Drug Companies, Allies Fight Back on Medicare Drug Price Negotiations

Experts debated the claims made by drug companies and industry allies suing the federal government over its recently launched drug price negotiation program during an online panel discussion hosted by KFF on Tuesday.

At issue is whether the federal government is "coercing" companies into making their drugs available at lower-than-market prices, explained Dan Troy, JD, managing director at the Berkeley Research Group, who currently serves on the litigation counsel advisory board for the U.S. Chamber of Commerce, one of the groups suing.

"The bottom line is this is not a price negotiation. These are price controls by other names," argued Troy, who is not involved in the lawsuit.

Last month, the Centers for Medicare and Medicaid Services (CMS) released its list of the 10 drugs now eligible for price negotiation under the agency's new Medicare Drug Price Negotiation Program, which came about through a provision of the 2022 Inflation Reduction Act. The negotiation process leading up to the determination of a "maximum fair price" will continue until Aug. 1, 2024, and CMS will publish the negotiated prices on Sept. 1. The final price will take effect on Jan. 1, 2026.

Along with the U.S. Chamber of Commerce, the Pharmaceutical Research and Manufacturers of America (PhRMA), Janssen, Merck, Bristol Myers Squibb, Boehringer Ingelheim, AstraZeneca, and Novartis have brought litigation against HHS over the program.

Key Claims in Drug Company Lawsuits

Several key themes emerged from the lawsuits brought by the drug companies and their allies, said Zachary Baron, JD, of the O'Neill Institute for National and Global Health Law at Georgetown University Law Center in Washington, D.C.

Some lawsuits claim that HHS violated the First Amendment by forcing drug companies to "endorse speech they disagree with," given that companies are required to sign an agreement in which the price of the drug claims to be fair, Baron said. Others are claiming that the government is taking their property "without just compensation," as companies are being asked to sell their products at below-market rates.

In recent discussions, groups suing the government have referenced Horne v. Department of Agriculture, in which the Hornes, the owners of Raisin Valley Farms, were told that if they wanted to sell their raisins, they must give a portion of their product to the government.

"In one of the years at issue, the government insisted that the Hornes turn over 47% of their raisin crop in exchange for the benefit of being allowed to sell the remaining 53%. The next year the toll was 30%," Troy explained.

"How much freedom do the manufacturers have to walk away when at least 40% of the entire U.S. drug market is Medicare?" he asked. "Nobody thinks that ... anyone can really walk away from this [program] and that's why it's viewed as partly coercive and not voluntary."

"There is no oversight here," Troy said. "HHS is the beneficiary. It is the judge, the jury ... and it's the one that actually is dictating the prices, and gets the budgetary benefit of these dictated prices."

Some claims do argue that the law is requiring companies to sell their products without "constitutionally sufficient safeguards," Baron said, pointing to the absence of rule-making, judicial review, and the possible levying of an excise tax on those who refuse to participate in the negotiation process.

In particular, some companies specifically argue that the excise tax violates the Excessive Fines Clause under the Eighth Amendment.

Some claim that the excise tax is not a tax, but rather a penalty that is "grossly disproportionate" to the conduct it's meant to respond to, Baron said. According to Troy, the excise tax is nearly 20 times the drug's revenue in the U.S.

Another major argument is that the program isn't actually voluntary, Baron noted.

"The negotiation isn't really a negotiation," said Troy, noting that if the drug companies selected to participate have not submitted data by a certain deadline, they are fined $1 million a day.

Federal Government Disputes Drug Company Claims

As for the government's response to these claims, Baron said HHS recently submitted filings in response to both the Merck and the Chamber of Commerce's lawsuits, in which it pushed back significantly on the argument that the program is not voluntary.

"The government points to decades of precedent considering challenges to reimbursement rates under Medicare that have uniformly rejected similar takings [claims]," he noted. For example, courts have previously ruled that the Medicare program is allowed to limit what the government pays participating providers and that doing so does not require them to "surrender any form of property."

"At the end of the day, like other participants in the [Medicare] program, whether they be doctors, hospitals, nursing homes, if they don't like the terms of the program, nobody is forcing them to participate. And there are a range of ways to both withdraw from the program and mitigate any impact," he said.

Baron added that the government has underscored that there is no "physical appropriation" with the drug companies, as there was in the Horne case, in which "the government literally sent trucks to their home to take away raisins. That's not happening here with drugs."

The government has pushed back saying, in so many words, "at the end of the day if we side with the drug companies here, does that mean that any company that participates in a federal program gets to dictate the prices and means there can be no effort in which the government can try and leverage its authority to constrain certain costs that it can pay? And what would that mean in other aspects of the Medicare program?"

Here, Tricia Neuman, PhD, senior vice president at KFF and executive director of KFF's program on Medicare policy, stressed that in certain respects the drug industry has been given "very different treatment" in the Medicare program compared with all other groups up to this point. The drug price negotiation program is in "some ways ... getting closer to what Medicare does with hospitals, doctors, nursing homes, and others," she said.

HHS also argued that drug companies deeply misunderstand the excise tax, which is based on drugs sold to Medicare beneficiaries in the U.S. and not the total number of sales nationally for the drug, Baron noted.

What's Next

There are several steps between now and when the drug prices are expected to take effect in 2026 -- if none of the current lawsuits succeed in delaying or disrupting the negotiation process.

The next step for the courts is the oral arguments in the U.S. Chamber of Commerce lawsuit, which will be heard on September 14. The Chamber has requested a preliminary injunction and a decision from the courts prior to the October 1 deadline for participation in the program.

"If the Chamber loses that case, we could see it quickly appealed up to the Sixth Circuit and even conceivably up to the Supreme Court," Baron said.

Troy agreed, noting that "I do think that if any court or court of appeals strikes it down ... or holds it unconstitutional, then I would bet a lot of money that the Supreme Court will take it up."

If all of the courts reject all of the claims, it's unclear to me whether the high court would take the case, he added.

With regard to the other lawsuits, between the briefing schedules (some of which have yet to be determined), oral arguments, time allotted to write opinions, and time allowed for possible appeals, district court decisions are unlikely to happen before "the first quarter of next year ... at the earliest," Baron noted.

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