The IRA allows for negotiation on 60 drugs, starting with 10 in 2026 and adding the other 50 over the following three years.
The Act puts a lot of guardrails on what drugs can be chosen for that lot. They must be among the 50 most expensive Part D drugs and the 50 most expensive Part B drugs. They can’t include small molecule drugs that have been on the market for under nine years or biologics on the market for less than 13 years. Orphan drugs and plasma-derived products are also excluded.
The law sets an upper limit for negotiated prices, but not a lower limit. It provides criteria that the Department of Health & Human Services (HHS) must consider in negotiating the price, but not a weighting for those criteria. And, crucially, the government wields a fairly large stick to encourage pharma companies to come to the table – threatening them with a 65% to 95% excise tax (which, due to the complex way the law is written, could amount to a 1,900% penalty) if they don’t charge the agreed-upon price.
Nor can pharma companies practically opt out altogether – the Act requires that, to pull out, they must stop selling to Medicare and Medicaid completely, not just for the drug in question (although it might be possible to work around this restriction with corporate re-organisation).
The IRA passed in 2022, but in many ways the story of its contentious drug negotiation provisions began nearly 20 years before that, when the Medicare Prescription Drug, Improvement, and Modernization Act passed in 2003.
That law, orchestrated by controversial Louisiana congressman W.J. “Billy” Tauzin, included a provision that banned Medicare from negotiating on the prices of the drugs it covers.
“The government negotiates for everything from aircraft carriers to copy paper,” David Mitchell, founder of Patients for Affordable Drugs Now, told pharmaphorum. “But they managed to get this sweetheart deal where they did not have to negotiate [prescription drug prices], and they could, in fact, dictate the price. For about 19 years, they kept winning. Then last year, finally, because more than 80% of Americans insisted on having it done, they had had enough.”
The Act only allows for negotiation on 60 drugs. Nonetheless, the difference between no negotiation and some negotiation is big, and pharma companies are not taking the shift in fortunes lying down.
“Put simply, the price setting provisions in the IRA are bad policy,” PhRMA’s CEO, Stephen Ubl, said in a recent press conference. “They threaten our industry’s ability to research and develop new treatments and cures. They put access to innovative medicines at risk for Americans today, and in the future. And they jeopardise providers ability to prescribe the treatments they believe are in the best interest of their patients.”
Their primary objection? What constitutes negotiation when it comes to a law that essentially requires pharma companies to take the price offered to them by the government, pay an extraordinarily high excise tax, or else pull out of Medicare and Medicaid entirely.
“In reality this ‘Drug Price Negotiation Program’ is a sham,” Merck writes in the lawsuit that kicked off the flurry of litigation. “It involves neither genuine ‘negotiations’ nor real ‘agreements’. Rather, once HHS unilaterally selects a drug for inclusion in the programme, its manufacturer is compelled to sign an ‘agreement’ promising to sell the drug to Medicare beneficiaries at whatever ‘fair’ price the agency dictates, which must represent at least a 25% to 60% discount.”
Nicholas Bagley, a University of Michigan law professor who specialises in administrative law and healthcare law, says that the companies’ various arguments all stand on the same foundation –that participating in Medicare isn’t really voluntary.
“[Pharma companies] say it’s not really a free choice because there’s so much economic pressure put on [them],” he told pharmaphorum. “But on that front, the law is abundantly clear. That economic pressure of the kind that they’re complaining about – which is, well, you’re showering so much money on me, I can’t afford to turn my back on it – that doesn’t count as coercion. That’s just a very tempting offer. So, they’ve got a problem on their hands because this is not a compulsory programme. It just feels compulsory to them.”
Pharma companies are also concerned about the effect the law will have on drug development processes.
Because drugs only become eligible for negotiation after a certain period – nine years for small molecule drugs and 13 years for biological products – the law will start a clock when a drug first enters the market. For drugs with multiple indications this could incentivise companies to hold back on releasing drugs until they are cleared and ready for all indications, keeping drugs out of the hands of patients.
“Many cancer medicines in the US launch first in an orphan indication and broaden use over time to additional populations,” AstraZeneca, one of the plaintiffs, said in a statement. “One example is Lynparza (olaparib), a small-molecule cancer medicine approved in 2014 in the US for a small group of late-line ovarian cancer patients […] If the IRA had been in place, significant disincentives would have existed for pursuing the late-line ovarian cancer approval in the US, an indication which has benefitted patients in great need of this unique medicine for their rare condition.”
More broadly, pharma believes this law will stifle innovation by limiting the ability of drugs to recoup their R&D costs – including the costs of other, failed drugs. But Mitchell doesn’t buy it.
“We believe that the IRA will stimulate innovation,” he said. “Why? Because right now the drug companies can choose to raise prices on old drugs at will, to hit profit targets, to trigger executive bonuses. This will force them to bring better drugs, innovative drugs, to market so they can charge higher prices for them.”
It’s far from a settled question, but it is one that the nonpartisan Congressional Budget Office attempted to answer when it analysed the effects of the bill, estimating that it would result in 15 fewer new drugs being released over the next 30 years. However, the accuracy of that prediction is a matter of some debate, with other analyses producing much higher numbers.
The nine filed lawsuits span seven jurisdictions, prompting critics to suggest that pharma’s overall strategy here is to maximise the chances that at least one will reach the Supreme Court. Some plaintiffs have also filed injunctions seeking to halt the start of negotiations until the lawsuits are resolved.
Here is a breakdown of the lawsuits so far:
Merck, Janssen, Bristol Myers Squibb, Astellas, Boehringer Ingelheim, AstraZeneca, and Novartis have all sued in their respective districts. The other two plaintiffs are PhRMA, whose lawsuit also includes the National Infusion Center Association and the Global Colon Cancer Association, and the United States Chamber of Commerce, whose lawsuit also includes the Michigan, Ohio, and Dayton Area Chambers of Commerce.
US Secretary of HHS Xavier Becerra and Chiquita Brooks-Lasure, administrator for the Centers for Medicare and Medicaid Services (CMS), are named as the defendants in all cases.
While the various lawsuits have many similarities, they are not in any respect carbon copies. The pharma company lawsuits mostly employ First and Fifth Amendment arguments, while the PhRMA and Chamber of Commerce lawsuits use the Eighth Amendment, the Constitution’s due process clause, and arguments pertaining to the separation of powers and legislative authority. And a recent suit, by AstraZeneca, presents some more specific arguments based on the Administrative Procedures Act.
Below is a breakdown of each of the legal arguments, all of which challenge the constitutionality of the law.
Perhaps the most famous Constitutional amendment in the United States Bill of Rights, the first amendment protects American’s right to free speech. This includes preventing the government from “compelling speech”, except in certain cases (think Surgeon General warnings on cigarette boxes). Pharma companies argue that the law’s requirement that pharma companies sign a public agreement asserting that the price is a result of negotiation and constitutes a fair price, when (as they assert) neither of those things is true, constitutes compelled speech.
This line of argument is unlikely to succeed, Bagley says, because of the nature of Medicare as a voluntary programme. Additionally, the claim only works if they can prove their assertion that the negotiation is not a true negotiation.
The Fifth Amendment is probably best known for protecting Americans from self-incrimination – if you’ve ever heard someone say, “I plead the fifth”, they’re invoking this amendment. But it also includes the “takings” clause, which says, “nor shall private property be taken for public use, without just compensation.”
“What the drug manufacturers want to say is we’re kind of like public utilities here,” Bagley explained. “We’re required to sell our drugs. Because everybody’s so dependent on them and because we can’t really walk away from Medicare and Medicaid and you’re not paying us enough, therefore it’s basically confiscatory.”
Though different on the surface, this argument has the same weaknesses as the First Amendment argument – it requires pharma companies to prove that this is government price setting, rather than the requirements for participating in a voluntary programme, which is how the courts are likely to see things.
The Eighth Amendment is known for its provision against “cruel or unusual punishment”, but it also protects citizens against “excessive fines”, and that’s the provision at issue here. And, to be fair to the pharma companies, they have a pretty strong case that the excise tax the government will impose if pharma companies don’t pay the negotiated price is excessive.
“Put into context, this is like trying to sell your car to someone, and if they propose a price you’re unwilling to accept, you have to not just give them your car, you have to give them 19 of your other cars,” James Stansel, EVP, general counsel and corporate secretary at PhRMA said in their press conference. “That’s absurd, and it’s unconstitutional. It’s also clear that Congress never actually meant for that to be a tax that would be paid. It is intended solely as a way of forcing manufacturers to take the price that the HHS sets.”
For evidence that Congress never intended the tax to be paid, several lawsuits point to Congress’s own revenue projections for the bill, which predicted the penalty provisions would raise no money.
But it doesn’t matter if the tax is excessive if the court doesn’t consider it a fine, and this is where the argument will likely run into trouble. Once again, the voluntary nature of the programme is likely to be a sticking point. Additionally, excessive fines complaints in general have a bad track record as courts are wary of overstepping their own authority, Bagley said.
Some plaintiffs argue that the procedure that has been followed with the establishment of the negotiating process violates their Fifth Amendment rights to due process, or that giving the powers inherent in the Act to CMS, a part of the executive branch, violates the Constitution’s separation of powers.
Mostly, Bagley says, these arguments employ the non-delegation doctrine, the legal theory that Article I, Section 1 of the Constitution forbids Congress from delegating its legislative power. Unfortunately for the plaintiffs, non-delegation tends to be a non-starter.
“The non-delegation doctrine has been used to strike down two statutes in the 20th century and zero in the 21st,” he said. “The modern administrative state is bottomed out on broad delegations of authority, and there are hundreds of them, so it’s not that it’s incoherent to say, ‘Gosh, CMS has a lot of power here’. It’s true. But lots of agencies have lots of power that Congress has given to them in duly enacted statutes. And the courts have never said that run-of-the-mill delegations like this are constitutionally problematic.”
AstraZeneca’s case, one of the more recent cases to be filed, employs some novel arguments not found in the other eight and may have more success as they aim to take a scalpel, rather than a sledgehammer, to the law.
These two counts appeal, not to the Constitution, but to the 1946 Administrative Procedures Act. They argue that two particular parts of the law violate the statute: its categorisation scheme that counts different formulations and indications of the same drug as the same for negotiation purposes and its “bona fide marketing” standard used to determine whether generic competition exists (one of the factors for choosing drugs to negotiate).
Bagley, however, believes that these arguments aren’t much more likely to bear fruit than the others, even when it comes to securing a temporary injunction.
“To challenge an agency action, that action has to be ‘final’, and you have to be ‘aggrieved’, meaning that it’s the end of the decision-making process and the action directly affects you,” he says. “CMS’s guidance isn’t final – it’s an explanation of how the agency will going to exercise its discretion – and AstraZeneca wasn’t harmed when CMS issued the guidance. Now that CMS has acted to select drugs, its decision is shielded from judicial review under the IRA. So, AstraZeneca is very likely out of luck.”
It’s not an accident that there are nine lawsuits and counting, in seven different jurisdictions. The various plaintiffs want the law struck down, and lucking out with a few sympathetic judges could get this case to the Supreme Court, a body that has made some unexpected and precedent-defying rulings of late.
But Bagley’s assessment is that everything about these cases says “long shot”.
“There’s a good rule of thumb in lawyering that if you’ve got 15 claims in your complaint, it’s because you have zero good ones,” he said.
As different as they are, most of the claims share a single Achilles’ heel: Medicare is a voluntary programme, and pharma companies can opt out.
Even if courts were inclined to support pharma in its particulars, they might not want to be responsible for the precedent that ruling against the IRA’s cost negotiation provisions would set.
“It’s effectively a claim to constitutionalise all of government contracting,” Bagley said. “I think the courts are not going to have an appetite for inserting themselves into those kinds of policy debates – and they really are policy debates – about how much the federal government ought to spend for goods and services that it provides to its people.”
Anything is possible, but the most likely outcome here is that pharma is going to take a hit to its profits as this law takes effect – and it will take effect quite quickly.
How bad a hit will it be? That’s hard to say objectively in a moment when both sides have such strong incentives to overstate their case.
It’s safe to say pharma will still make a significant profit from Medicare sales on the many drugs that aren’t selected for negotiation and even on those that are. On the other hand, pharma companies are already making R&D decisions because of this law that involve cutting back on new drug development.
But one thing is for sure: for more than eight million Medicare beneficiaries who take the first 10 drugs that will be negotiated, this legislation could make a big difference in their lives.
Jonah Comstock is a veteran health tech and digital health reporter. In addition to covering the industry for nearly a decade through articles and podcasts, he is also an oft-seen face at digital health events and on digital health Twitter.