Medicare Drug Price Cuts Add Fuel to Legal Fight Over Program

The historic list of the first 10 drug prices negotiated for Medicare may emerge as a double-edged sword in pending litigation between the Biden administration and pharmaceutical industry, intensifying the debate over the legal future of the program.

The US government’s Thursday unveiling of lowered prescription drug costs from the first cycle of the Medicare Drug Price Negotiation Program touted billions of dollars in savings for government spending and beneficiary costs, after the landmark Inflation Reduction Act allowed the US to set the prices of some of the most expensive and widely used drugs covered under Medicare.

The final negotiated prices—dubbed the maximum fair prices—resulted in cuts ranging from 38% to 79% off of the drugs’ list prices. But those final prices may steer the debate in ongoing lawsuits fighting the program, health attorneys say.

Nine lawsuits filed by pharmaceutical giants and business trade groups are working their way through federal district and appellate courts. But judges have been skeptical of the industry’s claims that the plan is unconstitutional, unlawfully implemented, and involuntary because it coerces manufacturers to agree to price cuts or face hefty penalties.

The list of negotiated prices is one piece of a puzzle that’s been the foundation of several claims debating how far the government will go with price cuts. The unveiled prices may serve to either give a much needed boost in support for theories that the program causes financial harm to drugmakers, or further bolster US claims that an actual negotiation took place, health attorneys say.

“Now that we have the prices for the first year, I wouldn’t be surprised if we see that influence the litigation that’s underway, whether through further filings or briefing on the impact of the actual price cuts,” said Margaux Hall, a health-care partner at Ropes & Gray LLP.

“There are certain claims that could be strengthened if the government’s more aggressive in its price cuts,” Hall said. “Conversely, I would not be surprised if the government argues CMS did not exceed its statutory authority if the agency decided to take the bare minimum of discounts and actually had a meaningful, thoughtful negotiation process.”

‘A New Piece of The Puzzle’

Manufacturers have brought forth a swarm of legal arguments against the program’s provisions, ranging from compelled speech violations to physical takings of proprietary information. The government scheme has been labeled as a “sham” with “enterprise-killing penalties.”

Drugmakers also allege the plan was unlawfully implemented and violates the separation of powers.

The industry so far has been unsuccessful in court as federal judges have dismissed cases on procedural grounds or granted summary judgment to the government.

But the list of prices may provide “a new piece of the puzzle” for certain challenges, said Rachel Alexander, a member at Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo PC.

In lawsuits brought under the Administrative Procedure Act, such as ones by AstraZeneca PLC and Novo Nordisk A/S, district courts opined drugmakers lacked standing to challenge the lawfulness of the program’s guidance. The manufacturers’ arguments, which are now both before the US Court of Appeals for the Third Circuit, “would benefit from a stronger showing of redressable injury,” Alexander said.

“Appellants may have new evidence to show tangible harms resulting from low maximum fair prices,” she said.

AstraZeneca’s Farxiga, used to treat diabetes, will receive a 68% cut from its list price starting in 2026. Novo Nordisk’s group of diabetes medications will be cut 76%.

Other drugmakers with cases now at circuit courts also have a chance to revive their lawsuits with the list of prices.

“If an appellate court was to find that a taking occurred, the next step in this inquiry could be whether the taking was for public use and whether the manufacturers received just compensation,” Alexander said. “This ‘just compensation’ piece is a fact-specific inquiry and would likely require the court to take a closer look at CMS’ MFP calculations.”

The CMS is slated to make public an explanation of the agreed upon maximum fair prices by March 2025.

Health legal experts also say the list of prices may fuel the debate over the Centers for Medicare & Medicaid Services’ selection of drugs, which chose certain qualifying single-source drugs with the highest Medicare expenditures, among other factors.

For example, the crux of Novo’s lawsuit alleges the agency unlawfully deemed six of its insulin products as a single biologic product and subjected all of them to the first negotiation cycle.

A federal judge in New Jersey rejected Novo’s argument, ruling the Inflation Reduction Act precludes administrative or judicial review of the selection of drugs. Therefore, the court lacks subject matter jurisdiction to consider challenges to the CMS’s underlying determinations that led to its identification of Novo’s selected drug.

But the CMS “abandons the pretense that the statutory term ‘qualifying single-source drug’ is anything different than a ‘single-source drug,’” which is considered a single drug approved under a new drug application or biologics license application, said William Sarraille, a regulatory consultant at Sarraille & Associates.

Sarraille pointed to the various products for Novo Nordisk, which were listed next to one negotiated price tag.

“Manufacturers are challenging the standard that CMS is supposed to use in making its determination,” Sarraille said. “The application of the standard are two different things.”

A ‘Real’ Negotiation

While it’s possible manufactures will flag prices in subsequent legal filings as confirmation for their theories about financial harm, it’s also conceivable that the Department of Justice, on behalf of CMS in court, will use the final negotiated prices to “flip the script on the companies,” said Zachary Baron, director of the Health Policy and the Law Initiative at Georgetown University’s O’Neill Institute.

The DOJ could argue the agency didn’t “leverage the negotiation process to push for the lowest possible price under the statute” and that the “process was in fact a real negotiation program where both parties engaged in a give-and-take,” he said.

The CMS Thursday said it “negotiated in good faith consistent with the requirements of the law.”

For five of the selected drugs, the agency and the drugmaker reached an agreement on a negotiated price for the drug. In four of those cases, the agency accepted a revised counteroffer proposed by the drug company.

For the remaining five selected drugs, the CMS sent a written final offer to those drug companies, and in each instance, the drug company accepted the government offer on or before the statutory deadline.

“The DOJ could seek to use this to counteract some of the constitutional claims that have attacked the negotiation process itself as a ‘sham’ and ‘gun to the head,’” Baron said.

The CMS reaching agreements with drugmakers may also fuel the DOJ’s position in court—given drugmakers complied with the agency and completed the first negotiation round, said James G. Hodge, a health law professor at Arizona State University’s Sandra Day O’Connor College of Law.

Federal judges so far have rejected industry arguments that the program is involuntary because manufacturers can withdrawal from Medicare at any time. Drugmakers, though, are up against hefty penalties if they choose to dodge negotiations.

Under the law, companies that decline to participate in the program or don’t comply with the maximum fair price will have to pay taxes that start at 65% of the US sales of a product. The fines would increase by 10% every quarter, with a maximum of 95%.

A drug company could also opt out of the program and avoid the excise tax, but would need to withdrawal from the Medicare and Medicaid programs.

However, “they sat through negotiations with them,” Hodge said. “Everything’s gone according to the CMS plan, and consequently, the litigation strategy around the unconstitutionality of this entire program is really starting to unravel.”