By Laura Dolbow
Merck recently filed a lawsuit that challenges the constitutionality of the Medicare price negotiation program created by the Inflation Reduction Act. Under this program, HHS will select a small number of single source drugs for price negotiation. Merck alleges that the price negotiation program operates as a price control because it effectively requires manufacturers to accept the maximum fair price as a condition of participation in Medicare and Medicaid. Merck argues that this form of price regulation charts a “radical new course” for Medicare that violates the Takings Clause of the Fifth Amendment.
But the price negotiation program is not the first time that Congress has placed a restriction on the prices that Medicare program participants can charge. And Merck’s lawsuit is not the first suit that has alleged that such price regulations are unconstitutional takings. Drug manufacturers recently made similar claims in litigation involving the 340B Drug Pricing Program. Two district courts rejected those claims, highlighting several obstacles that Merck’s takings claim may face as well.
The 340B Drug Pricing Program, created in 1992, requires manufacturers to agree to sell drugs at discounted prices to certain covered entities as a condition of participating in Medicaid and Medicare Part B. Covered entities include various federally funded clinics and hospitals that serve low-income patients. Recently, disputes have arisen over whether the 340B program requires manufacturers to deliver discounted drugs to an unlimited number of contract pharmacies. Contract pharmacies are pharmacies like CVS or Walgreens that contract with covered entities to dispense drugs to patients. Several drug manufacturers have brought lawsuits challenging an HHS interpretation that prohibits manufacturers from placing limits on sales of 340B discounted drugs to contract pharmacies.
In litigation over the contract pharmacy issue, drug manufacturers have made Fifth Amendment takings claims. In two separate lawsuits, both Eli Lilly and Novo Nordisk argued that a requirement to deliver 340B discounted drugs to contract pharmacies without restrictions is an unconstitutional taking. The basic theory behind the takings claims was that the 340B program coerced the manufacturers into transferring their drug products at discounted prices to contract pharmacies. Both Lilly and Novo invoked the unconstitutional conditions doctrine, which they argued prohibited the government from requiring them to relinquish their property without just compensation as a condition of participating in federal health-insurance programs.
Judges in both the District of New Jersey and Southern District of Indiana rejected the takings claims based on one primary reason: the drug manufacturers voluntarily chose to participate in the 340B program. Such voluntariness, both courts reasoned, defeats a claim that a regulation imposes a taking. Both courts pointed to the Supreme Court’s decision in Ruckelhaus v. Monsanto, where the Court held that no taking occurred where a party voluntarily agreed to relinquish trade secrets in exchange for a government license to sell a product. Both courts noted that withdrawing from Medicaid and Medicare Part B would have a major financial impact on the manufacturers, but concluded that such economic hardship is not enough to show legal compulsion to accept the condition.
Judge Wolfson of the District of New Jersey noted several alternative reasons that Novo’s takings claim failed. For example, under the Fifth Amendment, a taking only occurs where the government fails to provide “just compensation.” Judge Wolfson opined that there was no evidence that Novo did not receive just compensation when it sold drugs at the 340B discounted price. She concluded the average required discount of 25-50% was not inadequate compensation “in the sense of the Fifth Amendment.”
These two district courts are the only courts thus far to consider the merits of the takings claims in the 340B contract pharmacy litigation. Although the litigation remains pending, these district court decisions foreshadow challenges that Merck’s takings claim may face, if the district court reaches the merits of the claim in that case.
Substantively, Merck’s takings claim has significant parallels to the 340B takings claims. Like the 340B plaintiffs, Merck argues that the Medicare price negotiation program will coerce Merck into selling drugs at discounted prices. Yet also like the 340B program, there is an element of voluntariness. Merck can avoid price regulation by opting out of Medicare and Medicaid altogether. Forgoing the federal health-insurance market would impose serious economic hardship. In the 340B cases though, courts held that similar economic hardship — withdrawal from Medicaid and Medicare Part B — is not enough to make a government action unconstitutionally coercive.
Moreover, Merck suggests that mandated discounts of at least 25% in the price negotiation program fall below the threshold of just compensation that the Fifth Amendment requires. But the mandated discounts involved in the 340B program and the price negotiation program are similar. Judge Wolfson concluded that average discounts of 25-50% were insufficient to show that Novo did not receive just compensation for its sales of 340B drugs to contract pharmacies.
The 340B district court opinions are not binding for Merck’s lawsuit. And Merck has raised several other distinctive arguments to support its takings claims. For instance, Merck alleges that the price negotiation program affects its patent rights and that it does not have sufficient time to withdraw from Medicare before the first round of price negotiations. Nonetheless, the 340B litigation highlights that takings challenges to the Medicare price negotiation program face an uphill battle.
