The Constitutionality of Medicare Drug-Price Negotiation under the Takings Clause

Abstract

In recent months, pharmaceutical manufacturers have brought legal challenges to a provision of the 2022 Inflation Reduction Act (IRA) empowering the federal government to negotiate the prices Medicare pays for certain prescription medications. One key argument made in these filings is that price negotiation is a “taking” of property and violates the Takings Clause of the US Constitution. Through original case law and health policy analysis, we show that government price negotiation and even price regulation of goods and services, including patented goods, are constitutional under the Takings Clause. Finding that the IRA violates the Takings Clause would radically upend settled constitutional law and jeopardize the US’s most important state and federal health care programs.

The Inflation Reduction Act (IRA) of 2022 empowers the Centers for Medicare & Medicaid Services to negotiate the prices Medicare will pay for a small number of top-selling brand-name prescription drugs, a process that is expected to save patients and taxpayers billions of dollars every year. Yet this significant achievement is now threatened by at least 10 different lawsuits brought by the brand-name pharmaceutical industry and associated trade organizations. These cases allege a slew of constitutional violations, including that drug-price negotiation works an unconstitutional “taking” of private property. The taking argument is one of the most consequential claims brought against the IRA’s drug-price negotiation program, as it would put a great many government programs at risk, from critical healthcare programs like Medicaid to the Emergency Medical Treatment and Labor Act (EMTALA).

In this review, we evaluate the takings claim made in litigation against the IRA and conclude that it is without merit.¹ It should fail in court and the challenged portions of the IRA should not be struck down on these grounds. We show, based on original analysis of case law, policy precedents, and other sources, first, that price negotiation and price controls by the US government have long been held constitutional under the Constitution’s Takings Clause; and second, that the fact that brand-name drugs are commonly covered by patents does not convert price negotiation on those drugs into a taking.

Background

As part of the Inflation Reduction Act (IRA), Congress for the first time empowered the Department of Health and Human Services (HHS) to negotiate with drug-makers the prices of a small number of drugs that the Medicare program purchases. The IRA requires the HHS Secretary, acting through the Centers for Medicare & Medicaid Services (CMS), to negotiate the prices Medicare pays for a certain set of drugs meeting a number of key criteria, such as that they are responsible for the highest Medicare Parts B and D spending, have been marketable for at least seven years, and lack bona fide generic or biosimilar competitors.²

The standard for what constitutes a “public use” for which the government may take property is broad. As such, the constitutional question at the heart of most takings claims — as here — is whether a regulation interferes with “property” in the relevant sense. In the classic scenario, where government condemns land for public use, as when building a railroad, the standard is easily satisfied. But more difficult cases arise, particularly where regulations are involved.

In so doing, the IRA’s drug-price negotiation program modifies the Medicare non-interference provision in the Medicare Modernization Act of 2003. That provision, a victory of extensive pharmaceutical lobbying,³ prevented CMS from negotiating prices for drugs it buys through its Part D program.⁴ The Medicare non-interference provision has been anomalous since its inception: the federal government negotiates prices and receives discounts on most contracts it enters, including for drugs it purchases for patients covered by the Veterans Health Administration and the Medicaid program for low-income patients. The IRA’s Medicare drug-price negotiation program thus begins to bring Medicare in line with these other government-sponsored health insurance programs, if only for a limited number of high-revenue drugs and only many years after marketing.

Drug Manufacturers’ Challenges to the Medicare Drug-Price Negotiation Program

Failing to defeat the drug-price negotiation program in Congress, a host of drugmakers have brought suits to challenge the new law. They assert that the law violates a variety of constitutional provisions. A key claim is that the price negotiation program “takes” their property without just compensation in violation of the Takings Clause of the Fifth Amendment.⁵

The Fifth Amendment prevents the government from taking private property unless for public use and requires that the government provide just compensation when it does so. The scope of the Takings Clause has expanded over time: until the twentieth century, the Takings Clause only protected against physical appropriations of property by the government.⁶ The Supreme Court extended the reach of the Takings Clause to “regulatory takings” in Pennsylvania Coal Co. v. Mahon, holding that “while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.”⁷ In assessing whether a regulatory taking has occurred, courts apply three factors: the economic impact of the regulation on the claimant, the extent to which the regulation has interfered with distinct investment-backed expectations, and the character of the governmental action.⁸

The standard for what constitutes a “public use” for which the government may take property is broad.⁹ As such, the constitutional question at the heart of most takings claims — as here — is whether a regulation interferes with “property” in the relevant sense. In the classic scenario, where government condemns land for public use, as when building a railroad, the standard is easily satisfied. But more difficult cases arise, particularly where regulations are involved.

If property is “taken,” courts must evaluate the compensation to determine if it is “just;” if the government provides “just” compensation to the property owner, then the court will award no further remedy. Of course, judicial monitoring of just compensation may add substantial costs and complexity to government programs, especially because formulations of just compensation are unsettled and context-dependent.¹⁰

The Takings Clause applies not just to real estate but to personal property — cars, crops, and more. The Takings Clause requires just compensation when regulations effect a government seizure of personal property.¹¹ This much is settled doctrine.

In their lawsuits, drugmakers advance a novel argument: allowing the government to negotiate the prices of a prescription drug constitutes a taking that deprives a drugmaker of its property.¹² As one drug-maker contends, “a Government-imposed 50% discount on forced transfers of Eliquis is no different than if the Government were to seize 50% of BMS’s inventory.”¹³ Because no drugmaker is forced to surrender its medications to the government, the drugmakers — which are not protesting the sale itself but the government’s opportunity to reduce the sale price — appear to be asking courts to confer constitutional protection to their profits.

As the following sections show, and as we have described in amicus briefs filed in several courts, the companies’ takings arguments are unsound as a matter of law. We also show that they are dangerous; indeed, if accepted by courts, their claims would radically rewrite takings doctrine and jeopardize a range of government healthcare programs.

Government Price Negotiation and Price Regulation in the US

Price negotiation and price regulation are ubiquitous economic tools available to, and regularly used by, the federal government. The voluntariness of prescription drug market participation disqualifies a takings claim. This alone should end this argument against the IRA’s Medicare drug-price negotiation program. Companies also argue that the government is coercing their participation in the program because a great deal of profit is at stake. We show that this is irrelevant to the voluntariness of the program. Finally, even if the government were to introduce an industry-wide program extending beyond Medicare, this would not “take” property in the relevant sense. In highly regulated industries that receive substantial government privileges — as the pharmaceutical industry clearly does — Congress may set regulatory conditions such as these without running afoul of the takings clause.¹⁴

Government Price Negotiation Does Not Create a Takings Violation

As a purchaser of goods and services, the government regularly engages in price negotiation without raising any kind of takings issue. In 2022, the government spent $694 billion on contracts.¹⁵ Many of these contracts were fixed-price vehicles that do not guarantee profit.¹⁶ Courts have consistently held that no one is constitutionally entitled to sell to the government.¹⁷ Rather, the government, like any other purchaser, is allowed to select its commercial partners,¹⁸ adjust the terms and conditions of its sales contracts,¹⁹ and negotiate the prices it will pay.²⁰ The federal government contracts like any other commercial party bargaining for sale, as opposed to when it seizes possession of goods as a sovereign entity.²¹ As a result, government contracting does not implicate the Takings Clause,²² even when price negotiations reduce the profit amount that a contracting party hoped to net.

Prescription drugs are no different. In fact, the government already negotiates drug prices and sets parameters on the prices it will pay for drugs across several federal programs, including the Veterans Health Administration, the Medicaid program, and the 340B program (a special program through which safety net hospitals can acquire medications at prices far lower than commercial purchasers’). Under each of these programs, the government contracts with a manufacturer to provide prescription drugs.²³ Each program ensures a baseline statutory discount for drug price, with options for the federal government or seller (e.g., a hospital) to negotiate further discounts.²⁴ Drugmakers do not have to supply medicines to the government. However, if they opt not to sell to the Veterans Health Administration or the 340B program, the government can limit the drug maker’s access to Medicaid and Medicare Part B.²⁵ In essence, these programs offer manufacturers the opportunity to negotiate drug prices in exchange for access to various government markets.

Courts have routinely and uniformly held that the structures and requirements of these programs do not violate the Takings Clause. In facts, courts have expressly distinguished the “economic hardship” that these programs may impose on drugmakers from the kind of compulsion that triggers the Takings Clause.²⁶ For example, courts have emphasized that the 340B program is voluntary, even if withdrawal from one program means the drug company will be prohibited from selling its drugs to another government program.²⁷ Indeed, one court described as borderline nonsensical the argument that 340B negotiated discounts amounted to the government physically taking a company’s prescription drugs.²⁸

Drug manufacturers have revived similar claims here. They claim that the IRA’s Medicare drug-price negotiation program is a “taking” of their patented drugs but can point to no reassignment of patent rights or physical seizure of their tablets or injections. Instead, their true argument is that curbing Medicare spending interferes with the enormous profits they expect from this program,²⁹ constituting a “taking” of their property. But courts have consistently, and properly, rejected similar claims.

The breadth of health care price negotiation programs already approved by courts underscores the extent of disruption that a takings holding here would engender. The IRA’s Medicare drug-price negotiation program sets up a structure similar to the existing drug purchasing programs under 340B, Medicaid, and the Veterans Health Administration.³⁰ If a court were to accept drug-makers’ argument that price negotiations constitute a taking, the door would open for nearly all government contract negotiations to be challenged as takings under the Fifth Amendment.³¹ Such a holding would undermine settled contract law involving voluntary, bargained-for exchanges. This view would also upend a vast array of government contracts, not just limited to health care, whenever a company was displeased with a contracted-for rate. The government’s leverage to secure favorable rates for its myriad social service programs would in turn diminish.

Even as to health care alone, a loss would be devastating. A determination that price negotiation effects a taking would jeopardize altogether the viability of federal and state health care programs. Government health care programs provide a key safety net for more than one in three Americans.³² Due to their reach, these programs often strain state and federal budgets. In 2021, Medicare alone accounted for 21% of all US healthcare spending and 10% of the federal budget.³³ Medicare’s costs are predicted to rise to 18% of the federal budget by 2032.³⁴ Excluding administrative costs, the Medicaid program cost $728 billion in fiscal year 2021,³⁵ or about 17% of national health expenditures that year.³⁶ Without negotiated discounts, the combination of exclusive rights and coverage mandates afforded by these programs would confer almost limitless pricing power to drug manufacturers.

Government price negotiation for these health care services enables federal and state health care programs to offer coverage to millions of Americans. A ruling that these programs’ statutory discounts constitute takings would imperil these programs’ continued operation. For patients, this would translate into reduced access to health care, especially for our country’s elderly and low-income populations. For courts, it would mean a flood of litigation over the level of payment necessary to compensate takings by longstanding programs.

The Medicare, Medicaid, and Veteran Health Administration programs would not be the only areas of healthcare affected. For example, the federal Emergency Medical Treatment and Labor Act (EMTALA) entitles all Americans to emergency room treatment irrespective of insurance status. This law requires hospitals with emergency departments that receive Medicare funding to accept all patients in critical condition, regardless of their ability to pay.³⁷ Takings challenges to EMTALA by hospitals have failed on the grounds that participation in Medicare (and by extension in EMTALA) is voluntary.³⁸ A holding that the IRA’s Medicare drug-price negotiations effect a taking could reopen the door to a similar holding with respect to EMTALA. Every unpaid emergency room visit could be grounds for a takings lawsuit in which a court would have to evaluate the necessary extent of government compensation — no small feat considering the byzantine systems of medical billing and government reimbursement rates.

Price Regulations Are Common, and Generally Not Constitutionally Suspect

Companies do not directly argue that price regulations themselves “take” property, perhaps because they are aware that, historically, price regulation was widespread and violated no constitutional rights. Still, they argue they are somehow “coerced” to accept the government’s prices. This argument is belied by the fact that price regulations have only very rarely been understood to interfere with “property” at all.

History shows us that price controls were commonplace in the early US. At least eight of the thirteen colonies adopted “expansive” price controls affecting “substantially everything in use at the time.”³⁹ Price controls extended even to patented products. Borrowing from English common law and statutory obligations that a patentee would not use their exclusivity to “be ‘mischievous to the State’ by raising the prices of commodities,”⁴⁰ some colonies granted patents with “working clauses” that stipulated price as a condition.⁴¹

Courts have consistently rejected claims that price controls violate constitutional rights. Early cases were litigated under the Due Process Clause. During this era, the Supreme Court constructed the so-called Lochner doctrine, a controversial constitutional doctrine prioritizing and protecting the right to contractual freedom. Under this doctrine, the Court struck down many economic regulations, including labor laws, eventually generating the constitutional crisis that led Franklin Roosevelt to threaten to pack the court. The Lochner doctrine was abandoned in the late 1930s, paving the way for the modern rule that Congress is free to enact social and economic legislation without judicial interference.⁴² But even while the laissez faire Lochner doctrine stood, courts repeatedly upheld price regulations against challengers who claimed they interfered with the right to contractual freedom.

In the “pioneer”⁴³ case of Munn v. Illinois,⁴⁴ the Supreme Court held that property “used in a manner to make it of public consequence” was “clothed with a public interest.”⁴⁵ The purveyors of such goods and services — a categorization encompassing public utilities and transportation — had to “submit to be controlled by the public for the common good” through price regulation.⁴⁶ Post-Munn, the federal government and nearly every state established public service commissions that set utility rates.⁴⁷ Congress also passed antitrust legislation, including the Sherman Antitrust Act, to restrain unchecked monopoly prices.⁴⁸

Later, in Nebbia v. New York, the Court extended the scope of regulable businesses,⁴⁹ pronouncing it “clear that there is no closed class or category of businesses affected with a public interest.”⁵⁰ Nebbia clarified that Congress may regulate the price of commodities sold by private businesses, such as milk, if the “conditions or practices of an industry … produce[d] waste harmful to the public [or] threaten[ed] … to cut off the supply of a commodity needed by the public.”⁵¹ After the Court stood down and abandoned its effort to overturn economic regulations in areas it determined were not “clothed in the public interest,” it affirmed a general presumption that price regulation was constitutional.⁵² Such regulation continued to play a prominent role in American history. For example, to limit profiteering and price gouging during the wartime and economic crises of the mid-twentieth century, the government imposed systemic price freezes and price maximums on nearly all commodities, services, rents, and wages;⁵³ these broad mandates all survived constitutional challenges.⁵⁴

Congress’s price-setting authority was so well-established that the Supreme Court upheld price regulations affecting a broad range of industries and services, including essential⁵⁵ and recreational commodities,⁵⁶ public utilities,⁵⁷ rent,⁵⁸ and labor;⁵⁹ prices that have the potential to limit⁶⁰ or deny a seller’s profits,⁶¹ or reduce the value of the regulated good;⁶² price regulations that have differential effects on members of a regulated class;⁶³ retroactive price regulations to recover excessive profits;⁶⁴ and the prevention of economic waste as a permissible justification for price regulation.⁶⁵ In 1987, the Supreme Court declared the constitutionality of state and federal price regulation to be “settled beyond dispute.”⁶⁶

The one area where the Supreme Court has found price regulation subject to some constitutional oversight is in industries for which market participation is legally mandated — namely, public utilities.⁶⁷ To compensate for public utilities’ compulsory service at fixed rates, courts have exercised some judicial oversight over those rates. But even the modicum of oversight applied in the utility context is the exception, not the rule.⁶⁸ The reason it applies at all is that utilities have a legal mandate to supply their services. In their suits, the pharmaceutical companies have not argued that they should be treated like public utilities, perhaps because courts have done relatively little to regulate rates even for utilities and have not deemed such companies entitled to any particular level of profit.⁶⁹

For industries that are highly regulated and sell potentially dangerous products, such as prescription drugs, Congress has great freedom to set conditions on market entry without implicating the Takings Clause.⁷⁰ Courts have seen such regulations as not implicating property rights but rather establishing the conditions for market entry. Even a regulation covering the entire pharmaceutical market, in other words, would merely establish a legitimate condition for market entry which companies voluntarily accept in exchange for enormous privileges. A price regulation convering the entire industry would complement existing federal regulations, including the Food and Drug Administration’s review of safety and efficacy and the patent and other exclusive rights that allow drugmakers to establish high prices, that benefit the pharmaceutical industry enormously — and that generate the possibility of price gouging which the IRA seeks to combat.

Of course, the IRA does not affect the whole industry. It merely enables the government to negotiate as one purchaser for one portion of the market: Medicare. As such, courts need not traverse this broader issue. They can hold simply that the drug manufacturers at hand voluntarily choose to sell their drugs to Medicare, and as such cannot argue that their medicines are “taken” without their consent.

That Medicines Are Patented Does Not Alter the Takings Analysis

Some of the pharmaceutical industry’s court challenges to the IRA’s drug-price negotiation program have suggested that the fact that many brand-name drugs are protected by government-granted patents should somehow alter the takings analysis. For example, in its lawsuit, BMS declares that “patented medicines are protected by the Takings Clause.”⁷¹

The fact that drugs are patent-protected does not strengthen the pharmaceutical industry’s takings claims. The IRA works no interference with constitutionally protected patent rights. No Supreme Court case has ever held that patents are private property protected by the Takings Clause. Even if a court were to conclude this, it would not help companies here, because courts see property as a bundle of rights, not all of which have to be granted together. Since Congress has never given companies the specific right to prevent the federal government from interfering with their patents, this “right” cannot now be taken away.

Patents Are Not Private Property Eligible for the Protection of the Takings Clause

The Supreme Court and the Federal Circuit have never directly addressed the question of whether patented drugs are personal property eligible for protection under the Takings Clause. The most recent Supreme Court analysis of the fundamental nature of patent rights suggests strongly — but does not hold outright — that patents are not private property in the relevant sense. In its 2018 Oil States decision, a 7-2 majority of the Supreme Court concluded that patents are not private rights, but are public rights, akin to government franchises: a right the government takes from the public and grants to a private party.⁷² As the Court explained, a patent is a “creature of statute”⁷³ and thus “can confer only the rights that ‘the statute prescribes’”⁷⁴ — the right “to exclude others from making, using, offering for sale, or selling the invention throughout the United States.”⁷⁵ The Court observed that, as creatures of statute, patents are not personal property per se; instead, “[t]he Patent Act provides that, ‘[s]ubject to the provisions of this title, patents shall have the attributes of personal property.’”⁷⁶

All this language and reasoning in Oil States strongly suggests that patents are not private property for purposes of the Takings Clause. There is no reason for patent rights to be considered public for the purposes of Article III, but private for the Fifth Amendment. In a recent article, intellectual property law professor Robin Feldman summarizes Oil States as follows: “the Court made absolutely clear its view that there is a strict, categorical difference between land/chattels as ‘core’ private property rights and patents as public rights.”⁷⁷ Feldman also argues more broadly, based on history, the text and structure of the Fifth Amendment, and many decades of case law, that patents simply should not be protected by the Takings Clause.⁷⁸

Although the Oil States majority cautioned that it was not formally deciding that “patents are not property for purposes of the Due Process Clause or the Takings Clause,”⁷⁹ a lower court responded by taking Oil States to its logical conclusion. In 2019, shortly after Oil States, the Court of Federal Claims held in Christy, Inc. that “patents are public franchises, not private property,” and therefore that “patent rights are not cognizable property interests for Takings Clause purposes.”⁸⁰ In so holding, the court echoed Oil States and reasoned that because “patent rights derive wholly from federal law, Congress is free to define those rights (and any attendant remedies for an intrusion on those rights) as it sees fit.”⁸¹ Highlighting the Court’s discussion of the public nature of patent rights, the Court of Federal Claims concluded that the Court’s reasoning in Oil States could not “be dismissed as dicta.”⁸²

The Court of Federal Claims is so far the only court to directly tackle the question of whether patents are personal property subject to the Taking Clause. As noted above, Oil States declined to hold that patents are not protected by the Takings Clause.⁸³ Although language from a nineteenth-century Supreme Court decision may appear to describe patents as constitutional property,⁸⁴ scholars note both that this language is dicta (or non-binding commentary) and that it refers not to patents but to the distinct English property law construct of “letters-patents.”⁸⁵ The Federal Circuit has similarly avoided answering this question directly, including in its review of the Christy decision (a decision it affirmed on narrower grounds).⁸⁶ As a result, no court has ever held that patents are private property protected by the Takings Clause.

The drug-makers’ takings challenge may well end up before the Supreme Court, and their argument has implications for far more than the IRA’s price-negotiation program. Robust government healthcare programs depend on negotiated discounts to offer essential services for our most vulnerable populations, including the low-income, those with disabilities, veterans, and the elderly. A successful takings challenge to the IRA’s price negotiation provisions would threaten these and other government programs involving price negotiations. Courts should reject the takings arguments as they have always done, and affirm the constitutionality of price negotiation.

No Right To Exclude the Federal Government from Patented Products

Even if patents were property subject to the Fifth Amendment’s Takings Clause, no individual or company has ever had the right to enjoin the federal government from making, procuring, or using a product covered by a patent — even without the patent holder’s consent.⁸⁷ Put another way, there is no property right to exclude the federal government in the “bundle of sticks” that a patent confers.

Until the twentieth century, the US government’s sovereign immunity completely shielded it from lawsuits brought by patent holders for government use of their patents.⁸⁸ In 1894, in Schillinger v. United States, the Supreme Court confirmed as much, holding that a patent holder could not bring a takings claim against the government in the event of government patent use.⁸⁹ The Court explained that Congress had not waived the government’s sovereign immunity as to “claims founded upon torts.”⁹⁰ Because a patent infringement action “is one sounding in tort[,]” Schillinger held that government patent use did not expose the government to liability.⁹¹

In response, Congress enacted a limited waiver of the US government’s sovereign immunity. This law provided patent holders with a claim for “limited relief”⁹² for government patent use.⁹³ The committee notes accompanying the bill clarified that the law not only covered inadvertent use by the government, but also covered the government’s intentional use of patents when such actions benefited the public.⁹⁴ This provision only allowed patent holders to seek “reasonable and entire compensation” for government use of their patents; it foreclosed injunctive relief.⁹⁵

The law is now codified as 28 U.S.C. § 1498.⁹⁶ In relevant part, it reads: “Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture.”⁹⁷

As a panel of the Federal Circuit noted during a subsequent discussion of Schillinger, “[h]ad Congress intended to clarify the dimensions of the patent rights as property interests under the Fifth Amendment, there would have been no need for the new and limited sovereign immunity waiver” that § 1498 effects today.⁹⁸ Put more directly, if the Constitution ensured that patent holders were entitled to compensation when the government uses their patents, Congress would not have had to so provide.

Today, § 1498 offers a more extreme — and yet entirely constitutional — remedy to the problem of high prices than the IRA’s Medicare drug-price negotiation program. Some of the authors’ past scholarship has documented the government’s “routine[]” use of § 1498 to procure everything from “electronic passports to genetically mutated mice.”⁹⁹ The government relies on § 1498 “not only when the patent holder is unwilling or unable to negotiate a license with the federal government and infringement is the only way for the government to use the patented technology, but also when the patent holder is willing and able to negotiate.”¹⁰⁰ For example, in the 1960s, the Department of Defense negotiated purchase of the antibiotic tetracycline from an Italian maker instead of the US-based patent-holder, Pfizer, even though Pfizer was able to supply the government’s purchase order, because the Italian version was 72% cheaper.¹⁰¹ According to one source, the Department of Defense relied on § 1498 to procure approximately fifty drugs in a three-year period during the 1960s.¹⁰²

The federal government has continued to rely on this statute into the twenty-first century. During the post-9/11 anthrax scare, the Bush Administration, through then-HHS Secretary Tommy Thompson, publicly discussed bypassing Bayer’s patent to amass a stockpile of the antibiotic ciprofloxacin (Cipro).¹⁰³ At the time, Bayer held the patents on this drug, controlled its sale in the US, and refused to lower its prices to supply a purchase order for the government to use in response to a potential biological threat.¹⁰⁴ In response, Secretary Thompson suggested that the government could invoke § 1498 to lawfully use Bayer’s patents and import cheaper versions of the medication.¹⁰⁵ The mere specter of this action led Bayer to slash its prices: Bayer agreed to sell ciprofloxacin for $0.95 or less per pill, half of what the government had been paying ($1.83) and about a fifth of Bayer’s list price ($4.67).¹⁰⁶ In contrast to the IRA’s Medicare price negotiations, Bayer’s price concession — made under threat of government patent use — did not result in any lawsuit.

Section 1498’s real bite, in comparison to the IRA, springs from its compensation provision. Under § 1498, the government typically pays the patent holder only a reasonable royalty — in practice rarely exceeding 10% of the price of the generic¹⁰⁷ — as compensation for its infringement.¹⁰⁸ Importantly, the § 1498 case law does not interpret “reasonable and entire compensation” to mean the entirety of the patent holder’s lost profits. Although the precise royalty rate is a case-specific determination, the Court of Federal Claims (where all claims for compensation under § 1498 must be litigated)¹⁰⁹ examines “mixed considerations of logic, common sense, justice, policy and precedent” when setting compensation under § 1498.¹¹⁰ The best measure for “reasonable and entire” compensation under § 1498 is the rate the patent holder agreed to in any prior or existing licensing agreements.¹¹¹ When the Court of Federal Claims lacks evidence of prior licensing agreements, it typically applies the “willing buyer-willing seller” rule to arrive at a royalty rate.¹¹²

Because “reasonable and entire compensation” does not mean lost profits, pharmaceutical companies would not, under § 1498, be guaranteed profits on sales to or for the federal government.¹¹³ This interpretation makes sense: because the government is not obligated to purchase from the patent holder, the patent holder has no right to any profits — neither the profits the patent holder lost nor those the contractor gained through the government invocation of § 1498.

Finally, government patent use doctrine undermines pharmaceutical companies’ suggestion that the drug price negotiations coerce the sale of medications the government would otherwise be unable to procure.¹¹⁴ The government has legal authority to purchase other drugmakers’ copies of pharmaceutical companies’ drugs should the patent-holding companies decline to participate in the price negotiations. The government has chosen a more generous approach, negotiating prices with patent-holding companies instead. This too shows that companies’ constitutional arguments are without merit.

Conclusion

Last year, Congress took an important step to address the US drug-price crisis by bringing Medicare in line with other government healthcare programs that negotiate drug prices with their manufacturers. In response, drug-makers advanced the radical argument that these negotiations are a constitutional taking of their profits, likening the government’s mere ability to negotiate prices to a forcible seizure of their private property. But as this article has illustrated, decades of Supreme Court precedent upholding government price negotiations and regulations — an analysis unchanged by the fact that patents cover the negotiated drugs — demonstrate the incorrectness of the drug-makers’ claims. In fact, the government is constitutionally empowered to procure patented drugs at below-market cost even without the manufacturer’s consent, a tool that would likely reduce pharmaceutical companies’ profits more than mere price negotiation.

The drug-makers’ takings challenge may well end up before the Supreme Court, and their argument has implications for far more than the IRA’s price-negotiation program. Robust government healthcare programs depend on negotiated discounts to offer essential services for our most vulnerable populations, including the low-income, those with disabilities, veterans, and the elderly. A successful takings challenge to the IRA’s price negotiation provisions would threaten these and other government programs involving price negotiations. Courts should reject the takings arguments as they have always done, and affirm the constitutionality of price negotiation.