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Congress gave Medicare the authority to negotiate prices for drugs. Drug companies have accepted the invitation to negotiate while in courts across the country claiming Medicare's negotiating authority is unconstitutional.

But in Court They Claim Negotiations with Medicare Are Unconstitutional

Seven drug companies have agreed to negotiate Medicare drug prices while at the same time pursuing court cases challenging the constitutionality of requiring them to negotiate drug prices. They lost their first case but have nine more pending legal challenges.

The Inflation Reduction Act gives Medicare new authority to negotiate prices for drugs commonly used by older Americans. The Centers for Medicare and Medicaid identified 10 drugs for the first round of negotiations. The list includes Eliquis, Jardiance, Xarelto, Farxiga and Entresto. The negotiated prices would go into effect in 2026.

Between 15 and 20 drugs will be negotiated annually over the next four years. Drug makers that don’t comply with negotiated prices will be forced to pay a tax or face penalties.

The Inflation Reduction Act also made more vaccines free under Medicare Part D plans and lowered the cost of insulin to no more than $35 per person for a one-month supply.

Goal of Drug Price Negotiations
The goal of drug price negotiations is to cut Medicare payouts by $25 billion by 2031. Rising drug prices threaten to average Medicare Part D payouts to drug companies of $111 billion per year over the next decade. Total prescription drug purchases in 2022 under private insurance, Medicare or patient out-of-pocket expenses totaled $328 billion. Ten drugs account for 22 percent of Medicare Part D expenditures.

The new law focuses on maximum prices for drugs but doesn’t specify how low negotiated prices can go. The negotiations are expected to shed light on how drug companies price their products when there is no competition.

The amounts involved are huge. The Bristol-Myers Squibb’s blood thinner Eliquis is used by 3.7 million patients who average an annual out-of-pocket cost of $608. Under Pard D plans, Medicare pays 75 percent of prescription costs and  patients 25 percent.

Because Medicare is a huge player in the drug market, pharmaceutical companies cannot afford to avoid negotiations and eventual price caps. They hope one or more of their claims will have enough legal steam to make it all the way to the U.S. Supreme Court.

The Case Against Negotiations
Drug company lawsuits claim price negotiations with Medicare deny them due process under the “takings clause” in the Fifth Amendment and violate their First Amendment rights. Cases have been filed across the country, presumably shopping for a court open to its arguments. The first negative ruling came from a Trump-appointed federal judge in Ohio.

Legal experts have expressed doubt about drug company claims that are being coerced into offering drug price concessions. Judge Michael J. Newman of the Southern District of Ohio agreed in his September 29 ruling. “Because the plaintiffs are not legally compelled to participate in [drug price negotiations] – or Medicare generally – they have not shown a strong likelihood of success on the merits of their due process claim.”

One legal expert predicts drug companies will give up a constitutional challenge and try instead to make drug-specific arguments.

The goal of negotiations is not to pay zero for drugs but to arrive at a fair price.

The Price Negotiations Process
The price negotiation process begins will listening sessions for patients, caregivers and consumer organizations that extend from October 30 to November 15. Drug companies will receive their initial price offers February 1 next year. Negotiations are scheduled to be finalized by August 1.

“Our goal is to ensure access to innovative treatments and therapies for people who need them when they need them,” according to Centers for Medicare and Medicaid Administrator Chiquita Brooks-LaSure. “The goal is not to pay zero for these drugs. The goal is to arrive at a price that both sides agree is a fair price.”

Impact on Drug Makers
Drug makers anticipate drug price negotiations won’t completely disappear regardless of legal challenges. They have begun to estimate the impact to their bottom lines and consider alternatives to prop up profits.

Bristol-Myers Squibb projects a negotiated price with Medicare for its anticoagulant Eliquis could result in a 15 percent hit to its per-share earnings. Amgen says it could lose 6 percent profit on its arthritis treatment Enbrel. This impact may convince drug makers to diversify and become less reliant on so-called blockbuster, one-of-a-kind drugs. Two drugs accounted for half of Bristol-Myers Squibb’s sales in 2021.

Drug companies also face expiring patents that will open the door to competitors and market price competition.

One market analyst said the news isn’t all bad for either drug companies or consumers. “This could be fuel for biopharmaceutical innovation, because pharma will need to do more…You need more drugs.”

On the flip side, another analyst speculated lower prices for major drugs could discourage some new drug development or delay when companies seek federal approval for new drugs to maximize their proprietary patent rights as long as possible.