Drugmakers in Court Fight Tax Penalties in Medicare Price Talks

The penalties drug manufacturers will face if they choose to withdraw from a government price-setting program were the focus of debate before a federal judge Thursday.

Judge Zahid N. Quraishi of the US District Court for the District of New Jersey pressed the attorneys of four major drugmakers and the US Department of Justice on the impacts of the Medicare Drug Price Negotiation Program.

“Is this a voluntary program?” Quraishi asked attorneys of the manufacturers.

The Biden appointee heard oral arguments on the federal scheme that is facing multiple lawsuits seeking to block the program. The plan was created under the 2022 Inflation Reduction Act to slash the costs of prescription drugs Medicare spends the most on. The program selects drugs for negotiated prices under Medicare, but an excise tax is on the line if companies refuse to participate in the negotiations or comply with the maximum fair price ultimately set by Medicare.

“Someone is going to have to walk me through the math,” he said in regards to the excise tax.

The attorneys for Bristol-Myers Squibb Co., Johnson & Johnson, Novartis AG, and Novo Nordisk A/S presented an array of claims alleging the plan violates the US Constitution and was unlawfully implemented on procedural grounds.

Attorneys for each drugmaker defended a variety of claims. They allege the program violates compelled speech under the First Amendment, the Fifth Amendment takings clause and due process, and excessive fines under the Eighth Amendment.

Claims that the program violates the separation of powers doctrine and the Administrative Procedure Act were also argued by Novo Nordisk.

Takings, Excise Tax, Agreements

Quraishi pressed both parties on their arguments as he followed up with multiple questions trying to understand the crux of each claim.

“What excise tax would not result in irreparable harm?” he asked the drugmakers, but also asked the government: “Why do you need the excise tax?”

The judge seemed skeptical on the First Amendment claims and asked how the program’s contract agreement is “different than other agreements.”

“You can say whatever you want,” he said in regard to the First Amendment argument.

“The government is saying you are more than free to do that,” he later added.

Both parties answered “no” when asked if they knew of any manufacturers that withdrew from the Medicare program.

Quraishi said it could signal that drugmakers are not withdrawing because they’re “forced at gunpoint” to agree with the government.

The government maintained throughout the argument that choosing to sell drugs to Medicare, like participating in other federal health programs, is voluntary and drug companies have the option of not selling their drugs to Medicare.

The program “is a voluntary program” and no one is “obligated” to participate in Medicare, said Brian David Netter, deputy assistant attorney general for the Federal Programs Branch at the US Department of Justice.

The drugmakers continued to defend various claims, but mainly that the Inflation Reduction Act imposes penalties if the manufacturer doesn’t agree with Medicare. In other words, the program results in a physical taking backed by an excise tax penalty, the drugmakers argued.

The “bottom line” is the statute on its face is to “hand over the product” on “government-dictated terms,” said Yaakov M. Roth, a partner at Jones Day representing Bristol-Myers Squibb.

There were also questions about who will benefit from the Medicare Drug Price Negotiation Program.

“The government is reaping the benefits of the discounts,” Roth said.

But “what about Americans? Do they not benefit from this?” Quraishi asked the drugmakers’ attorneys.

“They may,” Roth said. “They may not,” he said, highlighting the government does benefit because it is paying less for the products.

Quraishi said he doesn’t have “enough information” on where the companies’ spending goes and about how the program will effect their innovation.

“That’s an important fact,” he said.

After nearly five hours of oral arguments, Quraishi ended with remarks that attorneys for both parties were “outstanding.”

He noted that this particular district court is not “generous” on offering oral arguments, since they can be “redundant” and a “waste of time.”

“That was not the case today,” he said, highlighting how the parties were “absolutely informative to the court.”

The cases are

• Bristol-Myers Squibb Company v. Becerra, D.N.J., No. 3:23-cv-03335
• Janssen Pharmaceuticals, Inc. v. Becerra, D.N.J., No. 3:23-cv-03818
• Novartis Pharmaceuticals Corporation v. Becerra, D.N.J., No. 3:23-cv-14221
• Novo Nordisk Inc. et al v, Becerra, D.N.J., No. 3:23-cv-20814.