Drug industry launches furious legal fight against Medicare negotiating powers

The drug industry is launching a legal assault on Medicare’s new powers to negotiate drug prices just as talks with manufacturers begin, threatening to stall a key Biden initiative.   

Merck & Co., the U.S. Chamber of Commerce and Bristol Myers Squibb have all filed lawsuits against the Biden administration, seeking to block the Medicare price negotiation program established by the Inflation Reduction Act (IRA). The plaintiffs argue the program violate the First and Fifth Amendments.   

The parties allege their freedoms of speech were violated because the process implies the companies agreed to the prices set during the negotiations and believe them to be fair, which they do not.  

Representatives from Merck and the Chamber of Commerce said they are not opposed to negotiating drug prices with the federal government but take issue with how the system has been set up. 

The Fifth Amendment states private property cannot be taken “for public use, without just compensation.” The pharmaceutical industry argues their Fifth Amendment rights are violated by allowing Medicare to negotiate prices because they will not get “just compensation.”   

The Health and Human Services Department has said it will vigorously defend the new law, which it argues will lower health care costs for seniors and people with disabilities. Separately, some legal scholars are criticizing the arguments behind the cases.  

“There’s nothing in the law that requires the contract to say that it’s fair. That’s just an instruction for the agency,” said David Super, a Georgetown Law professor who focuses on constitutional law. “There’s really no First Amendment case of its kind that I’m aware of … I have trouble even understanding it as a coherent claim.”   

Christopher Robertson, a specialist on health law at the Boston University School of Law, pointed out the government routinely negotiates prices with other companies when it makes procurement decisions.  

“What is the implication here? That if Boeing wants to sell a jet fighter to the U.S., the U.S. has to buy it from them at whatever price Boeing says? Of course not,” said Robertson.  

Jennifer Dickey, deputy chief counsel of the U.S. Chamber Litigation Center, said what makes the Medicare drug price negotiation program different was a lack of “constitutional safeguards.” According to Dickey, the legislation doesn’t do enough to specify what Medicare should value when it sets a price for a drug. 

“If you look at this scheme compared to others, there’s a strong limit on the right to judicial review,” said Dickey. 

The IRA explicitly states that Medicare’s determinations of whether a drug is eligible for negotiation and what drugs are chosen will not be subject to administrative and judicial review. These conditions give Medicare a disproportionate amount of unchecked power, plaintiffs argue. 

“In our country, administrative agencies cannot simply run around setting prices that manufacturers have to agree to on pain of a debilitating fine without judicial review,” Dickey added.  

The suits have the potential to slow down the government’s ability to negotiate deals. Any of the plaintiffs in these cases could file a preliminary injunction to block the Medicare program until the case is decided by the courts. 

Yet there are also hurdles for some of the parties opposed to the negotiations.  

A judge hearing these arguments may need to be convinced that a plaintiff like the Chamber has cause to bring a case forward. The federal government could argue that the organization cannot prove harm as it is not a pharmaceutical company. 

Dickey said her organization was suing because it was “concerned about this law, not just because it harms our pharmaceutical members, but because of the broader implications it could have for free enterprise.” 

“There’s definitely the component of representing our most directly affected members in the pharmaceutical industry, but also the voice of business more broadly,” she said. 

Supporters of having Medicare negotiate with drug companies argue Merck and other companies have the ability to walk away from negotiations or reject prices suggested by the federal government, though this would mean losing a highly lucrative income stream from Medicare. 

They argue that is a compelling argument for why the price negotiations do not trample on the two amendments at the core of the legal challenges.  

Companies who do not want to negotiate can either withdraw all of their drugs from Medicare and Medicaid coverage or face heavy excise taxes. The excise tax penalty begins at 65 percent of sales from a drugmaker’s product in the U.S., increasing by 10 percent every quarter until it reaches 95 percent.  

“The IRA wields the threat of crippling penalties to force manufacturers to transfer their patented pharmaceutical products to Medicare beneficiaries, for public use,” Merck stated in its complaint. 

“And the Act costumes these seizures as ‘sales’ by forcing manufacturers to accept government-dictated payments that represent a fraction of the drugs’ fair value. By definition—and by design—that is not ‘just compensation.’ Requisitioning manufacturers’ medicines in this manner is instead a classic per se taking.” 

And drug companies cannot immediately end their relationships with Medicare. The termination of the relationship between a drugmaker and Medicare could be delayed for many months depending on when notice is issued, during which the company would face the excise tax. 

Plaintiffs argue the choices provided for not engaging amount to coercion by the federal government, giving them no other financially feasible option than to submit to a process they disagree with.  

The three complaints that have been made so far have been issued in the D.C. District Court, the Southern District of Ohio and the District of New Jersey. If any of these courts reach differing rulings on this issue, the question over the constitutionality of Medicare’s price negotiation could be fast-tracked before the Supreme Court. 

As was seen during the fight over the abortion pill last month, the Supreme Court could determine whether the program can continue while it is argued over in courts. 

According to Chad Landmon, a partner at the law firm Axinn with over 20 years of experience representing pharmaceutical companies, angling for an appearance before the Supreme Court could explain the timing of the suits, but he also noted the two organizations may have also been motivated to sue before the negotiation process got very far. 

When asked about the timing of the suits, Dickey from the Chamber of Commerce said, “We filed our complaint when we were ready to file it. We didn’t pick a date in coordination with anyone else.” 

Dickey said this case dealt with a particularly “complicated scheme” that had less to do with drug pricing control and more to do with unchecked government power. 

“Ultimately, this is really not a referendum on drug pricing in particular. This, from our perspective, is a referendum on a price control scheme that lacks judicial review,” Dickey said.