Commentary: With New Pricing Law, the Feds Can Make Drug Firms Offers They Really Can’t

President Biden has promised that the $740 billion Inflation Reduction Act, signed into law this August, will “lower the cost of prescription drugs and health care for families” thanks to provisions that allow the Department of Health and Human Services to negotiate the price of some medications directly with pharmaceutical companies. 

Critics are decidedly less enthusiastic. They say the IRA’s new drug price provisions are more akin to government price-fixing than negotiation – an unprecedented power grab in health care. 

As of Oct. 1, the new law requires drugmakers to pay rebates to Medicare if the costs of certain drugs rise faster than annual inflation. If the government determines that the price of a drug increased 6% and the inflation rate that year was 4% – regardless of how or why the price rose – the manufacturer will be required to pay the government back the 2% difference in the price. The law does not provide an appeals process. 

And starting in 2026, the IRA permits the government to “negotiate” a “maximum fair price” for certain prescription drugs purchased by the Medicare program. Under the new law, “negotiation” means the HHS determines the price it wants to pay for a specified medicine. Drug manufacturers can counteroffer, but if HHS doesn’t budge, the pharmaceutical company has no choice but to accept that price. Otherwise, the IRS will be empowered to slap the company with a “noncompliance” excise tax of up to 1,900% of the medicine’s daily U.S. revenue until the manufacturer sells the drug at the price HHS has set or withdraws from the market. 

 “I don’t believe that’s negotiation,” said Matt Wetzel, a Washington, D.C. lawyer at Goodwin Procter who specializes in health care policy. “This is the opportunity to give one counteroffer and then a price cap is generated.” 

Cory Andrews of the Washington Legal Foundation, a free-market advocacy group in Washington, D.C., was even more blunt: “No matter how obscured by a regulatory haze, strong-arm robbery is not a ‘negotiation’ for a ‘fair’ price.” 

HHS did not respond to a request for comment on the new drug pricing provisions. Rep. Curt Schrader of Oregon, a Democrat who claimed a central role in the measure’s bipartisan passage after his early objections, also declined to comment. 

Although the new rules will only cover a relatively small number of high-priced medicines, critics say this new authority could set a far-reaching precedent for Medicare, which purchases more than 30% (roughly $130 billion per year) of all prescription drugs in the United States. While raising constitutional issues, it may also hinder the development of new drugs. 

In October, HHS produced a report to promote its new powers to compel rebates for drugs that exceed inflation, emphasizing that more than 1,200 drugs rose faster than the cost of inflation between July 2021 and July 2022, and the average price increase was 31%. 

The powerful pharmaceutical industry, whose deep-pocketed lobbyists have a reputation for very rarely suffering legislative defeats, appears to be keeping its powder dry so far. Brian Newell, a spokesman for the drug manufacturer advocacy group Pharmaceutical Research and Manufacturers of America (PhRMA), said that for now the industry is evaluating its legal options. 

If a drug manufacturer objects to the price dictated by HHS or thinks the government has unfairly calculated the inflation rebates, it has little legal recourse even if it can be demonstrated that the price the government wants them to accept is below manufacturer cost. The law also contains language prohibiting judicial or administrative review of whether the drug is eligible for negotiation or the price that is set. The IRA also imposes fines of up to $1 million a day if the company fails to provide HHS with any information it demands. And if a drug company is determined to have “knowingly” provided inaccurate information to the government, it can be fined up to $100 million. 

The only way a manufacturer can exit a negotiation is if it chooses to withdraw all its products from being purchased by Medicare and Medicaid. Pulling out would be a financially ruinous move since those programs are far and away the largest buyers of prescription drugs in America. 

Andrews called the price dictates radical and unprecedented in American history. “Apart from one or two rare wartime exceptions, due process requires that a party deprived of property must have the opportunity to be heard,” he said. “The IRA’s bar on administrative  or judicial  review is an unprecedented  deprivation of due process.” 

In addition, the law gives Health and Human Services three years’ leeway. “CMS and HHS, for purposes of the statute will issue guidance through program instructions for the first three years and not through Notice of Proposed Rulemaking,” Wetzel said. “In other words, for the first three years, CMS has sort of full latitude to implement the program as it sees fit without public input and without stakeholder input or feedback, as is typically the case when implementing regulations.” Wetzel added that CMS, the Center for Medicare and Medicaid Services, the agency within HHS responsible for administering the law, has already submitted a plan to Congress noting that implementing the law will require adding six new divisions to the agency and 95 new federal employees. 

‘Price Negotiation’ Redefined

Containing rising drug costs has long been a priority for reining in Medicare spending. The program has $103 trillion in unfunded liabilities, more than three times the national debt, according to the Congressional Research Service. 

Democrats have long sought to leverage the government’s buying power to drive down drug prices as a way to address both Medicare spending and overall health care costs without having to make structural reforms to a popular social program. According to the Kaiser Family Foundation, prescription drugs “account for 10% of national health spending and nearly 20% of health benefit costs for large employers.” 

Government negotiations over Medicare drug prices were legally forbidden until the passage of the IRA. In 2003, Congress passed the “Medicare Prescription Drug, Improvement, and Modernization Act” which created Medicare Part D (Medicare’s prescription drug benefit program). As part of that legislation, Congress included what’s become known as Medicare’s “noninterference” clause which states “the [HHS] Secretary may not interfere with the negotiations between drug manufacturers and pharmacies,” along with forbidding government intervention with other relevant entities that play a role in the drug market. According to PhRMA, the purpose of the noninterference clause was to preserve market competition within the Medicare program which helps drive prices down. 

Since then, congressional Democrats had been attempting to repeal the noninterference clause, and it’s long been clear “drug price negotiation” was being redefined to include price controls and other regulatory inducements. Most notably, in 2007 the House passed the “Medicare Prescription Drug Price Negotiation Act of 2007,” but the legislation died after Senate opposition and President George W. Bush’s threatened veto. According to The New York Times, Republicans opposed government drug price negotiations because “private insurers and their agents, known as pharmacy benefit managers, were already negotiating large discounts for Medicare beneficiaries.” 

This view was affirmed by the nonpartisan Congressional Budget Office, which concluded that allowing HHS to negotiate the price of drugs would have a “negligible effect” on federal spending. However, in 2007 the CBO told Oregon Senator Ron Wyden, a longtime champion of Medicare drug price negotiation, that coercive tactics might produce the results Democrats wanted to see. “Negotiation is likely to be effective only if it is accompanied by some source of pressure on drug manufacturers to secure price concessions,” said the CBO. “The authority to establish a formulary, set prices administratively, or take other regulatory actions against firms failing to offer price reductions could give the Secretary the ability to obtain significant discounts in negotiations with drug manufacturers.” 

Given the statutory language forbidding judicial or administrative review, the pharmaceutical industry’s options are limited if it chooses to fight. Legal experts say the Constitution – which prohibits the government from taking property without just compensation in the Fifth Amendment and from imposing “excessive fines” under the Eighth Amendment – may provide the best grounds for a challenge, especially if HHS uses its new powers aggressively.