Lawsuits, Tax Fuel Doubt as Medicare Preps Drug Pricing Talks

Ongoing litigation from the pharmaceutical industry threatens to delay Medicare’s plans for negotiating lower prices for some of the drugs it spends the most on as questions linger on how the federal government will implement certain parts of the law.

The Centers for Medicare & Medicaid Services is rapidly approaching a Sept. 1 deadline to publish the list of the first 10 Part D drugs for which manufacturers must negotiate lower prices with the government. While the official batch of companies has yet to be announced, analysts predict Merck & Co., Bristol-Myers Squibb Co., and Janssen Pharmaceuticals Inc. will be among the drugmakers subject to the first round of price cuts, which would go into effect in 2026.

The CMS announcement will trigger a range of questions, including how many of the drug manufacturers will agree to comply with the negotiations, attorneys and drug pricing analysts say. The Internal Revenue Service has also yet to release a proposed rule on how it will implement the excise tax companies face if they refuse to negotiate.

The official announcement from the CMS will be a “definitive moment” for the affected companies, said Nick Shipley, the Biotechnology Innovation Organization’s chief advocacy officer.

“That’s going to be a pivot point for all the companies and their decision making internally. Do more people file lawsuits? Do they change their engagement?” Shipley said.

Will Companies Comply?

Manufacturers of the first 10 selected products have until Oct. 1 to sign agreements to enter the price talks or risk financial penalties. By the following day, companies must submit manufacturer-specific data to the CMS to help the agency make an initial offer on a product’s maximum fair price.

Companies can decline to participate in the negotiations but would then have to withdraw their products from all federal health programs. This means drugmakers would lose access to the more than 65 million Americans covered by Medicare and more than 87 million enrolled in Medicaid as of March 2023.

“Medicare is like the largest purchaser of health care, so it’s hard to not be a part of that,” said Tara Dwyer, a member of the global law firm Mintz. It also wouldn’t be beneficial for them from a messaging standpoint, she said.

“You can imagine what the dialogue would be from the other side where it’s like, ‘You can’t get these drugs anymore because the manufacturers decided they wanted to get so much for them that they wouldn’t work with the government,’” Dwyer said.

The penalties for not complying with the negotiations are severe enough that companies will be compelled to participate, said Duane Wright, a senior research analyst with Bloomberg Intelligence. 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 starting at 65% of the US sales of a product. The fines would increase by 10% every quarter, with a maximum of 95%.

How Will the Excise Tax Work?

Opposing interpretations on how the excise tax will actually be calculated likely won’t be resolved until the IRS offers additional information on this area, analysts say.

One of the main arguments in the IRA lawsuits from the Pharmaceutical Research and Manufacturers of America and the US Chamber of Commerce is the tax companies face if they decline to participate is “grossly out of proportion to the ‘offenses’ that trigger the fine.”

PhRMA, which represents the brand-name pharmaceutical industry, argued in its complaint the tax could reach “as high as 1,900% of the total daily revenues for all sales of the relevant drug and compounding for each day of ‘noncompliance.’”

An Aug. 4 notice from the IRS makes it appear the federal government will only apply the tax to the specific drug’s sales within the Medicare program and not all sales, said Mark E. Miller, executive vice president of health care at the philanthropy-funded Arnold Ventures.

In the notice, the IRS said the tax “would be imposed on taxpayer sales of designated drugs dispensed, furnished, or administered to individuals under the terms of Medicare.”

“What I’ve seen is the IRS and Treasury saying, very definitely Medicare, and specifically the product in question. And so if that’s the case, then that 1,900% is not correct,” Miller said.

Will Lawsuits Delay Negotiations?

Briefing schedules for most of the lawsuits from drugmakers and trade groups go well into October and beyond, leaving it unlikely a court will issue a decision before the initial list of 10 drugs comes out, analysts say.

The chamber has asked a federal judge to pause implementation of the program while litigation proceeds—a request that triggered opposition from the Department of Health and Human Services and several patient groups. The chamber wants the US District Court for the Southern District of Ohio to act before Oct. 1.

It’s unclear whether any of the constitutional claims the pharmaceutical industry makes will succeed, but any court-ordered pause would be a win for drugmakers, Wright said.

“They could win in terms of throwing sand in the gears and slowing this down to the point where they can get some extra breathing room for some of their drugs to keep their pricing power for an additional year or two,” he said.

How Will Drugmakers Respond?

The list of the first 10 drugs is likely to trigger a wave of new legal action, as well as research pipeline changes that drug companies will blame on lost revenue as a result of the IRA, analysts say.

“Companies that have not yet filed a lawsuit, then may say, ‘Well, I have standing now, I’m harmed, and I’m going to sue on this particular basis,’” Miller said.

John Murphy, BIO’s chief policy officer and health-care counsel, said the industry group is “already hearing from companies in the broader membership who aren’t even going to be on the list who are absolutely reevaluating pipeline decisions, reprioritizing research dollars as a result.”

In November 2022, Eli Lilly & Co. cited the IRA as major reason for ending investments in developing a drug for certain blood cancers.

PhRMA has also specifically criticized the shorter length of time small-molecule drugs are exempt from negotiations compared with more complex biologics. A 2022 survey of its members found 78% of companies were expecting to cancel some of their early-stage pipeline projects.

One important factor to watch for is whether companies abandon clinical trials at a higher rate after the IRA than before its passage, Miller said.

“There’s plenty of clinical trials that are abandoned as a matter of course on a daily basis, and the percentages are not small,” he said.

One analysis of clinical trial data from 2010 to 2017 found that 10% of failed clinical trials for drugs in development were a result of poor strategic planning or other commercial factors.