A Price to Life: Challenges Faced by the Inflation Reduction Act and Their Impacts on Access to Life-Saving Medications
Written by Vinay Vangala
Edited by Alexandra Harbourt, Will Mayer, and Austin McNichols
8 percent of adult Americans do not take their medication as prescribed because of financial concerns. This adds up to millions of Americans whose wallet must come before their health. A Department of Health and Human Services report focusing on drug prices found that, from July 2021 to July 2022, 1,216 tracked prescription medications rose in price by more than triple the rate of inflation, with some drugs increasing by 500 percent in price. Further, drug companies including Merck have planned future price increases as soon as 2023. Increases are commonly attributed to rising manufacturing costs and supply chain issues. Prior to 2023, the most successful action taken against exorbitant drug prices was a 2017 Maryland anti-price gouging law. This law, however, was swiftly repealed in Association for Accessible Medicines v. Frosh (2018). The Fourth Circuit ruled that the law violates the Dormant Commerce Clause, interpreting Maryland’s law setting drug prices as a state regulation of transactions that occurred outside of state borders. The challenges stemming from the legality of this law demonstrated a need for drug price ceilings to be set at a federal level. Four years later, as a part of the Inflation Reduction Act of 2022, the federal government introduced Medicare drug price negotiations.
The Biden Administration passed the Inflation Reduction Act (IRA) in 2022, as a large bill designed to tackle inflation on multiple fronts, placing increased funding into clean energy, mitigation of climate change, and importantly, the reduction of prescription drug prices. Specifically, the IRA authorizes Medicare to negotiate prescription drug prices for drugs without biosimilar competitors—in other words, those with a monopoly on their market. There are many more rules to the negotiation process, but the key point is that the IRA levies an excise tax against companies that fail to comply with the negotiation process, and that companies can choose to opt-out of Medicare and Medicaid entirely if they opt not to pay the excise tax. The negotiation process is designed for the federal government to work with the drug companies to reach agreement on a fair price for both the consumer and producer, with the excise tax acting as a punishment to help drug companies comply with the process. The negotiation process is unique, as it creates open communication with the pharmaceutical industry, with the punishment of an excise tax helping drive the conversation to a fair solution for consumers. Unfortunately, the implementation of negotiation is slow, with only 10 drugs slated to have their price negotiated to be lowered in 2026, and only 10 to 15 more in 2028.
While past administrations—famously, President Franklin Delano Roosevelt and his New Deal—have taken major action to return the market to normalcy in times of economic crisis, the federal government has seldom limited the freedom of drug manufacturers to set prices. As the IRA’s almost forced compliance with the negotiation process is unprecedented, groups have filed lawsuits hoping to eliminate the IRA’s drug price negotiation requirements. With these suits still pending, the arguments within them provide insight into the constitutionality of the IRA.
Merck, a large pharmaceutical company, filed one of the first major lawsuits against the Inflation Reduction Act. Merck is set to have its diabetes drug, Januvia, subject to drug price negotiation. Merck centers their argument around violations of the “takings” clause of the Fifth Amendment, which states that private property cannot be taken without just compensation. Specifically, they argue that patented pharmaceuticals are doubly protected because they are both private property and patent-protected property. While the IRA does not take the patent from them, the result of the negotiation process is expected to result in a 25 to 60 percent discount of the fair market value, which Merck considers “extortion,” and “taking” through reduction of revenue, thus allegedly violating the requirement of just compensation.
Merck’s argument draws from Horne v. Department of Agriculture (2015), in which the Horne family argued that the California Marketing Order requiring them to set aside some of their raisin production each year to stabilize the crop price violated the Fifth Amendment’s “takings” clause. The Supreme Court ruled in favor of Horne, setting a precedent by clarifying that both real and personal property are equally protected under the Fifth Amendment. While Merck’s argument holds in being able to prove that their patents constitute property rights, they fail to prove that there is a lack of “just compensation” after the drug price negotiation process.
With regards to “just compensation,” Merck argues that the discounted drugs are not being sold at “fair market value,” as is stated in the Inflation Reduction Act. The difficulty in proving this assertion is that Merck themselves are asserting the fair market value. As a contingent to being a negotiated drug under the IRA, no biosimilar drug may exist, meaning that the chosen drugs are already facing no competition and thus have no external constraints to Merck’s setting the price at a “fair value.” The drugs being chosen for negotiation have monopolized the market, giving drugmakers free reign to hike prices given a a lack of competition for sales. In fact, the specific Merck drug being targeted, Januvia, had its price increased by 93 percent from 2010 to 2015, possibly a symptom of these monopolistic conditions. With no competition, a genuine “market” is not defined, making the concept of a true “market value” dubious in describing this monopoly. Without an alternative, users are simply forced to accept the new price or skip their medication entirely.
Merck argues that these price increases are necessary to continue investment into new drugs, making the price hikes a function of research and development (R&D) costs. However, as a 2022 study of major drug manufacturers including Merck found that, from 2009 to2018, there was no correlation between increased R&D costs and increased drug prices. While this argument has not yet been presented in court, without a proper definition of what Merck considers “fair market value,” they are unable to prove the required element of “just compensation.” As stated earlier, Merck themselves are arguing that meeting the requirement of “fair market value” in pricing is needed for them to receive “just compensation” after the drug price negotiation process. Lacking concrete figures in their lawsuit to support their claim that revenue increases are required to match the R&D costs, Merck appears unable to prove that the reduced revenues would not meet the requirements for “just compensation” under their business structure.
Merck’s overarching qualm is that they are essentially forced into the negotiation process, with any fair price agreed upon being under duress of excise tax. However, as previously stated, companies are left free to opt out of Medicare and Medicaid entirely, leaving them from being obligated to pay said excise tax. Therefore, lacking specific figures or a definition of what is truly “just” for their business needs, they seem to fail to meet the standard of evidence needed to prove that the IRA is unconstitutional under their claim that the drug price negotiation process constitutes a “taking.”
Along with Merck, the Chamber of Commerce filed a lawsuit alleging the unconstitutionality of Medicare drug price negotiation, implicating violations of the First and Eighth Amendments.
The lawsuit alleged an Eigth Amendment violation concerning “excessive fines,” which they draw from Austin v. United States (1993), which identified “grossly disproportionate monetary exactions that are designed, at least in part, to serve a punitive purpose” as unconstitutional. In the case of the Inflation Reduction Act, this exaction would be the excise tax that the drug manufacturer is required to pay if non-compliant in negotiating. The Chamber of Commerce argues that the compulsory nature of the excise tax makes it a penalty, stating that a fine is unconstitutional under the Eighth Amendment “when the amount is grossly disproportionate to the gravity of the conduct it is trying to punish.” They state that this amount is up to 1,900 percent of the original price, based on the proposed excise tax calculations.
The difficulty in maintaining their argument is twofold. Firstly, rather than accepting the tax, companies who choose not to negotiate in the process have the option to opt-out of Medicare and Medicaid entirely, meaning they are not compelled to work through the government negotiation process if they prefer otherwise. Secondly, the Chamber of Commerce argues the tax is designed to enforce punishment for non-compliance with the negotiation process and that the tax is too severe. However, the consequences of non-compliance with the negotiation process must also be considered in determining if the penalty meets the punishment. Non-compliance continues a lacking commitment to changing the reality in which 34 million Americans know someone who died after being unable to afford medical treatment. With each American life estimated to be worth $7.5 million by FEMA, there is reason to consider an excise tax just, as punishment for lives lost due to exorbitant drug prices.
The Chamber of Commerce fails to prove that the IRA violates the First Amendment, by failing to consider the government’s interest in protecting life. The Chamber of Commerce begins its argument by drawing from Wooley v. Maynard (1977) in stating that one has the “right to avoid conveying a message that one does not believe.” The Chamber of Commerce goes on to state that the government may not impose its viewpoints upon businesses and that forcing any business to agree to a reduction in price under the threat of taxation is an imposition of a government viewpoint. They center their argument on their quoting of National Institute of Family & Life Advocates. (NIFLA) v. Becerra (2018), quoting Reed v. Town of Gilbert (2015). This quote creates the avenue for a rebuttal of their argument. They state that laws that allow the government to infringe upon free speech are unconstitutional unless “narrowly tailored to serve government interests.” The Chamber of Commerce argues that the law is not tailored in any way to a government interest in regulating prices. Again, this can paralleled by the Eighth Amendment argument, wherein the government is attempting to protect the narrow interest of life, due to the number of lives being harmed by prescription drug prices. The government has an interest in protecting the unalienable right to life; as shown, high drug prices force patients to make potentially life-altering sacrifices. Negotiating the prices down is a logical, narrowly tailored way to protect life. The Chamber of Commerce’s arguments fail to recognize this perspective, rendering the action constitutional under the First Amendment.
The outcome of the two suits discussed remains pending. As with any proposed limit to the free market, pushback from those who profit and those who regulate that profit is an expected and natural progression. Analysis demonstrates that there are flaws in the arguments presented; however, the constitutionality of the Inflation Reduction Act is still to be determined by a court of law. Nevertheless, without decisively illustrating that unfettered profit is needed to sustain research and that life is not a protected interest, these lawsuits appear to lack adequate justification to allow drugmakers to continue monopolizing their markets.
