Because No One is Immune to the Law
July 24, 2023 - FDA, Healthcare, Litigation, Pharma, United States

Legal Battles Continue Over Inflation Reduction Act’s Drug Price Negotiation Measures

Prescription Drug

In recent months, six different lawsuits have been filed challenging the Inflation Reduction Act (IRA)’s Drug Price Negotiation Program (the “Program”), with a flurry of activity likely in the coming months before the Program’s first deadlines. Below we analyze the latest developments in the cases and compare the lawsuits.

The Program

As we previously covered, the drug price negotiation requirements were enacted as part of the IRA, which authorizes the Centers for Medicare and Medicaid Services (CMS) to engage in price negotiations with drug manufacturers for certain high-cost, single-source Medicare Part B or Part D drugs. CMS will select the 10 and 15 highest-ranked Part D drugs for rolling out negotiated prices in 2026 and 2027, respectively. To ensure compliance with the negotiation process, the IRA applies an excise tax on each sale of the drug during a period of non-compliance, including drugs sold to purchasers other than Medicare and Medicaid.

Some of the Program’s first, major deadlines are fast approaching. CMS recently confirmed that by September 1, 2023, the agency will publish a list of 10 Medicare Part D drugs for negotiation. By October 1, 2023, manufacturers of the selected drugs must sign an agreement with CMS to conduct negotiations.

The Lawsuits

Currently, six complaints have been filed against the U.S. Department of Health and Human Services (HHS), which oversees CMS. The primary plaintiff and location of each suit are listed below:

  1. Merck & Co., Inc. (Merck): Filed June 6, 2023, in Washington, D.C.
    Merck v. Becerra et al., D.D.C., No. 1:23-cv-01615

  2. U.S. Chamber of Commerce (Chamber): Filed June 9, 2023, in Columbus, OH
    Dayton Area Chamber of Com. et al. v. Becerra et al., S.D. Ohio, No. 3:23-cv-00156

  3. Bristol Myers Squibb (Bristol): Filed June 16, 2023, in Trenton, NJ
    Bristol Myers Squibb Co. v. Becerra et al., D.N.J., No. 3:23-cv-03335

  4. Pharma. Research and Manufacturers of America (PhRMA): Filed June 21, 2023, in Austin, TX
    Nat’l Infusion Ctr. Ass’n v. Becerra et al., W.D. Tex., No: 23-cv-00707

  5. Astellas Pharma (Astellas): Filed July 14, 2023, in Chicago, IL
    Astellas Pharma US, Inc., v. Dep’t of Health and Hum. Services et al., N.D. Ill., No: 23-cv-04578

  6. Johnson & Johnson (J&J): Filed July 18, 2023, in Trenton, NJ
    Janssen Pharmaceuticals, Inc. v. Becerra et al., D.N.J., No: 23-cv-03818

Factual Allegations

Two factual allegations are most common among the plaintiffs: 1) that drug price negotiation will not provide a genuine opportunity to negotiate, and 2) that the excise taxes operate as a coercive penalty.

The Chamber complaint argues that there is no genuine opportunity to negotiate by pointing out that there is no judicial or administrative review of prices, government offers are capped via statute and have no minimum, and materials used in the negotiation are limited. The Chamber complaint also preempts the government’s likely counter, that manufacturers could voluntarily withdraw from Medicare and Medicaid to avoid the Program altogether. The Chamber points out that Medicare and Medicaid programs dominate the market, respectively accounting for 21% and 17% of national health spending. Therefore, manufacturers cannot afford to withdraw drugs from those programs to avoid the price setting.

The Merck complaint provides an example supporting the argument that enormous excise taxes constitute a penalty. Merck states that excise taxes escalate daily from 186% to 1900% of a drug’s daily revenues, and estimates that refusal to negotiate for even just the one drug cited in their complaint would incur tens of millions of dollars in penalties on the first day. The penalties would purportedly escalate to hundreds of millions of dollars per day thereafter.

Legal Arguments

The legal arguments detailing why the Program is unconstitutional are varied, but overlap across complaints. The most common argument is that the Program violates the First Amendment by forcing companies to state that they “agree voluntarily” to the government’s offer. Across all the complaints, seven legal arguments in total challenge the constitutionality of the Program. A summary of each argument and the associated litigants are below.

  1. Fifth Amendment – Unlawful Taking: Under the Program, the government is taking products and giving them to third parties through arbitrary, forced sales.
    Plaintiffs: Merck, Bristol, Astellas, and J&J

  2. Fifth Amendment – Due Process: There is no procedural or legal recourse under the Program, prices are prejudiced against manufacturers, and negotiations are concealed from the public. Thus, there is significant risk of “erroneous depravation” under Supreme Court legal standards.
    Plaintiffs: Chamber, PhRMA, and Astellas

  3. First Amendment – Compelled Speech: The Program forces companies to publicly state that they voluntarily “agree” to a price, when it is actually a forced negotiation.
    Plaintiffs: Merck, Chamber, Bristol, Astellas, and J&J

  4. Eighth Amendment – Excessive Fines: The “excise taxes” imposed by the Program are not taxes intended to discourage the use of a product, but rather are penalties intended to punish manufacturers for refusing to agree to negotiate or agree to the maximum fair price.
    Plaintiffs: Chamber and PhRMA

  5. Const. Article 1 – Separation of Powers: The Program violates constitutional nondelegation principles through Congress’s impermissible delegation of broad, unconstrained authority to HHS to set prices without any meaningful constraints.
    Plaintiffs: Chamber and PhRMA

  6. Const. Article 1 – Enumerated Powers: Congress does not have the power to authorize the Program’s excise tax because it operates as a penalty.
    Plaintiffs: Chamber

  7. First and Fifth Amendment – Unconstitutional Condition: The government cannot condition participation in Medicare and Medicaid upon compliance with the Program and subsequent relinquishment of its constitutional speech and property rights.
    Litigant: J&J

Recent Motions

On July 11, 2023, Merck filed a motion for summary judgment seeking declaratory and injunctive relief, reasserting allegations that the Program “is tantamount to extortion” and further expounding arguments that the Program violates the Fifth Amendment as an illegal taking and the First Amendment as compelled speech. The motion also more fully develops a response to the government’s argument that participating in Medicare and Medicaid is voluntary. Specifically, it argues that the Program is not analogous to receipt of federal funds with “conditions,” especially since a manufacturer cannot realistically terminate participation in Medicare or Medicaid in time to avoid potential excise taxes. Merck points out that it would have needed to give CMS notice by January 31, 2022, in order to properly extricate its products before the upcoming October 1, 2023, deadline.

On July 12, 2023, the Chamber filed a motion for a preliminary injunction, asking the court to enjoin HHS from implementing the Program. The Chamber’s motion focuses on the Due Process argument, stating that when the government sets prices, it must afford parties procedural safeguards to ensure just and reasonable prices and a fair return on investment, as directly addressed by Sixth Circuit precedent. The Chamber finally asserts that manufacturers will be irreparably harmed by costs associated with compliance and disclosure, separate from the even greater costs associated with government-mandated prices.

Key Takeaways

  • Litigation challenging the Program will likely grow more active as CMS deadlines approach in the Fall, with resultant court decisions potentially impacting the pharmaceutical and healthcare industry more broadly.
  • The courts’ decisions will inform the legal strategy of other litigants seeking to challenge the Program, and likely indicate which arguments present the most viable challenge.
  • Unless a court is willing to take action before October, the first phase of the Program will go into effect, and affected manufacturers will need to collect necessary data for submission to CMS.
  • With lawsuits filed in five district courts in five circuits, plaintiffs are clearly trying to diversify their chances for an injunction. It remains to be seen whether this strategy will increase the likelihood that the Supreme Court will take the case and whether the Supreme Court would decide in favor of the pharmaceutical industry.

The Morrison Foerster team will continue to monitor this litigation for developments and is actively advising clients on how it may impact their business.