Last year, Congress passed the Inflation Reduction Act, a law championed by Democrats and President Joe Biden. Among many other goals, it aimed to lower the cost of some prescription medications by allowing Medicare, which serves around 60 million Americans, to negotiate prices directly with drugmakers — something it was previously barred from doing.

In anticipation of the first negotiations, which are scheduled to begin in 2026, the pharmaceutical giant Merck filed a lawsuit against the federal government. The company, which produces several commonly prescribed drugs such as Januvia, used to treat type 2 diabetes, claims the provision is unlawful because it violates the Constitution’s First and Fifth Amendments.

Harvard Law Today spoke with Carmel Shachar J.D./M.P.H. ’10, an incoming assistant clinical professor of law and the faculty director of the Health Law and Policy Clinic, about the Inflation Reduction Act, Merck’s lawsuit, and what a victory for the federal government might meant for drug prices. The case is “an interesting one,” says Shachar, who is also the outgoing executive director of the Petrie-Flom Center for Law Policy, Biotechnology, and Bioethics, “one that is going to have a big impact on our health care spending in the coming years.”

Harvard Law Today: To what extent did the Inflation Reduction Act empower Medicare to negotiate drug prices with drugmakers?

Carmel Shachar: Prior to the IRA, Medicare was forbidden from negotiating drug prices. The law that establishes Medicare Part D, which is the prescription drug coverage, has a provision that’s known as the “noninterference clause,” which says that the Secretary of Health and Human Services can’t interfere with negotiations between drug manufacturers and pharmacies, and other related companies can’t require particular formularies. In other words, you can’t require coverage of certain drugs or institute a price structure for the reimbursement of covered Part D drugs. It was basically saying that we don’t want Health and Human Services or Medicare influencing drug pricing directly.

Increasingly, I think there was a lot of dissatisfaction there. Medicare enrollees are a huge proportion of the prescription drug market, and they tend to be older, more medically complex. They have a lot of prescriptions. And part of the Inflation Reduction Act was a response to how much Medicare Part D was costing. What it does is it keeps that noninterference clause for most drugs, except for a very small number of drugs — up to 20 drugs once it gets fully implemented. The drugs that are selected are the drugs that have the highest total Medicare Part D spending, as well as the highest total Medicare Part B spending. The idea is to really focus negotiations on a small set of drugs that are going to impact spending the most.

HLT: What other factors will be taken into account when selecting which drugs will be subject to negotiation?

Shachar: As I mentioned, they’re looking at highest spend, but there are a whole bunch of exemptions. If you’re a drug with a high spend, but there’s a generic or biosimilar available, you don’t get put in this negotiation pot. If you were approved less than nine years ago for small molecule drugs, or 13 years ago for biological products, again, you’re not part of this pot. They also have exceptions for if you’re a drug with an orphan designation, which means that it is for a condition without a lot of other treatments available.

“The idea is to really focus negotiations on a small set of drugs that are going to impact spending the most.”

HLT: The Veterans Health Administration has long had the authority to negotiate some drug prices. Why is Medicare different?

Shachar: The VA health system is kind of its own very special flavor within the American healthcare system. The VA has been empowered for years to negotiate drug pricing, but it also looks different than Medicare because it’s one unified system. It’s allowed to have a much narrower formulary. There are a lot of drugs covered by Medicare Part D programs that are not covered by the VA. They also entirely bypass the retail pharmacy structure because what they do is they buy the drugs directly, and then they get them to the patient through the VA system. So yes, they’ve been allowed to negotiate, but they’re also such a different creature than Medicare Part D, which is fairly privatized — you go through a private company for your Part D plan. Ultimately, comparing the two is comparing apples to oranges.

HLT: Does the U.S. differ from other countries in this regard? Do other countries negotiate with drug suppliers on drug prices?

Shachar: I think other countries, particularly those with government-run health care systems, tend to negotiate quite strongly on price. They are more reluctant to add new expensive blockbuster drugs, and they want to see that there’s a high degree of return before doing so — that this drug is really effective, that it really buys people more time. Drug prices in the U.S. have been traditionally much higher than in other countries for the same medications, in part because of the strong price negotiations that other governments engage in.

HLT: Earlier this year, you told Harvard Law Today about how pharmacy benefits managers tend to fill the price negotiator role in the U.S private insurance market. Does that also apply for Plan D beneficiaries? If so, why would the federal government want to instead step in in lieu of those pharmacy benefits managers? 

Shachar: PBMs are definitely involved in the Medicare Part D plans. I think that for a variety of market distortion reasons, there is a sense that the government might be able to do a stronger job with negotiating. For example, with PBMs, they’re incentivized to deliver on rebates. They’re happy to have a high list price and then bring that down, because they can show their clients — the insurers — that they’ve saved X amount off the list price.

The other issue is just one of scale. There are a lot of companies in the Medicare Part D space. I think anyone who has either had to pick a Part D plan or helped a parent pick a Part D plan knows that all of the options can be overwhelming, which in some ways is great, because it lets people choose the right plan for them. But it also means each of these plans are negotiating separately for drug prices, and so they may not have the power of, say, the VA, to say ‘If you want your drug to be available to VA enrollees, you have to play ball with us.’ The thinking is that if it’s a more centralized negotiation, then Health and Human Services can use Medicare Part D’s market share to get better prices for its enrollees.

HLT: In its lawsuit, Merck makes a few claims. One is that this new scheme is an unconstitutional taking of private property without proper compensation in violation of the Fifth Amendment. What do you make of that argument?

Shachar: I think the takings clause argument is an interesting one. I think it’s definitely on the legal cutting edge. The takings clause says that the government cannot take your private property without just compensation. People often think about it in the context of eminent domain and land. Can the government take your house so that it can build a highway? Here, we’re not talking about land, obviously. But we are talking about patents and the profits that come out of utilizing those patents. And there, I believe it’s an open question as to whether a patent can serve as a basis for that private property. There is at least one case saying that trade secrets can qualify as property for the takings clause. But I think it’s going to be a novel question as to whether pharmaceutical patents qualify.

“I think the takings clause argument is an interesting one. I think it’s definitely on the legal cutting edge.”

The other key question is, will the negotiation process outlined in the Inflation Reduction Act result in a fair market value for these drugs? The government can take your land as long as it is offering you just compensation. So, could they take some of the control given to you by this patent, as long as they’re providing fair market compensation for your drugs? The court will likely look at how much of an economic impact it will have on a company like Merck and other pharmaceutical companies, which is a little tricky, because this is an unprecedented program.

The last point is that, going back to our classic example, if the government is saying that it is going to take your house to build a highway, you don’t really have the option to move your property away from the highway, because houses can’t be moved very easily. However, the government could potentially argue that participation in Medicare Part D is voluntary, and therefore it is allowed to put conditions on participation. If the pharmaceutical company doesn’t want to participate in these negotiations, they can either choose to not offer their pharmaceuticals through Part D plans, or they can try to get into one of the exceptions I mentioned earlier, the most notable being to have a generic or biosimilar, which is effectively generic for biologics. They can say, ‘we will let a generic onto the market, and now you can’t negotiate with us.’ So, the government may argue that it’s not coercion — it’s simply negotiation.

HLT: What about the company’s argument that its free speech rights are violated by forcing it into pricing agreements?

Shachar: That’s also an interesting argument. I have to say free speech was not what immediately came to mind what I heard about this case, but I do see the logic. Merck is saying it would be more honest for Health and Human Services to just set the price they want to pay. It’s saying, don’t pretend that this is a good faith negotiation, don’t make us essentially cosign your pricing decisions. But I’m not sure how far this will go.

“Merck is saying it would be more honest for Health and Human Services to just set the price they want to pay.”

There is one case on record in California, which is on the vanguard of drug pricing negotiations in its Medicaid program. PhRMA, which is the trade organization for the pharmaceutical industry, filed suit with a First Amendment claim saying the state was forcing companies to cosign negotiations that were not really negotiations, which is compelled speech. The U.S. District Court sided with California and said it was not a First Amendment issue. But if this case is in a different circuit, the judge might say that what the California district court said was interesting, but not controlling. The Court of Appeals could say something else. It may very well go to the Supreme Court, which certainly would not feel bound by the district court. But I think that precedent indicates that the First Amendment argument is less likely to have legs than the Fifth Amendment argument.

HLT: Finally, what do you think of Merck’s claim that these pricing negotiations will reduce spending by drug makers on the development of new medications? Is there any danger that the possibility of reduced profits could prevent innovation?

Shachar: I think it’s really tricky. It’s true that the U.S. is a hub for pharmaceutical innovation, in part because we are willing to pay higher prices than other countries. It’s really us and Switzerland who are in the innovation game. And certainly, what you don’t want is to control drug prices such that you never get kind of the next cutting-edge generation of pharmaceuticals. However, I do think that the economics literature indicates that there is probably room for drug prices to go down and still have that innovation. I also think the way that drugs qualify for negotiation under the IRA, by giving companies either a nine- or 13-year period of immunity for your blockbuster drugs from the first related patent filed, helps.

“[IRA qualifying requirements] might actually put pressure on pharmaceutical industries to always look for a truly new blockbuster drug as opposed to making small changes to existing ones.”

Right now, there is an issue where oftentimes it’s really lucrative for pharmaceutical companies to slightly tweak their blockbuster drugs, rather than chase truly new drugs. And I think that by the IRA saying that the nine-year period starts from the initial patent and not subsequent modifications, it might actually put pressure on pharmaceutical industries to always look for a truly new blockbuster drug as opposed to making small changes to existing ones.

Overall, I think this suit is an interesting one, and one that is going to have a big impact on our health care spending in the coming years.

Want to stay up to date with Harvard Law Today? Sign up for our weekly newsletter.