Price cuts for Medicare drugs fuel legal battle over program
The historic list of the first 10 drug prices negotiated for Medicare could prove to be a double-edged sword in the upcoming legal battle between the Biden administration and the pharmaceutical industry, intensifying the debate over the legal future of the program.
When the U.S. government announced lower prescription drug prices from the first cycle of the Medicare Drug Price Negotiation Program on Thursday, it touted billions of dollars in savings in government spending and insured costs. Previously, the landmark Inflation Reduction Act allowed the U.S. to set its own prices for some of the most expensive and commonly used drugs covered by Medicare.
The final negotiated prices – known as maximum fair prices – resulted in discounts of 38 to 79 percent from the drugs’ list prices. But those final prices could dominate the debate in ongoing lawsuits against the program, health lawyers say.
Nine lawsuits filed by pharmaceutical giants and trade associations are currently being heard in federal district and appeals courts, but judges are skeptical of industry claims that the plan is unconstitutional, is being implemented illegally and is involuntary because it forces manufacturers to agree to price cuts or face heavy fines.
The list of negotiated prices is one piece of a puzzle that forms the basis of several lawsuits debating how far the government will go in cutting prices. The revealed prices could either serve to support theories that the program is causing financial harm to drugmakers or further bolster U.S. claims that negotiations actually took place, health lawyers say.
“Now that we have the first year’s prices, I wouldn’t be surprised if this impacts the ongoing litigation, whether through further filings or by providing information on the impact of the actual price reductions,” said Margaux Hall, a healthcare partner at Ropes & Gray LLP.
“There are certain claims that could be strengthened if the government is more aggressive in its price reductions,” Hall said. “Conversely, I would not be surprised if the government argues that CMS did not exceed its statutory authority if the agency chose the bare minimum discounts and actually engaged in a meaningful, thoughtful negotiation process.”
“A new piece of the puzzle”
Manufacturers have raised a range of legal arguments against the program’s provisions, ranging from violations of free speech to physical expropriation of proprietary information. The government program has been called a “scam” with “business-damaging penalties.”
The pharmaceutical companies also claim that the plan was implemented illegally and violates the separation of powers.
So far, the industry has not been successful in court, with federal judges dismissing the lawsuits on procedural grounds or granting summary judgment to the government.
But the price list could provide “a new piece of the puzzle” for certain challenges, says Rachel Alexander, a member of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC.
In actions under the Administrative Procedure Act, such as those brought by
“Plaintiffs may have new evidence showing that low maximum prices cause concrete harm,” she said.
The list price of AstraZeneca’s Farxiga for treating diabetes will be reduced by 68% from 2026. The price of Novo Nordisk’s diabetes drugs will be reduced by 76%.
Other pharmaceutical companies whose cases are currently pending in district courts also have the opportunity to revive their lawsuits with the price list.
“If an appeals court were to conclude that expropriation occurred, the next step in that inquiry might be whether the expropriation was for a public purpose and whether the manufacturers received adequate compensation,” Alexander said. “That ‘adequate compensation’ portion is a fact-specific inquiry and would likely require the court to take a closer look at CMS’s MFP calculations.”
The CMS is to publish a statement on the agreed maximum fair prices by March 2025.
Health care legal experts also say the price list could fuel debate over drug selection by the Centers for Medicare & Medicaid Services, which has, among other things, selected certain qualified, one-stop drugs that have the highest Medicare spending.
The core of Novo’s complaint, for example, is that the agency mistakenly considered six of its insulin products to be a single biological product and subjected all of them to the first negotiation cycle.
A federal judge in New Jersey rejected Novo’s argument, ruling that the Inflation Mitigation Act precludes administrative or judicial review of drug selection. Therefore, the court lacks subject matter jurisdiction to consider challenges to CMS’s basic findings that led to the identification of the drug Novo selected.
But CMS “abandons the claim that the statutory term ‘qualified single-source drug’ is anything other than a ‘single-source drug,'” which is considered a single drug approved under a New Drug Application or biologics license, says William Sarraille, a regulatory consultant at Sarraille & Associates.
Sarraille pointed to the various Novo Nordisk products listed next to a negotiated price tag.
“Manufacturers are questioning the standard that CMS should use in making its decision,” Sarraille said. “The application of the standard are two different things.”
A “real” negotiation
While it’s possible that manufacturers will use the prices in later lawsuits to support their theories about financial harm, it’s also conceivable that the Justice Department, on behalf of CMS, will use the final negotiated prices in court to “deal the death blow to the companies,” said Zachary Baron, director of the Health Policy and Law Initiative at Georgetown University’s O’Neill Institute.
The Justice Department could argue that the agency “did not use the negotiation process to extract the lowest possible price under the law” and that the “process was in fact a genuine negotiation program in which both parties participated in a give-and-take,” he said.
The CMS said on Thursday that it had “negotiated in good faith and in accordance with legal requirements”.
For five of the selected drugs, the agency and the pharmaceutical manufacturer agreed on a negotiated price for the drug. In four of these cases, the agency accepted a revised counteroffer from the pharmaceutical company.
For the remaining five selected drugs, CMS sent the pharmaceutical companies a written final offer, and in each case the pharmaceutical company accepted the government’s offer within or before the statutory deadline.
“The Justice Department may try to use this to counteract some constitutional challenges that have attacked the trial process itself as a ‘farce’ and a ‘gun to the head,'” Baron said.
The fact that CMS has reached agreements with the drug manufacturers could also strengthen the Justice Department’s position in court – assuming the drug manufacturers have complied with the agency’s guidelines and completed the first round of negotiations, says James G. Hodge, professor of health law at the Sandra Day O’Connor College of Law at Arizona State University.
Federal judges have so far rejected industry arguments that the program is involuntary because manufacturers can opt out of Medicare at any time. However, pharmaceutical companies face heavy penalties if they avoid negotiations.
Under the law, companies that refuse to participate in the program or fail to meet the maximum fair price would have to pay taxes starting at 65 percent of a product’s U.S. sales. Fines would increase by 10 percent each quarter, up to a maximum of 95 percent.
A pharmaceutical company could also withdraw from the program and avoid the excise tax, but would then have to withdraw from the Medicare and Medicaid programs.
“However, they have negotiated with them,” Hodge said. “Everything has gone according to CMS’s plan, and as a result, the litigation strategy around the unconstitutionality of this entire program is really starting to fall apart.”
