U.S. Chamber of Commerce Sues HHS Over Constitutional Defects in Inflation Reduction Act’s Medicare Negotiation Program

On June 9, the U.S. Chamber of Commerce and several affiliate organizations filed a lawsuit in the Southern District of Ohio raising a series of constitutional challenges to provisions of the Inflation Reduction Act (IRA). At issue in the lawsuit are several statutes granting the U.S. Department of Health & Human Services (HHS) the authority to set prices for Medicare drugs. The U.S. Chamber is challenging a lack of oversight for so-called “negotiation” procedures as well as an onerous excise tax on several grounds, including separation of powers and due process violations.

Burdensome Excise Tax Coerces Drug Companies Into “Negotiation” Process

Prescription drug pricing controls are one aspect of the IRA, a landmark piece of legislation passed by Congress last August that also directs funding to be spent on clean energy projects and increased tax enforcement. The IRA authorizes the HHS Secretary to establish a Drug Price Negotiation Program, codified at 42 U.S.C. § 1320f, to establish maximum fair prices of certain drugs that become eligible for the program because they constitute a large portion of expenditures by Medicare Part B and Part D patients. Pharmaceutical companies who do not agree to the price set during negotiations with HHS will have to pay a new excise tax codified at 26 U.S.C. § 5000D calculated based on daily sales and starting at 65 percent.

However, the U.S. Chamber alleges that, due to the convoluted way the excise tax is calculated based on the sum of the tax and the drug’s sale price, the excise tax actually begins at about 185% of daily drug sales. Drugmakers holding out from HHS’ set pricing for more than 270 days will face an excise tax that, using an applicable percentage of 95%, could penalize pharmaceutical firms up to 1900% of daily drug sales.

The onerous nature of this tax, and the lack of administrative or judicial review of the HHS price setting program, undercuts any sense that “negotiations” under the IRA could be fair or even-handed, the U.S. Chamber contends. While pharmaceutical companies can submit counteroffers to HHS pricing levels, initial guidance from the Centers for Medicare & Medicaid Services (CMS) indicates that no standards exist for the HHS to make maximum fair price determinations. Drugmakers that do not agree to enter the negotiations program or sell their drugs at the maximum fair price set by the HHS are required to pay the excise tax.

No Judicial or Administrative Oversight for New Price Control Regime

From an intellectual property standpoint, the drug negotiation program under the IRA goes too far in undermining patent protections that support innovation in pharmaceuticals, according to the U.S. Chamber’s complaint. Market exclusivity under patent protections allows innovative firms to charge the price for their invention that is set by voluntary market choices. The HHS’ price-setting program eliminates patent exclusivity, in turn limiting their ability to recoup profits that would otherwise be reinvested in further drug development.

The IRA specifically precludes the availability of administrative or judicial review for several determinations by the HHS, including drugs eligible for renegotiation and maximum fair prices. This lack of review undergirds the U.S. Chamber’s argument that the IRA violates constitutional separation of powers. To be valid, such statutory delegations of legislative power to administrative agencies must be guided by an intelligible principle with which the agency must conform, a principle most recently reiterated by the U.S. Supreme Court in Gundy v. United States (2019). Other price control regimes enacted by Congress have allowed judicial review to ensure delegated authorities are exercised in a fair and non-discriminatory manner. That the IRA fails to do so points to more nefarious motives, according to the U.S. Chamber:

“The only plausible explanation for the way the IRA is structured is that the President and Members of Congress thought that it would be easier and more politically palatable to enact a price control program designed to reshape the nation’s prescription drug markets by advertising it as a ‘negotiation’ program and by guarding it against judicial scrutiny, even though doing so violated the Constitution.”

The IRA also violates constitutional due process, the U.S. Chamber argues, as the governmental process established by the law fails each of the three factors under Mathews v. Eldridge (1976). First, the government negotiation process severely impacts private interests by subjecting drugmakers to a price-setting process for which the statutory ceiling is a percentage of a drug’s net sales price, which incorporates price concessions to wholesalers. Second, the HHS’ unreviewable authority to set prices, coupled with a statutory mandate to “achieve the lowest maximum fair price for each selected drug,” creates a major risk of erroneous deprivation. Third, the U.S. Chamber alleges that the federal government has no legitimate interest in setting up roadblocks shielding the HHS’ authority under the IRA other than politically shielding the negotiation program from public scrutiny.

The U.S. Chamber’s complaint raises several other constitutional challenges. The IRA violates the Excessive Fines clause of the Eighth Amendment, the complaint alleges, as it is merely designed to get drugmakers to comply with the negotiation process, a conclusion underscored by Congressional Budget Office estimates that the excise tax will raise zero dollars in revenue. Finally, the U.S. Chamber contends that Congress had no Article I legislative authority to enact the excise tax, and that forcing pharmaceutical companies to “agree” with price determinations is government-compelled speech violating the First Amendment.

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Author: robeo123