The economic impact of pharma giants’ fight with the U.S. government over drug pricing reform

Big Pharma firms Merck and Bristol Myers Squibb are challenging President Biden’s Inflation Reduction Act, alleging the law’s plan to lower drug prices infringes on their rights. The U.S. Chamber of Commerce — whose members include drugmakers AbbVie and Eli Lilly — is also aiming to block Medicare from rolling out the program.

In 2022, President Biden signed the Inflation Reduction Act (IRA) into law to fund major healthcare and climate change initiatives. No Republican supported the bill. The IRA allows Medicare to negotiate the prices of certain high-cost drugs. The program would first focus on 10 drugs in 2026. From there, it is slated to expand to 15 drugs in 2027 and 2028, and 20 drugs per year from 2029 on. Only medications on the market for years without competition are eligible.

Assessing the impact of the Inflation Reduction Act on drug pricing

The stakes are high for non-compliance. Under the law, if drugmakers do not agree to the negotiation process, they face an excise tax of up to 95% of the drugs’ U.S. sales or must withdraw all their medications from the Medicare and Medicaid markets. In light of such penalties, Merck has called the IRA’s mandated “negotiations” a “sham” and “Kabuki theater” among other things.

Conversely, Energy and Commerce Committee Ranking Member Frank Pallone, Jr. (D-NJ) has labeled Merck’s lawsuit as “outrageous,” asserting that it’s crucial for Medicare to negotiate fair prescription drug prices.

In any event, the ongoing lawsuits from Merck and BMS signal an intensifying battle over healthcare affordability, pitting Big Pharma against the Biden administration and many patient advocates. If Medicare can negotiate drug prices under the Inflation Reduction Act (IRA), it could lead to significant curbs in healthcare spending. But the industry argues that the IRA would threaten research and development. For instance, in addition to Merck and BMS, Lilly CEO David Ricks has also argued that the legislation would limit their ability to fund R&D, which could have lasting effects for the industry and innovation.

Historical precedents and the ‘taking clause’

The lawsuits recently filed by Merck & Co. and Bristol Myers Squibb against the Biden administration center on the Takings Clause of the Fifth Amendment. This clause states that “private property [shall not] be taken for public use, without just compensation.” Historically, the interpretation of this clause has shaped key Supreme Court rulings.

For instance, in Armstrong v. United States (1960), the Court held, “The Fifth Amendment’s [Takings Clause]… was designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”

Some economists have argued that pricing regulations can be compatible with normal markets. For example, the Nobel-winning economist Paul Samuelson believed that unregulated markets have drawbacks, arguing that free markets do not self-stabilize.

Implications of the Inflation Reduction Act on property rights

Some critics argue that the IRA’s provisions constitute an unconstitutional taking. For instance, in a WSJ op-ed, attorney Daniel E. Troy contends that the law’s mandated “negotiations” are “a ruse” to impose “price controls.” He goes on to argue that by forcing companies to sell drugs at government-set prices deprives companies of earning a “reasonable return on their massive investments.”

Historically, some scholars have prioritized strong property rights in similar situations. For instance, Richard A. Epstein, a legal scholar and professor at New York University School of Law, has argued for strong intellectual property rights and warned against excessive regulation. In a similar vein, economist Michael Kremer has lamented that price controls can discourage investment in innovation, harming affected industries. “So when barriers to entry are limited, there may be much less incentive to develop those innovations,” Kremer said in an International Monetary Fund (IMF) podcast earlier this year. “A particular sub case that I think is very important, is scientific advances which enable other innovations.” Kremer goes on to note that the principle doesn’t apply to basic science alone. “So for example, developing good biomarkers for use in developing further medical technology, or sensors to pick up environmental changes can in turn, help the development of other pharmaceutical or environmental technologies, but they’re probably not rewarded appropriately,” he added.

In light of these positions, the Supreme Court’s interpretation of the Takings Clause and its effects on property rights could have noteworthy economic implications. If the Court rules in favor of the pharmaceutical companies, it could strengthen corporations’ power over pricing, potentially bringing about an economic environment with diminished government regulation. On the other hand, a ruling against the pharma companies could set a precedent for further regulation, possibly threatening profit margins and industry dynamics.

The role of free speech in drug pricing

In addition to the Taking Clause argument, Merck & Co. has invoked another the First Amendment in their legal fight — their rights to free speech in a commercial context.  In its complaint, Merck said that the IRA would force it to affirm the government’s view that the imposed prices are “fair” and are the result of genuine “agreements” even if it actually disagreed. Its complaint went on to call the IRA a “dystopian parody of ‘negotiation.’”

The concept of commercial free speech, or “freedom of speech for corporations,” is relatively new. In the 1970s, the Supreme Court’s treatment of commercial speech underwent a transformation, as Cornell Law School has pointed out. In that decade, commercial speech transitioned from total nonprotection under the First Amendment to qualified protection

Some scholars argue commercial free speech rights undermine regulation. For instance, Erwin Chemerinsky, a UC Berkeley School of Law scholar, has warned against extending First Amendment protections to corporations in ways that limit the government’s ability to protect public interests. In a similar vein, consumer groups such as Public Citizen have opposed invoking First Amendment rights to corporations in ways that limit regulation and consumer protection.

The lawsuits involving Merck, BMS and the U.S. government could extend beyond a mere price control and property rights dispute. They could provide an opportunity to reassess the balance between commercial incentives for drug developers and societal priorities of affordability. Potential compromises, like value-based pricing, profit margin caps and tiered or reference pricing strategies, could help achieve this balance, but forging such a compromise will likely prove elusive.