By Howard L. Dorfman, Adjunct Professor at Seton Hall University School of Law who previously served as general counsel or chief legal officer for several pharmaceutical manufacturers.

Last fall, the Department of Health and Human Services (HHS) and the Centers for Medicare and Medicaid Services (CMS) proposed a new payment model for most drugs covered under Medicare Part B designed to reduce prescription drug costs. The plan would replace CMS’s current process for obtaining the covered drugs with government-imposed price controls in the form of an International Pricing Index (IPI) based on prices currently set by foreign governments. In announcing the proposal, various government officials, including HHS Secretary Alex Azar and CMS Administrator Seema Verma, as well as the President, stressed that the resulting cost reductions would address the disparity between drug costs in other countries and the United States.

Healthcare cost concerns in general, and prescription drug prices in particular, have become predominant issues for the overwhelming majority of Americans as the country enters the 2020 elections. While the goal of cost-containment is laudable, the International Pricing Index model presents significant public-health problems by disrupting distribution of potentially life-saving therapies, chilling pharmaceutical research and development in rare diseases and other indications, and negatively affecting government initiatives such as the 21^st Century Cures Act. In addition to the potentially devastating societal impact, the proposed IPI model exceeds CMS’ statutory authority and raises several constitutional issues, including possible violations of the separation of powers and the Foreign Commerce Clause, among others.

IPI-Based Process Would Harm U.S. Healthcare System while Failing to Reduce Prescription-Drug Prices

If CMS issues a final rule consistent with the details found in the Advance Notice of Proposed Rulemaking (ANPRM), a cascade of negative developments can be expected with adverse consequences affecting particularly vulnerable patient populations. For example, the Community Oncology Alliance (COA), a non-profit organization supporting the needs and interests of independent community oncology practices, filed comments on the ANPRM expressing concern over the IPI Model’s potential impact on community oncology practices and their patients. COA noted it was “very concerned that the IPI Model as proposed will totally upend how cancer care is delivered under Part B…” as well as the likelihood that a precipitous change in Medicare reimbursement on a national basis, without sufficient research and analysis as to its potential impact, “could accelerate the shift in the site of cancer care from independent community cancer clinics to much more expensive hospital systems.” The impact would be particularly harmful to cancer patients in rural or underserved areas.

The very mechanics of the IPI Model could cause prescription-drug shortages—a serious threat to the overall healthcare system. The ANPRM proposes to replace the current reimbursement system of Average Sales Price (ASP) plus 4.3% (intended to cover costs related to processing, handling, and storage) with vendors who would purchase the drugs and distribute them to providers. The vendors would thereafter be reimbursed based on the IPI calculation consistent with the lower prices in place in international markets. Given that prices outside of the U.S. are generally subject to government price controls, CMS would be unilaterally imposing these controls on Part B drugs. Mandatory price controls distort market dynamics and result in drug shortages, further complicating treatment as well as the physician-patient relationship as clinical decisions are increasingly based on availability in place of sound medical judgment.

Pharmaceutical research may also suffer a slowdown under the weight of a new, untested reimbursement model for prescription drugs. Biotech venture capitalists have expressed concern that artificial drug pricing would constrain investment in biomedical research and innovation, depriving seriously ill patients access to clinical trials and potentially breakthrough therapies as pricing limits distort research priorities. In fact, the IPI proposal would effectively stifle much of the progress Congress’s 2016 passage of the passage of the 21^st Century Cures Act inspired. In the past three years, pharmaceutical and biotech companies have prioritized research on novel therapies for unmet medical needs. FDA has issued a record number approvals for both innovator and generic drugs that have lowered healthcare and improved patients’ quality of life. The IPA Model threatens to shut off that pipeline.

IPI Model’s Implementation Faces Strong Legal Headwinds

Regulated entities would almost certainly challenge a finalized IPI rule as exceeding CMS’s statutory and constitutional authority. Plaintiffs would have a strong Administrative Procedure Act claims that CMS lacks the statutory authority to replace the congressionally mandated reimbursement system with price controls adopted through rulemaking. CMS argues in the ANPRM that Section 1115A of the Social Security Act authorizes its IPI action. Section 115A empowers CMS to develop test models to improve the Medicare program. The provision also allows CMS to waive statutory requirements where doing so is necessary for a model’s implementation. A careful reading of Section 1115A, however, reveals that the provision’s focus is on patient care, not drug pricing. The statutory section references a list of 23 potential models, all of which address patient care.

A final rule implementing the IPI Model would also be vulnerable to constitutional challenge. As noted above, the IPI Model would supplant the prescription-drug reimbursement formula dictated by federal law. That type of Executive action is akin to the selective budget-cutting authority Congress granted to the President in the Line Item Veto Act. The Supreme Court held in Clinton v. New York, 524 U.S. 417 (1998), that the Executive cannot unilaterally nullify a legislative action.

Plaintiffs in a constitutional challenge could also argue that CMS’s action violates the Foreign Commerce Clause, which grants Congress the power to “regulate Commerce with foreign nations.” White House statements reflect that the administration is aiming policy tools such as the IPI Model at ending “global freeloading” in drug pricing which cause “Americans [to] pay more so other countries can pay less.” If the IPI Model pressures American drug manufacturers to increase prices to oversees purchasers, plaintiffs challenging the CMS action could argue that the agency usurps congressional authority to regulate foreign commerce contrary to the Foreign Commerce Clause.

Finally, the plaintiffs may claim that CMS is intruding on Congress’s authority to define patent rights. Article I, Section 8, Clause 8 of the Constitution grant Congress the power to award patents. Some of the foreign prices that the IPI Model would utilize in a drug pricing model for Medicare Part B reimbursement result from government compulsory licensing and other policies that weaken patent rights. The IPI Model imports those policies into U.S. law, and in the process dictates patent standards that differ from those defined by Congress.

Conclusion

With the IPI Model, CMS attempts to address the very complex issue of drug pricing with a poorly designed blunt instrument. The policy’s implementation would decelerate emerging research to develop new modalities for unmet medical needs, particularly for rare orphan diseases. The Model would undercut statutory initiatives meant to promote societal health without effectively addressing the various factors that affect drug pricing. Finally, the concept is fatally flawed from a legal perspective with little to no chance of surviving judicial review. Instead of contemplating reforms based on a careful review of market realities that can produce tangible benefits to patient populations, policymakers appear more interested in sound bites on the evening news that are “full of sound and fury, signifying nothing.”