Drug companies laying groundwork for IRA litigation

Lawsuits could be filed as soon as June seeking to delay, shape implementation of the Inflation Reduction Act

Comments filed by the biopharma industry about CMS’s draft guidance on implementing the Inflation Reduction Act are a roadmap to litigation trade associations and companies will file over the next year as part of a broad ranging strategy to delay Medicare drug price negotiation and blunt its impacts on the industry. 

The litigation is likely to be filed in waves, starting with cases challenging the procedures CMS has used to stand up the Medicare drug price negotiation program and asserting that some aspects of the law are unconstitutional. PhRMA and some of its members could file these cases as soon as June, individuals briefed on the trade association’s plans told BioCentury.

No IRA litigation has been filed or announced, but trade association board members and attorneys who represent drug companies told BioCentury the comments submitted by the industry were written with an eye on the courts — and Congress. Given the stakes, the question is when lawsuits will be filed, not whether they will be filed.

In addition to trying to delay and shape implementation of the IRA’s price negotiation program, filing lawsuits would send a signal to the industry’s allies in Congress. Republican leadership in the House has expressed frustration about the pharmaceutical industry’s muted response to the IRA and has indicated that industry should take a more aggressive stance if it wants GOP members of Congress to prioritize the issue, biopharma lobbyists told BioCentury.

While there are arguments supporting filing lawsuits now in response to the draft guidance, attorneys working for the biopharma industry told BioCentury the most likely trigger for the first suits will be release of final guidance. CMS has stated it will finalize the guidance by July.

More lawsuits are likely to be filed over time by companies that manufacture drugs selected for price negotiation, and then by companies contesting prices and/or the processes used to arrive at those prices. The list of the first 10 drugs subject to price negotiation is scheduled for release Sept. 1. 

The comments, filed in response to draft guidance released March 15, point to legal strategies for delaying the program’s launch and forcing CMS to revise its implementation in ways that could substantially reduce the impacts on drug companies.

Comments reviewed by BioCentury argue that the Medicare drug pricing program is “legally flawed,” and contend that CMS must allow for more extensive engagement with stakeholders, even if public consultation causes it to miss statutory deadlines for launching the negotiation program. The biopharma industry is also challenging the legality of criteria CMS plans to use to select drugs that will be subject to price regulation, including its criteria for defining whether a product is sole source.

Another likely target of litigation will be the extraordinary measures CMS wants to impose to prevent companies from disclosing information about the price negotiation process, especially its plans to require the destruction of all documents created as part of the negotiations.

A comment from BIO hints at a possible attempt to overturn the IRA Medicare drug price negotiation program altogether. “BIO and our members have long argued that the underlying structure of the negotiation program, as set forth by the statute and implemented here by CMS, is legally flawed. In review of the punishing penalties for non-compliance, and the general inflexibility of the process for product selection and maximum fair price (MFP) implementation, these legal flaws cannot be overcome through general guidance clarity at this stage.”

Because the timing and outcomes of lawsuits are uncertain, it isn’t clear whether or how drug companies and investors can factor litigation into decisions about investments and pipeline prioritization.

Demand for formal rulemaking

CMS has stated that Congress exempted IRA implementation from the standard notice-and-comment rulemaking process, and that because creating and launching the Medicare drug price-regulation program on a tight timeline is a heavy lift, it has opted to take advantage of the exemption. 

Instead of using the standard rulemaking process, CMS issued draft guidance and provided a 30-day period for comments on specific portions of the guidance while stating that other portions are final.

In soliciting public comments, the agency stated that the Sept. 1 deadline for announcing the first 10 drugs that will be subject to price regulation constitutes “good cause” for not subjecting certain aspects of the guidance to change based on public comment.

In addition to streamlining the establishment of the program, avoiding the notice-and-comment process allows CMS to sidestep some kinds of legal challenges.

At least two commenters, PhRMA and Terns Pharmaceuticals Inc. (NASDAQ:TERN), however, argue that CMS violated the law by opting out of the rulemaking process.

“CMS is incorrect that the Guidance is exempt from procedural requirements of the Medicare statute or the Administrative Procedure Act (APA) and that the Agency need only ‘voluntarily’ accept comments,” PhRMA stated. “Under the APA, the Guidance is a legislative rule; under section 1871 of the Social Security Act (SSA), program guidance or program instructions that establish a ‘substantive legal standard’ must be issued with notice and 60 days of comment in the Federal Register.”

Terns said it disagrees with CMS’s “position that Congress exempted CMS from the APA and notice-and-comment rulemaking obligations.”

While Congress authorized implementation of the IRA’s drug pricing provisions “by program instruction or other forms of program guidance,” Terns stated that any exemption from standard rulemaking procedures applies only to guidance that does not “alter substantive rights.” The draft guidance fails to meet that test, according to Terns.

“The substantive complexity of the IRA’s Medicare Drug Price Negotiation Program—that being an excuse or basis for skipping the notice and comment process—is, in fact, a strong reason why notice and comment requirements exist, and why stakeholder input should be sought and considered,” Terns stated.

The company advised CMS to revert to the rulemaking process before finalizing the guidance, a path that would almost certainly prevent it from meeting the Sept. 1 deadline for selecting the first drugs for the price-negotiation program. Failure to do this, Terns warned, “will invite stakeholder litigation and further delay IRA implementation.”

Arguing that CMS has violated the APA could give trade associations and biopharma companies an early opportunity to sue CMS because they can argue that they’ve been harmed by the lack of opportunity to provide comment, attorneys working with industry told BioCentury. 

Arguments made by PhRMA, Terns, BIO and other commenters that highlight CMS’s decision to finalize the section of the draft guidance dealing with selection of the initial slate of drugs for price-regulation could add weight to lawsuits asserting that the agency has not provided adequate opportunity to comment.

PhRMA said it is “particularly troubled” that CMS designated this section final, noting that the agency precluded public comment on issues of great importance to patients, including which drugs and forms of drugs would be subject to price setting and the statute’s orphan drug exclusion. Finalizing this section “without notice and comment denies the Agency the expertise of all stakeholders and raises serious legal questions,” PhRMA stated.

BIO expressed “strong disappointment that key aspects of this guidance have been issued as final without soliciting comment, which is a concerning step backward from CMS’s stated commitment to transparency.”

The EveryLife Foundation also expressed concern over the inability to provide comment. “As a rare disease-focused organization, we are particularly concerned about the lack of opportunity to provide input into the criteria for determining eligible products for the initial price applicability year of 2026.”

Finalizing the criteria for drug selection without notice and comment violates the Due Process Clause of the U.S. Constitution, RA Capital Management and OrbiMed Advisors LLC said in joint comments.

The comments from the trade associations and other stakeholders read like the opening statements in a lawsuit. If industry goes to the courts to force CMS to accept comments on sections of the guidance that CMS deemed final, the agency could be forced to delay launch of the negotiation program.

According to Sidley Austin Partner Meenakshi Datta, CMS’s argument that it is unwilling to accept feedback on certain aspects of the draft guidance because considering comments would cause it to miss deadlines may not resonate with the courts.

Speaking on a webinar sponsored by BioCentury and Putnam, Datta said expediency and the desire to meet a tight timeline are not permissible reasons for excluding comment. She noted there is precedent for CMS missing statutory deadlines because it needed more time to craft policies.

“There have been dozens of instances by CMS over the years, including the Medicare Modernization Act, including the Affordable Care Act,” Datta said, “where they have had statutory deadlines that they blew.”

CMS wants to lump formulations, doses

Writing the IRA was comparatively easy; figuring out how to make it work is far more difficult. The Byzantine nature of the U.S. healthcare system and the nuances of drug regulation add to the complexity.

A fundamental issue, crafting a policy for setting the prices of drugs that have been approved under separate NDAs and BLAs because they are marketed in different formulations and doses, illustrates how hard it is to fit the messy biopharma world into the IRA’s drug price regulation scheme.

The solution CMS has come up with is bad news for drug companies — and the industry says it is illegal.

The agency decided to lump all drugs that include the same active moiety together for purposes of drug price regulation, and to use the approval date of the oldest product as the tripwire for the countdown to eligibility for the negotiation process. It will, however, treat combinations that include two or more active moieties as separate products.

While treating all formulations and doses as a single product prevents drug companies from making minor tweaks to a product to avoid price regulation, it fails to acknowledge that new formulations can sometimes have high value to patients.

It also creates an avenue for at least partially evading price setting.

Because the IRA’s price-setting procedures only apply to single-source drugs, in certain circumstances, companies could use the lumping of doses and formulations to their advantage.

For example, a drug company could allow or encourage generic or biosimilar products to launch with “skinny” labels that permit marketing for only a portion of the indications on the original product’s label. The manufacturer of the original product would then be exempt from price setting and have opportunities to retain part of the market.

Similarly, generic or biosimilar products could be approved for a formulation that is little-used, making a more widely used improved formulation of the original drug exempt from price setting.

CMS stated in its guidance that in establishing whether a product can be excluded from negotiation because generic or biosimilar versions have been approved, it will seek to ensure that there is “bona fide” marketing of the competing product, and to determine if the product should retain the exemption, “CMS intends to monitor whether robust and meaningful competition exists in the market.”

CMS stated that it will exempt a drug from the negotiating process only after data from Medicare Part D demonstrate there is “bona fide marketing of that drug or product.” This shifts the goalpost for making a drug subject to price negotiation from approval of a generic or biosimilar competitor to Medicare plans reporting the launch of that competitor. 

While the draft guidance indicates how it will determine if a generic or biosimilar has been launched, it does not otherwise define how it will determine if there is bona fide competition. 

BIO asserted in its comments that CMS’s decision to lump all forms of a drug is illegal.

“It is imperative,” the trade association wrote, “that CMS reconsider its approach to identifying a qualifying single source drug and its dosage forms and strengths by reference to common active moiety (drugs) or common active ingredient (biologics), and instead identify such a drug and its dosage forms and strengths by reference to common New Drug Application (NDA) or Biologics License Application (BLA).”

BIO stated that the language in the IRA makes it clear that a “qualifying single source drug is distinguished by a distinct approval or licensure—i.e., a distinct NDA or BLA.”

RA Capital and OrbiMed urged CMS to “define a Qualified Single Source Drug by its NDA or BLA to encourage development of new and meaningfully better formulations.”

The investors cited the development of a formulation that could be taken less frequently and is less onerous for the patient, for example, because it doesn’t have to be taken with food.

Both BIO and PhRMA assert that the bona fide marketing standard is illegal and that it undermines the intent of the law. No Patient Left Behind (NPLB), a non-profit organization comprising biotech investors, researchers, physicians and patient advocates, also called the bona fide standard “extra-statutory.”

BIO wrote that the bona fide marketing standard for “determining the date of marketing of a generic or biosimilar is incompatible with the statute and contrary to sound public policy.”

Mission Impossible gag order

Although the law describes the price regulation exercise as a “negotiation,” CMS outlined restrictions in its draft guidance that are intended to ensure its complete control over the process.

Opposition to these provisions is likely to be included in a lawsuit PhRMA plans to file this summer, BioCentury has learned. 

CMS is trying to impose gag measures that seem to be borrowed from a Mission Impossible movie. The agency wants to require manufacturers to destroy — and certify it has destroyed — all records of its interactions with CMS related to price regulation.

The guidance contemplates barring companies from making public “any information in the initial offer or any subsequent offer by CMS, the ceiling price contained in any offer, or any information contained in any concise justification provided with an offer. Further, a Primary Manufacturer shall not disclose to the public any information exchanged verbally during the negotiation period.”

CMS contemplates similar document destruction and gag orders on other aspects of its communications with companies, such as decisions to determine whether a product can be exempted from price-setting because it is not a sole-source drug.

The draft guidance indicated that CMS would make exceptions from the document destruction to allow companies to comply with state and federal laws.

Several commenters argued that the gag provisions of the draft guidance are illegal.

PhRMA asserted that the document-destruction requirements “constitute impermissible restrictions on the freedom of speech. Indeed, the requirement to destroy information ‘receive[d] during the negotiation period from CMS’ goes a significant step further even than a prior restraint on publication. It is hard to imagine almost any scenario (outside the national security context) in which the government can justify forcing a private individual to destroy the individual’s own property — even the individual’s own notes — in order to prevent truthful information from getting out.”

PhRMA noted that “taken literally, the Guidance would require manufacturers to destroy emails, notes, and other records of their own internal company deliberations, so long as those deliberations ‘pertain to negotiations,’ regardless of whether the records reflect information from CMS itself.”

Among the trade association’s objections, it noted that the policy would “prevent manufacturers from reporting inappropriate or unlawful behavior by CMS or its employees and officials, since such disclosures are usually not ‘required by applicable state or federal law.’” It concluded that the “government has no legitimate interest — much less a compelling interest — in commanding such a result.”

BIO also said the proposed gag and document destruction policies violate constitutional free speech protections and create legal jeopardy. In addition, it noted the asymmetry of the proposed document destruction regime, which wouldn’t apply to CMS, as well as the legal hazard it creates for manufacturers. “Basic due process mandates that manufacturers be given the ability to maintain records related to negotiation proceedings. As CMS knows, the statute contemplates penalties of up to $1 million per day for failing to submit required information.”

Net or gross?

Biopharma industry comments raise other issues that could end up as grist for the legal mill.

BIO, for example, stated that CMS’s decision to base its calculations of maximum fair price (MFP) on net rather than gross prices violates the IRA. The MFP serves as the ceiling, or maximum price Medicare can pay for a drug that is subject to negotiation.

By basing the MFP on the net price, after rebates, CMS has ensured that in most cases the maximum price will be lower than it would be if the gross price was used.

“CMS’s proposed approach is contrary to statute, which makes clear that the MFP ceiling option must be determined by reference to the Part D negotiated price,” BIO stated.

BIO and PhRMA argue that CMS’s proposal to treat patents and exclusivity as grounds for reducing prices is illegal. “By imposing a financial penalty on manufacturers for obtaining patents and exclusivities, CMS would exacerbate the serious concerns that the Program raises under the Takings Clause of the Fifth Amendment to the U.S. Constitution, including by effectively depriving manufacturers of part of the value of a patent or exclusivity,” PhRMA stated.

PhRMA also contends that the civil monetary penalties (CMPs) authorized in the IRA are unconstitutional.

The law authorizes a “penalty equal to $100 million for each item of false information” given to CMS during the price negotiation process, which “is by far the highest CMP amount related to any federal health care enforcement regime,” PhRMA stated.

Other monetary penalties in the IRA are set at levels that are intended to assure compliance.

“These extraordinarily high penalties, by themselves, warrant notice-and-comment rulemaking prior to Agency implementation,” PhRMA argued. The trade association plans to make this argument in litigation that could be filed this summer. 

It also stated that the potential fines are so high that they “present serious concerns under the Excessive Fines Clause of the Eighth Amendment to the U.S. Constitution.” It advised CMS that although “amounts are set by statute, in seeking to impose a CMP on a manufacturer, CMS should consider whether a compromise penalty amount below the statutory amount is required to avoid this constitutional issue.”