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Forging Ahead to the Supreme Court? Drug Company Sues U.S. Over Inflation Reduction Act Pricing

June 8, 2023

Forging Ahead to the Supreme Court? Drug Company Sues U.S. Over Inflation Reduction Act Pricing

June 8, 2023

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After the Inflation Reduction Act was passed in August 2022, it was expected that a pharmaceutical manufacturer would file a challenging lawsuit.

A lawsuit is challenging the constitutionality of the drug price negotiation process contained in the Inflation Reduction Act of 2022 (IRA). The IRA impacts other industries―including energy―so additional legal actions are anticipated. These lawsuits may be heading to the Supreme Court of the United States.

IRA Amends Medicare Part D’s Noninterference Clause and Requires Federal Government to Negotiate Prices for Some Drugs

The IRA aims to curb inflation by: (1) lowering prescription drug prices, (2) investing into domestic energy production while promoting clean energy and (3) reducing the deficit. President Joe Biden signed it into law on August 16, 2022.

Regarding prescription drug costs, the IRA allows Medicare to negotiate prices with drug companies, put an inflation cap on drug prices and lower out-of-pocket expenses for Medicare recipients. The Congressional Budget Office estimates that the drug pricing provisions in the law will reduce the federal deficit by approximately $237 billion over 10 years (2022-2031).

By way of background, the Medicare Part D program―for which Medicare contracts with private plan sponsors to provide prescription drug benefits―contains a noninterference clause that states that the secretary of the U.S. Department of Health and Human Services (HHS) is prohibited from negotiating prescription drug prices with manufacturers on behalf of Medicare beneficiaries and establishing a preferred drugs list.

Medicare prescription drug prices are negotiated between prescription drug manufacturers and insurance companies that administer Part D plans.

The IRA amends the Part D noninterference clause through an exception that requires the HHS secretary to negotiate prices with drug companies for a small number of single-source brand name drugs or biologics without generic or biosimilar competitors that are covered under Medicare Part D (starting in 2026) and Part B (starting in 2028). Certain categories of drugs are excluded from the negotiation process.

The IRA establishes an upper limit for the negotiated price (“maximum fair price”) for a specific drug. When negotiating the “maximum fair price” for a drug, the HHS secretary is required to consider the criteria, including: (1) manufacturer’s research and development costs, (2) current unit costs of production and distribution, (3) patents, and (4) market data and revenue.

The Centers for Medicare & Medicaid Services (CMS) plan to implement this through a signed agreement that will set forth the requirements governing the manufacturer’s participation in the program. See CMS, Medicare Drug Price Negotiation Program: Initial Memorandum, Implementation of Sections 1191-1198 of the Social Security Act for Initial Price Applicability Year 2026, at 26 (Mar. 15, 2023).

The HHS is scheduled to release its list of the first 10 drugs up for negotiation in September 2023, and prices will take effect on January 1, 2026. Then, the HHS will begin its negotiations on the next round of drug pricing, which will be released in September 2024.

Lawsuit Challenging Constitutionality of IRA’s Drug Price Negotiation Process

This week, Merck & Co. filed a federal lawsuit in the District of Columbia against HHS and CMS, asserting two claims:

  1. Count 1: Uncompensated Takings in Violation of the Fifth Amendment: In sum, the purpose of the IRA’s process is “for Medicare to obtain prescription drugs without paying fair market value” while the IRA “yields the threat of crippling penalties to force manufacturers to transfer their patented pharmaceutical products to Medicare beneficiaries, for public use.”
  2. Count 2: Compelled Speech in Violation of the First Amendment: In sum, the IRA is engaging in a “façade of ‘negotiations’ and ‘agreements’ that require manufactures to convey that they ‘agree’ to HHS’s ‘fair’ process.”

Merck v. Becerra, No. 1:23-cv-01615 (D.D.C.)

Merck expects that the HHS will select its products Januvia―a medication for diabetes―as part of the first round of the program, which is being released in September 2023, and then Janumet―a diabetes medicine―and Keytruda―a cancer drug―in the next two rounds of the program.  

Merck calls the drug price negotiation process a “sham” and “extortion.”

Why These Lawsuits Matter

After the IRA was passed in August 2022, it was expected that a pharmaceutical manufacturer would file a challenging lawsuit. We expect that additional manufacturers, pharmacist groups, and other interested parties will file lawsuits and/or submit papers in support of the Merck lawsuit and the anticipated appeals in the federal court system. Further, the IRA impacts multiple industries and many participants of the pharmaceutical industry, so additional lawsuits challenging the IRA are expected. These lawsuits matter because they may reach the U.S. Supreme Court relatively quickly before the new prices for the first round of 10 drugs take effect starting on January 1, 2026.

For More Information

If you have any questions about this Alert, please contact Sheila Raftery Wiggins, Jonathan L. Swichar, any of the attorneys in our Pharmacy Litigation Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.