IRA lawsuits will test US’ ability to regulate social pricing in pharma

Lawsuits brought by a range of pharmaceutical companies, including AstraZeneca and Johnson & Johnson (J&J), against the US Department of Health and Human Services (HHS) over the Inflation Reduction Act (IRA) are heating up as the deadline to propose prices draws near and will test the agency’s regulatory strength in pricing drugs for social programmes.

The IRA was signed into law in August 2022 and allows the Centers for Medicare & Medicaid Services (CMS) – a federal agency within HHS – to negotiate prices for some of the most expensive drugs bought by the US national health insurance providers. The first ten drugs affected by the legislation were announced in August 2023, and many affected pharmaceutical companies filed lawsuits in response, alleging infringements of the companies’ constitutional rights.

HHS must present proposals for the price of these drugs by 1 February, and, as this deadline draws near, several major legal challenges have received updates. J&J Innovative Medicine (J&J IM), formerly Janssen, has filed its case in the New Jersey District Court and argues that the IRA infringes upon the company’s First and Fifth Amendment rights.

The legal arguments in favour

This suit, as many of the others do, relies on the argument that the price negotiations between the CMS and the manufacturers of the targeted drugs are not in fact voluntary due to the penalties imposed by the government should manufacturers not comply.

These “penalties” include having to withdraw all products from Medicare and Medicaid or face punitive taxation on the targeted drug. J&J IM argues this infringes its Fifth Amendment rights by inflicting “an uncompensated physical taking of Xarelto (rivaroxaban), […] force[ing] a transfer of Janssen’s property to third parties, appropriating Janssen’s rights to possess and dispose of the medicines it invests billions to develop.” Xarelto is one of the 10 drugs included in the initial list of drugs up for price negotiation.

The company argues that the programme “is akin to the Government taking your car on terms that you would never voluntarily accept and threatening to also take your house if you do not ‘agree’ that the taking was ‘fair.’ [The US government may seize assets including cars and houses if an individual does not pay tax, which is not voluntary in the country.]”

It also argues that the regulation infringes upon its First Amendment rights to free speech as it coerces the company to “’agree’ with the Government that it is ‘negotiating’ a ‘fair’ price,” which it claims are false and misleading statements.

It finally argues that “the Act’s ultimate harm is to patients, […] threatening access to existing therapies and eviscerating incentives to continually improve those therapies.”

The legal arguments against

This viewpoint has been rejected by both the CMS and a multitude of lawyers, economists and health policy experts. Most recently, an amicus brief (an opinion given by non-parties to a legal case to provide alternative opinions or legal perspectives) filed 11 January by experts from Yale, Harvard, Johns Hopkins, Boston and Georgetown universities calls J&J IM’s challenge “overly simplistic and misleading”, according to Endpoints News.

The amicus goes on to state: “The hallmarks of a fair negotiation process include communication between parties, differences in interests and alternatives to negotiation. All of these hallmarks are present in the negotiation program established by the Inflation Reduction Act.”

The CMS has also recently (12 January) filed a new reply in another case brought in the District Court of New Jersey by Novartis on First, Fifth and Eighth Amendment grounds.

In its introduction, it notes that price limits on prescription drugs are not novel. Manufacturers that sell to the Department of Defense and Department of Veterans Affairs do so at statutory price ceilings, and the agencies both have the authority to negotiate prices further.

It goes on to reiterate the voluntary nature of the programme, arguing that this invalidates the plaintiff’s First, Fifth and Eighth Amendment arguments. It closes by stating that the “plaintiff’s objections to that program are no more than ‘a dispute with the policy choices’ made by Congress masquerading as constitutional theory.”

The value of Medicare

While the pharmaceutical companies’ arguments may well seem in bad faith, the importance of selling to the Medicare programme for major pharmaceutical companies means that they are heavily incentivised to do so, even at lower profit margins than they currently make.

The CMS claims that in 2022, Medicare spending totalled 21% of the US’ total National Health Expenditure (NHE), only 8% lower than private health insurance spending. While not all of this will be on prescription drugs, losing the ability to supply to this market would have serious impacts on companies’ bottom lines.

This also means that Medicare is incredibly costly for the government. The current annual cost of the ten drugs chosen in the first round of IRA price negotiations alone reaches over $80bn for the government per year. Reducing expenditure on these key drugs will not only save the government money but bring prices more in line with the global average.

Will the IRA work?

There is also reason to believe that price negotiations will have limited impacts on the companies currently fighting it. GlobalData analysis shows that nearly all of the drugs affected would still cost close to their launch prices depending on the exact discount negotiated.

GlobalData is the parent company of Pharmaceutical Technology.

This is only the first round of IRA negotiations, however, with further discussions expected to take place in 2026 and 2027. For the pharmaceutical companies, winning the fight now could save costly concessions in the future. A win for the government would set a precedent that it has the right to ask a fair price for products it buys and pave the way for future regulation.

GlobalData analyst Cyrus Fan explains that whatever the outcome, the stakes are high for both sides: “It is not known whether the lawsuits will be successful, and both sides feel confident in winning the case. There have been suggestions the industry has already conceded, with AstraZeneca suggesting to alter the IRA but not invalidate the legislation, which many in the industry have called for. It’s likely the lawsuits will head to the US Supreme Court for final judgment.”

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