A provision in the Inflation Reduction Act requires drug companies to sell their products at a steep discount or face ruinous fines.
Pharmaceutical giant Merck & Co. filed suit against Xavier Becerra and the Department of Health and Human Services Tuesday over a new drug-price negotiation program it says is unconstitutional.
The intention of the program, which will revolutionize the way drug pricing works, is to make drugs more affordable for Medicare patients. However, what the legislation casts as a voluntary negotiation between HHS and pharmaceutical companies is actually “tantamount to extortion,” Merck’s attorney’s claim in a lawsuit filed in Washington, D.C., District Court and obtained by National Review.
Normally, HHS would sit down with a drug manufacturer and perhaps negotiate a discount owing to the fact that it is a big buyer. If an agreement cannot be reached, the product would not be made available to Medicare patients. In order to avoid the negative health consequences — and the resulting political fallout — that follows the pulling of a drug, the new legislation dictates that pharmaceutical firms must stay at the negotiating table, or face ruinous fines.
Under the statute, the firms are required to strike a deal that sees their products offered at a 25 to 60 percent discount to Medicare beneficiaries. Should the company refuse that price range, a daily excise tax would be levied that starts at 186 percent and eventually reaches 1,900 percent of the drug’s daily revenues.
According to the filing, this constitutes a taking under the Fifth Amendment. A drug is a pharmaceutical company’s property, protected by a patent. In order to avoid the excise tax, a company would be forced to comply with the discount and would not be reimbursed by the government.
Given the enormous financial stakes and far-reaching implications of the provision, Merck is prepared to litigate the case all the way to the Supreme Court, where the company is confident it will prevail, a source familiar with the firm’s strategy told National Review.
The filing also argues that the First Amendment is violated in that the company is made to pretend to conclude an agreement when they are instead being coerced. Merck will argue that the statute is designed to create an impression in the public’s mind that is false, the source said.
There are several other contentious features of the legislation: Companies are barred from talking about the negotiations and courts are barred from reviewing HHS’s decisions about what prices to offer.
The statute also ties the hands of pharmaceutical companies by requiring that they extricate themselves entirely from the Medicaid and Medicare programs in order to avoid being subject to the ruinous excise taxes. Given the share of the market these programs make up, total extrication would be financially unworkable for the vast majority of pharmaceutical companies. The statute does not allow a company to extricate itself from reimbursements for one particular drug, which would be more manageable.
Aside from the legal issues Merck is alleging, the company expects the program to chill research and development investments that are necessary to develop the next round of medicines for the United States, the source told National Review.
Most drugs that a pharmaceutical company invests in do not get approved or sold but billions are nevertheless spent developing those products. The only way a pharmaceutical company recoups those losses is by patenting for a number of years those drugs that do get approved, giving the company a profitable window before other companies can make a generic brand. The program would directly interfere with that approach, limiting the profitability of approved drugs and shrinking the availability of the company’s research and development war chest.
The effect would be particularly pronounced in the case of cancer drugs, which are generally developed for end stage treatment first because it’s easier to get approval for experimental drugs when there are no other available options. If a treatment is successful with end stage cancers, companies then use it for earlier stage cancers. However, if those initial drugs for end stage cancers go through the drug price negotiation, the shot clock and consequential financial losses start immediately. Thus, by the time they get the product approved for the earlier stage cancers, it’s no longer a profitable drug.
If the Drug Price Negotiation Program is not enjoined, the first ten drugs that will be subject to the new statute are set to be announced on September 1, 2023 and the pharmaceutical companies will have 30 days to enter into agreements with HHS.