Is Medicare Coercing Merck?
I’ll save you the suspense: I think it is.
Drug company Merck is suing Medicare. What’s its beef? Merck claims that certain changes in the way Medicare will pay for drugs are coercing Merck, forcing it to sell drugs at below-market prices. But Cato health economist Michael F. Cannon disagrees. He says that there is no coercion whatsoever. Indeed, Michael’s post is titled “Medicare Is Not Taxing or Coercing Merck, Just Reducing Its Government Subsidies.”
At first I agreed with him. And then I read his post more carefully. Read it too—it’s not long—if you want to understand my objections.
Michael starts with an argument I agree with and I was pleasantly surprised to see him being so radical on the issue of Medicare. He writes, “The price Medicare should pay for all medical goods and services is $0.00.” In other words, he’s saying that Medicare should not exist. You can be sure that if it paid $0.00 for every medical good and service, its budget would be zero. Then the tax that people pay for Medicare, 1.45 percent of all “earned” income for employees and the same tax for employers (and a higher tax for higher-income people) could be zero. Most workers below the age of 40, who are years away from ever getting Medicare benefits, would probably be thrilled.
The key issue, though, is whether Merck and other drug companies are free to say no and not sell drugs to Medicare. If that were so, then Michael would be right.
But my understanding of the law is that it’s not so.
Michael links to a very long document from the Center for Medicare that explains the process. I didn’t have the patience to work my way through it, but I’ll accept that Michael has summarized it accurately. He boils it down to 4 steps:
If Medicare selects a Merck drug for price negotiation, Merck has until October 1 to enter into an “agreement” to negotiate a “maximum fair price.” Medicare’s opening bid must be at least 25 percent less than the current price.
If Merck does not enter into an “agreement” by October 1, “a noncompliance period would begin” that could result in “excise tax liability” for Merck.
If Merck enters into an “agreement,” it must sell the drug to Medicare at whatever price Medicare negotiates/dictates or pay an “excise tax.”
Merck may terminate the “agreement” for any reason, but the termination does not take effect until 11–23 months after Merck announces it. In the meantime, Merck must continue to sell the drug to Medicare at the price Medicare negotiated/dictated.
To his credit, Michael puts “agreement” in quotation marks because it’s not an agreement. The crucial issue, as I noted above, is whether a drug company is free to engage. Bullet #2 above says that it’s not. A company that refuses to enter an agreement is designated by Medicare as being noncompliant and is taxed for being noncompliant. The tax, by the way, is very heavy.
So how does Michael claim that the drug company is not coerced? He writes:
First, Both Merck and the government are wrong to describe those “excise taxes” as taxes. Merck’s own lawyers admit, “the excise tax is suspended if the manufacturer has no relationship with Medicare or Medicaid.” Taxes are compulsory; these “taxes” are optional. Ergo, it’s not a tax. The correct way to think of those payments is that Merck would be rebating to the government a portion of the subsidies it receives from taxpayers through Medicare and Medicaid. In essence, those rebates are an across‐the‐board reduction in the prices Medicare and Medicaid pay for Merck’s products. No one is taxing Merck, just reducing their government subsidies.
Since those “excise taxes” are not taxes, the government is not compelling Merck to enter an “agreement.” Merck is free to decline. If the resulting rebates Merck must pay mean its government “book of business” is unprofitable, it can walk away from federal health programs.
If Merck and other drug companies really were free to decline, then he would be right that they’re not coerced.
But there’s a big wrinkle and Michael addresses it in his next paragraph, writing:
Not even the 23‐month period that Merck would have to continue selling the drug to Medicare at the Merck‐unfriendly price is coercive. Merck has received plenty of notice of that condition. Merck was aware of that provision as Congress debated the law in 2021. And when Congress passed it. And when President Biden signed it in August 2022. And when Medicare announced in March 2023 how it would be implementing these provisions. Merck has had and will continue to have plenty of opportunities to avoid those conditions. It could have avoided them at any time from when Congress began debating them in 2021 until now. It could avoid them today. It could avoid them by refusing to enter into an “agreement.” At any of these points, Merck could avoid these conditions of Medicare participation without coercion.
Excuse me? Merck received plenty of notice? Yes, that provision was debated and there was reason to think that Joe Manchin (D-WV) would stand his ground and that the Inflation Reduction Act would be defeated. Merck was supposed to anticipate that Larry Summers would convince Manchin that it was a good bill that he should vote for? Really? Once Biden signed it, then, yes, Merck could see the writing on the wall. But let’s do some basic math. August 2022, when Biden signed it, was 10 months ago. So if Merck was already selling drugs to Medicare, it was stuck. 10 is less than 11 and is way less than 23.
Interestingly, Michael makes the point that Medicare announced in March 2023, just 3 months ago, how it would implement those provisions. I think Michael is saying that there was some ambiguity. If so, then Merck had not 10 months, but 3 months. So it’s really stuck. 3 is less than 11 and is way less than 23.
But whether the right measure is 3 months or 10 months, would Michael apply this to other government measures? What if Congress passed a law today, and Biden signed it today, stating that anyone currently working for the federal government could be shipped to Ukraine to fight or serve in some other capacity within the next 11 to 23 months? Would Michael then say that those government workers are not being coerced? Would he go further and say that those workers should have anticipated that provision because it had been debated months and months ago?
I don’t think he would. But if so, what’s the difference in principle?
HT2 Charley Hooper for helpful discussion.