The Pharmaceutical Research and Manufacturers of America (PhRMA), which represents innovator drug companies, has filed a complaint against the US government over drug-pricing reforms in the Inflation Reduction Act, which was signed into law last year.

The US drug-pricing reforms being contested
The Pharmaceutical Research and Manufacturers of America (PhRMA), which represents innovator drug companies in the US, was joined by the National Infusion Center Association, and the Global Colon Cancer in filing a complaint in a federal district court in Texas asserting the price-setting provisions in the Inflation Reduction Act are unconstitutional. PhRMA’s lawsuit follows separate lawsuits filed earlier this month (June 2023) by the US Chamber of Commerce, Merck & Co., and Bristol Myers Squibb, with each of those parties filing their own lawsuits in federal district courts against the US government on the grounds that the price-setting measures under the Inflation Reduction Act are unconstitutional.

The Inflation Reduction Act, a major climate, tax, and healthcare bill, was signed into law in 2022 and includes measures to address the cost of prescription drugs in the US. A key provision under the new law is that for the first time ever, the US government, through the Department of Health and Human Services (HHS), was authorized and required to negotiate prices for certain prescription drugs under Medicare, the US federal health insurance program for people 65 or older. That process for implementing the new law began this year (2023), and the first negotiated prices are set go into effect in 2026.

The drug-pricing measures apply to select drugs under Medicare Part D, which covers most outpatient prescription drugs from pharmacies and other pharmacy providers, and Medicare Part B, which applies to prescription drugs administered in a physician’s office or clinical/hospital outpatient setting. The Medicare Drug Price Negotiation Program limits the number of drugs to be selected for price negotiations. Under the drug-price negotiation program, the HHS Secretary is authorized and required to select a specified number of drugs from a list of 50 “negotiation-eligible drugs” with the highest Medicare Part D spending and from a list of 50 “negotiation-eligible drugs” with the highest Medicare Part B spending over a given 12-month period. It would limit the number of eligible drugs for negotiations to 10 Medicare Part D drugs in 2026, 15 Medicare Part D drugs in 2027, 15 Medicare Part B and D drugs in 2028, and 20 Medicare Part B and D drugs in 2029 and thereafter.

In addition, the program also limits the type of drugs eligible to be negotiated under the drug-pricing plan. For example, the plan applies only to “high-cost” drugs defined by levels of Medicare spending, “older” drugs, defined on the basis of the number of years from when a drug was approved by the US Food and Drug Administration (FDA), and drugs without generic-drug and biosimilar competition.

Specifically, under the Medicare Drug Price Negotiation Program, “negotiation-eligible” drugs include brand-name drugs but would exclude the following types of drugs:

• Drugs that have a generic or biosimilar available;
• Small-molecule drugs with less than nine years from their approval date by the US Food and Drug Administration (FDA) and biologic-based drugs with less than 13 years from their licensure date by the FDA;
• Certain “small biotech drugs,” defined as drugs that account for no more than 1% of Medicare spending for all drugs from all manufacturers and that account for at least 80% of total 2021 Medicare spending for all drugs from a given manufacturer (this exclusion applies only in 2026, 2027, and 2028);
• Drugs that accounted for less than $200 million in Medicare spending in 2021;
• Drugs with an orphan-drug designation as the only-FDA approved indication; and
• Plasma-derived products.

Under the  Medicare Drug Price Negotiation Program, a maximum fair price for those drugs subject to negotiation in a given year would be determined through several criteria. The upper limit of a negotiated price would be equal to the lower of three possible conditions: (1) the drug’s enrollment-weighted negotiated price (net of price concessions) for a Medicare Part D drug; (2) the average sales price of a Medicare Part B drug; or (3) a percentage of the non-federal average manufacturer price (referring to the average price wholesalers pay manufacturers to distribute their drugs to non-federal purchasers) based on FDA approval dates. For this condition, that percentage would be 75% for small-molecule drugs with more than nine years but less than 12 years beyond FDA approval, 65% for drugs with between 12 and 16 years beyond FDA approval, and 40% for drugs with more than 16 years beyond FDA approval.

Earlier this year (January 2023), the US Centers for Medicare and Medicaid Services (CMS), the US federal agency responsible for administering the Medicare and Medicaid programs, and the HHS detailed the actions they plan to take in implementing the Medicare Drug Price Negotiation Program, including when and how it will engage with stakeholders and gain input on the drugs selected for price negotiation. Key dates for implementation include:

• By September 1, 2023, CMS will publish the first 10 Medicare Part D drugs selected for the Medicare Drug Price Negotiation Program.
• The negotiated maximum fair prices for these drugs will be announced by September 1, 2024, and prices will be in effect starting January 1, 2026.
• In future years, CMS will select for negotiation 15 more Part D drugs for 2027, 15 more Part B or Part D drugs for 2028, and 20 more Part B or Part D drugs for each year after that, as outlined in the Inflation Reduction Act.

Earlier this year (2023), CMS released information on how it will engage members of the public (including people with Medicare, consumer advocates, prescription drug companies, Medicare Advantage and Part D plans, healthcare providers and pharmacies, and other interested parties) on key policies, make requests for information, and inform the public on other implementation timelines and milestones. Also, the CMS began to propose its data-collection processes for carrying out the first year of the Negotiation Program. The first proposal includes a data-collection-process to gather information necessary to identify which dugs qualify for the small biotech manufacturer exemption in the early years, as provided for under the Inflation Reduction Act. CMS also plans to issue guidance for the negotiation process for 2026 and invite public comment on key elements, such as the offer and counteroffer process between Medicare and prescription drug companies, and the methodology for applying maximum fair prices. In addition, CMS will propose its data-collection processes and invite public comments on proposals that will ask for input on data and information the federal government must collect for consideration when negotiating the maximum fair prices as well as information to be included in the offer and counteroffer process. By September of this year (2023), CMS is slated to publish a list of 10 Medicare Part D drugs selected for negotiation for 2026. These 10 drugs will the first list of drugs that were subject to negotiation. The deadline for companies of drugs selected for the Negotiation Program to sign agreements to participate in the negotiation process for 2026 is October 1, 2023. The deadline for companies of drugs selected for the Negotiation Program to submit manufacturer-specific data to CMS to consider in the negotiation of the maximum fair price is October 2, 2023.

PhRMA responds back
PhRMA contends that these drug-pricing reforms are unconstitutional and would constrain research and development. “The price-setting scheme in the Inflation Reduction Act is bad policy that threatens continued research and development and patients’ access to medicines,” said  PhRMA President and CEO Stephen J. Ubl in a June 21, 2023, statement. “It also violates the US Constitution because it includes barriers to transparency and accountability, hands the executive branch unfettered discretion to set the price of medicines in Medicare and relies on an absurd enforcement mechanism to force compliance. We hope the court recognizes the serious concerns raised and declares the price-setting provisions unconstitutional.”

In their complaint, PhRMA, the National Infusion Center Association, and the Global Colon Cancer outlined their case that the price-setting provisions in the Inflation Reduction Act should be declared unconstitutional because of the following violations as outlined below.

Separation of powers: The parties contend that “Congress has impermissibly delegated broad authority to HHS to set prices within Medicare with no meaningful constraints on the agency’s exercise of this new price-setting authority,” they specified in a June 21, 2023, statement. “This is in conflict with fundamental separation-of-powers and nondelegation principles in the Constitution.”

Due process: The parties also say that the price-setting measure lacks transparency and do not adequately involve stakeholder input from drug manufacturers. “Unlike virtually any other statutory program affecting the public, the price-setting scheme denies manufacturers the right both to front-end input on how the policy will be implemented and to back-end judicial or administrative review after critical implementation decisions have been made,” said the parties in their statement. “And HHS has proposed in guidance to make the process even less transparent, preventing manufacturers from disclosing any information about the price-setting process. This violates the Plaintiffs’ and their members’ Fifth Amendment due process rights.”

Excessive fines: The drug-pricing reforms also include fines for drug manufacturers that do not participate in the price-negotiation process, something that PhRMA says is unconstitutional. “The excise tax aims to force manufacturer compliance with the price-setting scheme by imposing a staggering tax that serves as a severe penalty that violates the Eighth Amendment’s Excessive Fines Clause. Imposed each day that a manufacturer has not agreed to ‘negotiate,’ it increases swiftly to 1,900% of a drug’s total sales revenues,” PhRMA said in its statement.

The complaint seeks the following relief:

• Declare that the price-setting scheme under the Inflation Reduction Act violates nondelegation and separation-of-powers principles and is unconstitutional;
• Declare that the Inflation Reduction Act excise tax violates the Eight Amendment Excessive Fines Clause and is unconstitutional;
• Declare that the Inflation Reduction Act price-setting scheme violates Plaintiffs’ and their members’ Fifth Amendment due-process rights and is unconstitutional;
• Enjoin HHS from implementing the Inflation Reduction Act price-setting scheme in a manner that does not incorporate adequate procedural processes, including the opportunity for public notice and comment regarding key implementation decisions and for judicial review regarding issues of statutory interpretation; and
• Enjoin the government from enforcing the Inflation Reduction Act excise tax.