Pharmaceutical companies are waging war against federal agencies over one of the Inflation Reduction Act’s major provisions allowing Medicare to negotiate 10 drugs to reduce out-of-pocket costs for patients.
The highly anticipated list released in late August included popular blood clot prevention drugs Eliquis and Xarelto and diabetes drugs Jardiance and Januvia. It also included Farxiga, Entresto, Enbrel, Imbruvica, Stelara and Fiasp.
These drugs are subject to a new drug negotiation standard, where the Centers for Medicare and Medicaid Services will send an initial price offer to companies by Feb. 1 based on months of listening sessions and submitted information provided by pharma companies that will include R&D and cost of production and distribution figures.
Drug companies can accept, reject or submit a counteroffer. Barring delays, the program will begin Jan. 1, 2026.
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Beginning in June, drug companies filed lawsuits arguing against the constitutionality of the drug negotiation provision, according to a litigation tracker from Georgetown University’s O’Neill Institute for National and Global Health Law.
While the lawsuits vary, most of the drug companies allege the legislation violates aspects of either the First or Fifth Amendments, if not both. Merck filed the first lawsuit, promptly followed by the U.S. Chamber of Commerce, Bristol Myers Squibb, the National Infusion Center Association, Astellas Pharma, Janssen Pharmaceuticals, Boehringer Ingelheim and AstraZeneca. Astellas voluntarily dismissed the lawsuit once it was clear they were not selected in the first wave of negotiated drug prices.
Novartis is the latest company opposing the negotiations, filing a lawsuit Sept. 1. These lawsuits span across the nation from Connecticut to Texas.
“The nub of the issue is, is the government overstepping and coercing these companies into giving the drugs making them available?” said Berkeley Research Group Managing Director Dan Troy during a recent webinar.
Oral arguments will be heard Friday in the Chamber of Commerce lawsuit. The judge could decide to enter a nationwide preliminary injunction, effectively stopping the government in its tracks from being able to implement the program, at least until appeals would take place, said Zachary Baron, associate director at the O’Neill Institute for National and Global Health Law at Georgetown University. A decision is expected by Oct. 1. If they lose, the Chamber of Commerce could appeal, potentially all the way up to the Supreme Court.
Pharma's perspective
Drug companies believe it’s unfair to call the process a negotiation because they are only left with one reasonable option, and that is to accept the new price for their product.
“The bottom line is, this is not a price negotiation,” said Troy. “These are price controls by other names. The companies really have no choice whether to participate.”
Troy said that to leave Medicare, drug companies are expected to give 19 months' notice, but the IRA was enacted less than 19 months ago. CMS has said exceptions will be made in these drugs’ cases, but it’s “not at all clear that’s legal.”
Companies that refuse to provide information to CMS face seven-figure penalties, and if the manufacturer refuses to negotiate, they will be forced to pay a large excise tax of up to 1,900% (though the government rejects this figure), according to the Tax Foundation. If they turn down CMS’ offer, they’ll be forced to withdraw from Medicare and Medicaid, which would have serious financial ramifications.
Pharma companies argue this not-really-voluntary program denies them the right to sell drugs at market rate prices without safeguards, even alleging in some lawsuits the federal government is taking their property (patented products) without just compensation, said Baron.
Troy suspects the drug companies could cite Horne vs. Department of Agriculture, where raisin manufacturers were told they needed to set aside a percentage of their crop to the government. The Supreme Court ruled in Horne’s favor, saying the government could not take claim of the raisins. Baron is skeptical this would hold up in court for drug companies since the government is not physically taking the drugs out of the manufacturer’s hands through the IRA provision.
There is also no review or oversight of CMS of the drug negotiation process once a price is finalized, despite CMS being the party that determines which drugs will cost substantially less.
Critics of the program say that drug innovation will be shuttered and that there is less incentive for drug companies to produce certain life-saving drugs if they know their profit motive is weakened years down the line. And oftentimes, a few highly successful drugs can subsidize the thousands of failed drugs, said Troy.
CMS' perspective
The Biden Administration says their push for price-negotiated drugs will substantially bring down out-of-pocket costs for customers for conditions such as heart failure and arthritis, will promote transparency and save the Medicare system money in the process.
CMS believes there is decades of precedent for legal success against this type of program, pointing to challenges of reimbursement rates under Medicare that have rejected alleged violations of the Takings Clause in the Fifth Amendment. Additionally, in National Federation of Independent Business (NFIB) vs. Sebelius, courts ruled that state participation in Medicaid expansion was voluntary and they were not coerced. Should the courts rule against the federal government, it could open the rest of the Medicare program to legal uncertainty.
Tricia Neuman, executive director of the program on Medicare Policy, said that Medicare has a long history of setting prices, dating back to 1983 when it established the prospective payment system. Since then, it has set up formula-driven payment systems for physicians, skilled nursing homes and Medicare Advantage plans. Only 1% of physicians have chosen to opt out of Medicare.
“In some ways, the drug industry has been given very different treatment by Medicare than every other provider group so far,” she said. “This is … getting close to what Medicare does with hospitals, doctors, nursing homes and others.”
The government also says in filings that drug companies are “misunderstanding” how straightforward it is to withdraw from the program. They flatly reject the 1,900% figure thrown out by drug company advocates, clarifying that the tax will only impact the drugs sold to Medicare beneficiaries, not the total number of sales, said Baron.
A report from the Congressional Budget Office found that the drug pricing provision won’t hinder innovation to the extent the pharmaceutical industry fears, as R&D impact will only be reduced by 1% over the next 30 years. While pharmaceutical companies rack in huge profits, slightly reining a few drugs will only serve to sustain Medicare and help the average person, the government believes.
Neuman said it’s hard to know whether those 1% of drugs would’ve been breakout success stories, or if the impact will be minimal on the drug landscape.