Can the federal government impose a 95% tax on prescription drug companies who do not agree to government price controls? The U.S. Court of Appeals for the Third Circuit recently heard oral arguments on the case, and, as we wrote in our brief, this tax (adopted as part of the Inflation Reduction Act of 2022 and taking effect in 2026) is not really a tax but more a punishment, and thus violates the Eighth Amendment’s protection against excessive fines. Also, because the program takes away a company’s control over its own products, it violates the Fifth Amendment’s Takings Clause.
At oral argument, the companies pointed out that the law requires that they agree to set drug prices or else see all of their products pulled from Medicare. In this way, the government is acting as more than just a market participant, but also as the government. The companies also argued the program violated the First Amendment because it compels them to state in writing they agree to the program and that the low price is the maximum fair price.
The government argued that the program is nothing more than exercising the power to attach conditions to federal spending and a company can leave the program since the agency can terminate the drug price agreement within 30 days for good cause. Even if the companies have to stay in for 11 months (as the companies argue), the price controls do not go into effect until 2026. Regarding the First Amendment argument, the government responded that contracts typically do not raise freedom of speech issues. Moreover, the entire program is voluntary and the contract’s terms are for statutory definition and are not government compulsion of a certain ideology.
These cases are important for taxpayers because they address how far the government can go when imposing a functional fine on private corporations, but calling it a tax. We will continue to monitor and participate in these cases as amicus curiae as they work their way up the court system.
The cases are Bristol Myers Squibb v. Secretary of Health and Human Services and Janssen Pharmaceuticals v. Secretary of Health and Human Services (3d Cir. Nos. 24-1820 & 24-1821).