In our recent series of blog posts analyzing the Inflation Reduction Act’s (IRA) impact on the life sciences industry, we considered how the IRA’s drug pricing negotiation process (Negotiation Process) might influence future drug development and related transactions. For an overview of the Negotiation Process, please refer to our “Inflation Reduction Act Price Negotiation” blog post.
As the Centers for Medicare and Medicaid Services (CMS) gears up to make its first selection of drugs that will be the subject of pricing negotiations later this year, several pharmaceutical companies and pharmaceutical interest groups—namely, Merck & Co., Inc. (Merck), Bristol Myers Squibb (BMS), Janssen Pharmaceuticals (Janssen), Astellas Pharma US (Astellas), the U.S. Chamber of Commerce (U.S. CoC), and National Infusion Center (NIC) (joined by the Pharmaceutical Research and Manufacturers of America (PhRMA))—have filed lawsuits which aim to block the U.S. government from enforcing the Negotiation Process based on constitutional arguments.[1]
As summarized below, these lawsuits argue that the IRA’s Negotiation Process is unconstitutional on a number of grounds, including claims of impermissible compelled speech under the First Amendment, violations of procedural due process and governmental takings without just compensation under the Fifth Amendment, excessive fines under the Eighth Amendment, alleged violations of nondelegation principles, and claims of unconstitutional conditions being placed on Medicare/Medicaid participation.
First Amendment Claims
Most of the lawsuits claim that the Negotiation Process would effectively result in drug manufacturers engaging in compelled speech on behalf of the U.S. government through their entry in “voluntary” agreements for the negotiated maximum fair price. As noted in our “Inflation Reduction Act Price Negotiation” blog post referenced above, if a drug manufacturer does not comply with the negotiation process—including where it does not execute an agreement with the U.S. government memorializing the negotiated price—the manufacturer will be subject to a steep excise tax on future sales of the applicable drug. As a result, the claimants argue that these agreements are not voluntary, and to execute them would result in drug manufacturers essentially being compelled to state that they have “agreed” to “negotiate” and that the resulting price is “fair” when they did not have a meaningful choice as to whether to participate.
Fifth Amendment Claims
All the lawsuits advance Fifth Amendment claims in some form. The lawsuits brought by Merck, BMS, Janssen, and Astellas claim that the power afforded to the U.S. Department of Health and Human Services (HHS) to effectively set drug prices for certain products would interfere with their property rights, including those conferred by patents, in a manner which constitutes a de facto taking under the Fifth Amendment. For example, BMS argues that, even if the U.S. government is not the direct beneficiary of the negotiated drug prices, the government is effectively appropriating property from drug manufacturers and redistributing it to Medicare beneficiaries at highly discounted rates requiring just compensation from the government.[2] Since the Secretary of the HHS may institute a maximum fair price for drugs that may not necessarily reflect their fair-market value, the claimants argue the reduced revenues for drugs that are selected would not satisfy the just compensation requirement of the Takings Clause of the Fifth Amendment.
In addition, the U.S. CoC, NIC, and Astellas lawsuits set forth arguments alleging the Negotiation Process violates procedural due process requirements under the Fifth Amendment. Notably, these claimants allege that the lack of transparency, arbitrary implementation guidance, and sparse opportunity to be heard and to engage with the rulemaking process afforded to them violate their rights under the Due Process Clause of the Fifth Amendment. A key component of these claims, as highlighted in the NIC and U.S. CoC complaints, focuses on the process with which the HHS may implement regulations under the IRA. The complaints note it does not include a standard notice-and-comment process that commonly applies to U.S. administrative rulemaking and does include other provisions that the claimants assert bar any meaningful administrative or judicial review of decision-making. In short, the claimants argue that the Negotiation Process seriously lacks the sorts of procedural safeguards or neutral review mechanisms that are typical of agency rulemaking.
Eighth Amendment Claims
The U.S. CoC and NIC lawsuits also take aim at the IRA’s excise tax, claiming that it is more appropriately characterized as an excessive fine meant to compel compliance with the Negotiation Process. These arguments primarily rely on precedent which establishes: (1) that a fine may be excessive where the monetary extraction is grossly disproportionate when levied to serve a punitive purpose; and (2) a doctrine which evaluates the substance of a provision, rather than the label Congress chooses to place on it. In essence, the argument is that, if the excise tax is more appropriately characterized as a penalty to force compliance with the Negotiation Process, then the conduct triggering the imposition of the penalty (i.e., not complying with the requirements of the process) is grossly out-of-step and disproportionate with the penalty, which has been alleged to reach as high as 1900% of the drug’s daily total sales revenue.[3]
Nondelegation
The U.S. CoC and NIC also claim the power afforded to HHS under the IRA runs afoul of the nondelegation doctrine, which is meant to limit the scope of legislative authority granted to administrative agencies by Congress. Both lawsuits argue that Congress did not include a clear “intelligible principle” in the Negotiation Process, which is a well-established requirement under modern administrative law precedent. While the claimants acknowledge that Congress delineated factors for HHS to consider when determining how an initial price offer will be made, they take issue with the fact that there is little guidance on how these factors should be weighed and implemented. The lawsuits claim that, taken together, the lack of intelligible principle and procedural safeguards in the IRA constitute an impermissible delegation of legislative power which effectively grants the Secretary of the HHS unfettered power to “abrogate private rights under the IRA”.[4]
Unconstitutional Condition on Medicaid/Medicare Participation
Lastly, Janssen claims that the U.S. government is placing an unconstitutional condition on its participation in Medicare and Medicaid.[5] The “unconstitutional conditions doctrine” stands for the idea that the government cannot condition a benefit (e.g., participation in Medicaid and Medicare) on the forfeiture of a constitutional right (e.g., the companies’ First and Fifth Amendment rights).[6] The lawsuit notes how drug manufacturers who choose not to comply with the drug price negotiation program in the IRA must either: (1) face the excise tax described above; or (2) completely withdraw all of its products from Medicaid and Medicare, not just the drugs that are selected for pricing negotiation. The practical effect of this choice, Janssen claims, is that any rational drug manufacturer would ultimately be coerced to comply with (and, accordingly, surrender its First and Fifth Amendment rights in the process, as described above) the Negotiation Process.
Moving Forward
CMS issued revised guidance on June 30, 2023 which details the requirements and parameters for the Medicare Drug Price Negotiation Program that would be applicable to the first round of negotiations occurring later this year. Notably, the revised guidance clarifies how CMS will identify selected drugs, how CMS will consider negotiation factors during the Negotiation Process, and establishes additional opportunities for drug companies and the public to engage with CMS during the negotiation process.[7] While the revised guidance may address in part some of the claims and concerns levied at the IRA detailed in these lawsuits, it does not address the entire scope of legal claims currently brought forth against the IRA.
Since industry leaders have expressed concerns that reduced revenues for selected drugs will have a substantial negative impact on supporting their future R&D efforts, we expect to see additional lawsuits filed against the IRA by drug manufacturers, including those which may include additional challenges, whether constitutional in nature or otherwise.[8] Freshfields will continue to closely monitor the outcome of these lawsuits and future challenges to the IRA, considering the legislation’s potential impact on biopharma companies’ R&D activities and future transactions in the sector.
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For reference, please see below for links to the full complaints:
[1]
[2] BMS Compl. ¶ 61; see also Merck Compl. ¶ 60, Janssen Compl. ¶ 93; Astellas Compl. ¶ 85.
[3] Claimed figure in all the complaints. See e.g., Merck Compl. ¶ 30, BMS Compl. ¶ 37, Janssen Compl. ¶ 9, Astellas Compl. ¶ 31, U.S. CoC Compl. ¶ 93, NIC Compl. ¶ 93.
[4] U.S. CoC Compl. ¶ 135.
[5] Most of the other claimants also set forth the unconstitutional condition argument briefly in some form, but these arguments were made primarily to support their First and Fifth Amendment claims. See Merck Compl. ¶ 6, BMS Compl. ¶ 88, Astellas Compl. ¶ 119, U.S. CoC Compl. ¶¶ 220-221.
[6] See Janssen Compl. ¶ 118 (citing Koontz v. St. Johns River Water Mgmt. Dist., 570 U.S. 595, 604 (2013)).
[7] Fact Sheet: Medicare Drug Price Negotiation Program June 2023 (cms.gov)
[8] See, e.g., Biogen may follow Merck’s IRA lawsuit with its own, CEO says (fiercepharma.com)
