Inside the Inflation Reduction Act’s upcoming legal battles

Nine plaintiffs – six pharma companies and two alliances of industry groups – have sued the government over the price negotiation provisions of the Inflation Reduction Act (IRA), employing at least seven distinct legal arguments.

To hear pharma executives speak – and I have, at ASCO, Bio, and Reuters Pharma – this law could threaten pharma’s business model and seriously curtail incentives for new drug development. But patient groups say that these companies are overstating the effect of a law that merely returns to the government a power it ought to have had for the last 20 years.

What’s in the bill?

How we got here

Pharma fires back

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.”

The innovation question

The legal challenges

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:

First Amendment

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.

Fifth Amendment

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.

Eighth Amendment

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.

Non-delegation, due process, and separation of powers

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.”

The Administrative Procedures Act

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.”

The bottom line

About the author

Jonah Comstock 

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.



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