With Merck and BMS first out of the gates, here comes the assault on the Inflation Reduction Act

The Biden administration’s reaction to a spate of recent lawsuits from Merck, Bristol-Myers Squibb (BMS) and the US Chamber of Commerce must be somewhere between ‘well, this was predictable’ and ‘wake me up when it’s over’.

For some context, the Inflation Reduction Act (IRA), which was passed in 2022, gives Medicare the right to negotiate some (not all) drug prices with manufacturers. I’ll spare you the gory details of which ‘scheduled’ drugs can be negotiated and under what conditions (or you can go back and read my September 2022 column in PME) but suffice it to say that not everyone is happy.

Lawyers from both Merck and BMS claim that the Medicare-negotiation programme is unconstitutional and that it essentially amounts to coercion to provide products at government-set prices, violating a clause in the Fifth Amendment that prohibits the government from taking private property for public use without just compensation. Exactly how ‘just compensation’ is defined ought to be interesting to witness.

Lawyers have also stated that the programme would violate First Amendment rights – namely free-speech rights – by coercing companies to sign agreements that they do not agree with.

The US Chamber of Commerce also sued the Biden administration on essentially the same grounds and, for good measure, further alleged that ‘the penalties applied to companies who don’t comply with the negotiation process amounted to excessive fines that violate the Eighth Amendment’. Not to be left out, the Pharmaceutical Research and Manufacturers of America, along with the National Infusion Center Association and the Global Colon Cancer Association, also recently sued the Biden administration, effectively on the same grounds.

According to legal scholars and experts, the plaintiffs’ case is weak. I’ll take their word for it.

Forget the constitutionality of the whole thing. Forget the 1st, 5th and 8th amendments. And the lawyers. And all the posturing. And all the filing of motions and briefs in court.

Just for a moment, let’s remind ourselves about some basic health policy and health economic principles. Namely, that the conventional laws of supply and demand are very different in a healthcare setting as compared to non-healthcare settings, owing to things like informational asymmetry, indivisibility of costs and stochasticity (uncertainty) about the timing and severity of illness. Because of these (and other) reasons, pricing in healthcare has always been opaque to the general public. And it’s not just manufacturers who are driving this opacity. It is insurance companies, hospital systems, individual physicians, lobby groups and pharmacy benefit managers, to name a few.

But wait. The constitutionality of the whole thing is the point for the plaintiffs. It’s a distraction from the opacity of pricing. In a polarised America with the Supreme Court taking centre stage on a range of issues like Roe v Wade, affirmative action and internet content (Section 230), this is brilliant. The big, bad government is forcing us to accept prices they set for our drugs or pay egregiously high taxes if we choose not to accept their fixed-price negotiation. If we don’t stand up for America, they’ll come after you next.

Actually, what these lawsuits ought to tell us is something very simple that we’ve known for decades: there is no amount of price negotiation that is acceptable. That, in fact, price increases are the only thing that matters. Hiding behind ‘unjust seizure of property without just compensation’ and ‘excessive fines’ is a smoke screen. In the US, on 1 January every year, thousands of drugs get a price increase, anywhere up to 10% vs the previous year’s list price. Many do the same on 1 July as well.

There is no explanation related to rising labour costs. Or rising costs of raw materials and inputs. Or the need for increased capital expenditure to improve manufacturing plants and invest in the latest equipment and machinery. And the average price increases certainly haven’t historically matched the rates of inflation. In fact, they’ve been higher than inflation.

That manufacturers would fight tooth and nail against the IRA is expected. It took them about a year or so to finalise their strategy and allow it to work its way through the court system. That manufacturers would vigorously defend their profits is unsurprising. That manufacturers hope to garner some public sympathy as part of a ‘government overreach’ strategy and, perhaps, ride some sort of wave of goodwill coming out of the COVID-19 pandemic is predictable.

However, no one should lose sight of the bigger picture here. If the government somehow loses this battle in court, there will be no mechanism left to check the rise of drug prices in America.