By John McManus, president and founder, The McManus Group
The House of Representatives has had two objectives this fall: impeaching the President and advancing legislation to gain control over the pharmaceutical sector. Speaker Pelosi’s sweeping bill (H.R. 3) to regulate prescription drug prices in both the Medicare program and for all commercial insurers as well advanced out of three committees of jurisdiction on party-line votes in October and will be voted on by the House in mid-November. But red flags have gone up on the bill’s vast overreach, raising concerns that its key provisions that would enable the government to dictate prescription drug prices may be deemed unconstitutional.
The bill subjects the top 250 drugs by total costs to a price ceiling based on an international index of five foreign countries and then tasks the Secretary of Health and Human Services to “negotiate” for even greater discounts. Critically, the bill establishes an excise tax of 95 percent for total sales on products whose manufacturers refuse to “negotiate” and civil monetary penalties of 10 times the amount of any pricing “overage.”
The Congressional Research Service (CRS) — a nonpartisan agency that provides erudite analysis to Congress on legislation — issued a scathing report of Pelosi’s bill on October 21. It argued that aspects of the bill could violate not one, not two, but three constitutional principles:
Takings Clause Of The Fifth Amendment
The Fifth Amendment’s Takings Clause prohibits private property from being “taken for public use without just compensation.” CRS explains, “If legislation causes a claimant’s property to suffer a significant diminution of value or a deprivation of economically beneficial use, the legislation may result in a ‘regulatory taking.’” CRS continues, the bill “does not appear to impose a manufacturer’s participation in the Program as a condition of receipt of certain ‘government benefits,’” because it applies to any selected drugs identified by the Secretary.
CRS concludes, “The strength of a potential takings claim would depend on the negotiated price of a selected drug, the scope of the economic loss resulting from offering this price to Medicare beneficiaries and enrollees of participating plans, whether the revenue generated from sales at this price still allows the manufacturer to make a ‘reasonable return’ on the drug, and whether and how the price point would interfere with investment-backed expectations, including any impact on the manufacturer’s ability to recoup the relevant research and development costs or fund other research and development.”
In other words, if you take my property to build a highway, I have to be adequately compensated at the market rate, or that forfeiture could be unconstitutional.
In that vein, it is hard to understand why government-dictated prices could be extended from government programs to commercial payors. It is akin to extending the price concessions the Department of Defense may extract from Boeing for its military planes to airplane purchases by commercial airlines such as United, American, and Southwest.
Excessive Fines Clause Of The Eighth Amendment
The bill imposes an excise tax that starts at 65 percent and rises to 95 percent of total sales for manufacturers’ products that fail to enter into a negotiated price, thereby possibly triggering the Excessive Fines clause of the Eighth Amendment.
At issue is whether the tax is more accurately described as a penalty. The Eighth Amendment provides that “excessive fines shall not be … imposed.” The Supreme Court has ruled that a “punitive forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the gravity of the defendant’s offense.”
CRS observes, “Assuming the excise tax is not authorized by Congress’ taxing power alone and is actually a means of enforcing a regulatory drug-pricing statutory scheme, it could be viewed as a punitive measure subject to the Excessive Fines Clause.”
Of course, the whole purpose of a 95 percent tax on sales (not profit) is to compel the manufacturer to “negotiate,” not actually raise revenue, which is why the Congressional Budget Office (CBO) scored the provision as raising zero revenue though it predicted it would lead to lower prices due to the compulsory “negotiations.”
Preclusion Of Judicial Review
The bill exempts certain administrative action, such as which drugs would be selected for “negotiation,” from judicial review. While this exemption may be permissible to a degree, the Supreme Court has expressed “serious questions” about the constitutionality if Congress were to attempt to “deny any judicial forum for a colorable constitutional claim.” For example, the bill directs the Secretary to negotiate drugs for which there has been a “material change” with respect to factors to be considered in negotiation. That term is ambiguous and must be interpreted by courts, not exempt.
Next Steps For The Legislation
House floor consideration of H.R. 3 is held up as committees await final analysis and scoring from CBO and Speaker Pelosi works to shore up her splintered caucus. That is likely to be the week before Thanksgiving when current funding for the government also expires.
CBO’s initial analysis of Title 1 of the bill — which provides for the Secretarial “negotiation” that could be deemed unconstitutional — predicted the bill would cut Medicare spending on prescription drugs by $369 billion between 2023 and 2029. That estimate is based on the assumption that the international reference price cap would reduce prices for the first group of drugs “negotiated” by 55 percent.
Buried on page 12 of CBO’s analysis is a prediction that such a policy “would lead to a reduction of 8 to 15 drugs from coming to market” in the next 10 years. Which drugs for which diseases? CBO does not speculate, but we can: those more complicated drugs for complex diseases where the risk will not be seen as matching the reward. Industry experts believe that number is artificially low.
The Industry Must Rally
It is hard to see how such radical and potentially unconstitutional legislation can advance in the Republican-controlled Senate. Nonetheless, it sets out a very aggressive and troubling marker of what Democrats want to do to this industry should they gain control over all levers of power in the 2020 election. Speculating how the courts will decide such complex and multifaceted issues is ultimately a less useful exercise than marshalling all forces to defeat or derail such poor public policy from becoming enacted in the first place.
That’s why members should not be given a free vote on such consequential legislation when this comes to the House floor in November. The industry must rally its 800,000 high-tech, high-wage employees and another 3.2 million individuals who support the industry to inform their members of Congress on the ramifications of the hugely consequential policies that are being contemplated.
Launch all boats, and leave none in the harbor!
John McManus is president and founder of The McManus Group, a consulting firm specializing in strategic policy and political counsel and advocacy for healthcare clients with issues before Congress and the administration. Prior to founding his firm, McManus served Chairman Bill Thomas as the staff director of the Ways and Means Health Subcommittee, where he led the policy development, negotiations, and drafting of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Before working for Chairman Thomas, McManus worked for Eli Lilly & Company as a senior associate and for the Maryland House of Delegates as a research analyst. He earned his Master of Public Policy from Duke University and Bachelor of Arts from Washington and Lee University.