Merck lawsuit challenging Medicare drug price negotiation signals long battle ahead, experts say

By Eleanor Laise

Pharmaceutical giant says it's prepared to take case to the Supreme Court as it seeks to sidestep negotiation program

Merck & Co. Inc. on Tuesday filed a lawsuit against the federal government, alleging that the Medicare drug price negotiation program established last year as part of the Inflation Reduction Act is "tantamount to extortion."

The program does not involve genuine negotiation, Merck alleged in the complaint filed in U.S. District Court for the District of Columbia, claiming that the "singular purpose of this scheme is for Medicare to obtain prescription drugs without paying fair market value." The Rahway, New Jersey-based pharmaceutical giant is seeking a court order that would exempt it from the negotiation program.

The government will "vigorously defend" the drug price negotiation law, "which is already lowering health care costs for seniors and people with disabilities," Health and Human Services Secretary Xavier Becerra said in a statement. "The law is on our side."

Some legal experts agreed that Merck faces an uphill legal battle. "Merck will have a heavy lift to convince the courts," Robin Feldman, professor at University of California College of the Law, San Francisco, told MarketWatch. "The state is acting as a purchaser for Medicare. If the state can decide what it is willing to spend on a pencil or a desk, why not for prescription drugs."

Even so, Feldman said, some key issues in this area of the law are undecided, "and the case is likely headed to the Supreme Court."

Merck's stock (MRK) slumped 2.7% in afternoon trading Tuesday, enough to make it the Dow Jones Industrial Average's biggest decliner.

The Inflation Reduction Act allows Medicare for the first time to negotiate prices for certain high-cost drugs. But the scope of the program is limited, researchers say.

Initially, drugs generating the highest spending will qualify for price negotiation if they're covered under Medicare's Part D prescription-drug program, lack generic or biosimilar alternatives and have been approved or licensed for at least seven years for small-molecule drugs or 11 years for biologics. Another provision in the law, which has already taken effect, requires drugmakers to pay rebates to Medicare if prices of certain drugs rise faster than inflation.

Despite their limited scope, negotiations will generate massive savings for Medicare, researchers say. If the policy had been in effect between 2018 and 2020, the statutory ceiling prices for negotiation would have trimmed Medicare spending on the negotiated drugs by $26.5 billion, according to research published early this year in JAMA Health Forum. The savings are so big because the drugs to be negotiated "are really highly profitable, high-spending products," said Dr. Benjamin Rome, instructor at Harvard Medical School and lead author of the study.

As for Merck's claim that the negotiations are equivalent to extortion, Rome said, "arguably taxpayers and patients are being extorted" if drugmakers charge whatever prices they want and the government is forced to cover the drugs and pay those prices. Merck's claims suggest that the company "is being compelled to sell their drugs to Medicare, which is truly mischaracterizing the nature of how this works," Rome said.

"Merck intends to litigate this matter all the way to the U.S. Supreme Court if necessary," the company said in a statement, saying the statute "unlawfully impairs" its core purpose of engaging in innovative research that saves and improves lives.

The Centers for Medicare and Medicaid Services this September plans to release an initial list of 10 Medicare Part D drugs subject to negotiation--and Merck's diabetes drug Januvia may be on that list, experts say. Merck's blockbuster cancer treatment Keytruda could also face negotiation in years to come when the program expands to drugs covered under Medicare Part B, experts say.

Merck alleges that the negotiation program violates the Fifth Amendment, which requires the government to pay "just compensation" if it takes property for public use. The Inflation Reduction Act forces drugmakers to accept "government-dictated payments that represent a fraction of the drugs' fair value," Merck alleges in the complaint.

But guidance already released by CMS "does lay out a negotiation process," including a series of steps involving offers and counteroffers, said Juliette Cubanski, deputy director of the program on Medicare policy at KFF, a health policy nonprofit.

The lawsuit makes several references to the "fair value" of drugs--with an implication that the prices set by drugmakers are fair or reasonable, Cubanski said. "If that's the case, give us more information about how prices are determined and let the public evaluate the fairness of a drug's price," she said.

The law also violates the First Amendment, Merck alleges, by requiring drugmakers "to convey that they 'agree' to HHS's 'fair' prices."

Merck's claims are likely a sign of things to come, experts say, as other drugmakers are likely to start similar legal challenges. The lawsuit may also put a damper on talk about expanding the price negotiation program, said Antonio Ciaccia, CEO of drug-pricing research nonprofit 46brooklyn Research.

Merck's stock has slipped 0.8% year to date, while the Health Care Select Services SPDR exchange-traded fund (XLV) has lost 4.5% and the Dow has tacked on 1.3%.

-Eleanor Laise

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06-06-23 1554ET

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