The deep cuts in drug prices that Congress ordered two years ago are surviving — so far — a massive constitutional challenge in the courts by major pharmaceutical companies.  This is the latest chapter in the long history, going back at least to the early 1900s, of big business rebelling against the rise of big government, especially on health care.

How this $216 billion controversy ends will determine the prices that the government will pay through Medicare and Medicaid insurance on drugs used by some 65 million American patients.

Ten lawsuits have been filed by the makers of some of the most widely-prescribed medicines, the ones that produce the most income for the companies.  These are the results in court up to now:

• The companies have already lost three cases, even without going to trial. The firms are on the verge of losing two more, because they are pending before a judge who has already rejected the challenge in two cases.
• There have been temporary losses for the companies in two other cases.
• One case was dismissed as premature because that firm’s drug is not yet affected.
• The remaining two cases are awaiting pre-trial rulings by the judges.

Those are signs of a continuing pattern, especially since the companies have pursued similar claims, and the judges who have ruled seemed to have had little difficulty deciding.  Adding insult to the industry’s legal woe, it lost a case in the nation’s most business-friendly state, Delaware.  This is definitely a new world for an industry long in the habit of charging whatever the market would pay.

This, of course, is only the first round in this nationwide controversy, which almost certainly will reach the Supreme Court, perhaps as early as this Fall.  A few of the cases lost by the companies have already moved up to the appeals courts, and seem to be moving rapidly there: one of those appeals was heard just last week on an expedited schedule.

When the dispute gets to the Supreme Court, it would bring the first test of the Justices’ reaction to one of the most popular features of the huge Inflation Reduction Act, passed by Congress in 2022.

The Court’s current conservative majority has already shown a deep skepticism toward federal government controls that have a broad impact on economics and politics.  The majority has been exploring ways to revive a strong judicial check on such sweeping programs, last used most forcefully by the Court in 1935 in the final defeats for President Franklin Roosevelt’s Depression-era “New Deal.”

Today’s version of the controversy echoes the history of American health policy.  Since the early years of the 1900s, social reformers have been talking about universal health insurance (back then, they called it “sickness insurance” as a method of offsetting the loss of wages when factory workers became ill).  Over time, the reformers sought to assure medical care as a form of personal right, with access and insurance assured as national policy.  Along the way, the American Medical Association stubbornly resisted, fearing “socialized medicine.”

When Congress in the 1960s worked toward passage of Medicare and Medicaid insurance, the AMA was its most vigorous opponent.  Although the AMA did not oppose the Affordable Care Act (“Obamacare”) when Congress approved that in 2010, overhauling much of the healthcare industry, the doctors’ group has remained opposed to the idea of universal health insurance; other business groups tried to block the ACA in court, but failed.  Federal insurance is available now primarily under the Medicare and Medicaid programs (for the elderly, some disabled patients, and poor patients), and it is not universal.

That history is repeating itself, now that Congress has stepped in again, giving the federal government the option of using its immense buying power to push drug prices down (it pays for almost half of all drugs sold each year in the nation).

That new policy has drawn strenuous opposition not only from individual drug makers, but also from two big business groups: the Pharmaceutical Research and Manufacturers Association and the U.S. Chamber of Commerce.  Each has met a temporary setback in court.

Drugs, especially breakthrough medicines that do represent the creative ingenuity of the industry, have long been sold to patients at very high prices. The industry insists that it had to charge such prices to provide funds for developing new medicines, vital to improved medical care.

The new policy will affect the most profitable of the drugs, including the top revenue-producer: a blood-thinner sold under the brand Eliquis, which brought Bristol Myers Squibb nearly $16.5 billion in revenues in one year, and that represented only its sales to patients covered by Medicare insurance.  Some 3.7 million Medicare patients used Eliquis in that recent year.

Bristol Myers Squibb’s case is one of those lost last month in a federal District Court in Trenton, N.J., and is now on appeal in the Third U.S. Circuit Court.  Another company that lost in that same court and is appealing now is Johnson & Johnson, the maker of another brand name blood-thinner, Xarelto.  (J&J sold more than $6 billion of that drug in a year, to 1.3 million Medicare patients.)

How does the new drug price-capping program work?

The Inflation Reduction Act of 2022 is a behemoth of a law, 755 pages long and covering a multitude of major new federal programs and policies.  Among the most popular is the part that is in dispute in these court cases: the “Drug Price Negotiation Program.”  Its overall aim is to produce agreements between the federal government and the individual companies that manufacture specific drugs, with those negotiations resulting in setting a “maximum fair price” for that drug.  Such prices must be set as low as possible.

The government picks the drugs, based on its own review of the industry’s sales and costs, and on data that the drug companies must provide.   A company that takes part in the program must pay a daily fine of $1 million if it fails to provide the required data; the companies have complained that they have to disclose some of their trade secrets in the process.

The only drugs that will be involved are those that require a doctor’s prescription and have no competition – that is, the company that made the drug has a monopoly on it and there are no generic substitutes.  The first ten drugs involved were chosen by the government last August, for the first cycle.  The price for each is to go into effect on January 1, 2026.  Fifteen more will go into effect at the start of 2027, another 15 at the start of 2028, and another 20 for each annual cycle after that in the future.

Although no maker of any selected drug is required to take part in the program, every company that has sued the government has argued that it realistically has no choice, because the Medicare and Medicaid insurance programs serve so many people that it makes no sense economically to stay out.

Once a company joins in the program, it must take part in whatever negotiations occur (the companies claim they have no real bargaining power), they must charge only the resulting price (which they insist is not likely to be “fair” at all because it will be far below the real value of the drugs), or pay an “excise tax.”  Each time a company taking part sells a drug at a price higher than the “maximum fair price,” it must pay the government a penalty that is ten times the difference between what they charged and the “maximum fair price.”

If a drug company wants to withdraw from the program entirely, it can do so but, of course, it loses a huge economic opportunity (it can no longer sell any drug to any federal health program), and it must withdraw well in advance of when a fair price becomes effective.  Withdrawal, the companies argue, is not a genuine option.  One company’s lawyers described the program as a “gun to the head” to coerce participation.

If a cheaper, generic version of a drug on the list gets government approval and actually goes on the market, presumably at a low price, then the brand-name version is considered to have competition and  drops off the price cap list – for future years.  So far, there are no generics for the first ten drugs chosen.

Although ten companies have filed constitutional lawsuits, to try to block the program in its earliest stages, many decisions that get made during the process — including the choice of drugs and the resulting “maximum fair price” – cannot be challenged in the courts.

What constitutional claims are the companies making?

Each company that sues can choose the constitutional claims it wants to make, but there is a very close similarity, case to case.  The lawsuits are drafted in super-charged rhetoric, such as this statement in an Ohio case: “The various ruses are intended to lull onlookers with the appearance of a fair, voluntary, ‘negotiation’ process, but they are really just a façade for an unprecedented regime of extreme, unchecked delegation of power from Congress to the Executive.”

In the companies’ court documents, it is easy to find arguments relying on precedents set by the Supreme Court when it was actively nullifying “New Deal” programs some 90 years ago – a trend that stopped only when President Roosevelt unveiled his controversial plan to “pack the Court” with new Justices.  That plan failed, but the challenges did end.

Here are the companies’ constitutional claims today:

• The program allows the government to seize the drugs from their private owners, without adequate compensation – a violation of the Fifth Amendment guarantee of “due process” (a government process must be fair and not arbitrary) and a violation of that Amendment’s guarantee that government will not take private property for a government use without paying a fair price.
• It violates a doctrine, developed by the Supreme Court in a series of rulings over the years but tied to no specific constitutional text, that the federal government may not require someone to give up any of their rights in order to take part in an official activity or program (in these cases, participation in the Medicare and Medicaid health insurance programs).
• The program far exceeds any legislative power given to Congress by the Constitution, and it gives federal health agencies unchecked power, without any legal guidance from Congress, to control the selection of the drugs and to set the level of the prices.
• It contradicts the basic constitutional concept of “checks and balances” because it forbids the courts from reviewing basic features of the new regime, such as the drugs chosen and prices determined.
• It nullifies much of the benefit of the Constitution’s protection of the patents the companies have won by creating breakthrough medicines. They have a legal right to exploit their inventions for their own corporate benefit.
• It requires the drug companies to make public statements that do not represent their private views, in violation of the First Amendment’s Free Speech Clause. This claim is based upon the fact that, at the end of the price-cutting process, the companies must sign an agreement that declares that the price was “negotiated” and is “fair.”
• The high “excise tax” that the government will assess against a company that takes part but then sells a drug to anyone at a higher price is not a tax at all, because it raises no revenue for the government since no one could afford to pay it, and thus it serves only as coercion. The tax is a form of punishment that violates the Eighth Amendment’s ban on “excessive fines.”
• The program concentrates so much power in the federal government that it violates the Tenth Amendment’s assurance to states that the central government in Washington would be restricted to a clearly limited range of authority.

Beyond claims under the Constitution, some companies have challenged regulations that the government wrote to implement the program, claiming that they violate a 1946 law (the Administrative Procedures Act), which bars federal agencies from acting in “arbitrary and capricious” ways.

Why are those claims losing in court?

None of the decisions against the drug companies so far settles the dispute in any final way, since all of the cases have been filed in the first tier of the federal court system, the District Courts.  Significantly, none has gone to trial; the companies have been losing at a preliminary stage.

Each of the ten cases uses the same process, in which there is no disagreement about the facts so only legal issues must be decided — such as what the plan requires and how that measures up legally.  In most of the cases, there has been no need for the two sides to engage in lengthy pre-trial probes into the details of each side’s position (what lawyers call the “discovery process”).

Where decisions have emerged, the government has been granted a motion to dismiss the company challenge, has won a “summary” (no trial) decision rejecting the challenge, or has won both.  The companies clearly have the option of appealing any loss, and are likely to use it in every case.

One of the companies told a District Court judge in Washington, D.C., who has not yet ruled, that a quick decision is necessary to give the companies a chance to have a final decision from higher courts – perhaps the Supreme Court – before lowered prices start going into effect on January 1, 2026.

Though preliminary, the decisions that have emerged have undercut the core of the drug-makers’ argument: that they have no choice but to join in the pricing regime.  As one judge put it: “Participation in Medicare, no matter how vital it may be to a business model, is a completely voluntary choice….There is no constitutional right (or requirement) to engage in business with the government.”

In suing, the companies predictably relied heavily on the argument that the high prices they have charged over the years have been necessary to pay for the extensive research that goes into creating and marketing innovative medicines vital to people’s health.  The judges who have ruled have found no need to reject or even question that point; they have chosen, instead, to assure the companies that they can remain out or back out of the program and thus regain control over setting their prices.

Here are some of the specific points that judges made in rejecting the challenges:

• The government has not taken anything away from the companies, so there has been no transfer or seizure of property. The companies have no property interest in selling to the government at prices above what the government will pay.
• The program exists under Congress’s power to determine how to spend taxpayers’ money in a market – the market for drugs – that the government enters as a participant, not as a regulator. The government has no duty to assure the companies that they will remain financially solvent; it is simply providing them with a huge sales opportunity – one that they can accept or refuse.
• Because entry into the program, and staying in it, is voluntary, the companies have suffered no legal injury and thus had no right to sue to challenge the program.
• There is no violation of free speech under the First Amendment, because the program seeks to determine prices – a form of business conduct – and does not seek to control expression of views. The agreements that emerge at the end of the price-setting process are merely contracts, stating the terms of the deal.
• If the companies believe that their participation in the program sends a message that they don’t endorse, that is a public relations problem for them, not a constitutional defect. The companies remain entirely free to criticize the program in any way they choose; that is their First Amendment right.

What comes next?

In coming weeks, District Court judges will continue to decide, in the pre-trial setting, the remaining challenges by the drug companies.  There is no reason to expect the outcomes to differ as those rulings emerge, since the issues are usually the same and judges have begun following each other’s reasoning.

The next development to watch will be the coming ruling by a federal appeals court that is handling an appeal in a Texas case – the case heard last week.  In February, a District Court judge in Austin ruled that the case did not belong in court at this point, because none of the challengers had first taken their constitutional claims to officials in Washington who operate the Medicare-Medicaid insurance programs.

No other judge has made such a ruling against the challengers.  While the issue the appeals court heard last week has the outward appearance of only a procedural dispute, the challengers have put before that court all of their constitutional arguments, and that could give the appeals court judges a chance to say something meaningful on those issues.  That appeal involves, among others, one of the most powerful foes of the new price-setting regime – the pharmaceutical industry’s national trade association.

Sooner rather than later, though, the constitutional fight appears certain to be put before the Supreme Court, especially if any split develops among lower courts.