Legal Challenges to Washington’s ‘Sham’ Drug Price Control Scheme

With Bud Light, Target, and North Face trying to outdo each other in their “wokeness,” it is refreshing to see some leaders in corporate America standing up for their rights and customers—and quite forcefully.

Pharmaceutical giant Merck & Co. filed a lawsuit last week to stop what it called the government’s “draconian and deceptive scheme” to dictate drug prices through the ironically named “Inflation Reduction Act” (IRA) that Congress passed last August.

Soon afterward, the U.S. Chamber of Commerce followed with its own suit raising additional challenges to the law.

Democrats have been trying for decades to allow Medicare to negotiate lower drug prices for seniors. “[W]ho could oppose letting Medicare benefit from negotiated contracts, the basic building blocks of our market economy?” Merck asks in its filing.

But the government’s drug price program and CMS’s implementing guidelines are a “sham,” the company says, involving “neither genuine ‘negotiations’ nor real ‘agreements.’” 

Instead of taking the (politically unpopular) path of imposing price controls directly, Merck says the IRA uses “political deception” and “severe penalties” without paying fair value “and then coerces manufacturers to smile, play along, and pretend it is all part of a ‘fair’ and voluntary exchange. This is political Kabuki theater.”

“If a manufacturer refuses to ‘agree’ to negotiate, it must pay an escalating daily ‘excise tax’ that starts at 186% and eventually reaches 1,900% of the drug’s daily revenues.”

The Chamber filing didn’t mince words either:  “This is no tax; it is more like an ax. Because no one could afford to pay such an exorbitant penalty, the purported ‘tax’ is in reality an ultimatum to pharmaceutical companies: ‘agree’ to whatever price the government names, or we’ll smash up your business.”

“The IRA’s price control program is not only a disastrous error of public policy; it is illegal. The program is a violation of America’s fundamental constitutional requirements of limited government, property rights, the rule of law, and the separation of powers,” the Chamber says.

The Chamber also says Congress exceeded its enumerated powers with a law that doesn’t provide “for any of the accountability, transparency, or oversight controls that the Constitution requires and that Congress has built into other price control statutes.”  It says Biden administration officials abused their power in writing the implementation rules for the IRA drug price controls and went far beyond “traditional and constitutionally required guidelines.” 

Merck highlighted two Constitutional violations of the “extortion” scheme:

The Fifth Amendment:  “The IRA wields the threat of crippling penalties to force manufacturers to transfer their patented pharmaceutical products to Medicare beneficiaries, for public use. And the Act costumes these seizures as ‘sales’ by forcing manufacturers to accept Government-dictated payments that represent a fraction of the drugs’ fair value” —classic per se taking, Merck claims.

The First Amendment:  “The IRA…operates through a façade of ‘negotiations’ and ‘agreements’ that require manufacturers to convey they ‘agree’ to HHS ‘fair’ prices…

“Conscripting companies to legitimize government extortion is the sort of parroted orthodoxy that the First Amendment’s compelled-speech doctrine forbids,” Merck says.

Further, CMS demands secrecy, prohibiting manufacturers from speaking out in public and commanding them to “agree,” no matter how confiscatorily low the price offer may be.

“Our Constitution does not countenance compelled speech in service of state propaganda,” Merck proclaims.

“Rather, once HHS unilaterally selects a drug for inclusion in the program, its manufacturer is compelled to sign an ‘agreement’ promising to sell the drug to Medicare beneficiaries at whatever ‘fair’ price the agency dictates.”

If the company doesn’t willingly surrender its property, the government “levies immense monetary penalties.”

How bad is it? Januvia is Merck’s type 2 diabetes treatment and is expected to be one of the first drugs targeted by the IRA’s scheme. “There is no floor” to how low the government could set a drug’s price.

“Merck, for instance, could incur tens of millions of dollars in excise-tax penalties on the very first day of refusal to enter an ‘agreement’ relating to Januvia, escalating to hundreds of millions of dollars per day after a few months of such resistance.”

“And once the Government successfully coerces entry into such an ‘agreement,’ that manufacturer becomes legally compelled to sell its most valuable products for a fraction of their value, on pain of yet more draconian penalties.”

The Wall Street Journal describes it this way: “If an assailant points a gun at your head and threatens to shoot if you don’t hand over your wallet, is that a negotiation?” Merck and the Chamber make a compelling case that the Medicare price-control bill does violate the Constitution.

The suits are an extraordinary retort to a law that many of us fear will crush pharmaceutical innovation, and it is inspiring to see the industry push back.

We wrote earlier for RealClearPolicy about this draconian guidance the Biden administration has issued to implement the IRA.  Drug companies simply can’t sit back and take this.

The Chamber asks in its filing:  “If Congress is allowed to do this to the pharmaceutical industry, who will be next?”

Indeed. That is why these suits are so important and why they are likely to reach the U.S. Supreme Court.

The Chamber says that “the IRA’s purported ‘negotiation’ regime is Orwellian through and through: it is designed to maximize government power while evading public accountability.”

Other companies and allies are likely to follow to make their cases against the law.

Lawyer and health policy expert Thomas Miller of the American Enterprise Institute told the Pink Sheet that the multiple arguments against the IRA can “suddenly get enough combined power [where]…the totality of the circumstances make the court begin to look at this in a different framework.”

If the suits prevail, instead of punishing an industry, Congress could write a law that focuses on patients and how to help them get drugs at affordable but fair prices. We have better ideas.

Grace-Marie Turner runs the Galen Institute which works to advance health policies that support patient choice, affordable care and medicines, and continued innovation to improve the quality of care. She can be reached at gracemarie@galen.org and on twitter at @gracemarietweet