The Volokh Conspiracy

Mostly law professors | Sometimes contrarian | Often libertarian | Always independent

Merck Sues HHS, Claims Drug Price Negotiation Program Violates First and Fifth Amendment

Pharma has a "choice": Negotiate with HHS or pay $10 million "tax" per day.


Today, Merck challenged the constitutionality of the Drug Price Negotiation Program for Medicare, under the Inflation Reduction Act. Generally, the word "negotiation" suggests a voluntary transaction between two parties. But negotiating with the government is seldom voluntary. You can't just walk away. The New York Times describes the process this way:

Experts noted that the negotiation process gives drug makers leeway to reject Medicare's final offer and walk away without a deal if they are not happy, subject to a tax. [Update: The Times updated the story to include the following sentence] But Merck's lawsuit said that for one of the company's drugs, the tax for refusing an offer could amount to tens of millions of dollars on the first day and rise to hundreds of millions daily after a few months.

And how much is that "tax"? The amount starts at 186% of the drug's daily revenue, and increases to 1900% of the drug's daily revenue. Merck claims that it would have to pay tens of millions of dollars on the first day after it refuses to negotiate, and that amount could escalate to hundreds of millions per day after a few months. Is this a tax? Or a penalty? For those keeping track at home, Congress projected that the exaction, whatever it is, would raise no revenue, since non-compliance would bankrupt any company.

Sounds familiar? This framework reminds me of the Affordable Care Act's Medicaid Expansion. The Obama Administration gave the states a choice: expand Medicaid or risk losing their entire Medicaid budget. Ultimately, the Court found this spending program was unconstitutionally coercive. Chief Justice Roberts recognized that the states did not actually have a meaningful choice of whether to expand Medicaid. Roberts explained in his controlling opinion:

More importantly, the size of the new financial burden imposed on a State is irrelevant in analyzing whether the State has been coerced into accepting that burden. "Your money or your life" is a coercive proposition, whether you have a single dollar in your pocket or $500.

Of course, Merck is not a state, and the Inflation Reduction Act does not violate the Tenth Amendment. But there are other constitutional provisions at play.

First, Merck raises a claim under the Takings Clause of the Fifth Amendment. Here, the pharmaceutical products are "private property" under Horne v. USDA (2015). Moreover, the drugs are patented, which creates another species of property rights. Here is the crux of the argument:

Under the IRA, the Government will take Merck's patented products by forcing Merck to provide third parties with "access" to those products at steeply discounted prices. That compelled transfer of title effects a classic, per se taking. See, e.g., Horne, 576 U.S. at 362; Cedar Point Nursery v. Hassid, 141 S. Ct. 2063, 2072 (2021) (taking occurs whether the Government takes property "for itself or someone else"). This Program deprives Merck of the "rights 'to possess, use and dispose of'" its property. Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 435 (1982). Just as the statute in Horne effected a classic per se taking by requiring raisin farmers to turn over a portion of their crop to the Federal Government, see 576 U.S. at 361, the IRA's forced-sale regime does the same by compelling drug manufacturers to surrender their patented drugs to third parties for the Government's benefit.

Horne and Cedar Point provided robust protection of property rights. Indeed, Cedar Point–in my view, at least–quietly rewrote decades of Takings Clause precedent. The IRA program is somewhat different from Horne, in that the government is not physically taking the pills from Merck's factory–like the trucks that showed up to collect the Horne's raisins. Rather, the federal government is effectively forcing Merck to "negotiate" with Medicare, and then to sell the drugs at that "negotiated" rate. And all of this is done without providing any just compensation. Again, I put scare quotes around "negotiate" because the tax/penalty is so ruinous that there is no actual ground for arms-length bargaining. Your money, or your company's life.

Congress could, assuming there is a "public use," simply seize Merck and the drugs it produces pursuant to the Takings Clause, by paying just compensation. Remember, Congress could have seized the Youngstown Sheet & Tube Company, and required it to manufacture steel for the war efforts; the President could not act unilaterally. But taking over Merck, a la Venezuela, would have been politically unpalatable. Congress could have also dictated the prices at which the drugs were sold. But again, such a move would have been a political non-starter. Instead, the program was sold under the cheerful banner of "negotiation." Sort of like when the exaction that enforced the ACA was labelled a "penalty" rather than a "tax." Who wants to pay new taxes? But the Inflation Reduction Act's shortcut runs directly into the Takings Clause.

Merck also argues that they are required to "agree" that HHS's prices are "fair." Merck asserts that they are compelled to communicate "state propaganda," and thereby deceive the public.

In short, when the Government seeks to influence the public, it must do so as a genuine participant in the marketplace of ideas. It cannot seize additional megaphones by commandeering the voices of others. The IRA's dystopian parody of "negotiation" violates those principles. First, by forcing manufacturers to "agree" with HHS on a "maximum fair price"—as opposed to just forcing manufacturers to sell at that price—the Program compels those businesses to parrot an ideological message inimical to their own views.

In many regards, this case reminds me of the original challenge to the Affordable Care At in 2010. The case is brought by Yaakov Roth of Jones Day, who was one of the lawyers involved with NFIB v. Sebelius. Indeed, we once again have something of a synergy between big business and conservative constitutional jurisprudence (the Takings Clause and compelled speech doctrine). More and more of late, there is a greater disconnect between these pillars, but at least here, all the stars seems to line up.

Stay tuned.