Correcting the record: IRA’s government price setting provisions are unconstitutional

Let’s start by making one thing clear: The price setting program is not voluntary.

Jim C. Stansel
Jim StanselSeptember 8, 2023
Woman patient talking with woman doctor.

Correcting the record: IRA’s government price setting provisions are unconstitutional.

Let’s start by making one thing clear: The price setting program is not voluntary.

Manufacturers are forced between a rock and a hard place under the price setting scheme. Once a manufacturer’s medicine is selected for price setting, there are only two options if the manufacturer does not capitulate to the government and its unilaterally determined price:  

1. Pay a tax of up to 1,900% (not 95%) on the total sales revenue of the medicine selected for price setting. News coverage misreports the tax as an “up to a 95% tax.” To be sure, a 95% tax on all sales would be devastating, but the real tax is up to 1,900% due to the convoluted formula in the statute.

Don’t take my word for it — the Congressional Research Service found the same thing. And recent IRS guidance confirms it. As an analogy, this is like trying to sell your car to someone and, if they propose a price you are unwilling to accept, you must give them not just your car, but 19 cars. 

2. Watch all their medicines get withdrawn from Medicare (Parts B and D) and Medicaid, not just the medicine selected for price-setting. Even if manufacturers were to consider this option, it’s not up to them; CMS gets to decide. A manufacturer-initiated withdrawal would take 11 to 23 months to take effect, during which period the manufacturer would be required to disclose proprietary information and “agree” with CMS’ actions. And exiting Medicare and Medicaid is not just financially impossible, it would devastate millions of patients’ access to frequently prescribed medicines, as both Medicare and Medicaid coverage would no longer be available for all of the manufacturer’s products.  

It’s also important to note that no other U.S. government program “negotiates” in this way.  

Some claim the government already sets the price of medicines for the Department of Veterans Affairs (VA), and the IRA’s price setting scheme is no different. That couldn’t be further from the truth. On the simplest level, manufacturers can choose not to accept the VA’s price without facing a ruinous excise tax like the one in the IRA.  

Looking at the functionality of the two programs, the difference is even more clear: 

  • The VA health system is unique, using a closed system of providers and a centralized coverage, drug acquisition and distribution system. Because the VA directly purchases medicines from pharmaceutical manufacturers, its prices do not include retail distribution costs, such as dispensing fees to compensate pharmacists. Moreover, because the VA distributes medicines through its own closed health care system, financed separately, the VA prices for medicines do not include costs for storage, overhead or dispensing. 

  • Medicare Part D, on the other hand, is administered by nearly 1,000 different health plans which rely upon local retail pharmacies. Forcing manufacturers to sell medicines to retail pharmacies at a government mandated price is unprecedented.   

And, alarmingly, the law has already harmed medical innovation.  

In the year since the IRA became law, drug development is already under threat. As a recent analysis shows, R&D investment is already shifting away from small molecule medicines as a result of the IRA’s “pill penalty,” despite the significant benefit these types of medicines have for patients. One manufacturer has made clear they are “not going to do certain [clinical] trials … because it is becoming financially not viable.” And another noted the IRA is “leading to companies…deprioritising [sic] pills for the elderly, which is not going to be the right thing in the long run for public health.” 

As the court cases continue, the focus should be on the unprecedented harms caused by the administration’s price setting scheme, as well as its lack of constitutionality.

More information about our lawsuit is here.  

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