Merck Pharmaceuticals Challenges Medicare Drug Price Negotiation

What does the pharmaceutical giant's lawsuit against the federal government mean for drug prices and consumers?

In an unprecedented move that's setting the healthcare and pharmaceutical industries abuzz, Merck & Co., a multinational pharmaceutical company, filed a lawsuit against the U.S. government on June 6th, 2023. The suit is designed to halt a recent law that allows the federal government to negotiate the prices of prescription drugs under Medicare.

This legislation came as part of a broader push by the government to address the high cost of healthcare in the United States, but Merck is arguing that the reduced costs negotiated by the government are forcing Merck to sell products below market value and cannot be considered “just compensation.”

We spoke with Mike Botta, PhD and co-founder of Sesame, to discuss the details of the lawsuit and its potential implications for both the healthcare industry and the millions of Americans who rely on Medicare for their prescription drugs.

Background

Merck's lawsuit challenges the constitutionality of a recent law allowing Medicare to negotiate the prices of prescription drugs with pharmaceutical companies. The law allows the Center for Medicare and Medicaid Services (CMS) to choose 10 expensive drugs with no generic alternatives - which are typically more affordable than their name-brand counterparts - to be subject to government price negotiation starting in September of 2023.

Merck's primary argument is that the new law forces drug manufacturers to offer their products to Medicare at prices dictated by the government. The company contends this is a violation of the Takings Clause of the Fifth Amendment, which prohibits the government from taking private property for public use without "just compensation." According to Merck, the reduced profits that would result from government-negotiated prices would also prevent them from developing new drugs and funding new clinical trials.

However, supporters of the law see it as a crucial step in curbing escalating prescription drug prices, a common grievance among American citizens and a priority for the government; a recent report by the CDC that nearly 60% of Americans are skipping medication doses, taking less medication than prescribed, or delaying filling a prescription in order to save money. Additionally, the report found that out-of-pocket spending for prescription medications increased by 4.8% in 2021. As prescription prices rise, advocates of the new CMS law believe that negotiation will help to ensure fair pricing and make necessary medications more affordable for the millions of Americans aged 65 and up who rely on Medicare.

Many healthcare experts have also pointed out that negotiation capabilities prevent pharmaceutical companies from maximizing profits, so it is in the best interests of pharmaceutical companies like Merck to argue against the law. “Pharmaceutical companies are not a charity, so they're always trying to get every entity to pay as much as possible,” says Botta.

Does Merck have a strong legal argument against the US?

Although Merck claims that the Medication negotiation law is coercing Merck into providing discounted medications, others have pointed out that their argument doesn’t necessarily have the constitutional footing it needs. “Merck has promised to fight this case to the Supreme Court, and they may need to appeal it all the way there, because it isn’t necessarily a strong legal argument,” says Botta.

However, Botta does understand why Merck wants the fight. Because US payors are more willing to pay high prices for medical care and pharmaceuticals than anywhere else in the world, introducing economic structures like US market competition will force pharmaceutical companies to bring their prices down.

“Giving Medicare – which is the largest individual customer in the U.S. healthcare market – the power to negotiate their prices is a scary proposition for big pharma,” he says. “Pharmaceutical companies typically make the majority of their income in the United States because payors here have a higher ability to pay, it’s a large market with the ability to distribute these medications, and there are fewer centralized price controls.”

What will happen if Medicare price negotiations are successful?

Whatever the outcome of the lawsuit, its effects will be felt far and wide. If Merck's challenge succeeds, it could throw a wrench into government efforts to lower prescription drug prices. If Merck’s challenge fails, it could set a precedent confirming the government's power to negotiate drug prices, potentially leading to more affordable medications for millions of Americans.

Botta also suggests that while pharmaceutical companies may attempt to pass costs onto private insurers if Merck’s suit fails, their efforts will likely be in vain. “If Medicare price negotiations are successful, pharma companies may try to plead with others to increase prices,” says Botta. “This would pass higher prices on to those channels, whether it’s consumers with private insurance in the US, or consumers in other countries) – but other payors aren’t charities either. They have no reason to hand over higher prices to pharma companies.”

As we wait for this legal battle to unfold, we'll keep a close eye on the implications of this case - many legal and healthcare policy experts predict that this case could be the first of many filed by pharmaceutical manufacturers in the battle for more accessible medications and healthcare in the US.