To date, the pharmaceutical industry has lost every substantive motion in their legal efforts to thwart the implementation of the historic Medicare drug price negotiation program enacted under the Inflation Reduction Act (IRA). Such a streak has been particularly notable in light of the numerous strategic litigation choices adopted by drug companies and industry allies—lawsuits pursuing statutory, agency authority, and constitutional claims have been filed in court houses spanning DC, New Jersey, Delaware, Connecticut, Texas, and Ohio.
But on September 20, 2024, a divided Fifth Circuit panel handed the pharmaceutical industry its first narrow victory (though a technical one) in the broader litigation that has been ongoing for more than a year. In a 2-1 decision, the Fifth Circuit panel reversed a February 2024 ruling by a district court judge in Texas dismissing the lawsuit brought by PhRMA (a trade association representing drug manufacturers), the Global Colon Cancer Association (GCCA), and National Infusion Center Association (NICA). The Fifth Circuit did not, however, rule on the merits of any of the associations’ constitutional claims. This Expert Column will summarize the decision, what it means for the lawsuit in Texas, and recent developments in other lawsuits challenging the Medicare drug price negotiation program.
Background
In June 2023, PhRMA, GCCA, and NICA sued in the Western District of Texas alleging that the Medicare drug price negotiation program violates the Due Process Clause of the Fifth Amendment, Excessive Fines Clause of the Eighth Amendment, and the Nondelegation Doctrine (a judicially created principle that prohibits Congress from passing its legislative functions to administrative agencies). The plaintiffs argued that they could file their lawsuit in Texas because NICA—a trade association that represents certain infusion providers receiving reimbursement under Medicare Part B—is based there.
Judge David A. Ezra, a Reagan appointee, disagreed. His February 2024 ruling dismissed the case. The judge explained that NICA had not followed the standard process for providers bringing Medicare reimbursement disputes (“channeling” them first through HHS and only then going to federal court). As a result, NICA was dropped from the case and the judge concluded that the lawsuit should be dismissed for improper venue—meaning that, with NICA eliminated from the case, none of the remaining plaintiffs had a sufficient connection to the Western District of Texas for the case to be heard there. The plaintiffs subsequently appealed to the Fifth Circuit, with briefing focusing on issues primarily related to standing and venue. Oral argument was held in May 2024.
The Fifth Circuit’s Decision
Majority Opinion
Judge Jennifer Walker Elrod, a George W. Bush appointee, wrote the majority opinion for the Fifth Circuit panel. She was joined by Judge Kyle Duncan (a Trump appointee).
The majority began with standing, the threshold requirement for challengers to bring a lawsuit in federal court. The majority found that NICA “has alleged sufficient facts to establish both economic injury and procedural injury.” The court stated that NICA had established a future economic injury. Although the court acknowledged that NICA was a third party to the drug price negotiation program, not a drug manufacturer; it nevertheless found that NICA would likely suffer economic harm because “the selection of a drug will inevitably lead to a lower market price for that drug . . .” and consequently diminution of revenue. And the court found a present economic injury, finding that NICA had adequately shown how the negotiation program currently “limits its members’ ability to obtain necessary debt and equity capital.”
The court next turned to whether NICA also has standing based on procedural injury. The majority provided a cursory analysis of the relevant test courts apply under the Due Process Clause. With respect to the “private interest affected,” without examining relevant case law, the majority wrote that the negotiation program “substantially impacts NICA members’ revenue and ability to stay in business.” The majority pointed to a “procedural deficiency” associated with the lack of notice-and-comment rulemaking under the negotiation program, and suggested that providing a party like NICA an opportunity to comment could cause HHS to reconsider its negotiation decisions.
Notably, this analysis (in the context of whether NICA can even bring this lawsuit) appears to contrast with the holdings of other federal district court judges who have carefully considered the merits of similar due process claims by the pharmaceutical industry against the drug price negotiation program. For example, a district court judge in Delaware rejected AstraZeneca’s Due Process Clause challenge, holding that “[n]o one . . . is entitled to sell the Government drugs at prices the Government won’t agree to pay.” Judges in Connecticut and New Jersey also rejected similar Due Process claims, focusing on the lack of a protected property interest and voluntary nature of the Medicare program.
In a footnote, however, the majority explained that NICA did not have standing for its Nondelegation Doctrine and excessive fines claims. At its core, the majority noted that the procedural harm alleged in connection with those claims directly impacted drug manufacturers, not NICA itself.
Next, the majority turned to whether NICA’s claims had to be “channeled” administratively through the agency. Ultimately, the majority found that NICA was challenging the IRA, not the Medicare Act. The majority also noted that NICA was focused on “allegedly unconstitutional government processes” that affected prices, not particular reimbursement levels themselves. Because the majority held that NICA’s claims “are not inextricably intertwined with the Medicare Act,” the court had jurisdiction to hear the case.
The majority accordingly reversed the district court’s decision and sent the case back down to the district court for further briefing and review.
Dissent
Judge Irma C. Ramirez, a recent Biden appointee, wrote the dissenting opinion. Judge Ramirez wrote that the panel should have held that NICA lacked standing and must “channel” its claims administratively.
Zeroing in on the procedural injury arguments made by NICA, the dissent explained that because Medicare “does not entitle NICA’s members to a profit, it has not identified a concrete interest of which its members are deprived.” Pointing to existing precedent, including recent challenges against the drug price negotiation program, Judge Ramirez explained, “[i]f the drug manufacturers that are the object of the Program’s regulations have not been found to be deprived of any protected interests under the Program, it is unclear how these providers could be.”
As to NICA’s economic injury theories, Judge Ramirez wrote that the law “does not entitle NICA’s members to profit from [Medicare] Part B reimbursements.” And because the negotiation program “does not regulate investors,” she rejected the supposed economic harm to this group. Such investors are “independent third parties” who could decide not to invest in NICA’s members regardless of what happens to the negotiation program going forward. Given the lack of certainty of such economic injury or demonstration that such injury could be addressed through blocking enforcement of the program, Judge Ramirez would also reject this theory of standing.
Addressing the issue of whether NICA had to “channel” its due process claim through HHS, Judge Ramirez concluded that under existing precedent, channeling was required because “NICA’s claims arise at least in part under the Medicare Act.”
Takeaways
Looking ahead, the Fifth Circuit’s recent decision will have an immediate impact on the ongoing lawsuit brought by the pharmaceutical industry in Texas. The decision means that PhRMA and its industry allies will be able to pursue the substance of their due process claim back at the district court. Briefing will likely take months and a final decision will probably not be issued until well into the new year. If the industry loses on the merits of its due process claim in the district court in Texas (which is possible, as nothing in the Fifth Circuit’s majority opinion guarantees an outcome either way), it would just appeal back to the Fifth Circuit.
More broadly, however, the reach of this decision is unclear and could be fairly limited. The Fifth Circuit’s majority opinion is largely technical, concerning standing and the requirement to “channel” certain Medicare reimbursement challenges through HHS. The Excessive Fines Clause and Nondelegation Doctrine claims seem to be entirely rejected for now. The short, cursory analysis of NICA’s protected property interest under the Due Process Clause stands in tension with the conclusion of several other district judges that have benefitted from full briefing of the substantive legal arguments. And multiple appellate courts, with the Third Circuit likely to act first (after oral argument slated for October 30), may issue new rulings on similar due process challenges in the coming months.
A broad coalition of academics, Medicare experts, US Senators, and health care professional organizations have filed amicus briefs in support of the government. The briefs highlight the stakes of these cases for managing the Medicare program, containing health care costs, and protecting the scope of federal authority. If the Administration is able to secure additional victories in those cases, it will be on stronger footing to push back against due process arguments in the Fifth Circuit.
