoring a more laissez-fair public healthcare system are just the tip of the iceberg. While these lawsuits allege several constitutional violations, ranging from Eighth amendment to First amendment claims, the bulk of the briefs filed on behalf of pharmaceutical companies attack the constitutionality of the IRA’s Negotiation provision on the basis that it violates the takings clause of the Fifth Amendment.[23]

III.  CHALLENGES TO THE IRA

Plaintiff manufacturers argue the IRA violates the takings clause of the Fifth Amendment, which prohibits the Government from taking private property without just compensation.[24] Here, the private property in question is the patented medicines that CMS has selected for negotiation. Plaintiffs allege the IRA imposes a “forced transfer” of their intellectual property, whereby they will not receive the fair “market value of the property.”[25] One plaintiff, Merck, who manufactures the diabetes medication Januvia, one of the initial drugs identified for negotiation, claims that the Negotiation Provision forces them “to provide third parties with ‘access’ to [their] products at steeply discounted prices.”[26]

Plaintiffs argue that the negotiation provision creates a “forced sale” as opposed to merely a price cap because of the steep penalties a company will pay if they fail to comply with CMS’s final offer.[27] They allege they will receive less than fair market value because the IRA sets the ceiling price at no more than seventy-five percent of the average price paid by non-federal purchasers (such as private insurers like United Health or BlueCross BlueShield).[28] And additionally, because the government can use discretion to implement even lower prices.[29]

IV. POTENTIAL OUTCOMES

Currently, it’s unclear how successful these lawsuits will be across jurisdictions. Courts have rejected various challenges to federal health care policies asserted under the Takings Clause in recent years.[30] Plaintiffs substantially rely upon Horne v. Department of Agriculture, a 2015 decision where the Supreme Court found government regulations of the raisin industry violated the Takings Clause.[31] However, unlike the raisin farmers in Horne, who successfully challenged a regulatory scheme requiring them to surrender a portion of their crop to the government free of charge,[32] pharmaceutical manufacturers face no such requirement to surrender their property or even sell to Medicare, holding significantly more autonomy under the mechanics of the IRA.[33] Prior litigation involving constitutional challenges to Medicare programs makes three things clear: corporations do not have a constitutional right to engage in business with the government, participation in Medicare is completely voluntary, and the financial consequences of that “participation cannot be considered a constitutional violation.”[34]

Yet despite the sparse precedent supporting their claims, if plaintiff manufacturers generate friction among lower courts, they could have the chance to argue before a particularly pro-business and anti-regulatory audience: the Supreme Court.[35] Many advocacy groups have filed amicus briefs supporting the constitutionality of the IRA, including physician groups, economists, health policy and legal scholars, warning of the impact this litigation could have on the state of the drug market and consequently, patient care.[36] In the words of the American Association of Retired Persons (AARP), the Negotiation Program has been decades in the making, providing “long-overdue relief from excessive drug prices.”[37] Striking it down “will harm millions of older people, Medicare, and American taxpayers.”[38]

 

[1] Michelle M. Megellas, Medicare Modernization: The New Prescription Drug Benefit and Redesigned Part B and Part C, 19 Baylor U. Med. Ctr. Proc. 21, 21 (2006).

[2] Id. at 22.

[3] NPR Weekend Edition, Pharmaceutical Groups Are Suing the Biden Administration for its Medicare Plans, NPR, at 00:49 (Sept. 3, 2023), https://www.npr.org/2023/09/03/1197461131/pharmaceutical-groups-are-suing-the-biden-administration-for-its-medicare-plans [https://perma.cc/7F2U-TZE9].

[4] Medicare Prescription Drug, Improvement, and Modernization Act of 2003, 42 U.S.C. § 1395w-102 (2003).

[5] Id.

[6] NPR Weekend Edition, supra note 3, at 00:55. But see Robert Pear & Carl Hulse, A Final Push in Congress: The Overview; Senate Removes Two Roadblocks to Drug Benefit, N.Y. Times (Nov. 25, 2003), https://www.nytimes.com/2003/11/25/us/final-push-congress-overview-senate-removes-two-roadblocks-drug-benefit.html [https://perma.cc/K37S-9WD4] (describing how at least one Republican, John McCain, found it “outrageous” the bill prohibited federal officials from negotiating better drug prices for its beneficiaries).

[7] See Robin Toner, Political Memo; Seems the Last Word on Medicare Wasn’t, N.Y. Times (Mar. 17, 2004), https://www.nytimes.com/2004/03/17/us/political-memo-seems-the-last-word-on-medicare-wasn-t.html [https://perma.cc/XC9A-W2P5] (“Critics argue that the Republicans were so sensitive to the drug industry’s fear of price controls that they left the elderly exposed to a future of soaring drug costs”). See also id. (discussing how prominent consumer advocacy groups warned that barring the federal government from negotiating prices for Medicare was a “lighting rod” in the law and that the price of drugs was the “No. 1, 2, and 3 concern” of beneficiaries).

[8] Prescription Drugs: Spending, Use, and Prices, Cong. Budget Off. 16–17 (2022), https://www.cbo.gov/system/files/2022-01/57050-Rx-Spending.pdf [https://perma.cc/DUZ6-QT77].

[9] See Andrew W. Mulcahy, Christopher M. Whaley, Mahlet Gizaw, Daniel Schwam, Nathaniel Edenfield & Alejandro Uriel Becerra-Ornelas, International Prescription Drug Price Comparisons: Current Empirical Estimates and Comparisons with Previous Studies, Rand Corp. at iii, vii (2021), https://www.rand.org/pubs/research_reports/RR2956.html [https://perma.cc/2UQB-XHEP] (“[W]e found that U.S. prices for drugs in 2018 were 256 percent of those in the 32 OECD comparison countries combined. U.S. prices were even higher than those in comparison countries for brand-name originator drugs (with U.S. prices at 344 percent of those in comparison countries.)”).

[10] For a detailed discussion of the programs used in France, Germany, Switzerland, the United Kingdom, Canada, and Australia, see Leah Z. Rand & Aaron S. Kesselhelm, Getting the Price Right: Lessons for Medicare Price Negotiations from Peer Countries, 40 PharmacoEconomics 1131 (2022). For example, France and Australia require rebates if manufacturers exceed predicted sales volumes. Id. at 1134–35. In the UK, the public health insurer considers pricing of comparators, prices of other comparable markets, clinical need, and the manufacturer’s profit level to set a maximum price. Id. at 1138. In Germany, if manufacturers cannot reach an agreement with the public insurers, either party can initiate proceedings where an arbitration board decides a final price after considering the facts of the case, the condition being treated, and an explanation by the manufacturer and the public insurer. Id. at 1133–34.

[11] Inflation Reduction Act of 2022, 42 U.S.C. § 1191 (2022).

[12] 42 U.S.C. § 1320f–1(a) to (b).

[13] Under the Negotiation Program, CMS is directed to select 10 drugs for negotiation for 2026, 15 drugs for 2027 and 2028, and 20 drugs for 2029. Id.

[14] The IRA requires CMS to consider the following categories of information when formulating offers during negotiations: (1) “[r]esearch and development costs of the manufacturer for the drug and the extent to which the manufacturer has recouped” those costs, (2) “[m]arket data for the drug,” (3) current “costs of production and distribution of the drug,” (4) “[p]rior Federal financial support for . . . discovery and development with respect to the drug,” (5) “[d]ata on patents,” (6) information regarding alternative treatments. 42 U.S.C. § 1320f–3(e). Congress directed CMS to aim for the “lowest maximum fair price” manufacturers will accept. Id. at § 1320f–3(b)(1). Congress additionally imposed a ceiling for the “maximum fair price” which it tied to specific pricing data. Id. at § 1320f–3(c).

[15] 42 U.S.C. § 1320f–2.

[16] The excise tax starts at 186% of the drug’s daily revenue and eventually reaches 1,900%. U.S.C. § 5000D. See also Tax Provisions in the Inflation Reduction Act of 2022 (H.R. 5376), Cong. Rsch. Serv. 4 (Aug. 10, 2022), https://crsreports.congress.gov/product/pdf/R/R47202 [https://perma.cc/RQZ2-3XJG].

[17] Manufacturers can choose not to sell to Medicare and withdraw from the program without occurring liability or paying an excise tax. Meena Seshamani, Medicare Drug Price Negotiation: Revised Guidance, Implementation of Sections 1191 – 1198 of the Social Security Act for Initial Price Applicability Year 2026, Ctrs. for Medicare & Medicaid Servs. 33–34 (June 30, 2023), https://www.cms.gov/files/document/revised-medicare-drug-price-negotiation-program-guidance-june-2023.pdf [https://perma.cc/T8NJ-DCKZ].

[18] See generally Medicare Drug Price Negotiation Program: Selected Drugs for Initial Price Applicability Year 2026, Ctrs. for Medicare & Medicaid Servs. (2023), https://www.cms.gov/files/document/fact-sheet-medicare-selected-drug-negotiation-list-ipay-2026.pdf [https://perma.cc/72C5-PGMK]. The ten drugs selected are Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica, Stelara, and Fiasp. Id. These drugs treat a variety of conditions, including diabetes, heart failure, kidney disease, arthritis, Crohn’s disease, and psoriasis. Id.

[19] Id. at 2.

[20] Id.

[21] See generally Merck v. Becerra, No. 1:23-cv-01615 (D.D.C. filed June 6, 2023); Bristol Myers Squibb Co. v. Becerra, No. 3:23-cv-03335 (D.N.J. filed June 16, 2023); Janssen Pharmaceuticals, Inc. v. Becerra, No. 3:23-cv-03818 (D.N.J. filed July, 18, 2023); AstraZeneca Pharmaceuticals v. Becerra, No. 1:23-cv-00931 (D. Del. filed August 25, 2023); Novo Nordisk v. Becerra, No. 3:23-cv-20814 (D.N.J. filed Sept. 29, 2023); Boehringer Ingelheim Pharmaceuticals, Inc. v. U.S. Dept. of Health and Human Services, No. 3:23-cv-01103 (D.D.C. filed Sept. 27, 2023); Novartis Pharmaceuticals Corp. v. Becerra, No. 3:23-cv-14221 (D.N.J. filed Sept. 1, 2023); Astellas Pharma US Inc., v. U.S. Dept. of Health and Human Services, No. 1:23-cv-04578 (D. Ill. filed July 14, 2023). These suits typically name CMS, HHS, and their respective directors as defendants and bring claims arising under alleged violations of the First, Fifth, and sometimes the Eighth Amendments. Id.

[22] See Joe Grogan, The Inflation Reduction Act is Already Killing Potential Cures, Wall St. J. (Nov. 3, 2022), https://www.wsj.com/articles/the-inflation-reduction-act-killing-potential-cures-pharmaceutical-companies-treatment-patients-drugs-prescriptions-ira-manufacturers-11667508291 [https://perma.cc/7QS7-W4E8] (discussing how one manufacturer suspended development of treatment for a rare eye disease that could have been subject to the IRA).

[23] See generally Plaintiff’s Motion for Summary Judgment, Merck, No. 1:23-cv-01615; Motion for Summary Judgment, Janssen Pharmaceuticals, No. 3:23-cv-03818; Plaintiff’s Motion for Summary Judgment, AstraZeneca Pharmaceuticals, No. 1:23-cv-00931; Plaintiff’s Motion for Summary Judgment, Boehringer Ingelheim Pharmaceuticals, No. 3:23-cv-01103; Motion for Summary Judgment, Bristol Myers, No. 3:23-cv-03335.

[24] E.g., Complaint at 15, Merck, No. 1:23-cv-01615.

[25] Motion for Summary Judgment at 16, Bristol Myers, No. 3:23-cv-03335; Complaint, Astellas Pharma, No. 1:23-cv-04568.

[26] Supra note 24 at 16.

[27] Id. at 17.

[28] 42 U.S.C. § 1320f–3(b)(2)(F), (c)(1)(C).

[29] 42 U.S.C. § 1320f–7.

[30] See Zachary Baron & Andrew Twinamatsiko, A Deep Dive into Takings Challenges to the Medicare Drug Price Negotiation Program, Health Affs. (July 6, 2023), https://www.healthaffairs.org/content/forefront/deep-dive-into-takings-clause-challenges-medicare-drug-price-negotiation-program [https://perma.cc/LX5K-GAXK] (describing how the 11th, 9th, and 2nd Circuits rejected Takings Clause claims brought against Federal healthcare regulations).

[31] Id.

[32] Horne v. Dept. of Agriculture, 569 U.S. 513 (2015).

[33] See supra note 17 and accompanying text.

[34] See, e.g., Order Denying Plaintiff’s Motion for Preliminary Injunction, Dayton Chamber of Com. v. Becerra, No. 3:23-cv-156 (S.D. Ohio filed Sept, 29, 2023) (rejecting due process challenges to the IRA); Minn. Ass’n of Health Care Facilities, Inc. v. Minn. Dep’t of Public Welfare, 742 F.2d 442 (8th Cir. 1984) (“Despite the financial inducement to participate in Medicaid, a nursing home’s decision to do so is nonetheless voluntary . . . .”); Livingston Care Center, Inc. v. U.S., 934 F.2d 719, 720–21 (6th Cir. 1991) (“[P]articipation in Medicare involves a degree of risk . . . the economic rule which instructs that diversification decreases risk does not stop working just because the government becomes involved.”).

[35] Lawrence O. Gostin, Andrew Twinamatsiko & Zachary Baron, An Analysis of the Blizzard of Lawsuits to Block Drug-Price Negotiations, MedPage Today (Aug. 9, 2023), https://www.medpagetoday.com/opinion/the-health-docket/105818?trw=no [https://perma.cc/5HYD-DYRD].

[36] See e.g., Brief of Nationally Recognized Healthcare and Medicare Experts as Amici Curiae in Support of Defendants’ Cross-Motion for Summary Judgment and in Opposition to Plaintiffs’ Motions for Summary Judgment, Bristol Myers Squibb Co. v. Becerra, No. 3:23-cv-03335 (D.N.J. Oct. 23, 2023); Brief of Economists and Scholars of Health Policy as Amici Curiae in Support of Defendants’ Cross-Motion for Summary Judgment and in Opposition to Plaintiffs’ Motions for Summary Judgment, Bristol Meyers, No. 3:23-cv-03335; Brief of Amicus Curiae Constitutional Accountability Center in Support of Defendants, Bristol Meyers, No. 3:23-cv-03335.

[37] Brief of Amici Curiae AARP and AARP Foundation Supporting Defendants’ Opposition to Plaintiff’s Motion for Summary Judgment and Cross-Motion at 24, Janssen Pharmaceuticals, Inc. v. Becerra, No. 3:23-cv-03818 (D.N.J. Oct. 23, 2023).

[38] Id.