Can Constitution Save Us from Drug Price Controls?

AstraZeneca made its case against Medicare's prescription drug price-setting scheme before a federal judge in Delaware last week. It's one of several drugmakers challenging the program on constitutional grounds, among them Johnson & Johnson, Merck and Bristol Myers Squibb.

Defenders of the price control plan have portrayed these cases as the machinations of money-grubbing pharmaceutical companies determined to put profit before patients. But that narrative is dead wrong.

Indeed, when a company is in the business of inventing life-saving medicines, profit and patient well-being go hand-in-hand. The real threat to patients comes from Medicare. By upending the system of incentives that drives medical science forward, Medicare's prescription drug price controls will stifle innovation for years to come.

At the center of this legal fight is the Medicare Drug Price Negotiation Program established by the Inflation Reduction Act of 2022. The law requires the federal government to "negotiate" the prices Medicare will pay for certain brand-name medicines.

Starting in January 2026, 10 drugs covered under Medicare Part D will be subject to these "negotiated" prices. That number will steadily rise — adding 15 more in 2027, 15 more under Medicare Parts B and D in 2028, and 20 more under both programs in 2029 and thereafter.

But "negotiate" is a misnomer. Congress effectively gave Medicare the power to name its price. If a drug company doesn't acquiesce, then it has to withdraw all its products from Medicare and Medicaid or pay an excise tax that can reach 95% of the drug in question's sales.

AstraZeneca claims this arrangement violates the Fifth Amendment's protection against the seizure of property without due process. The company has a point. After all, the wealthiest, most powerful government on the planet is effectively expropriating its property — the drug, and the intellectual property undergirding it — for whatever price it wants.

It's doing so after the company spent billions of dollars and years of work bringing that drug to market — investments it might not have made had it known that it would not have the power to set its own prices.

U.S. District Judge Colm Connolly doesn't seem to agree. He questioned whether AstraZeneca would in fact lose any property under the program.

Seizing 95% of a drug's sales — nearly every penny it takes in — as punishment for refusing to accept the government's offer is an awful lot to lose.

True, the company could withdraw from Medicare and Medicaid. But the federal government accounts for over 40% of all drug spending in the United States. Medicare is the largest public payer for drugs — and covers roughly one in five Americans. Medicaid covers roughly one in four. There isn't a drug firm on the planet, no matter how large, that can afford to withdraw from markets of that size.

So when Medicare insists on paying below-market prices for certain drugs, it isn't a negotiation — it's more like a stick-up.

Unfortunately, there's more at stake in these cases than the integrity of America's "supreme Law of the Land." Should these price controls go into effect, patients will soon find it harder to get the medicines they need.

Medicare has broad discretion to consider a drug's "therapeutic alternatives" when setting prices. So the government could decide that a new drug for cancer or heart disease or diabetes is only marginally more effective than a generic alternative — and use that judgment to demand a steep price cut.

But what if the new drug offers substantial benefits for a patient's quality of life? It might be more convenient to take, for instance, or have fewer painful side effects.

The price control scheme could undervalue marginal improvements like these — and thus discourage drug firms from investing in the kind of incremental progress that can be life-changing for individuals suffering from a serious illness.

It isn't just small medical advances that will become rarer under the price-setting program. If even a groundbreaking new cancer drug or Alzheimer's treatment can fall victim to government price controls, the incentive to fund these long-shot projects will be much weaker.

Investment in medical innovation will contract — and the drug-development pipeline along with it.

The Biden administration is shaking down an industry that is our best hope for improving human health — and ultimately lowering healthcare costs by obviating the need for more expensive emergency interventions.

Whether this violates the Constitution is a matter for legal scholars. That this price control scheme betrays the interests of patients, however, is beyond doubt.