First Drugs Selected for Price Negotiations Under The Inflation Reduction Act To Be Announced Next Week: A Recap of What That Means – The Drug Price Negotiation Program and Pending Legal Challenges

The Inflation Reduction Act’s Medicare Drug Price Negotiation Program will kick off next week.  The statute sets a deadline of September 1, 2023 for the Secretary of Health and Human Services (HHS) to publish a list of the 10 drugs that will be subject to “negotiations” with the government to determine the “maximum fair price” for the drug under Medicare.  There are reports that the White House may announce the list of selected drugs even before that deadline, on Tuesday, August 29th.

In anticipation of this announcement, below is a recap of the IRA’s Drug Price Negotiation Program and pending legal challenges to various aspects of the program.  For those interested in more detail about the IRA, please visit our Goodwin IRA webpage, where you can view and download material from our previous webinars covering additional detail and background on the IRA, including guidance from the Centers for Medicare & Medicaid Services (CMS) on implementation of the Program, presented by Goodwin Life Sciences Regulatory & Compliance partner Matt Wetzel.  We will also be monitoring pending legal challenges to the IRA and tracking updates on the IRA Litigation Tracker, which is also available on our IRA webpage.

The IRA’s Drug Price Negotiation Program (the “Program”)

The Inflation Reduction Act (IRA), which was signed into law just over a year ago, enacted significant changes in the way the government intends to treat certain prescription drugs under the Medicare program.  Before the IRA, the government could not set prices for any drugs covered by Medicare.  Congress left Medicare drug pricing to the drug manufacturers, pharmacies, and insurance plan sponsors to determine, and expressly prohibited the government from “interfering” in those private price negotiations under the so-called “Non-Interference Clause” of the Medicare Modernization Act of 2003.

With the IRA, Congress changed the pricing model for certain “high-priced” Medicare-covered drugs without generic or biosimilar competition.  Specifically, Congress directed HHS to establish the Drug Price Negotiation Program, whereby CMS selects top-spend drugs under Medicare for “price negotiations” to determine a “Maximum Fair Price” for the drugs.  In effect, the Maximum Fair Price (MFP) must be set at no more than 40-75% (depending on how long the product has been on the market without generic or biosimilar competition) of what the drug’s average manufacturer price was in the year 2021.

For the first year of the Program, the statute requires CMS to identify 10 selected drugs on September 1, 2023.  As noted above, there are reports that the identification may take place even earlier, on August 29, 2023.  Negotiations will take place over the course of the following year, ending on August 1, 2024.  The MFP will then be published on September 1, 2024, and will take effect on January 1, 2026.

The process for the Drug Price Negotiation Program is as follows:

  1. Drug Selection. The IRA targets high-expenditure, “single-source” drugs for inclusion in the Drug Price Negotiation Program.

Drugs are considered to be “qualifying single-source drugs” if they have been without generic or biosimilar competition for a certain number of years.  Small-molecule drugs are eligible for inclusion in the Program if, by the date the drug is selected for the negotiation program, at least 7 years will have elapsed since the drug’s initial approval and there is no approved and marketed generic product listing the drug as the reference product.  Biologic drugs are eligible for inclusion in the Program if, by the time the drug is selected for the negotiation program, at least 11 years will have elapsed since the date of its initial licensure, and there is no licensed and marketed biosimilar product that lists it as the reference product.  (Note that authorized generics are treated as the same “qualifying single-source drug” under the statute and will not exempt otherwise eligible drugs from inclusion in the Program.)

Drugs are considered to be high-expenditure drugs eligible for inclusion in the Program if they are among the 50 single-source drugs with the highest total expenditures under Medicare Part D (or alternatively under Part B, for later years of the Program).

a. Exceptions

There are several exceptions to these general eligibility criteria.  For example, a drug that has been without generic or biosimilar competition for the specified number of years will nonetheless be excluded from the definition of “qualifying single-source drugs” if:

  • It is an orphan drug that has received only one orphan designation and is approved for only one indication, and that sole indication is a rare disease or condition;
  • It is a “low spend Medicare drug” (i.e. total expenditures for the drug under Medicare Parts B and D were less than $200m from June 2022-June 2023, adjusted for inflation in later years of the Program); or
  • It is “a biological product that is derived from human whole blood or plasma,” which CMS has indicated may include some cell or gene therapies; or
  • It is a “small biotech drug,” the sales of which account for a significant percentage of total Medicare expenditures for all of the manufacturer’s drugs, but a small percentage (1%) of the Medicare program’s total expenditures.

b. Biosimilar Delay Provision

A notable exception to the general selection process that is particularly relevant to the biologics and biosimilars industry is the “Biosimilar delay” provision.  The IRA includes a “special rule to delay selection and negotiation” of biologic drugs that should soon face biosimilar competition.  Under this rule, a biologic drug that would be selected for the Program may be left off the list if a biosimilar manufacturer submits a request to delay the drug’s inclusion in the Program.  The request may be granted if the biosimilar manufacturer shows a “high likelihood” that the biosimilar will be licensed and marketed within 2 years of when the reference-product biologic would otherwise be announced as a “selected drug.”

To qualify for the requested delay, the biosimilar manufacturer must show that the aBLA has been accepted for FDA review or has already been approved.

The biosimilar manufacturer must also include information sufficient to show by “clear and convincing evidence” that the biosimilar will be marketed within 2 years.  CMS has stated in guidance that this information must demonstrate both

“(1) that patents related to the Reference Drug are unlikely to prevent the Biosimilar from being marketed and

(2) that the Biosimilar Manufacturer will be operationally ready to market the Biosimilar.”

CMS has further clarified that a biosimilar manufacturer may satisfy “the patent-related component of the high likelihood determination” if it submits information showing any of the following:

  • “There are no unexpired patents relating to the reference product included in the Reference Drug that are applicable to the Biosimilar.” CMS has stated that “if a Biosimilar Manufacturer has carved out a patent-protected indication or method of use from the Biosimilar’s labeling, then such patents would not be considered to be ‘applicable to the Biosimilar.’”
  • “[O]ne or more court decisions establish the invalidity, unenforceability, or non-infringement of any potentially applicable unexpired patent relating to the reference product included in the Reference Drug that the patent holder asserted was applicable to the Biosimilar; or
  • “[T]he Biosimilar Manufacturer has a signed legal agreement with the Reference Manufacturer that permits the Biosimilar Manufacturer to market the Biosimilar before [the selected-drug publication date], without imposing improper constraints on the Biosimilar Manufacturer.”

Revised Guidance at 24.

Biosimilar Delay requests for the first year of the Program were due to CMS in May 2023.  CMS’s publication of selected drugs will reflect the results of CMS’s determinations on any submitted requests.

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The Drug Selection process takes place every year.  For the first year, CMS will select 10 drugs.  The MFPs for this first round of drugs will take effect starting January 1, 2026.  For the following two years, CMS will select 15 additional products each year.  Thereafter, CMS will select 20 additional products each year.  (Note that the specific deadlines for each step of the Program are adjusted for the first two years of the Program.  Beginning in 2025, CMS will publish its selected drugs on February 1.)

Drugs selected for inclusion in the Program will remain a “selected drug” that must be made available at the MFP until a generic or a biosimilar product is both approved and marketed.

Manufacturers cannot challenge the CMS’s selection of drugs: the IRA provides that “[t]here shall be no administrative or judicial review” of, among other things, the selection of drugs or the final determination of the “maximum fair price.”

  1. Negotiations.

Once a drug has been selected for the Program, the manufacturer has approximately one month to enter an agreement with CMS to negotiate a Maximum Fair Price and submit certain data for CMS.

Four months after the manufacturer submits its information to CMS, CMS will respond with an initial proposal for the Maximum Fair Price.  The manufacturer then has 30 days to accept the proposal or propose a “counteroffer.”  CMS will then respond to the counteroffer and provide a final MFP.  Negotiations for the first year of the Program must end by August 1, 2024.

The final MFP will be published on September 1, 2024 for the first year of the program.  As noted above, the IRA prohibits “administrative or judicial review” of the agency’s final determination of the “maximum fair price.”

The manufacturer must then “provide access” to the drug to Medicare beneficiaries at a price no higher than the MFP (beginning on January 1, 2026 for the first year of the program).

a. Non-Participation and Non-Compliance

Manufacturers whose drugs are selected for the Program may decline to participate in the Program only if they withdraw all of their products from the federal health care programs altogether.

Manufacturers who continue to participate in federal health care programs (i.e. Medicare Part B or Part D – including the Coverage Gap Discount Program, Medicaid, and the 340B Program) for any drug face stiff monetary penalties if they do not comply with the IRA’s negotiation process or with the MFP determined through that process.

  • If a manufacturer (a) does not enter an agreement to negotiate with CMS within one month of being publicly selected for the Program, or (b) does not submit the required data to CMS, or (c) does not agree to the ultimate MFP determined by CMS, it faces an excise tax on each sale of the drug made during the period of non-compliance.  The excise tax begins at 185% of the drug’s sale price and escalates to 1900% of the drug’s sale price – per day – within 9 months.
  • If a manufacturer enters an agreement to negotiate with CMS and then violates that agreement, it is subject to a civil monetary penalty of $1 million per day.
  • If a manufacturer does not “provide access” to the drug at or below the MFP to eligible individuals, it will be subject to a civil monetary penalty equal to 10 times the difference between the sale price and the MFP for each unit sold above the MFP.

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The IRA’s “negotiation process” and associated penalties for non-compliance are the subject of numerous legal challenges, as summarized below.

  1. Pending Litigation

There are currently eight pending cases challenging the IRA’s Drug Price Negotiation Program.  Five of these cases are brought by manufacturers who expect to have drugs selected for inclusion in the first round of the Program:

  • Merck & Co., Inc. (JANUVIA®) – Merck & Co., Inc. v. Becerra et al. (D.D.C., Case No. 1:23-cv-1615)
  • Bristol Myers Squibb Co. (ELIQUIS®) – (D.N.J., Case No. 3:23-cv-3335)
  • Astellas Pharma US., Inc., (XTANDI® and also potentially MYRBETRIQ®) (N.D. Ill., Case No. 1:23-cv-4578),
  • Janssen Pharmaceuticals, Inc. (XARELTO®) (D.N.J., Case No. 3:23-cv-3818), and
  • Boehringer Ingelheim Pharmaceuticals, Inc. (JARDIANCE®) (D. Conn., Case No. 3:23-cv-1103),
  • AstraZeneca Pharmaceuticals LP (FARXIGA®, LYNPARZA®, CALQUENCE®, SOLIRIS®) (D. Del., Case No. 1:23-cv-00931).

The two remaining cases are brought by the U.S. Chamber of Commerce (and affiliated organizations) and PhRMA (as part of a consortium of stakeholders):

  • Dayton Area Chamber Of Commerce et al. v. Becerra et al. (S.D. Ohio, Case No. 3:23-cv-156) names four Chambers of Commerce as plaintiffs: the Dayton Area Chamber of Commerce, the Ohio Chamber of Commerce, the Michigan Chamber of Commerce, and the U.S. Chamber of Commerce.
  • National Infusion Center Assoc. et al. v. Becerra et al. (W.D. Tex. Case No. 1:23-cv-707) names three plaintiffs: the National Infusion Center Association (NICA), the Global Colon Cancer Association (GCAA), and the Pharmaceutical Research and Manufacturers of America (PhRMA).

The Plaintiffs across these cases collectively raise eight types of claims:

  1. First Amendment – Compelled Speech. In nearly every case, the plaintiffs claim that by effectively forcing manufacturers to agree to a process called a “negotiation” that results in what will be described publicly as a “maximum fair price,” the IRA compels their speech in violation of the First Amendment.
  2. Fifth Amendment – Uncompensated Takings. Five of the six individual drug manufacturer plaintiffs allege that the IRA violates the Fifth Amendment by requiring drug makers to sell their private property (patented drug products) at significant price discounts under threat of coercive penalties, which amounts to a government “taking” without “just compensation.”
  3. Fifth Amendment – Due Process. In several cases, the plaintiffs allege that the IRA also violates the Due Process Clause of the Fifth Amendment by directing HHS to set Medicare prices without adequate procedural safeguards (such as administrative or judicial review).  The plaintiffs in the Dayton case are seeking to preliminarily enjoin implementation of the Drug Price Negotiation Program on this ground.  The government has filed its opposition to that motion, and the AARP has filed an amicus brief in support of the government’s position.  The plaintiffs’ reply in support of their motion is due August 25.
  4. Eighth Amendment – Excessive Fines. In three cases, the plaintiffs claim that the IRA’s excise tax provision acts as a penalty rather than a true “tax” and punishes manufacturers that do not agree to the negotiation process or to the ultimate MFP.  They claim that the penalty is grossly disproportionate to the conduct that it punishes, and is therefore unconstitutional under the Eighth Amendment.
  5. Nondelegation / Separation of Powers. Several plaintiffs allege that the IRA unconstitutionally transfers legislative power to CMS, an executive administrative agency, in violation of the principles of nondelegation and separation of powers.
  6. No Legislative Authority. The plaintiffs in the Dayton case allege that the IRA’s “excise tax” is unauthorized by any enumerated power of Congress, and is therefore unconstitutional.
  7. Unconstitutional Condition on Medicare and Medicaid Participation. The two cases filed most recently (Janssen and Boehringer) include claims that the IRA unconstitutionally conditions the manufacturer’s ability to participate in Medicare and Medicaid on the “relinquishment” of their constitutional rights.
  8. Violation of the APA and Medicare Statute. Boehringer Ingelheim’s Complaint alleges that CMS’s final guidance on how it will implement the Program “is a legislative rule that requires and comment under the APA and Medicare statute because it imposes legally binding obligations that are enforced through the imposition of ‘excise tax’ penalties and civil monetary penalties.” BI claims that because CMS issued its final guidance with sections that were not subject to a comment solicitation period, its implementation of the Program will violate the APA and Medicare notice-and-comment requirements and should therefore be enjoined.  AstraZeneca also alleges violations of the APA, challenging CMS’s definition of a “Qualifying Single Source Drug” and “bona fide marketing” standard.

The plaintiffs in four cases have filed Motions for Summary Judgment.  Currently, the earliest scheduled date for briefing to be completed on motions for summary judgment (and any cross-motions for summary judgment by the government) is in the PhRMA case, which is scheduled to complete briefing by November 17, 2023.

The plaintiffs in the Chamber of Commerce matter filed a motion for preliminary injunction on July 12.  Briefing on the motion is scheduled to close on August 25.  The government filed a motion to dismiss the case on August 11.  Briefing on the government’s motion is scheduled to close on September 8th.

So far, two groups have submitted or proposed amicus briefs across the seven litigations.  AARP filed an amicus brief in support of the government in opposition to the plaintiffs’ motion for a preliminary injunction in the Chamber of Commerce case, and the Biosimilars Forum has filed an amicus brief in support of the plaintiffs’ motion for summary judgment in the PhRMA case.

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We will post updates on the pending cases and other IRA developments that may be of interest to our readers here on the Big Molecule Watch and on our IRA webpage.