The IRA’s Unconstitutional Drug Price Controls

Authored by Roger D. Klein via RealClearPolicy,

The Biden-Harris administration recently announced the negotiated prices for the first 10 drugs of the Inflation Reduction Act’s (IRA) drug price negotiation program (DPNP). That same day, Vice President Harris stood alongside President Biden for their first joint appearance since Biden stepped down as the Democratic presidential nominee. At the campaign event, Harris touted the Medicare drug pricing scheme as evidence of their administration’s economic success. Her friends in the media have followed suit, applauding Harris’s “well-earned victory lap.”

However, as a number of pharmaceutical companies have argued in court, the IRA’s drug price negotiations are misnamed, unconstitutional price controls. In a series of lawsuits, drug companies have collectively argued the program illegally coerces pharmaceutical firms to accept massive discounts on 60 of the most successful medications sold to Medicare and Medicaid. The administration deceptively describes the “maximum fair price” for each drug as the product of a negotiation to avoid blame for the decreases in the supply of existing and newly discovered drugs these price controls are likely to cause.  

The first 10 drugs selected for price controls include treatments for diabetes, blood clots and prevention of strokes, heart failure, leukemia, arthritis, inflammatory bowel disease, and chronic kidney disease. The Congressional Budget Office (CBO) estimated the IRA would result in a loss of 13 new drugs over 30 years. This is probably a substantial underestimate. Many pharmaceutical companies have already cut back on or cancelled development programs for new drugs, and a University of Chicago analysis predicts that as many as 79 new drugs and 188 indications would not be developed over the next 20 years This would result in 116 million years of life lost.

Manufacturers who choose not to participate in the DPNP would be excluded from providing any Part D or Part B drugs to Medicare beneficiaries. Nevertheless, aside from its fiction that the DPNP is a negotiation, the government has argued participation in the DPNP is voluntary because participation in Medicare is voluntary, an argument accepted by several circuit court judges. However, Medicare and Medicaid account for over 40 percent of pharmaceutical spending in the United States. Walking away from Medicare would be suicidal for any drug manufacturer. Further, there are program restrictions that do not permit ending participation at will. Instead, drugmakers that don’t accept Medicare dictated prices could face ruinous financial penalties – euphemistically labeled an excise tax – starting at 186 percent and rising to as high as 1900 percent of a drug’s total daily revenues from all sources, not just Medicare. Thus, pharmaceutical companies are given a Hobson’s choice. Participate under the government’s arbitrary and detrimental terms or cease to operate.

In addition to the DPNP and other provisions of the IRA such as mandated rebating of price rises in excess of inflation that are estimated to cost drug companies $288 billion over 10 years, the IRA creates serious financial risks for Part D insurance plans. Irrespective of the merits of lowering the cap on out-of-pocket costs, increased low income subsidies, and other benefits, their implementation has raised costs, creating premium price instability that will lead to an expected 21.5% increase in 2025 premiums. In response, and just weeks before the President and Vice President’s joint event, their administration announced a rescue package it is calling a “voluntary demonstration project,” aimed at achieving premium stabilization and protecting insurers.

Analogous to the DPNP, insurers have no practical alternative but to participate. As part of this program, taxpayers will fund an additional $10 billion in subsidies, masking increased costs and mitigating an already hefty 21.5% estimated increase in 2025 Part D premiums.  

To add insult to injury, most of the projected $266 billion in Medicare savings in pharmaceutical spending is being siphoned off as a downpayment on Democrats’ green new deal, rather than being applied toward lowering premiums or strengthening the Medicare program.

Millions of Americans depend on lifesaving prescription medications. These drugs are developed with enormous investments made at great financial risk. Policies that encourage competition among drugmakers will best achieve optimal pricing, maintain the supply of essential therapeutics, and encourage the development of novel medicines. The phony “negotiation” program forced on drug makers, the strain placed on Part D insurers, and other noxious provisions of the Inflation Reduction Act will do the opposite.

Roger D. Klein, M.D., J.D. is a faculty fellow at the Center for Law, Science and Innovation at the Sandra Day O’Connor School of Law. He was previously Chief Medical Officer of OmniSeq, Inc., which was acquired by LabCorp. A former advisor to HHS, FDA, CMS,  and CDC, he completed his medical training at Yale School Medicine and received his law degree from Yale Law School.