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Drug price controls in the Inflation Reduction Act (IRA) involve unconstitutional coercion and will destroy innovation in transformational treatments that save patients’ lives, the Biotechnology Innovation Organization (BIO) argues in a recent amicus brief.
“If the Program is upheld and manufacturers are forced to succumb to the Government’s coercive drug-price ‘negotiation,’ the Program will yield devastating consequences for the future of biopharmaceutical research and development,” BIO argues in its “friend of the court” brief to the U.S. Court of Appeals for the Third Circuit.
The brief was filed on July 19 in the case of Bristol Myers Squibb (BMS) and Janssen, who are appealing a decision by the U.S. District Court for the District of New Jersey. The companies argue that the IRA drug price control program is not a negotiation at all, as it coerces drug makers to agree to sell their products at below-market prices. This amounts to an unconstitutional “taking” of the companies’ property, in violation of the Fifth Amendment. The IRA program also forces them to endorse government messaging on what is, and is not, a “fair price,” in violation of the First Amendment.
BIO’s amicus brief supports these assertions while focusing on two specific arguments: countering the government’s position that participation in the price “negotiation” program is voluntary and sounding the alarm regarding the IRA’s impact on innovation.
Noting that multiple lawsuits have been filed challenging various aspects of the IRA, BIO’s Deputy General Counsel, John Delacourt, explained that “BIO became active in this case because of the strong focus on harm to innovation, which has been our primary concern with the IRA from the beginning.”
Why the IRA amounts to coercion
Under the IRA, the Centers for Medicare and Medicaid Services (CMS) can call for “negotiations” on the price of prescription drugs covered by Medicare, starting with 10 drugs chosen this year, and eventually expanding to 20 drugs a year.
Drug makers who refuse to participate in drug price “negotiations” would face an excise tax that would eventually amount to 1,900% of the price of the drug, according to estimates. The only alternative to paying this crippling tax would be for a drug maker to agree to withdraw all of their products from Medicare and Medicaid coverage but, as BIO’s amicus brief explains, that choice is also unfeasible.
“Medicare is the 10,000-pound gorilla in the pharmaceutical market, particularly for the drugs targeted by the Program,” asserts the brief, noting that Medicare and Medicaid account for almost half of national spending on prescription drugs.
“The Program is nothing but an illusion of ‘choice’ – manufacturers must either ‘voluntarily’ participate in the Program’s ‘negotiations’ or withdraw entirely from Medicare. That is no choice at all,” says BIO’s brief.
In its order dismissing the suit by BMS and Janssen, the district court cited a 1986 case in which a hospital’s request for Medicare coverage of bad debts was rejected on the grounds that the hospital’s participation in Medicare was voluntary.
As BIO’s brief explains, however, the analysis is decidedly different for pharmaceutical companies. Healthcare providers are well positioned to, and often do, opt out of participation in Medicare. In contrast, there is no evidence “that any manufacturer has ever offered its products only to patients not covered by Medicare. For good reason: It is simply not an economically feasible alternative.”
Misunderstanding of drug R&D
In addressing the impact on innovation, BIO’s brief provides an overview of the challenges that have always faced pharmaceutical innovators. It highlights in particular the fact that drug development involves huge investments in R&D with no guarantee of return – “[e]ach drug that makes it to market stands on the shoulders of nine or ten other drugs that never make it out of clinical trials.”
According to Delacourt, the price controls in the IRA do not acknowledge these considerable costs.
“You have a price setting framework that isn’t accounting for the cost of R&D. The real cost of developing a drug product has to include those nine products that never make it to market,” he says.
As the amicus brief explains, drug price controls undercut the usual workings of the market, removing incentives for investment in innovation.
“Innovators—including large manufacturers and emerging biotech startups—are willing to take on those risks in a competitive market where they can be rewarded for a successful innovation,” the brief notes. “But in a world where a company is forced to receive less than fair market value for its products, it must make a very real, and unsettling, choice about whether [a new product] even makes economic senset.”
The impact on innovation
The result of forcing drug makers to sell at below-market prices will be reduced investment and innovation. As BIO’s amicus brief argues, “[b]y employing a pricing structure divorced from market or business realities, the Program . . . will inflict serious consequences on the expansion of indications for existing medications and on the development of new medications.”
The brief cites a study showing that if the drug price control program had been enacted in 2014 there would be a 40% drop in revenue, and nearly 50 therapies that are on the market today would never have been developed.
The view looking forward isn’t much better. Another survey cited by the brief found that 78% of manufacturers are planning to cancel early-stage projects, which “no longer make sense given the short timelines before medicines could be subject to government price setting.”
The population that suffers most isn’t manufacturers. It’s patients. As the brief notes, rare disease patients in particular will be impacted by a provision of the IRA that exempts orphan drugs from price controls, but only if they are approved for a single indication. While many beneficial treatments are discovered by investigating new uses for existing drugs, the IRA works against such investigation.
“How do you attract investment for a second or third indication when the consequence of that will be to lose the exemption from IRA price setting?” Delacourt asks.
Where the case stands
Briefing before the court of appeals is ongoing and should be completed by the end of August. The court may also request oral argument. Beyond that the timing of the case is difficult to predict, though prior Third Circuit cases suggest that the court could issue a decision as soon as early 2025.
Litigation can be a slow process, but Delacourt insists on the importance of manufacturers continuing to press their case. “With this restrictive framework, in which a company that doesn’t agree with the price set by CMS has to withdraw every one of its products from the Medicare program, there’s clearly coercion. Participation is not voluntary,” he says.
