Howard L. Dorfman is an Adjunct Professor at Seton Hall University School of Law who previously served as general counsel or chief legal officer for several pharmaceutical manufacturers.
On September 13, President Donald J. Trump signed an Executive Order detailing his “America First Healthcare Plan,” a combination of previously issued and newly introduced drug-pricing proposals with the stated goal of lowering drug costs and insurance premiums. The “Executive Order on Lowering Drug Prices by Putting America First” directs Health and Human Services (HHS) Secretary Alex Azar to implement a model for Medicare Part B and Part D drugs whereby the government program would pay no more than the “most-favored-nation” price for “certain high-cost” drugs and biological products. Although details are not provided, the Executive Order indicates that the most-favored-nation price would represent the lowest price, “after adjusting for volume and differences in national gross domestic product, for a pharmaceutical product that the drug manufacturer sells in a member country of the Organization for Economic Co-operation and Development (OECD) that has a comparable per-capita gross domestic product.”
The Executive Order follows and expands upon an Executive Order issued in July. Following that order, HHS and the Centers for Medicare and Medicaid Services (CMS) proposed a new payment model for most drugs covered under Medicare Part B. The plan would replace the current process for obtaining the covered drugs with government-imposed price controls in the form of an International Pricing Index (IPI) based on prices set by foreign governments. CMS postponed further implementation to provide an opportunity for a negotiated agreement between the administration and pharmaceutical companies; the lack of any meaningful discussions led to the signing of the new Executive Order.
Although the intent of both Executive Orders is reduction of government expenditures for Medicare-covered drugs by focusing on the disparity in drug prices paid by other countries and the United States, neither proposal offers a solution that addresses the various factors that collectively affect drug prices. The September 13 Executive Order’s addition of Part D drugs vastly expands the number of products whose reimbursement amounts will be based on foreign prices. And unlike the July order, under which CMS determined the reimbursement amount via an average of product prices charged in various foreign nations, the September order requires that the lowest price among other nations’ prices become the U.S. price.
During the 2020 campaign season, healthcare costs in general, and prescription drug prices in particular, have been polling high with Americans as a priority policy issue. While the goal of cost-containment is laudable, utilizing a vague most-favored-nation model presents significant public-health concerns by potentially disrupting distribution of potentially life-saving therapies, chilling pharmaceutical research and development in rare diseases, and negatively affecting current and future government initiatives such as the 21st Century Cures Act designed to spur pharmaceutical research and innovation. In addition to the potentially devastating societal impact, an arbitrary price-control model based on drug pricing in other jurisdictions with vastly different reimbursement processes exceeds CMS’s statutory authority. Such a plan also 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
It is not possible to undertake a comprehensive analysis of the Executive Order and its potential impact on drug prices given the lack of details as to its development and implementation. If CMS issues a final rule in any meaningful way consistent with the details found in the Advance Notice of Proposed Rulemaking (ANPRM) issued under the July Executive Order, 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 interests of the independent community oncology practices, filed comments on the ANPRM that expressed concern with 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 previously proposed IPI Model would have disproportionately impacted cancer patients in rural or underserved areas. The July order’s addition of Part D drugs to the most-favored-nation calculus significantly intensifies the suffering such underserved patients would have to endure.
Neither do we have access to details on the proposed reimbursement process for these Medicare drugs that could have a profound effect on drug availability. Given that prices outside of the U.S. are generally subject to government price controls, CMS would be unilaterally imposing these controls on Medicare drugs without any Congressional authorization. Aside from the lack of legal authority, mandatory price controls distort market dynamics and result in drug shortages, further complicating treatment options and undermining the physician-patient relationship as clinical decisions would be increasingly based on availability rather than 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 drug-pricing legislation would seriously constrain investment in biomedical research and innovation, depriving seriously ill patients access to clinical trials and potentially breakthrough therapies as artificial pricing restrictions distort research priorities. An ill-conceived price-control process would effectively stifle much of the progress Congress’s 2016 passage of the 21st 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.
All these proposals also coincide with a global pandemic that demands accelerated drug research and development. The COVID-19 experience has required increased commitment of resources by government, academia, and private research-based drug and biotech entities. An ill-conceived and hastily introduced major change in pricing and reimbursement processes will not only threaten a successful government-industry partnership but serve to disincentivize those most that bear a significant portion of drug research and development costs.
IPI Model’s Implementation Faces Strong Legal Headwinds
Regulated entities and other affected institutions will undoubtedly challenge any finalized rule as exceeding CMS’s statutory and constitutional authority. Plaintiffs would have a strong Administrative Procedure Act claim that CMS lacks the statutory authority to replace the congressionally mandated reimbursement system with price controls adopted through rulemaking. For example, CMS argued when announcing the ANPRM that Section 1115A of the Social Security Act authorizes its action. Section 1115A 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. Those legal risks rose when the new Executive Order added Part D drugs to the program.
A final rule implementing the most-favored-nation model would also be vulnerable to constitutional challenge. As noted above, any process based on that model would likely require supplanting 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. That clause grants Congress the power “[t]o regulate Commerce with foreign nations.” White House statements reflect that the administration is aiming policy tools at ending “global freeloading” in drug pricing which cause “Americans [to]pay more so other countries can pay less.” If the model pressures American drug manufacturers to increase prices to overseas purchasers, plaintiffs challenging the CMS action could argue that the agency usurps congressional authority to regulate foreign commerce contrary to the Foreign Commerce Clause.
With the series of Executive Orders, the Administration is attempting 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 pandemic and rare orphan diseases. The most recent plan issued as an Executive Order would eviscerate statutory initiatives meant to promote societal health without effectively addressing the various factors that affect drug pricing. Last, the concept is fatally flawed from a legal perspective with little to no chance of surviving judicial review. Instead of researching 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.” Perhaps we are naïve to expect more during an election year.