Most-Favored-Nation Drug Pricing—How Courts Could Shape Future Health Regulation

The Trump administration recently issued an Executive Order aimed at delivering most-favored-nation (MFN) drug pricing to the US.1 The order instructs drug manufacturers to reduce the prices of brand-name drugs to match the lowest price among selected high-income countries. If drug makers do not make significant progress toward this goal, the administration will pursue several strategies to lower prices. Most notably, the Executive Order directs the Secretary of Health and Human Services (HHS) to propose a rule to impose MFN pricing.

In all likelihood, the administration will revisit prior efforts to enact MFN pricing through the Center for Medicare and Medicaid Innovation (CMMI). But doing so will require the administration to navigate some difficult legal questions—the most urgent of which relates to the geographical reach of an MFN policy.

Established through the Affordable Care Act, CMMI is authorized to waive Medicare and Medicaid rules to test new models of paying for medical care.2 If a model is shown to improve the quality and efficiency of federal health programs, CMMI can expand it nationwide. The goal of an MFN model could be to test whether matching international prices would lower spending and improve health outcomes.

Indeed, the first Trump administration attempted to use CMMI authority to implement MFN in 2020 for 50 high-cost physician-administered drugs. Courts promptly blocked the MFN policy because CMMI failed to solicit public feedback before the rule went into effect. But avoiding this previous procedural mistake would be straightforward: CMMI would simply have to follow the notice-and-comment process instead of a fast-track approach. That will take time—probably 1 year and perhaps longer—but it would eliminate one source of legal risk.

Meanwhile, alternative approaches to adopting MFN prices are not nearly as promising. Under the Inflation Reduction Act (IRA), for example, HHS sets a maximum fair price for certain prescription drugs that Medicare purchases. In theory, HHS could say it was using an international price to establish the maximum fair price. But any such policy would have limited scope, given that the IRA only applies to a small number of drugs (10 starting in 2026, 15 more in 2027). More importantly, the IRA specifies the factors that HHS may consider in establishing a maximum fair price, one of which is “revenue and sales volume data for the drug in the United States.”3 Treating a drug’s sales price outside the US as a factor would likely exceed HHS’s authority under the IRA.

While CMMI’s authority is broad, it is not unlimited. Notably, CMMI is authorized to “test innovative payment and service delivery models,”2 but the law does not confer authority to unilaterally set Medicare or Medicaid policy. An MFN model as ambitious as the one adopted in the first Trump administration will prompt legal challenges from drug manufacturers who say that it is not a genuine test but a flagrant attempt to avoid congressional approval for programmatic changes.

In the inevitable litigation, courts will need to decide what qualifies as a test and thus will determine not only the fate of the MFN policy but also whether future administrations have the power to implement sweeping health reform via executive action. In making that determination, courts are unlikely to insist on the exacting standards of medical or economics journals, with double-blinded control groups or unimpeachable identification strategies. Still, they will require the Trump administration to show that the model is designed to evaluate the effects of an intervention.4 That is what it means to be a test.

This need for a model to be a genuine test likely rules out a model that applies nationwide to all or even a subset of drugs that Medicare purchases. Courts are unlikely to be moved by the claim that a nationwide payment model is testing Medicare spending before the rule and Medicare spending after. That is not really a test; it is a programmatic change. Congress did give HHS authority to expand a model on a nationwide basis but only if the model is shown to reduce spending without compromising quality (or to improve quality without increasing spending).2 If CMMI already had the authority to adopt a nationwide model, Congress would have had no need to adopt strict conditions on a model’s nationwide expansion.
Moreover, a nationwide model may not benefit from protections afforded to other CMMI models. Congress said that “[t]here shall be no administrative or judicial review” of “the selection of models for testing or expansion” and “the elements, parameters, scope, and duration of such models.”2 Federal courts have embraced a “strong presumption that Congress intends judicial review of administrative action”5 and routinely draw on that presumption to narrowly read laws that attempt to limit judicial review. A plaintiff might argue, for example, that it is not challenging the selection of a model or its scope. Rather, it is challenging whether the MFN rule is a model at all. If it is not, the bar on judicial review may not apply, allowing courts to weigh in on the case. Indeed, the courts may be tempted to stretch a point to prevent the Trump administration from wildly exceeding its powers.

Legal developments since the adoption of the Affordable Care Act also reduce the odds that a nationwide model would survive legal scrutiny. In a string of cases, the US Supreme Court has held that federal agencies do not have the authority to exercise powers of “vast economic and political significance” unless Congress has clearly delegated that power to them.6 During the COVID-19 pandemic, for example, the Supreme Court invoked this major questions doctrine to stop the Occupational Safety and Health Administration from imposing a vaccine mandate on employers7 and the US Centers for Disease Control and Prevention from adopting an eviction moratorium.8 The federal courts are unlikely to endorse an interpretation of CMMI’s powers that would effectively allow it to remake federal programs, which dispense $1.9 trillion in taxpayer dollars every year.