ANALYSIS: Biden’s Drug Price Program Hangs on Nature of Medicare

A trio of cases before the Third Circuit will likely clarify that the voluntary nature of Medicare prevents drugmakers from toppling a landmark government drug price-setting program.

The appeals court on Oct. 28 is tentatively scheduled to hear challenges from AstraZeneca, Johnson & Johnson, and Bristol Myers over the Biden administration’s drug price negotiation program—which the government claims will save Americans $7.5 billion in its inaugural year. The pharmaceutical giants are appealing lower court rulings that tossed their constitutional claims.

The key question in the cases is whether the drug price scheme improperly forces drugmakers to give up property and speech rights (through product sales and negotiation agreements). But drugmakers’ ability to walk away from Medicare altogether, coupled with a string of Biden administration victories in the lower courts, suggests that the negotiation program is in good legal standing.

The cases, consolidated for disposition, are three of eight pending lawsuits that are winding their way through the courts and are the furthest along in reaching an appellate decision on the merits. Five of the eight are either at or headed toward the Third Circuit.

A Third Circuit decision in favor of the Biden administration could pave the way towards cementing the legality of the program. The government has prevailed in every court ruling to date on the issue.

Voluntary Participation

The pharma giants argue that a provision of the Inflation Reduction Act unconstitutionally forces companies to lower prices for their drugs. District courts in New Jersey and Delaware dismissed their claims that the law violates the Fifth Amendment’s takings clause and the First Amendment’s compelled speech doctrine.

The lower courts rejected the drugmakers’ Fifth Amendment claim because participation in Medicare is voluntary, so the government isn’t compelling them to give or sell their drugs at a certain price. The court in New Jersey rejected the First Amendment claim on similar grounds—the drugmakers are not compelled to participate in the program.

The Justice Department, in a Sept. 9 brief on behalf of the Biden administration, emphasized the voluntary nature of Medicare. The negotiation program doesn’t physically take any drugs, and drugmakers have the option to not sell their products on the terms the government offers, the DOJ argued. And because participation is voluntary, drugmakers aren’t compelled to sign agreements to negotiate or honor the negotiated price, it said.

Under the IRA, drugmakers that don’t comply with the negotiation program face a steep excise tax—which starts at 65% of the US sales of a product. Drugmakers can avoid the excise tax by withdrawing from Medicare and Medicaid. Participation in Medicare doesn’t become involuntary just because those two alternatives may be less profitable, according to the government.

“The existence of the excise tax option does not negate plaintiffs’ fundamental ability to walk away from any deal with the government (and pay no excise tax) if they are dissatisfied with the terms on which the government is willing to do business,” the DOJ said in its brief.

J&J contended in its opening brief that the drug price scheme “employs economic coercion to secure Janssen’s participation.” Bristol Myers argued that the lower court erred in ruling that participation in Medicare is voluntary regardless of what “conditions” Congress adds to it (i.e., the drug price negotiation requirement).

“Reframing statutory mandates as ‘conditions’ is no constitutional panacea,” Bristol Myers said in its brief.

According to AstraZeneca’s brief, accepting the lower court’s view on “voluntariness” would give the government unchecked power to impose price controls “by fiat with no due process whatsoever.”

What’s Next

While the Third Circuit gears up to hear those three cases, Novo Nordisk is readying its own opening brief that’s due Oct. 15 in the same circuit court.

In another case, Boehringer Ingelheim has until Oct. 25 to submit its brief to the Second Circuit. Meanwhile, a top drug lobby and health provider trade group await a decision from the Fifth Circuit on whether they have standing to bring suit in the first place. Two other cases are ongoing at the district court level.

The full report is available here for Bloomberg Law subscribers. Nonsubscribers can download a free copy of the report here. The individually published analysis pieces can be found here.

Bloomberg Law subscribers can find related content on our In Focus: Drug Pricing page.

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