Pharma’s Challenge to Drug Price Excise Tax Sits on Shaky Ground

Legal challenges by two major trade groups citing “excessive fines” in Medicare’s new drug price negotiation plan are the least likely of their constitutional arguments to bear fruit as lawsuits in several courts move forward, lawyers and academic experts say.

Pharmaceutical companies would face a steep excise tax if they refuse to comply with government price negotiations set up under the Inflation Reduction Act. The US Chamber of Commerce and several state and local affiliates, as well as drug industry trade group the Pharmaceutical Research and Manufacturers of America, are challenging the law in court, arguing that the tax violates the Eighth Amendment’s prohibition on excessive fines.

The IRA gave Medicare the authority to negotiate the prices of some of the drugs it spends the most on. Under the law, companies that decline to participate in the program or don’t comply with the maximum fair price ultimately set by Medicare 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%.

The groups say in their filings the tax amounts to a “penalty with the characteristics of regulation and punishment” that “is grossly out of proportion to the ‘offenses’ that trigger the fine.”

The Chamber and PhRMA “face a pretty uphill climb here when it comes to the excessive fines clause arguments,” said Zachary Baron, an associate director of the Health Policy and the Law Initiative at Georgetown University’s O’Neill Institute.

“PhRMA and the other plaintiffs will have to navigate precedent that cuts against the excise tax here meeting the threshold of being ‘punishment,’ ‘punitive,’ or ‘grossly disproportionate.’ Courts have previously rejected such claims even when millions of dollars are at stake,” Baron said.

The Centers for Medicare & Medicaid Services will announce by Sept. 1 the first 10 Part D drugs that will face negotiations, and the Internal Revenue Service just last week announced plans to propose a rule on how drugmakers would report and pay the excise tax.

Health law professors and attorneys say that this, as well as very few previous cases dealing with corporate excessive fines cases, leave a difficult road ahead for the Chamber and PhRMA as they and Merck & Co. Inc., Astellas Pharma Inc., Bristol-Myers Squibb Co., and Johnson & Johnson separately attempt to topple the program that the Congressional Budget Office has estimated will save Medicare roughly $100 billion over 10 years.

Tax as ‘Punishment’

The Chamber and PhRMA, whose members include drug companies that are likely to face price negotiations, make similar constitutional arguments in two separate lawsuits. They say that the law establishing the price negotiation program violates the separation of powers doctrine and the due process clause of the Fifth Amendment.

Their Eighth Amendment claim centers around the argument that the tax provides no other purpose than to force manufacturers to comply with Medicare’s decisions. The companies must “subject themselves to government price controls disguised as ‘negotiations’ or to ‘agree’ to whatever rock-bottom price the Secretary dictates,” the Chamber argued in its complaint.

PhRMA filed a request for summary judgment late Thursday in the US District Court for the Western District of Texas.

The Chamber is asking the US District Court for the Southern District of Ohio to halt implementation of the negotiation program while the litigation proceeds. The Biden administration, which has vowed to defend the law in the face of industry attacks, is scheduled to file by Friday a response opposing the Chamber’s motion for a preliminary injunction, as well as a separate motion to dismiss the case for lack of subject matter jurisdiction.

PhRMA declined to comment. The Chamber said its attorneys were unavailable for comment.

No Fine, No Suit

Analysts have predicted that top-selling drugs like Bristol’s Eliquis will face negotiated prices starting in 2026—the first year of the drug pricing program’s implementation. Companies whose drugs are selected by CMS will have until Oct. 1 to agree to the negotiations with Medicare.

Since the companies that would be subjected to fines won’t be known until the fall, it’s unclear whether PhRMA and the Chamber will be able to successfully demonstrate the excise tax is excessive at this point in the law’s implementation, attorneys say.

“There are so few corporate excessive fines cases that have ever been litigated,” said Beth Colgan, a professor at the University of California, Los Angeles School of Law, and an expert on the excessive fines clause. “That would be an open question as to whether or not they simply brought the case too early.”

The Supreme Court has only heard five cases dealing with the excessive fines clause thus far, most of which dealt with fines to individuals issued in response to civil or criminal violations. It has yet to weigh directly on whether corporations can bring an excessive fines clause argument, Baron said.

The judge hearing the Chamber’s challenge—Thomas M. Rose—has previously cited the excessive fines clause in a case related to the Foreign Account Tax Compliance Act. In a 2015 opinion, Rose said the plaintiffs’ Eighth Amendment claims weren’t “ripe,” with “no penalties having been imposed against them.”

“Generally when you’re dealing with challenges to tax provisions, the general way that the courts have approached this is to say, such a tax has to be imposed before you can sue,” Baron said.

Battling Precedent

In making their case, PhRMA and the Chamber will also have to overcome the Supreme Court’s test for excessive fines.

In its 1998 ruling in US v. Bajakajian, the Supreme Court determined that a fine is considered “excessive” if it is “grossly disproportional to the gravity of a defendant’s offense.”

Part of judging proportionality, Baron said, is “weighing multiple factors."such as statutory text and the intent of Congress. The justices “would have to balance this provision with the whole statutory scheme of drug negotiation,” Baron said.

But with these factors, whether a fine is disproportionate can vary depending on the context, said Barak Richman, a professor of law and business administration at Duke University.

“Neither PhRMA nor regulators have articulated a good metric for what is ‘out of proportion,’” Richman said.

“The pharmaceutical market in particular offers a very stylized context in which notions of value, price, and market norms—and thus ancillary notions of excessive and punitive—are all very poorly defined,” Richman added. He noted that pharmaceutical companies in particular have traditionally been resistant to adopting formalized measures of value and pricing.

Given this context, making the excessive fines argument against the IRA is “certainly not going to be easy to succeed,” Baron said.

The PhRMA case is Nat’l Infusion Ctr. v. Becerra, W.D. Tex, No. 1:23-cv-00707, complaint filed 6/21/23. The Chamber case is Dayton Area Chamber of Commerce v. Becerra, S.D. Ohio, No. 3:23-cv-00156, complaint filed 6/9/23.