An Offer You Can’t Refuse: Merck Attacks Medicare Negotiation Program as an Unconstitutional Taking
June 7, 2023The Inflation Reduction Act’s price negotiation program for drugs covered under Medicare Parts B and D (“Negotiation Program”) has been challenged in federal court. Yesterday, Merck filed a complaint in the D.C. District Court challenging the Negotiation Program as a “sham,” an “extortion,” and a violation of the First and Fifth Amendments to the Constitution.
We described the Negotiation Program in our summary of the IRA here. Recall that CMS will require manufacturers of selected drugs to negotiate a maximum fair price (“MFP”) with the agency according to the following timeline (the dates apply from applicable year 2027 onwards). Note, in particular, the array of severe penalties with which manufacturers are threatened for non-compliance at the various stages:
| Date (selection year) | Negotiation Step | Applicable Taxes and Civil Monetary Penalties (CMPs) |
| February 28 | Manufacturer must sign agreement to: · negotiate with CMS · submit non-FAMP and other required information in order to negotiate MFP · sell at/below MFP | Failure to sign agreement may result in daily excise tax of up to 95% of US sales revenue* |
| March 1 | The manufacturer must submit non-FAMP and other required information | Failure to submit information may result in daily excise tax of up to 95% of US sales revenue*
Delays in submitting information may result in daily CMPs of $1M
Providing false information may result in CMPs of $100M per false item |
| June 1 | CMS will confidentially propose a maximum fair price (“MFP”) with a rationale. CMS will consider various factors, including the manufacturer’s costs of R&D and production, the drug’s comparative effectiveness, patents, and any therapeutic advances (see the full list of factors here). | N/A |
| June 30 | The manufacturer must accept the price or counteroffer—with a rationale. CMS may respond to the counteroffer.
| N/A |
| November 1 | End of Negotiation Period | Failure to agree to MFP may result in daily excise tax of up to 95% of US sales revenue* |
| November 30 | CMS publishes MFP | Refusal to sell at/below MFP can result in CMPs of 10x the difference between the actual price and the MFP |
*unless manufacturer withdraws all its drugs from Medicare and Medicaid.
In its complaint, Merck characterizes the Negotiation Program as coercive and draconian. According to the company, neither the negotiations nor the agreements are genuine: the government unilaterally selects drugs for inclusion into the program, compels the manufacturer to sign an agreement to sell the drug at whatever price the negotiation will produce, and then requires the company to agree to the price—all under threat of enormous taxes or penalties.
Merck challenges the program on two constitutional grounds. First, Merck characterizes the program as a “per se taking” without just compensation under the Fifth Amendment, because manufacturers are “force[d] . . . to transfer their patented pharmaceutical products to Medicare beneficiaries, for public use” at a government-dictated price that is a fraction of the drug’s value. Complaint at 2. Although the Act does allow manufacturers to avoid the tax penalty by terminating its agreements for all of its drugs under Medicaid and Medicare (i.e., the Medicaid Drug Rebate Agreement and the Medicare Part D Coverage Gap Discount Agreement or the agreement under the successor Part D discount program that begins in 2025), Merck characterizes that as a coercive penalty for the refusal to forfeit its First and Fifth amendment rights. Merck also points out that it takes between 11 and 23 months for a manufacturer’s termination of the Part D agreement to take effect, during which it is subject to the tax. Merck asks the Court to declare that the Negotiations Program is a taking without just compensation and to enjoin the government’s agreements under the Fifth Amendment.
Second, Merck argues that the parody of a negotiation and a fair price compels speech in violation of the First Amendment. The “façade of ‘negotiations’ and ‘agreements’” require Merck to communicate that it has “agreed” to an HHS-mandated price, and to endorse the viewpoint that the price is ‘fair’”, when in fact there has been neither a real agreement nor a fair price. The complaint characterizes this as political deception that conscripts companies to legitimize government extortion. Complaint at 3.
In a prior post, we commented that, in enacting previous government discount programs in the early 1990s (the Medicaid Drug Rebate Program, the 340B drug discount program, and the VA federal ceiling price requirements), and even the Medicare Part D Coverage Gap Discount Program in 2003, Congress was careful to found the programs on voluntary agreements, in part to avoid Takings Clause and other Constitutional challenges. With the IRA Negotiation Program, Congress jettisoned the voluntary agreement approach in all but name. Constitutional challenges by Merck, and probably other manufacturers, are the predictable result.