Looks like we’re going to have ourselves a Legal Situation here in the biopharma industry. Last year you’ll recall (if you follow US politics) a huge bill called the Inflation Reduction Act was signed into law. This was one of those budget-reconciliation piñatas full of all kinds of stuff, including a great many sections addressing US energy policy and some important ones regarding prescription drugs. Its impact on inflation, well. . .that’s another thing entirely, and not easy at all to calculate, but the contents of laws are under no legal requirement to match their popular names. I’ve been waiting for the era when all big pieces of legislation are named things like Really Great Stuff Act or the Gosh It’s So Wonderful Act, and perhaps that era actually quietly arrived some time ago.
At any rate, the provisions that affected the drug industy were particularly those regarding Medicare pricing. In the US, Medicare purchases drugs through Part D (for prescription drugs that are provided through pharmacies to patients) and through Part B for drugs that are administered directly by physicians. The Inflation Reduction Act capped total drug spending by each patient on Medicare at $2000/year (the first time such a spending cap has been put into law). And there’s another provision that has never been in force before: from 2026 to 2029, a gradually increasing number of drugs will be put in a category that allows Medicare to negotiate their prices with the manufacturers. This had been strongly opposed by drug companies every time the topic was broached in the past, and its sudden appearance in the IRA bill seems to have come as a surprise. 10 drugs will be so negotiated in 2026, and the number will go to 60 over four years. What’s more, the law sets a “maximum fair price” that is about 25% below current market prices. For a drug to be in this negotiated category, it has to be a large-selling medication without market competition, and because of the patent system, that means a lot of them. These negotiations will in general kick in nine years after approval of new small-molecule drugs and thirteen years after approval of biologics.
Now, it’s expected that these negotiated prices will end up with pretty much the least price-lowering effect, because Medicare is going to have to buy them (after all, they’re big-selling medications). After all, what are they going to do – threaten not to purchase any Keytruda, etc.? But even that level of price reduction is going to bring on some new behaviors – for example, making the initial price of new drugs higher, to make up for the inevitable Medicare reduction. And as BioCentury reported recently, some pharma executives have publicly said that the IRA provisions will cause their companies to prioritize the largest indications for drugs and to delay getting approval for less-common ones. What happens now is often the reverse: companies start off with a less-common incidation that’s more likely to lead to an approval, then broaden out once the drug’s on the market. But with the clock that now starts ticking after approval, that makes less financial sense. What’s more, one of the pricing provisions in the bill is that negotiations will not occur for rare-disease drugs that have only one indication, which is (perversely) a strong incentive to never develop any second indications for such drugs.
With all of this in the air already, the situation has gotten still more fraught: Merck is now suing the government to try to block being forced into negotiating with Medicare. Something like this was expected to happen at some point, and now here it is. Their claim is that this is an unconstitutional “taking” of private property (without compensation) under the Fifth Amendment. I am most definitely not a constitutional law professor nor a highly paid courtroom advocate, but I don’t think that this is a ridiculous line of attack prima facie, and it will surely get a serious hearing in court. If it gets to court, that is. Merck is surely trying to affect Medicare’s own decisions about how it will implement the law (unclear as of yet). But it may be that the plain price limits written into the bill are going to be fought over no matter what. Merck also claims that their free speech rights are being violated, which might be more of a stretch, but then again, I’m not a First Amendment specialist, either.
This is going to go on for quite a while, and I have no idea how things are going to turn out. If it stays within the Judicial System, I see every chance of it ending up before the Supreme Court eventually – but how long will that take? And how many requests for injunctions to stay the whole price-reduction idea will be made while that process plays out? Who else might sue, to throw some more logs on the fire? No, this is going to be a major mess, and I hope you enjoy hearing about it, because it’s going to be a part of our lives for some time to come.
