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Merck Sues HHS, Claims Drug Price Negotiation Program Violates First and Fifth Amendment
Pharma has a "choice": Negotiate with HHS or pay $10 million "tax" per day.
Today, Merck challenged the constitutionality of the Drug Price Negotiation Program for Medicare, under the Inflation Reduction Act. Generally, the word "negotiation" suggests a voluntary transaction between two parties. But negotiating with the government is seldom voluntary. You can't just walk away. The New York Times describes the process this way:
Experts noted that the negotiation process gives drug makers leeway to reject Medicare's final offer and walk away without a deal if they are not happy, subject to a tax. [Update: The Times updated the story to include the following sentence] But Merck's lawsuit said that for one of the company's drugs, the tax for refusing an offer could amount to tens of millions of dollars on the first day and rise to hundreds of millions daily after a few months.
And how much is that "tax"? The amount starts at 186% of the drug's daily revenue, and increases to 1900% of the drug's daily revenue. Merck claims that it would have to pay tens of millions of dollars on the first day after it refuses to negotiate, and that amount could escalate to hundreds of millions per day after a few months. Is this a tax? Or a penalty? For those keeping track at home, Congress projected that the exaction, whatever it is, would raise no revenue, since non-compliance would bankrupt any company.
Sounds familiar? This framework reminds me of the Affordable Care Act's Medicaid Expansion. The Obama Administration gave the states a choice: expand Medicaid or risk losing their entire Medicaid budget. Ultimately, the Court found this spending program was unconstitutionally coercive. Chief Justice Roberts recognized that the states did not actually have a meaningful choice of whether to expand Medicaid. Roberts explained in his controlling opinion:
More importantly, the size of the new financial burden imposed on a State is irrelevant in analyzing whether the State has been coerced into accepting that burden. "Your money or your life" is a coercive proposition, whether you have a single dollar in your pocket or $500.
Of course, Merck is not a state, and the Inflation Reduction Act does not violate the Tenth Amendment. But there are other constitutional provisions at play.
First, Merck raises a claim under the Takings Clause of the Fifth Amendment. Here, the pharmaceutical products are "private property" under Horne v. USDA (2015). Moreover, the drugs are patented, which creates another species of property rights. Here is the crux of the argument:
Under the IRA, the Government will take Merck's patented products by forcing Merck to provide third parties with "access" to those products at steeply discounted prices. That compelled transfer of title effects a classic, per se taking. See, e.g., Horne, 576 U.S. at 362; Cedar Point Nursery v. Hassid, 141 S. Ct. 2063, 2072 (2021) (taking occurs whether the Government takes property "for itself or someone else"). This Program deprives Merck of the "rights 'to possess, use and dispose of'" its property. Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 435 (1982). Just as the statute in Horne effected a classic per se taking by requiring raisin farmers to turn over a portion of their crop to the Federal Government, see 576 U.S. at 361, the IRA's forced-sale regime does the same by compelling drug manufacturers to surrender their patented drugs to third parties for the Government's benefit.
Horne and Cedar Point provided robust protection of property rights. Indeed, Cedar Point–in my view, at least–quietly rewrote decades of Takings Clause precedent. The IRA program is somewhat different from Horne, in that the government is not physically taking the pills from Merck's factory–like the trucks that showed up to collect the Horne's raisins. Rather, the federal government is effectively forcing Merck to "negotiate" with Medicare, and then to sell the drugs at that "negotiated" rate. And all of this is done without providing any just compensation. Again, I put scare quotes around "negotiate" because the tax/penalty is so ruinous that there is no actual ground for arms-length bargaining. Your money, or your company's life.
Congress could, assuming there is a "public use," simply seize Merck and the drugs it produces pursuant to the Takings Clause, by paying just compensation. Remember, Congress could have seized the Youngstown Sheet & Tube Company, and required it to manufacture steel for the war efforts; the President could not act unilaterally. But taking over Merck, a la Venezuela, would have been politically unpalatable. Congress could have also dictated the prices at which the drugs were sold. But again, such a move would have been a political non-starter. Instead, the program was sold under the cheerful banner of "negotiation." Sort of like when the exaction that enforced the ACA was labelled a "penalty" rather than a "tax." Who wants to pay new taxes? But the Inflation Reduction Act's shortcut runs directly into the Takings Clause.
Merck also argues that they are required to "agree" that HHS's prices are "fair." Merck asserts that they are compelled to communicate "state propaganda," and thereby deceive the public.
In short, when the Government seeks to influence the public, it must do so as a genuine participant in the marketplace of ideas. It cannot seize additional megaphones by commandeering the voices of others. The IRA's dystopian parody of "negotiation" violates those principles. First, by forcing manufacturers to "agree" with HHS on a "maximum fair price"—as opposed to just forcing manufacturers to sell at that price—the Program compels those businesses to parrot an ideological message inimical to their own views.
In many regards, this case reminds me of the original challenge to the Affordable Care At in 2010. The case is brought by Yaakov Roth of Jones Day, who was one of the lawyers involved with NFIB v. Sebelius. Indeed, we once again have something of a synergy between big business and conservative constitutional jurisprudence (the Takings Clause and compelled speech doctrine). More and more of late, there is a greater disconnect between these pillars, but at least here, all the stars seems to line up.
Stay tuned.
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The law bans selling any drug unless it is sold to the government on government terms. In the case of patented drugs where Merck has a monopoly the company can take the government down with it. Merck technicians misplace a piece of paper, or an electronic file. Now the drug production process no longer complies with FDA GMP. Merck is required to stop selling the product. There is no revenue to tax. The government can not obtain the drug at any price.
How does this “take down” the government in any meaningful sense?
I mean, the government loses a minute bit of its revenue, the company a large portion of its own revenue. To be sure, the company, if it is willing to suffer greatly, can make the government suffer a tiny bit.
Then the government renegotiates its other drug prices, drives the company into bankruptcy, and other firms buy the patents.
the government renegotiates its other drug prices, drives the company into bankruptcy, and other firms buy the patents.
All this takes a little longer than a week or two.
Besides, the takedown doesn’t have to be financial. Imagine the political uproar if a popular drug were not available through Medicare, Medicaid, the VA.
You’d just blame it on the drug company.
John, that strikes me as something that would result in a felony indictment under even a fair DoJ, which we clearly don’t have now.
OTOH, you are right — and when you look at how badly the Feds freaked over Jan 6th, imagine irate people descending on DC because they couldn’t get specific drugs. That would be way uglier.
And Merck threatening to move to Switzerland would take down Team Bite Me.
Or Merck can ignore the accidental “misplacing” and just say they aren’t selling the drug then.
While I am no fan of big pharma, this is interesting….
The first thing that comes to immediate mind would be to threaten to relocate to Switzerland, negotiate a deal to do its manufacturing in the (still economically challenged) former East Germany and take all of its 69,000 employees with it. That would hit the already-struggling New York Metro area *hard* and I doubt the Swiss would make an issue of citizenship for any of these high-wealth high-wage executives as they will give immediate Swiss citizenship to anyone bringing a lot of money into the country.
The second thing is to sell the US patents to a non-US entity in a country that has a patent-protection treaty with the US. Then they truly have to negotiate or the drugs simply aren’t available in the US.
Could Merck say “bleep you — we just won’t make these drugs anymore” in a game of chicken with the feds? Like the raisin farmers, what if they’d just doused the whole bunch with kerosene and then told the Feds “take them if you really want them.”
Could Merck require a truly prohibitive insurance protection from the third party manufacturer on the grounds of potential damage to Merck’s property interest if the 3rd party screws up and kills people?
I’m reminded of the now-defunct Bangor & Aroostook RR trying to do that for private crossings until they realized they’d much rather have people crossing where they wanted to than just randomly running over the track with their 4x4s.
And what’s to prevent Merck from sending out a memo saying “while we have no specific reason to believe that the copied drugs made by the 3rd party vendor are unsafe, we recommend taking the Merck version and will provide it free of charge to all Merck employees.
That would get all the tin hat folks going.
PS: This is so sleazy that you sorta wonder if it would be possible for both Merck and the FEDs to BOTH lose….
Fascism, straight up.
https://www.youtube.com/watch?reload=9&v=dTRKCXC0JFg
“First they came for the pharmaceutical corporation super-profits extracted from bilking taxpayers, and I said nothing, for I was not pharmaceutical shareholder . . .”
Yup, “First they came for people I didn’t give a shit about” is about it.
Please try to get a grip on reality. If you seriously believe that a moderate, milquetoast drug price negotiation program (of the sort that has long been advocated by many Democrats and Republicans, by the way) is actually “fascism, straight up”, you’re simply too hysterical to engage with.
And I think we ultimately both know who the “first they came” quote is about. It begins:
“First they came for the Communists
And I did not speak out
Because I was not a Communist
Then they came for the Socialists
And I did not speak out
Because I was not a Socialist
Then they came for the trade unionists
And I did not speak out
Because I was not a trade unionist . . .”
Add in immigrants, trans people, and whatever the Fox News outrage-of-the-week happens to be now, and you’ve got the Brett Bellmore special.
“a moderate, milquetoast drug price negotiation program”
Is not what this is. This is a “Massive, company destroying fine if you don’t agree to our terms AND publicly state you think they’re fair” price imposition program.
It’s not a “negotiation” when one side has ALL the power.
“It’s not a “negotiation” when one side has ALL the power.”
So what? The companies have all the power when they “negotiate” prices with the consumers. Is turnabout not fair play? Whether it is fair or not, it is certainly not fascism.
“So what?”
So there’s no way for companies to recover fixed costs, and no incentive to develop new drugs.
Economically, it is exactly fascism.
Both fascism and communism took effective ownership of the means of production, the chief difference being that the communists would explicitly claim ownership and run things themselves, while the fascists thought it more efficient to leave the people who owned the factories still nominally in that position, while dictating everything they did, so transferring everything but the name on the deed to the government.
That’s what is going on here: The only remnant of private property rights remaining is that the drug company has the choice of going out of business. Otherwise it has to sell to the government at the government’s price, even if it is at a loss.
AND, publicly say that it thinks this is fair! That last bit of salt in the wound is pretty nasty.
The government negotiating from a position of strength on behalf of taxpayers is not fascism in any realm of the imagination.
Yeah, the fascists were big on “strength”, weren’t they?
There is no ‘economic fascism.’ It wasn’t an economic model.
You think the ACA is fascism as well, IIRC.
You are not to be listened to about what is fascism; you don’t know the history, you’ve just made up a thing.
Most companies emphatically do not “all the power” when they negotiate prices with the consumers. That’s because most companies are not monopolies. Consumers have the power to choose a different company who will sell either the same product or a close-enough substitute for a better price.
The only companies who hold “all the power” are monopolies. And while I agree that monopolies are sometimes a problem, that’s a power granted by (and therefore a problem created by) the government.
‘First they negotiated prices with a private company.’ Profoundly non-serious.
I’m in favor of Medicare being able to negotiate (or set) drug prices for people covered under Part D, but it seems unnecessary for the government to require that drug manufacturers make all drugs available through this process.
Why not negotiate a price, and if the pharma company wants more than the government is willing to pay, then the drug just isn’t covered? This seems to be roughly how private insurance works, and is also the model in most other countries.
Because then the government isn’t really using its full negotiating power…
Most people don’t consider staring down the barrel of a gun to be a part of legitimate negotiations.
Could the US say it will pay the average price of what other countries are paying?
The US taxpayer should not have to pay a higher price because other countries negotiate a lower price.
On a side note, expiration dates for drugs should be decided by independent experts and not big pharma.
How do you mean “expiration date” ?
If the government by regulation wnats to require drug companies to put a notice on pill bottles saying “don’t take this after 14 May 2024” then fine. If the drug company wants to say “we recommend you don’t take this after 14 May 2024 and we’re not responsible for the consequences if you choose to do otherwise” then also fine.
What role do you foresee for the independent experts ?
Could the US say it will pay the average price of what other countries are paying? The US taxpayer should not have to pay a higher price because other countries negotiate a lower price.
I think the issue is that the drug companies aim to recover their costs in the US market, by selling there first, and then what they sell in foreign markets is gravy. Lots of foreign countries have serious price controls or monopsonistic drug markets, so the drug companies have to accept lower prices than in the US, or forego the sales revenue, which by the time it gets to foreign markets, is mostly profit. So the US gets the drugs first, usually, but pays higher prices, thereby subsidising the rest of the world.
But the US could change its approach by adopting the same sort of regulated / monopsonist approach as happens in foreign parts. But if it did, you can’t assume that this would do anything other than completely change the drug market.
Drug development would become a much less attractive business, because drug companies would be selling to regulated/monopsonist buyers everywhere. This would make it very difficult to recover research costs. So drug research spending would collapse and drug companies would become much smaller. The world would have waaaay fewer new drugs. Maybe that would be good for the world. Maybe not. No doubt goverments would provide research funds for new drugs, but obviously much less than is currently spent by Big Pharma. And we know how good governments are at picking winners.
Anyway, the point is – the US market pays for most of the world’s R&D on drugs, and foreign countries with socialised markets piggy back off that. Get rid of the US market as currently constituted and you’re looking at a worldwide freeze on drug development. Which will save a lot of money. But not necessarily save any lives.
But it would be a good Trumpist poke in the eye to those freeloading foreigners.
The argument that drug development would become a less attractive business if drug companies couldn’t set high prices is a policy argument, not an argument for the courts. Doubtless more companies would be attracted to supplying defense needs if government paid thousands of dollars for every paper clip and thumb tack. But attractiveness associated with high profitability has to be balanced against the taxpayers’ interest in not being taken for everything they have. And that balance is for legislatures to craft. In a standard negotiation, if a company doesn’t find the government’s terms attractive, it can walk away and not sell.
Merck’s argument is different. Merck’s main argument is not that negotiation is bad and judges should force the government to take whatever price Merck wants to set because what’s good Merck is necessarily, as a matter of law, what’s good for America. That argument is not likely to fly. Merck is arguing instead that the government is giving Merck an offer it can’t refuse, in effect forcing Merck to take whatever price the government wants to set.
Sure, I was responding to vaadu’s policy proposal with a comment on the consequences of his/her/its proposed policy.
The point is not that vaadu’s proposal would make drug development a less profitable business, but that it would make drug development entirely unviable.
Perhaps that’s a good thing. Perhaps 20 years of no new private sector drug development would encourage people to focus on a healthy lifestyle and do less medication.
I’m a little confused (OK a lot confused) as to what the tax is levied on.
Is it some astronomical percentage of sales revenue on sales at some future time, whoever those sales might be to ? Or is it on sales that have already happened ?
Presumably if the company and the government fail to strike a “deal” then there won’t be any sales to the government. But there might be sales to other people – like private companies / individuals / foreign governments / state governments etc. Is the tax supposed to bite on that ?
If it’s on historical sales, then it’s inescapable and so just looks like a mugging. But if it’s on future sales, then the company can just stop selling to anybody, and it becomes akin to the government just banning the drug. Which presumably it has the constitutional power to do.
I have forgotten the details of Roberts’ “argument” in the ACA case, but presumably the fact that in this case, no revenue is expected to be raised suggests that it’s not doing the work of a tax in any normal sense of the word.
26 USC 5000D: Designated drugs during noncompliance periods “(a) In general There is hereby imposed on the sale by the manufacturer, producer, or importer of any designated drug during a day described in subsection (b) a tax in an amount such that the applicable percentage is equal to the ratio of-
(1) such tax, divided by
(2) the sum of such tax and the price for which so sold.”
“(d) Applicable percentage For purposes of this section, the term “applicable percentage” means-
(1) in the case of sales of a designated drug during the first 90 days described in subsection (b) with respect to such drug, 65 percent,
(2) in the case of sales of such drug during the 91st day through the 180th day described in subsection (b) with respect to such drug, 75 percent,
(3) in the case of sales of such drug during the 181st day through the 270th day described in subsection (b) with respect to such drug, 85 percent, and
(4) in the case of sales of such drug during any subsequent day, 95 percent.”
It’s pretty high, high enough that you’d be losing money on every dose you sold. If I’m doing the math right, it starts out at $185 per $100 of sales, and goes up fast.
Tops out at only $1,900 per $100 worth of sales.
Oh and a little gem,
“(f) Special rules
…
(2) Anti-abuse rule
In the case of a sale which was timed for the purpose of avoiding the tax imposed by this section, the Secretary may treat such sale as occurring during a day described in subsection (b).”
So, the Secretary can arbitrarily say “Never mind that you sold that before the period started, that was just a ruse. 1900% tax!”
But it’s a tax, right? It’s not a penalty. Government here is admitting it’s a tax, going against its interests to do so. So courts have no power to turn around and say it’s actually a penalty just because they think it resembles one. Drexel Furniture was bad law, right? Courts are bound by Congress’ characterization and are not to free to substitute their own and call this a penalty based on some sort of functional test, right?
Or was that just a one-time ad-hoc argument because you really didn’t like Obamacare, you had to come up with something to argue it was unconstitutional, but you didn’t really mean it?
Why do you regard the government “admitting it’s a tax” to be “going against its interests to do so” ?
To some extent it’s irrelevant to the Takings argument as to whether it’s a tax or a penalty. Assume the company caves to the pressure and “agrees” to sell 10 million units of Drug Z to Medicare at say $35 a pop. And “agrees” as required, that the negotiation was “fair.”
And suppose that, absent the pressure of the threatened tax / penalty / exaction / whatev, the price per pop would have been $75 a pop.
And suppose the company then goes to court and claims $400 million compensation, on account of the government “taking” the drugs at $400 million below market price.
There hasn’t actually been any tax/penalty etc levied, so it doesn’t matter whether it’s one thing or the other. The question then becomes – did the government “take” the drugs and pay less than market value compensation.
At this point the company can make its arguments that this tax (or whatever) was in essence a threat, and a very particular one. ie it applies only to a particular class of goods, it applies only if and when the government specifically identifies an item in the class, which is owned by one and only one taxpayer, and which happens to be the subject of a price negotiation with the government; and which is obviously ruinous if incurred – so much so that the Congressional Budget Office assumes no one will incur it. And which requires the company to “agree” that the negotiation was “fair.”
So, as some here have suggested, it’s just the government using its “full negotiating power” to acquire stuff more cheaply than it would otherwise be able to do. But using “full negotiating power” does not mean that the deal ends in the acquisition of the drugs from a willing seller at market value, which is the question in which the Takings clause is interested.
This doesn’t seem very different from the government saying to Farmer Joe. “We want your farm for a defense base. Sell it to us for half the market value. Pretty please. If you don’t agree, and moreover sign a statement that the negotiation was fair, your three boys will be conscripted tomorrow. But if you agree, then they won’t be.”
The government is legally entitled to conscript the boys, and be very particular about conscripting them and not other boys. So the argument isn’t about whether it has the legal power to make the threat. It’s about whether the “deal” reached with Farmer Joe is a taking, for which less than market value was paid. And since the threat is obviously a threat, it’s difficult to see how making Farmer Joe sign a piece of paper saying it’s “fair” helps the government case. Rather the opposite. If the farmer can be persuaded to say something that’s obviously not fair, is fair, that’s pretty good evidence of duress.
If I’m doing the math right, it starts out at $185 per $100 of sales, and goes up fast.
Yes. $185.71, to be precise.
Who writes these descriptions of the calculations? They give me a headache. Things would be much easier if they just bothered to do that math themselves.
“…a tax calculated as a percentage of sales as follows:
185.71% during the first 90 days
300% for days 91 through 180
566.7% for days 181 through 270
1900% thereafter”
Somebody who wants to impose an insanely high ‘tax’ without the actual text of the bill making it clear that the tax rate is insane, I’d assume.
I am not going to pretend to no more than their, what I am sure are, extremely high paid lawyers. But I would have added an 8th A excessive fines clause argument. It may not have worked but there is a decent argument this is a penalty, not a tax, and therefore subject to that clause. And a penalty that is known would bankrupt a company for something this relatively minor, sounds excessive to me.
If Roberts won’t admit a penalty is a penalty when Congress comes right out and says it’s a penalty, there’s no way he’s going to admit something Congress calls a “tax” is a penalty. So you start out with 4 votes against you, using that argument.
I predict Roberts will change his mind
Honestly, I think they went the right route here. Forcing somebody to sell something to the government below cost is a taking, the fine is just a mechanism to enforce the taking.
Getting the judiciary to admit ANYTHING Congress calls a “tax” is really an illegal penalty is like pulling teeth. The courts just don’t want to go there. And if they’re not going to admit that it’s a fine, then they’re not going to admit it’s an excess fine.
Under Roberts’ Sebellius opinion, which applied the Drexel Furniture functional test, it’s pretty obviously a penalty. But almost every commentator on this blog argued that Roberts was out of his mind, dishonest even, and courts have no right to call it anything other than what Congress called it for purposes of making decisions.
So under the opinion of almost every commentator on this blog, since Congress called it a tax, it’s a tax, and that’s that, only an out-and-out dishonest person could say otherwise. And since the Excessive Fines clause doesn’t apply to taxes, then under the opinion of almost every commenter on this blog, there’s no possible Excessive Fines claim.
What goes around comes around.
Generally, the word “negotiation” suggests a voluntary transaction between two parties. But negotiating
with the governmentfor a medication you can’t do without is seldom voluntary. You can’t just walk away.Then just pay for it. Dead people won’t be enjoying their savings.
‘Let them eat cake.’
None of these drugs are those that “you can’t do without”.
After all, before they were developed, everyone did without them.
And today everyone is doing without as yet unapproved drugs that will fall under this regulatory scheme in the future.
Suppose this mandated “negotiation” process results in a 5% reduction in effective new drugs being developed each year because the reduction in profit (adjusted for risk) caused by the process results in the initiative to develop some drugs not “penciling out”. In that case, many people in 30 years will not even know that there are drugs they “can’t do without” — because they were never developed. Rather like people didn’t know they “couldn’t do without” antibiotics 200 years ago. Ignorance is bliss I supposed.
If they’re effectively keeping you alive, or functional, then you obviously can’t do without them. It’s easy to be callous about other people’s health.
Yeah, and it’s even easier to be callous about the people who will die in the future because you’ve made it unprofitable to develop NEW drugs.
Biden loves this! If you lose, he’ll run against you losers. If you win, he’ll run against you the ones who stopped him from making big pharma lower the prices of medications.
Don’t underestimate the Old Mongoose!
How many drugs does Merck offer regarding which the government could not find an alternative? Perhaps the government should simply stop transacting with Merck.