While most U.S. peer countries use their purchasing power to negotiate prices with pharmaceutical companies, federal law has prohibited Medicare from negotiating drug prices. But last year, Congress passed the Inflation Reduction Act (IRA) and authorized the U.S. Department of Health and Human Services (HHS) — through the Centers for Medicare and Medicaid Services (CMS) — to negotiate the prices that Medicare pays for some of the costliest brand-name prescription drugs.
Following the same playbook that other well-resourced interest groups have used to challenge major legislative reforms, the pharmaceutical industry has now shifted its efforts to the courts. The pharmaceutical industry and its allies are now pursuing several challenges to the Medicare Drug Price Negotiation Program enacted under the IRA on various grounds, including the First Amendment, Due Process and Takings Clauses of the Fifth Amendment, nondelegation doctrine, and others. Here, we analyze the claim that the negotiation program violates the Procedural Due Process Clause and highlight the government’s major responses to that claim in litigation pending before a federal court in Ohio.
Background on Procedural Due Process Claims
Three of the six lawsuits filed so far argue that the negotiation program violates the Fifth Amendment’s Procedural Due Process Clause, which prohibits the government from depriving any person “of life, liberty, or property without due process of law.” The Due Process Clause requires the government follow a fair process before depriving anyone of a protected right. The lawsuits allege that the IRA denies drug manufacturers the right to sell their products at market rate prices without providing constitutionally sufficient safeguards.
In a case filed in Texas, Pharmaceutical Research and Manufacturers of America (PhRMA) and other groups claim that the negotiation program deprives manufacturers of the “right to sell their products at market prices free from arbitrary and inadequately disclosed governmental constraints.” It also claims that the negotiation program deprives drug manufacturers “of their interest in adequate reimbursement.” Because the IRA does not require CMS to go through rulemaking for the first three years and bars judicial review of some parts of the drug negotiation process, the PhRMA lawsuit claims that the negotiation program denies manufacturers, providers, and patients the opportunity to be heard. A lawsuit brought in Ohio by the U.S. Chamber of Commerce (Chamber), along with their state and local chapters, substantially makes the same arguments, claiming that manufacturers have the right to be free from arbitrary and discriminatory prices, and the negotiation program deprives them of that right by requiring CMS “to fix prices at the ‘lowest’ level, without procedural safeguards.” The lawsuit by Astellas, a drug manufacturer, in Illinois takes the due process claim even further, arguing that because CMS is entrusted with both implementing the negotiation program and achieving the lowest maximum fair price (MFP), CMS cannot be impartial.
The Chamber’s Arguments for a Preliminary Injunction and the Government’s Response
On July 12, 2023, the Chamber filed a motion for preliminary injunction in Ohio, asking the court to prohibit the administration from implementing the negotiation program on due process grounds. Its argument is mainly based on Michigan Bell Telephone Company v. Engler, a Sixth Circuit decision about rate-setting legislation for public utilities. The Ohio federal district courts fall within the Sixth Circuit’s jurisdiction and are bound by Sixth Circuit precedent. Relying on Michigan Bell, the Chamber argues that under the Due Process Clause, a price-control scheme must guard against confiscatory rates by providing “a fair and reasonable rate of return of investment.” Because the IRA directs CMS to achieve the lowest MFP without establishing any minimum threshold, the Chamber argues, it does not protect against confiscatory prices and therefore violates the Due Process Clause.
The Chamber’s reliance on Michigan Bell, however, is misplaced. That case dealt with a Michigan statute abolishing fees certain telephone companies imposed on users. The due process protection against confiscatory rates discussed in Michigan Bell applies only to public utilities. Indeed, as the Sixth Circuit stated in Michigan Bell, “the constitution protects utilities from being limited to a charge for their property serving the public which is so unjust as to be confiscatory.” (emphasis added). Thus, as the DOJ points out in its opposition to the Chamber’s motion for a preliminary injunction, the reasoning in Michigan Bell does not apply to the negotiation program, because drug manufacturers are not public utilities.
Public utilities are constitutionally protected from confiscatory rates because they are legally compelled to provide services to the public. But unlike public utilities, drug manufacturers are private businesses that voluntarily sell drugs to various purchasers — including commercial insurers, the Department of Veterans Affairs, Department of Defense, and Medicaid — at negotiated prices. Participation in Medicare is voluntary, and manufacturers can walk away if they find the MFPs unfairly low or confiscatory, as they argue. As the DOJ emphasizes, the negotiation program “does not compel manufacturers to surrender their property — at any price.”
Additionally, contrary to the Chamber’s claim, the IRA does not authorize HHS to set confiscatory rates. Rather, the IRA directs HHS to develop a methodology for establishing the MFP considering nine specific statutory factors and aim to achieve a fair price for each selected drug. And the negotiation process is bilateral and gives manufacturers various opportunities to provide HHS the necessary data to inform the fairness of the final price. Unlike the legislation at issue in Michigan Bell that abolished utility fees, the drug price negotiation program simply established thresholds that Medicare may not exceed when it pays for select prescription drugs.
Further, as the DOJ notes, the Chamber’s arguments fall short because they do not address the Supreme Court’s decision in Verizon Communications, Inc. v. FCC, which “effectively overruled” Michigan Bell. In that decision, the Supreme Court explained that it would not consider how a methodology affects payment rates as “confiscatory” without a challenger pointing to “particular, actual” rate orders that threaten an entity’s “financial integrity.” At this stage of the litigation, even assuming the Due Process Clause protections of public utilities against confiscatory rates applied to drug manufacturers, the Chamber cannot definitively establish that any of the negotiated prices will threaten their “financial integrity.” The Chamber’s facial challenge of the negotiation program is therefore untenable under Supreme Court precedent addressing confiscatory rates.
The DOJ highlighted the consequences for Medicare and other federal programs if the court sided with the Chamber, noting that for those businesses, like the drug manufacturers, who “depend on government dollars” it “would mean that the manufacturers have a constitutional right to dictate the government’s expenditures.” Overall, the DOJ stresses that the Chamber’s legal objection to the Medicare drug negotiation program “is little more than a dispute with the policy choices made by Congress, masquerading as constitutional theory.” The DOJ further warns that the “public’s interests would be gravely disserved” — including seniors and taxpayers — if the court in Ohio blocked implementation of the Medicare drug negotiation program before the program even technically started.
Analyzing Claims Against the Negotiation Program under Procedural Due Process Precedents
While the Chamber claims its arguments are based in the Procedural Due Process Clause, it essentially makes Substantive Due Process arguments that resonate with the Takings Clause. And the DOJ pushes back against the Chamber’s effort to cloak Taking Clause arguments in Due-Process garb. The DOJ emphasizes that “the Supreme Court has made clear that the ‘constitutional protection of utilities from confiscatory rates derives from the Takings Clause of the Fifth Amendment.’” As discussed above and in our previous deep dive in the Takings Clause claims, the Chamber’s arguments are not supported by Takings Clause precedent. The Chamber’s claims fare no better when properly analyzed under the Procedural Due Process Clause.
To succeed in its procedural due process claim, the Chamber must show that: (i) it has been deprived of a protected property right or interest; and (ii) the government failed to provide adequate procedural protections in denying that right or interest. A property right that triggers the Due Process Clause must be more than a unilateral expectation or “an abstract need or desire.” Only “a legitimate claim of entitlement” triggers procedural due process concerns.
Under that legal framework, the Chamber must point to a specific law that entitles manufacturers to freedom from “prices that are arbitrary, discriminatory, and demonstrably irrelevant,” as they claim. But they cannot do so. As discussed above, the case on which they rely for that right applies only to public utilities, which the courts have refused to apply in other contexts. Moreover, the Medicare program creates no such right. Simply because federal law previously prohibited Medicare from negotiating the price of prescription drugs does not mean it perpetually excludes manufacturers from negotiation. As the DOJ points out, claiming that the Due Process Clause entitles manufacturers to “force their drugs onto the government at unilaterally dictated” prices is similar to “a defense contractor . . . build[ing] an aircraft carrier and forc[ing] an unwilling Pentagon to buy it (at any price).”
Even if manufacturers had a right to sell prescription drugs at the price they desire, they cannot show that the IRA lacks adequate procedural protections to guard against deprivation of such right. The Supreme Court has adopted a flexible three-factor test for determining the validity of mechanisms afforded for procedural due process standards.
First, as previously noted, the Chamber cannot show that the negotiation program violates an entitlement to sell drugs “at market-based prices.” Second, the Chamber is unlikely to show that the lack of administrative and judicial review creates a risk of erroneous deprivation or how such review would mitigate this risk. The IRA lays out a detailed process for establishing each drug’s MFP. It specifies the factors and data that HHS must consider, and allows manufacturers to participate in the negotiation process. The Chamber will be hard-pressed to show that this congressionally required process falls short. Third, the Chamber argues that withholding administrative and judicial review is unprecedented and not supported by any governmental interest. Not so. According to a recent study, there are at least 190 provisions in the federal code barring judicial review. The Medicare statute bars judicial review in at least 25 instances. And the IRA instructs CMS to implement the negotiation program through instruction and guidance — enabling CMS to meet strict deadlines. As CMS noted in its revised guidance about the negotiation program, going through the ruling-making process would “be impracticable, unnecessary, and contrary to the public interest.”
Next Steps in the Litigation
The Chamber requested a decision on its motion by October 1. The judge may decide the case on the filings themselves or schedule oral argument before making a decision.
Besides pushing back against the Chamber’s preliminary injunction motion, the DOJ filed a motion to dismiss the Chamber’s case on multiple preliminary grounds. The DOJ argued that the Chamber lacked standing, arguing the Chamber could only speculate on whether its drug manufacturer members would be harmed by the negotiation program. Also, to satisfy standing requirements as an association, the Chamber must identify actual members that would have standing independently. But the member manufacturer that claims to be injured, AbbVie, only markets a drug that they speculate will be selected for negotiation. The negotiation process involves the “primary manufacturer” of a drug, not the marketer. So the legal obligations under the statute that the Chamber claims harm AbbVie do not even apply to AbbVie. The DOJ also argued that the Chamber’s case was not yet ripe. Even if AbbVie could show they are harmed by the Medicare drug negotiation program, it would not be until 2026, when new prices would take effect.
On August 14, 2023, various nonprofit organizations supporting patient access to health care, led by Public Citizen, filed an amicus brief supporting the DOJ’s position. The organizations wrote that while the Chamber’s motion “gives short shrift to the public interest, enjoining the negotiation process would risk derailing the benefit to seniors that Congress intended . . . at the expense of seniors’ physical and financial health.”
The court in Ohio may ultimately rule narrowly to dismiss the Chamber’s motion for a preliminary injunction on procedural grounds without addressing the merits of the arguments both sides presented related to due process.
The due process arguments in these cases — including relying on inapposite cases and failing to address controlling Supreme Court precedents — show how interest-groups will stop at nothing in their efforts to thwart the drug negotiation program. While the Chamber’s claims appear to be on shaky grounds, other cases raise the same claims that will likely be refined as litigation continues. Beyond the negotiation program, a victory for challengers on due process grounds would fundamentally hamper the federal government’s efforts to reduce unnecessary taxpayer expenses for major programs that benefit tens of millions of Americans.