No one really expected the pharmaceutical industry to lie down and take it when Congress authorized Medicare to start negotiating prices of the prescription drugs it buys for enrollees.
By that standard, the federal lawsuit filed June 6 by the big drug manufacturer Merck falls into the "dog bites man" category of non-news.
So, too, does a nearly identical lawsuit filed June 9 by the U.S. Chamber of Commerce. And also the threats by other drug companies to file their own lawsuits.
That doesn't mean the cases aren't worth examining. They're windows into the mind of Big Pharma, revealing the industry's grotesque level of entitlement and its cynical exploitation of Americans' desire for better healthcare in order to claim profits well beyond the level that any thinking person would consider moral.
The lawsuits are so similar they read like ChatGPT versions of each other. Both are compendiums of artful dodging and febrile rhetoric, which is what corporate lawyers produce for a living. (Merck calls the program a "dystopian parody of 'negotiation,'" which is pretty fancy wordsmithing.)
In essence, the lawsuits assert that the Medicare negotiation program, which was established by the Inflation Reduction Act, or IRA, signed in August by President Biden, is so weighted in Medicare's favor that it's illegal and unconstitutional—"tantamount to extortion," Merck says.
Big Pharma claims through these lawsuits that it's being "coerced" into bowing to price cuts mandated by unelected bureaucrats at the Department of Health and Human Services for its most popular prescription drugs. Merck's version of the argument is that by forcing it to negotiate with Medicare in order to sell its drugs, the government is engaging in an unconstitutional "taking" of Merck's private property "without just compensation."
The fundamental flaw in this argument, says Nicholas Bagley, an expert on administrative and healthcare law at the University of Michigan, is that "Merck doesn't have a constitutional right to sell its drugs to the government at the price that Merck would prefer." The government isn't "taking" anything that Merck doesn't choose to give it.
In explaining why it's suing the government, Merck produces a parade of horribles it says will be the consequences of federal regulation of drug prices. "We believe this program will negatively impact biopharmaceutical innovation and the sector's work to develop lifesaving and life-changing innovations. In turn, it will have devastating consequences for millions of patients in need."
We've heard all this before. Every industry always claims that every regulatory initiative will hamper innovation and raise consumer costs and harm millions of innocent people. This is just PR persiflage, and you can safely ignore it.
Merck's profit margin has averaged about 25% over the last two years. In fact, it collected more in profit over that time span ($27.5 billion) than it spent on research and development ($25.8 billion); in 2021 and 2022 the company also spent nearly $16 billion on stock buybacks and dividends. In other words, it has more than enough spare cash to "develop lifesaving and life-changing innovations."
Let's take a further look at the industry's arguments. But first, here's how the negotiation program works.
Starting in September, Health and Human Services will compile a list of 10 branded, non-generic drugs from the roster of those on which Medicare spends the most; 30 more drugs will be added to the list in 2025 and 2026, and more in subsequent years. The companies have 30 days after the selection to agree to negotiate a price with Medicare, which must be at least a 25% to 60% discount from a drug's average price on the non-federal market (the figure varies by drug). For this first round, the negotiation process lasts through July 2024, with prices to take effect in 2026.
Companies that refuse to participate in this process or reject Medicare's designation of a "fair" price will be subject to an excise tax starting at 65% of a drug's U.S. sales and rising over time to 95%.
Merck appears to resent that the government didn't take a more direct approach to setting drug prices for Medicare. "Congress could simply have allowed HHS to specify a maximum price it would pay for a covered drug, or to employ its natural leverage to obtain favorable pricing," its lawsuit states. "But those options would have enabled manufacturers to walk away from the table." Because walkaways would have created a political backlash, Merck says, the government chose a different route.
A couple of points about this.
First, do you really believe Merck and the rest of Big Pharma would have accepted price caps on Medicare drugs without filing lawsuits like this one? Me neither. Quite obviously, if the drug industry lobby hadn't made it known in words and cash that it would oppose any such initiative, it would have happened long ago.
Second, manufacturers are indeed enabled under the new system to walk away, just as Merck wishes. The mandate for negotiations and the penalty of a steep excise tax for refusing applies only to drug companies that have a relationship with Medicare or Medicaid. Those that choose not to sell any of their drugs to the programs are exempt.
But that's their choice. No one forces Merck to participate in Medicare and Medicaid, as Bagley points out: "To date, it has participated because selling drugs to Medicare and Medicaid is so lucrative. ... Merck will no doubt continue to participate — it's still so lucrative! — but it just wants to get paid more."
To put it another way, Health and Human Services is employing its natural leverage to obtain favorable pricing" — just as Merck says it should.
It's true that under the negotiation program drug companies can't withdraw from Medicare right away. Bagley told me by email that even if that's a genuine flaw, the remedy is either to let the drugmakers withdraw right away or give them a bit more time to keep charging full price. "But it's not an argument for invalidating the IRA altogether," he says.
Merck probably was the first drug company out of the gate with a lawsuit because it knows that two of its biggest-selling drugs are likely to be subjected to the negotiating program in its first rounds. They're Keytruda, a cancer immunotherapy drug that is its top seller, and Januvia, a diabetes treatment that ranks fourth. Together, those two drugs have accounted for about 45% of Merck's sales in the last two years, producing profits the company is desperate to protect.
That's why the drug industry is taking aim at the first significant effort by the U.S. government to impose sanity on drug pricing. It's worthwhile to examine how much drug companies get away with via the U.S. drug pricing system (which is no system at all). According to the most recent available figures, the list price of Keytruda treatment in Britain is $107,000 per year; in Canada, it's $152,000; and in France, $78,000.
In the U.S., it's $189,000.
Those other countries have robust systems for government-set price caps and, yes, negotiations with drugmakers. Outside the Department of Veterans Affairs, we don't have anything like that in the U.S. Now that Congress has created one, the drug companies are squealing like pigs being led to the abattoir.
At the heart of the Merck and Chamber of Commerce lawsuits is a dispute over how to calculate the "fair" price of prescription drugs. Merck asserts that Health and Human Services wants to impose its own number and that the negotiations are a "sham."
But that's not so. The IRA requires Health and Human Services to consider a host of criteria, such as the drugmaker's R&D costs, the costs of production, the remaining duration of patent rights, and the effectiveness of the drug compared with alternative therapies. Nothing stops a drug company from inundating Health and Human Services with evidence on all these points, many of which will weigh in favor of a higher price for Keytruda.
The law also requires Health and Human Services to consider the government's financial contribution to a drug's development. That might weigh in the opposite direction because direct and indirect government funding is a major contributor to the development of most drugs that have reached the market in recent decades. They include Keytruda, which was the subject of a 2014 deal in which Merck paid more than $625 million to settle allegations that the drug infringed existing patents that were themselves the product of government-funded research.
For all its hemming and hawing, Merck knows that selling drugs to Medicare, the largest healthcare customer in the nation, is too good a deal to refuse. Even if Health and Human Services drives hard bargains, it's not a good bet that they will cut very deeply into the drug industry's profits. For Merck and the chamber, these lawsuits appear to be just a way to fire a shot across Health and Human Services' bow warning that it should approach the negotiation process judiciously. Whether the courts will even consider the lawsuits now is an open question, since the negotiation process hasn't even started, so no one can yet claimed to have been burned.
Buried in Merck's lawsuit is a curious self-inflicted wound — a reference to a recent poll that found that 79% of Americans support allowing the government to negotiate lower drug prices.
That's the political tide that Merck is trying to hold back. Forget all the heavy breathing in its lawsuit about constitutional rights and the government's "commandeering" of the valiant work of drug researchers. It's all about money. Merck and the rest of Big Pharma just want to hold on to every cent they can, their patients be damned.
