Last week the Chamber of Commerce and Merck both sued the Health and Human Services Department, or HHS, and the Centers for Medicare and Medicaid Services, or CMS, to halt the first-ever round of Medicare drug-price negotiations. A third lawsuit, by the Pharmaceutical Research and Manufacturers of America, a lobby group, will likely follow. If Big Pharma could sue Congress, it would do that, too, because its real beef is with last year’s Inflation Reduction Act, which established a procedure for Medicare to negotiate over how much it pays for the massive quantity of drugs it purchases. (You can’t sue Congress—even when challenging the constitutionality of a law enacted by Congress—because it’s protected by the doctrine of sovereign immunity, to which any exceptions must be legislated by Congress itself, and by the Constitution’s speech and debate clause.)
For those of you just tuning in, our story begins in December 2003, when President George W. Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act, which for the first time extended Medicare coverage to the prescription drugs that Medicare beneficiaries purchased from their pharmacy. Drugs administered by doctors or hospital personnel had long been covered by Medicare, but outpatient prescription drugs had not, on the grounds that they were too expensive.
Bush, who positioned himself as a “compassionate conservative,” was also mindlessly pro-business, and to accommodate Big Pharma he made sure that the bill barred Medicare from using its considerable market power to negotiate with drug companies on prices—as, for example, the Defense Department, the Veterans Administration, and Medicaid do routinely. This giveaway cost the bill support from most House Democrats, including then-Representative Rahm Emanuel, Democrat of Illinois, who pointed out that Sam’s Club negotiated volume discounts from its suppliers all the time. “Lemon socialism” is a term sometimes used to describe the government takeover of failing businesses. The Medicare drug benefit, by design, was its opposite: above-market government payments to thriving businesses. One commentator (OK, me) dubbed this lemon capitalism.
The congressional Democrats who accused Republicans of writing a blank check for Medicare drug coverage proved more right than they knew. Between 2006, the first year the drug benefit took effect, and 2021, the last year for which data are available, Medicare spending on prescription drugs more than doubled in real terms. One reason, Jeromie Ballreich, a health economist at Johns Hopkins, explained to me, was that “the types of drugs they thought they were dealing with and the types of drugs that were developed and came to market were quite different.” The years after passage of the 2003 law saw a proliferation of very expensive outpatient drugs to treat serious health conditions, such as the cancer drug Imbruvica ($17,000 for a 30-day supply) and the autoimmune disease drug Enbrel ($1,762 for a one-week supply). Other federal agencies could limit what they spent on such drugs, but Medicare could not. As a result, a 2021 Congressional Budget Office report found that the average price charged for top-selling brand-name outpatient drugs was $118 for Medicaid, $272 for the Defense Department … and $343 for Medicare.
Just about every Democratic candidate for president between 2004 and 2020 called for Medicare to negotiate drug prices. So did Republicans John McCain and Donald Trump (though Trump backed off after he became president). The idea was popular with the public; one 2021 poll by the Kaiser Family Foundation found large majorities of both Democratic and Republican voters favored the change. But it wasn’t until last year that congressional Democrats were finally able to sneak it past the drug lobby.
HHS issued a guidance in March on how it will implement the law. By September 1, it said, the agency will select the first 10 drugs on which it will negotiate government discounts. The negotiations will take place over the course of a year, and the prices will take effect in 2026. Over the next three years, the same process will begin for 50 additional drugs, most of them outpatient drugs but some of them drugs administered by doctors or hospitals. After a price is agreed on, it may not rise faster than inflation. This procedure is expected to reduce what Medicare pays for drugs by 8 or 9 percent, according to the Congressional Budget Office, and to reduce the budget deficit by $25 billion in 2031 (because the government will be spending less on Medicare drugs).
The lawsuits filed by the Chamber and Merck both argue against this process on constitutional grounds. Merck (which said in its complaint that it expects its diabetes drug Januvia, which costs more than $7,500 per year, to be targeted in the first round) mostly argues that it violates the Fifth Amendment’s “takings” clause, which forbids private property to be “taken for public use, without just compensation.” The Chamber takes more of a shotgun approach, saying it violates separation of powers, due process, the Eighth Amendment’s “excessive fines” clause, and the First Amendment’s protection of free speech. The Merck lawsuit mentions the First Amendment too; both lawsuits allege that any negotiated agreement on price will constitute, on the drug company’s side, compelled speech, because the negotiation isn’t really a negotiation at all.
The Chamber and Merck are sort of right that it’s not a negotiation—not much of one, anyway—in the same sense that a vendor who complained about negotiating prices with Sam’s Club would be right. When your market share is very large, so is your leverage over suppliers. Medicare today accounts for about one-third of retail prescription drug spending, and when combined with Medicaid, it accounts for 45 percent. The latter is relevant because if, at the end of the negotiation process—which bends over backward to treat drug companies fairly in various ways too boring to explain here—the drug company rejects Medicare’s final offer, the company, under the new law, can’t sell any of its products either to Medicare or Medicaid. In other words, if the drug company doesn’t play ball, it will lose access to nearly half the U.S. market, which is the most profitable market for pharmaceuticals on planet Earth.
“Withdrawing all of a manufacturer’s drugs from federal healthcare programs,” complains the Chamber’s lawsuit, “is not a viable option” because “Medicare and Medicaid dominate the healthcare market.” The Merck lawsuit similarly states that “no rational manufacturer could simply withdraw from half of the U.S. prescription market.” True. That’s why drug companies fought this change for 20 years, in the meantime setting prices as high as they wished. (Or, to be more precise, as high as the private health insurers to whom Medicare contracted out management of this benefit—who had nowhere near the federal government’s market leverage—would tolerate.) Now drug companies will lose that privilege. Boo freaking hoo.
“Merck doesn’t have a constitutional right to sell its drugs to the government at the price that it sets,” tweeted University of Michigan economist Nicholas Bagley last week. “That’d be nuts.” As for its First Amendment claim, Bagley tweeted, “No one’s telling Merck that it can’t criticize the government. It can tell everyone who cares to listen that it was forced to accept a raw deal in these ‘negotiations’ and that its ‘agreement’ was coerced.”
But what about National Federation of Independent Business v. Sebelius, the 2012 Supreme Court decision that, among other things, said the federal government couldn’t tell states that it had to accept Obamacare’s Medicaid expansion if it wanted to continue participating in the Medicaid program—because that was too coercive? Not relevant, according to Bagley. “First, Merck is not a state,” he tweeted. “It’s not a sovereign entity.” NFIB v. Sebelius was “about the need to protect federalism, not about private actors.” Also, Bagley explained, in that decision, the court said that “it was OK to dangle big pots of money to the states, conditional on their abiding by certain rules.” It also said, Bagley further explained, “it’s OK to change the rules of an existing program. What you can’t do is add a new program, with new rules, and then condition participation in the old program on the new rules.” But “that’s not what’s going on here,” Bagley tweeted. “This is just changing an approach to drug pricing that is novel to Medicare as of 2005. That’s it.”
What happens if a drug company rejects Medicare’s final bid on price and does not withdraw from Medicare and Medicaid? Then it gets hit with a gigantic punitive excise tax—65 percent of the drug’s U.S. sales, increasing every quarter by 10 percent until it reaches 95 percent. I’m a little puzzled why this additional inducement is thought necessary, but perhaps Congress knows some tricks Big Pharma has up its sleeve of which I’m unaware.
The drug companies’ best argument is that the procedure for withdrawing from participation in Medicare and Medicaid is, as outlined in the Inflation Reduction Act, a slow one, and that during the year or two it takes a drug company to remove itself from Medicare and Medicaid it will have to pay that escalating fine. This does seem harsh—like shooting a man while he’s cutting his own throat. Perhaps HHS can fix it with a regulation. But keep in mind that the entire scenario of a drug company quitting Medicare and Medicaid is implausible, to begin with. Drug companies don’t commit suicide.
The Chamber says all this is tantamount to price controls. “If the government can impose price controls in the pharmaceutical industry,” Neil Bradley, the Chamber’s chief policy officer, told Reuters, “why not elsewhere?” Medicare’s drug-price negotiations do not constitute price controls in my view, any more than one can say Sam’s Club imposes price controls. But let’s suppose they did. What would be so godawful about that? The federal government has a compelling interest to keep its citizens healthy without bankrupting itself. And anyway, it’s imposed price controls in the past, along with wage controls. President Franklin Roosevelt did it in 1942 (under the guidance, among others, of John Kenneth Galbraith), and President Richard Nixon did it again in 1971. It worked better the first time than the second, but in both instances, the country managed to survive.
Republican opposition to price negotiations is just one among many examples of the GOP’s firm belief in lemon capitalism. A party that professes to oppose government waste consistently favors it when private enterprise is given a large cut. That’s the story, for instance, of Republican support for for-profit colleges with high default rates on federally guaranteed student loans. It’s also why Republicans scream bloody murder whenever anybody suggests that private companies drilling on federal land should pay market price. The GOP loves big business much more than it loves market capitalism, and when the two come into conflict, it will choose big business every time. That’s what the new lawsuits against Medicare volume drug discounts are about, and it’s why they are going to fail.