Split Third Circuit Upholds Medicare Price Negotiation Program Under Biden IRA

The U.S. Court of Appeals for the Third Circuit in a split decision today affirmed a district court ruling granting summary judgment to the U.S. government that the imposition of a Medicare Drug Price Negotiation Program via the Inflation Reduction Act (IRA) does not violate Bristol Myers Squibb (BMS) and Janssen Pharmaceuticals’ constitutional rights. Judge Thomas Hardiman dissented.

The underlying case was brought by BMS and Janssen in the U.S. District Court for the District of New Jersey. On appeal, the plaintiffs argued that the IRA: “1) effects an uncompensated taking of their property, (2) compels speech in violation of the First Amendment, and (3) imposes unconstitutional conditions on participation.”

The IRA, enacted in 2022, was designed as a way to reduce the federal budget deficit while simultaneously lowering prescription drug prices for eligible patients. While some celebrated the bill, pharmaceutical companies and IP advocates have been strongly opposed.

“The whole point of the Program is to obtain medicines for Medicare beneficiaries without the need for the government to pay fair market value,” BMS wrote in its opening brief to the Third Circuit last September. In addition to allegations that the IRA compels drug manufacturers to provide Medicare with “access” to their leading medicines at steep discounts, effectuating an unconstitutional taking in violation of the Fifth Amendment, BMS claimed that the IRA violates its First Amendment rights by forcing medicine manufacturers, through its Negotiation Program, to express the government’s political messages. By imposing monetary fines to companies that don’t comply, BMS and other drug companies have argued the IRA is using coercive tactics while ignoring the constitutional rights of the manufacturers.

The Trump Department of Justice (DOJ), in a rare demonstration of agreement with a Biden-era position, filed a brief in February that closely tracked the Biden Administration’s arguments. The brief echoed the Biden Administration’s view that “the Negotiation Program does not give rise to a physical taking because it neither physically takes plaintiff’s drugs nor mandates their sale. The government is instead offering to purchase drugs on terms that plaintiff is under no legal obligation to accept.”

No Physical Taking

The Third Circuit today agreed with the DOJ, finding that the companies were “incorrect” that the government’s Program amounts to a physical taking “because it permits the government to physically appropriate their drugs without paying just compensation.” Since the Program is based on a negotiation process, it is voluntary, said the majority. “If the Companies dislike the prices the government is willing to pay, they are free to stop doing business with the government.”

The pharmaceutical industry has contested this view in previous cases and statements. The U.S. Chamber of Commerce, for instance, sued the Department of Health and Human Services (HHS) in June of 2023, raising several constitutional and administrative law challenges to the implementation of the IRA’s drug pricing controls. The suit alleged that the IRA essentially disguises a mandatory price control regime as a negotiation process that has no voluntary nature due to statutory difficulties for drug manufacturers attempting to leave the Medicare program, as well as a tax penalty on non-cooperating drug companies up to 1900% of daily drug sales. Both the Chamber’s motion for preliminary injunction and the government’s motion to dismiss were denied in September 2023.

But the Third Circuit majority said today that the opt-out option built into the program “defeats the Companies’ argument that they were forced to sign contracts under the Program” and echoed other circuit courts in noting that “economic hardship is not equivalent to legal compulsion for purposes of takings analysis.”

The industry has pointed out, however, that opting out is not realistic for other reasons. For instance, Corey Salsberg, Vice President and Global Head of IP Affairs for Novartis, said at IPWatchdog’s Life Sciences Masters Program in October 2023 that pulling all of a company’s products out of Medicare would mean taking drugs away from 157 million Americans, “which of course is totally unethical and infeasible.”

First Amendment Argument Fails, Too

As to the companies’ other arguments, the Third Circuit found that the contention that Center for Medicare and Medicaid’s (CMS) form Agreement and Addendum “compel speech in violation of the First Amendment” failed because: “(1) The Program permissibly regulates conduct, with only an incidental effect on speech, and (2) participation in the Program is voluntary, so the Companies are not compelled to speak at all.”

And as to the argument that the Program “imposes an unconstitutional condition on a voluntary government benefit,” the majority said that “any speech compulsion does not reach outside of the contours of the Program,” and thus is permissible.

The Dissent

Judge Hardiman dissented, explaining that, in his view, “[t]he Companies have persuasively argued that their constitutional rights were violated and that they are entitled to invalidation of the Program as applied to them.” Because the Program requires that the companies either participate or pay “unavoidable, enterprise-crippling tax liabilities,” it constitutes a taking of their property in violation of the Fifth Amendment and Hardiman would reverse and remand.

Patient Advocates Celebrate

Patients for Affordable Drugs (P4AD), which filed an amicus brief in the case, issued a statement today noting the Third Circuit decision “marks the 13th ruling in favor of Medicare negotiation — a program that is set to deliver lower drug prices to 9 million people on Medicare in 2026 and is supported by over 80% of Americans.”

In August, other challengers were dealt back-to-back blows in their fight against the Program.

In one decision, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s judgment that dismissed all of Boehringer Ingelheim Pharmaceuticals, Inc.’s constitutional claims. In another case, the U.S. Chamber of Commerce and several state chambers of commerce lost their appeal to the U.S. Court of Appeals for the Sixth Circuit seeking to overturn a district court ruling that dismissed the case for improper venue.

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