Drug price negotiation program of federal govt. may violate its own antitrust laws

Drug price negotiation program of federal govt. may violate its own antitrust laws

Though the federal government is not subject to its antitrust laws, the longstanding economic principles underpinning them offer insight into why policymakers should reconsider the IRA and why the Supreme Court should review and reconsider the appeals court’s decision.

A recent U.S. Court of Appeals for the Third Circuit ruling upholding the drug price negotiation program of the federal Inflation Reduction Act (IRA) has been appealed to the U.S. Supreme Court, one of the many challenges to the Act’s constitutionality.

Drugmakers are required to sell selected patented drugs to the government by the IRA for its Medicare Parts B & D programs at a stipulated ‘maximum fair price’. If they don’t agree to these prices, they face tax penalties on sales of the drug exceeding their profits from it, or the exclusion of all their drugs from Medicare and Medicaid purchases. This would exclude access to up to 160 million patients, accounting for around 40% of US prescription drug spending or 20% of global prescription drug spending. US government purchases are valued at $200 billion annually.

Bristol Myers Squibb (BMS) and Janssen Pharmaceuticals argued that (1) the IRA constitutes an uncompensated taking of their property at below-market rates in violation of the Fifth Amendment, (2) that it compels speech in violation of the First Amendment through requiring them to sign an agreement that they ‘negotiated’ a ‘maximum fair price’ for their drugs, and (3) that it imposes unconstitutional conditions on their participation in the program.

These arguments were rejected by the appeals court majority. The IRA does not unconstitutionally take property since the drugmakers can choose to exclude government purchases even if this would considerably harm their business.

The federal government is given a green light to use its combination of regulatory and market power to reduce the value of private intellectual property to secure lower prices for taxpayers. The harms to IP owners are obvious. Lower drug prices in the short-term do not necessarily mean that American patients or even taxpayers will be better off in the long run—the very reason why the Sherman Act prosecutes the abuse of monopsony power by private buyers.

Monopsony power is market power on the buy-side of the market. This typically results from barriers to entry, including government regulation, that prevent rival businesses from challenging firms that would use their dominant position for anticompetitive ends.

Though the federal government is not subject to its antitrust laws, the longstanding economic principles underpinning them offer insight into why policymakers should reconsider the IRA and why the Supreme Court should review and reconsider the appeals court’s decision.

Drug development is a capital-intensive, high-risk process that is typically funded by profits from the sale of a company’s existing drugs and expected profits from future sales of the new drug. Patent protections provide commercial certainty to investors and drugmakers for researching, discovering, testing and bringing, the next round of cures to market.

Suppressing the price of drugs below market value, or excluding substantial sections of the market, is likely to chill investment in developing new drugs. New drugs, especially those targeting lifestyle illnesses, play a significant role in reducing future hospitalizations. Lifestyle illnesses disproportionately drive healthcare costs, and hospitalizations strain healthcare budgets far more than drugs. So, besides potentially denying Americans access to high-demand future drugs, it’s also unclear that Medicare and Medicaid beneficiaries and American taxpayers would benefit in the long run from paying less for patented medicines under the IRA.