Where Things Stand on Drug Pricing at the Halfway Point of 2023

While only slightly past the midway point of 2023, it has already been a busy year for developments in drug pricing. Notably, CMS released its final guidance in preparation for price negotiations and the first 10 drugs covered under the IRA, constitutional challenges to the IRA's drug-pricing provisions are mounting, and Congress is considering several new bills that seek to ban specific PBM practices and target certain types of conduct by drug manufacturers. In this alert, we examine these recent developments and outline some takeaways on where things stand on drug pricing in 2023.¹

The Inflation Reduction Act Faces Legal Challenges

The Inflation Reduction Act (IRA) contains several provisions aimed at lowering drug prices. The IRA empowers the Department of Health and Human Services (HHS) to "negotiate" drug prices for a narrow set of drugs and biologics under Medicare, imposes rebates on certain drugs with price increases greater than the rate of inflation, caps out-of-pocket costs for drugs under Medicare Part D, and limits copays for insulin under Medicare Part D to $35.² Industry participants and experts have warned that these provisions may limit investments in research development, curb innovation, and affect critical product-development decisions.³

Despite these concerns, the Centers for Medicare & Medicaid Services (CMS) has begun implementing the IRA's most controversial provision—the Medicare Drug Price Negotiation Program. CMS issued its final guidance for the first round of negotiations on June 30, 2023, including guidance on how CMS will select the drugs subject to negotiation and the negotiation process.⁴ CMS announced the first 10 drugs selected for negotiation under the program on August 29, 2023.⁵ Based on the current timeline, CMS will publish new prices for the negotiated drugs on September 1, 2024 and expects the prices to go into effect at the start of 2026.⁶

The fate of the IRA's negotiation program, however, remains unclear, as the program faces mounting legal challenges from major drug manufacturers, powerful business groups, and industry trade groups that allege the law is unconstitutional.⁷ Collectively, plaintiffs argue that:

• The excise tax imposed for non-compliance is so high that it coerces compliance and constitutes a "taking" of property without just compensation in violation of the Fifth Amendment;⁸
• The excise tax imposed for non-compliance is so high that it coerces compliance and forces manufacturers to publicly "agree" the government's proposed prices are "fair" in violation of the First Amendment.⁹
• Congress delegated too broad of discretionary authority to HHS in violation of the separation of powers.¹⁰
• The excise tax imposed for non-compliance is so high that the law effectively imposes excessive fines in violation of the Eighth Amendment.¹¹
• The law violates Fifth Amendment due process rights by failing to provide for judicial review for pricing decisions.¹²

As legal battles over the constitutionality of the IRA's negotiation provision gain steam, it remains to be seen if any of these challenges are likely to prevail in court. One of these lawsuits seeks a preliminary injunction to pause implementation of the law,¹³ while another seeks early summary judgment to permanently enjoin enforcement.¹⁴ Whether these actions will have a short- or long-term effect on the law or the timing of its implementation remains to be seen.

Drug Pricing Legislation Scheduled for Debate in the Senate

Five bills targeting drug prices were introduced to the Senate in late January 2023 and received committee approval in March 2023.¹⁵ Now on the calendar for full Senate review,¹⁶ these bills, which primarily focus on certain practices by industry participants that supposedly lead to higher drug prices, appear to have at least some level of bipartisan support.¹⁷

• The Preserve Access to Affordable Generics and Biosimilars Act of 2023 (S.142) seeks to ban so-called "reverse payment settlements" between patent holders and new generic or biosimilar entrants by classifying such settlements as presumptively anticompetitive.¹⁸ This classification imposes significant financial penalties (treble damages) on parties to such agreements. The bar to rebut that presumption and escape those penalties is high; parties would have to show by "clear and convincing evidence" that either: (1) payment to the generic or biosimilar manufacturer was solely for goods or services, or (2) that the procompetitive benefits of the settlement outweigh the anticompetitive effects.¹⁹
• The Affordable Prescriptions for Patients Act of 2023 (S.150) seeks to ban so-called "product hopping" by classifying it as an unfair method of competition under the FTC Act.²⁰ "Product hopping" occurs under the bill when a drug manufacturer "impedes competition" by making a "hard" or "soft" product switch within a certain period after being notified that a generic or biosimilar has referenced its product in an abbreviated new drug application.²¹ The Act defines "hard" switching as discontinuing or destroying a reference drug²² and a "soft" switching as taking any action to "unfairly disadvantage" a reference drug relative to a "follow-on product."²³
• The Interagency Patent Coordination and Improvement Act (S.79) would create an interagency task force between the United States Patent and Trademark Office ("USPTO") and the FDA to encourage information-sharing and technical assistance on patents for human drugs and biological products to increase regulatory efficiency and facilitate fraud monitoring.²⁴
• The Prescription Pricing for the People Act of 2023 (S.113) would require the FTC to study (1) the practices of PBMs such as spread pricing, steering, use of competitor proprietary data, and use of formulary designs to depress share of low-cost drug use; along with (2) other trends within the pharma supply chain that may impact the price of prescription prices.²⁵ Additionally, the FTC must provide recommendations for Congress "to strengthen enforcement actions relating to anticompetitive behavior."²⁶
• The Stop STALLING Act (S.148) would classify submitting "sham citizen petitions" to the FDA as an unfair method of competition under the FTC Act.²⁷ The bill defines "sham" petitions as objectively baseless petitions regarding the safety or effectiveness of generic or biosimilar drugs that delay FDA approval of those drugs.²⁸

Regulators and Lawmakers Continue to Pressure PBMs and Seek New Reforms

Enforcers and lawmakers continue their focus on PBMs. The FTC recently voted to issue a statement cautioning against reliance on prior advocacy statements and studies related to PBMs that "no longer reflect current market realities."²⁹ This vote followed a long-running review of PBMs and related rebating practices that started in 2022 when the FTC announced a Section 6(b) inquiry into PBMs, released a policy statement classifying certain rebate practices as anticompetitive, released a policy statement listing certain "loyalty rebates" as an example of "incipient violations" under the FTC Act, and initiated enforcement action against agricultural companies Syngenta and Corteva regarding their alleged loyalty rebates, which may lay the groundwork for future actions against rebating practices in the pharmaceutical industry.³⁰

Congress has also been analyzing the impact of PBMs over the last few years, and at least eight new bills targeting PBMs have recently been introduced on the floors of both chambers.³¹ These bills appear to be aligned with reforms identified as meaningful in the 2021 Republican House Oversight Committee Report.³²

• The Pharmacy Benefit Manager Reform Act (S.1339) would increase oversight of PBMs by imposing reporting requirements on drug manufacturers related to drug pricing (including rebates).³³ It would also limit PBM pricing practices by requiring PBMs to pass rebates through to health plans³⁴ and effectively ban "spread pricing."³⁵ Notably, this legislation would not stop PBMs from negotiating rebates.³⁶
• The Drug Price Transparency in Medicaid Act (S.1038) would mandate pharmacies be transparent with national average drug acquisition costs and mandate "pass-through pricing" by limiting Medicaid payments to only ingredient cost plus dispensing fees and administrative costs "related to services rendered" by PBMs or other intermediaries.³⁷ The bill would also require intermediaries to make pricing and cost information—including rebates—available for audit;³⁸ outlaw the practice of spread pricing;³⁹ and require the SSA to collect, and make publicly available, information on individual pharmacies regarding price concessions.⁴⁰
• The Pharmacy Benefit Manager Transparency Act (S.127) would require PBMs to report certain information regarding payments received from health plans and fees charged to pharmacies annually to the FTC.⁴¹ It would also prohibit PBMs from engaging in supposedly "unfair and deceptive acts," including spread pricing, claw backs, and adjusting compensation based on federal reimbursements.⁴² PBMs would be exempt from liability for these acts if they pass along 100% of any price concession or discount to the health plan; and specify costs, prices, reimbursements, fees, markups, discounts, and aggregate payments received for their services.⁴³
• The "Patients Before Middlemen Act" (S. 1967) would require that contracts between PDP sponsors and PBMs to preclude the PBM from deriving any income in connection with Medicare Part D other than "bona fide services fees."⁴⁴ Bona fide service fees must be fixed dollar amounts that cannot be passed on to another party and cannot be based "directly or indirectly" on drug price, discounts, rebates, or a variety of other price-related metrics.⁴⁵
• The "Modernizing and Ensuring PBM Accountability Act," which incorporates much of the substance from other bills into a single law. Substantive provisions of the bill include delinking PBM service fees from drug list prices, banning "spread pricing," and requiring annual reports regarding PBM rebates to be filed with Medicare plans.⁴⁶ The Senate Finance Committee approved the bill on July 26, 2023.
• The Pharmacy Benefits Manager Accountability Act (H.R. 2679) would require PBMs to report significant drug pricing information to health plan sponsors annually.⁴⁷ The required information includes:
  • a list of covered drugs dispensed during the reporting period;
  • each drug's wholesale acquisition cost;
  • the total out-of-pocket spending by enrollees on each drug;
  • the reason for each drugs placement on the formulary;
  • the amount received by the PBM in rebates, fees, and alternative discounts for certain pharmaceutical drugs; and
  • the total net spending on prescription drugs by the health plan during the reporting period.⁴⁸
• The PROTECT 340B Act or Preserving Rules Ordered for Entities Covered Through 340B Act (H.R.4390) would prohibit health insurers and PBMs from discriminating against entities that participate in the 340B Drug Pricing Program.⁴⁹ It would also block insurers and PBMs from interfering in a patient's choice to receive drugs from a 340B pharmacy.⁵⁰
• The "Healthcare Transparency Act of 2023" (H.R. 4822) would subject PBMs to drug-pricing transparency standards, cost-performance, and data-reporting requirements.⁵¹ Under the bill, PBMs would be required to report drug prices and related information to HHS. As amended on July 26, 2023, the bill would prohibit certain Medicare Part D beneficiaries from being subject to cost sharing greater than the net cost of a drug after rebates.

What's Next?

As the existing drug pricing landscape continues to be redefined by these developments, the potential impact of these new approaches to targeting drug prices may be significant on the pharma industry. Highlighted below are several takeaways to monitor:

• Challenges to the IRA Likely Will Expand: While there have been several legal challenges to the IRA to date, we expect to see additional lawsuits from other drug manufacturers whose drugs are selected for negotiation and other industry groups. The recent efforts by two challengers to pause implementation of the law signal that courts will have to take on the merits of these challenges sooner than expected, and thus a decision on the viability of the legal challenges and ultimately the fate of the law could be reached in short order.
• Proposed Legislation Targeting Pharmaceutical Manufacturer Practices Face Uphill Battle: While the package of bills targeting supposed manufacturer practices proposed at the start of 2023 generated a lot of attention when it was announced, we expect that at least the substantive bills targeting specific manufacturer practices will face significant resistance moving forward. Indeed, many of these bills are similar, if not identical, to bills that were proposed the last two years that fell short of passing.
• PBMs Likely to Remain on the Hot Seat: As the FTC and Congressional investigations into the PBM industry continue to develop, PBMs face growing criticism from the public and lawmakers, with significant legislative proposals gaining support that could increase monitoring and reporting requirements and ban certain practices, such as spread pricing. We expect this focus on PBMs and their pricing practices to not only continue but intensify through 2023 and into 2024, with potential enforcement actions and new legislation being a real possibility.

White & Case's Global Competition/Antitrust Group and the White & Case Pharmaceuticals & Healthcare Industry Group are tracking these developments in competition and drug policy closely, with a specific focus on potential investigations and litigation.

_{1 New York Summer Associates Gwendolyn Johnson and Daniel O'Rourke also contributed to this alert.
2 Kevin C. Adam & Eugene Hutchinson, Five Drug Pricing Issues to Watch in 2023, White & Case Insight Alert (Dec. 20, 2022).
3 See, e.g., Cathy Kelly, IRA Effect: Alnylam Acting 'Rationally' In Halting Second Orphan Indication for Amvuttra – Analysts, Pink Sheet (Nov. 7, 2022); Joe Grogan, The Inflation Reduction Act Is Already Killing Potential Cures, Wall Street Journal (Nov. 3, 2022); John Stanford, Congress Must Fix the IRA's Small Molecule Penalty, STAT News (Mar. 6, 2023); Arti K Rai et al, Cryptic Patent Reform Through the Inflation Reduction Act, Harvard J L & Tech, forthcoming (Mar. 27, 2023); Cathy Kelly, Game On: Medicare Will Parry Manufacturer Efforts to Sidestep Price Negotiation, Guidance Says, Pink Sheet (28 March 2023); Cathy Kelly, Medicare Negotiation Workarounds: Lilly's Ricks on Big Pharma Pricing Strategies for Small Molecule Drugs, Pink Sheet (June 15, 2023).
4 Centers for Medicare & Medicaid Services, Medicare Drug Price Negotiation Program: Revised Guidance, Implementation of Sections 1191 – 1198 of the Social Security Act for Initial Price Applicability Year 2026, CMS.gov (June 30, 2023). CMS issued an initial guidance for implementing the negotiation provision in March of 2023.
5 Centers for Medicare & Medicaid Services, Statements by CMS Leadership on Historic Announcement of First Selected Drugs for Medicare Drug Price Negotiation, CMS.gov (Aug. 29, 2023).
6 See id.
7 See Joseph Walker, Merck Challenges U.S. Government's New Powers to Negotiate Drug Prices, The Wall Street Journal (June 6, 2023); Joseph Walker, U.S. Chamber of Commerce 7 Challenges Federal Government's New Drug-Price Powers, The Wall Street Journal (June 9, 2023); Joseph Walker, U.S. Plan to Negotiate Drug Prices Faces Fresh Industry Fire, The Wall Street Journal (June 21, 2023).
8 Joseph Walker, Merck Challenges U.S. Government's New Powers to Negotiate Drug Prices, The Wall Street Journal (June 6, 2023).
9 Joseph Walker, Merck Challenges U.S. Government's New Powers to Negotiate Drug Prices, The Wall Street Journal (June 6, 2023).
10 Joseph Walker, U.S. Plan to Negotiate Drug Prices Faces Fresh Industry Fire, The Wall Street Journal (June 21, 2023).
11 Joseph Walker, U.S. Plan to Negotiate Drug Prices Faces Fresh Industry Fire, The Wall Street Journal (June 21, 2023).
12 Joseph Walker, U.S. Plan to Negotiate Drug Prices Faces Fresh Industry Fire, The Wall Street Journal (June 21, 2023).
13 See Mot. for a Preliminary Injunction, Dayton Area Chamber of Commerce v. Becerra, No. 23-cv-00156 (S.D. Ohio July 12, 2023).
14 See Pls.' Mot. for Summ. Judgment, Merck & Co., Inc. v. Becerra, Civ. No. 1:23-1615 (D.D.C. July 11, 2023).
15 See S.142 - Preserve Access to Affordable Generics and Biosimilars Act, Congress.gov; S.150 - Affordable Prescriptions for Patients Act of 2023, Congress.gov; S.148 - Stop STALLING Act, Congress.gov; S.79 - Interagency Patent Coordination and Improvement Act of 2023, Congress.gov; S.113 - Prescription Pricing for the People Act of 2023, Congress.gov.
16 See id.
17 See id.
18 Preserve Access to Affordable Generics and Biosimilars Act § 27(a)(2)(A), S.142, 118th Cong. (2023).
19 Preserve Access to Affordable Generics and Biosimilars Act § 27(a)(2)(B), S.142, 118th Cong. (2023).
20 Affordable Prescriptions for Patients Act of 2023 § 27(b)(1), S.150, 118th Cong. (2023).
21 Affordable Prescriptions for Patients Act of 2023 § 27(b)(1), S.150, 118th Cong. (2023).
22 Affordable Prescriptions for Patients Act of 2023 § 27(b)(1)(A), S.150, 118th Cong. (2023).
23 Affordable Prescriptions for Patients Act of 2023 § 27(b)(1)(B), S.150, 118th Cong. (2023).
24 Interagency Patent Coordination and Improvement Act of 2023, S. 79, 118th Cong. (2023).
25 Prescription Pricing for the People Act of 2023, S.113, 118th Cong. (2023).
26 Prescription Pricing for the People Act of 2023, S.113, 118th Cong. (2023).
27 Stop STALLING Act, S.148, 118th Cong. (2023).
28 Stop STALLING Act, S.148, 118th Cong. (2023).
29 Federal Trade Commission Statement Concerning Reliance on Prior PBM-Related Advocacy Statements and Reports That No Longer Reflect Current Market Realities, FTC.gov (July 20, 2023).
30 Kevin C. Adam & Eugene Hutchinson, Five Drug Pricing Issues to Watch in 2023, White & Case Insight Alert (Dec. 20, 2022).
31 S.1038 - Drug Price Transparency in Medicaid Act of 2023, Congress.gov; S.1339 - Pharmacy Benefit Manager Reform Act, Congress.gov; S.127 - Pharmacy Benefit Manager Transparency Act of 2023, Congress.gov; H.R.2679 - Pharmacy Benefits Manager Accountability Act, Congress.gov; H.R.4390 - PROTECT 340B Act of 2021, Congress.gov; Wyden, Crapo, Menendez, Blackburn, Tester and Marshall Introduce Bipartisan Legislation to Reform PBMs and Bring Down the Cost of Prescription Drugs, finance.senate.gov.
32 Minority Staff, Committee on Oversight and Reform, U.S. House of Representatives, A View from Congress: Role of Pharmacy Benefit Managers in Pharmaceutical Markets (Report, December 10, 2021).
33 Pharmacy Benefit Manager Reform Act § 2(b)(1), S.1339, 118th Cong. (2023).
34 Pharmacy Benefit Manager Reform Act § 2(d)(1), S.1339, 118th Cong. (2023).
35 Pharmacy Benefit Manager Reform Act § 2(c)(1), S.1339, 118th Cong. (2023).
36 Mark Terry, Merck's Frazier Joins Growing List of Pharma CEOs Attacking Drug Rebates, Bio Space (October 9, 2018).
37 Drug Price Transparency in Medicaid Act § 2(a)(1), S.1038, 118th Cong. (2023).
38 Drug Price Transparency in Medicaid Act § 2(b)(1), S.1038, 118th Cong. (2023).
39 Drug Price Transparency in Medicaid Act § 2(a)(1), S.1038, 118th Cong. (2023).
40 Drug Price Transparency in Medicaid Act § 2(b)(1), S.1038, 118th Cong. (2023).
41 Pharmacy Benefit Manager Transparency Act of 2023 § 2(b)(2), S.127, 118th Cong. (2023).
42 Pharmacy Benefit Manager Transparency Act of 2023, S.127, 118th Cong. (2023).
43 Pharmacy Benefit Manager Transparency Act of 2023 § 2(b)(1), S.127, 118th Cong. (2023).
44 Patients Before Middlemen Act § 2(a), S.1967, 118th Cong. (2023).
45 Patients Before Middlemen Act § 2(a), S.1967, 118th Cong. (2023).
46 Noah Tong, Senate Finance Committee Votes to Impose Drug Pricing Standards on PBMs, Fierce Healthcare (July 27, 2023).
47 Benefits Manager Accountability Act, H.R.2679, 118th Cong. (2023).
48 Benefits Manager Accountability Act, H.R.2679, 118th Cong. (2023).
49 PROTECT 340B Act of 2023, H.R.2534, 118th Cong. (2023).
50 PROTECT 340B Act of 2023, H.R.2534, 118th Cong. (2023).
51 Health Care Price Transparency Act of 2023 § 103, H.R. 4822, 118th Cong. (2023).}

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