Most-Favored-Nation Prescription Drug Pricing Executive Order: Legal Issues

Most-Favored-Nation Prescription Drug Pricing Executive Order: Legal Issues

Most-Favored-Nation Prescription Drug Pricing Executive Order: Legal Issues

June 5, 2025 (LSB11319)

On May 12, 2025, the Trump Administration issued an executive order titled "Delivering Most-Favored-Nation Prescription Drug Pricing to American Patients" (the 2025 EO). Both the 2025 EO and the accompanying fact sheet outline a plan to reduce prescription drug prices for Americans. The 2025 EO states that consumers in the United States are overcharged for prescription drugs and that "Americans must therefore have access to the most-favored-nation price." The 2025 EO directs multiple federal agencies, including the U.S. Department of Health and Human Services (HHS), to take specific actions aimed at compelling drug manufacturers to lower drug prices in the United States in a manner comparable with other "developed nations."

On May 20, 2025, HHS issued a press release stating that the Department "expects each [drug] manufacturer to commit to aligning [United States] pricing for all brand products across all markets that do not currently have generic or biosimilar competition with the lowest price of a set of economic peer countries." From this statement, it appears that HHS intends to apply the most-favored-nation (MFN) pricing only to single-source drugs (i.e., "brand-name" drugs without any approved generic or biosimilar versions). In its May press release, HHS also advised that it will calculate the MFN price as the lowest price in a country that is part of the Organisation for Economic Co-operation and Development and that has a per capita gross domestic product (GDP) of at least 60% of the U.S. per capita GDP.

In some respects, the 2025 EO resembles a 2020 MFN drug pricing executive order (the 2020 EO) from President Trump's first term, which also directed the HHS Secretary to implement MFN pricing, but which was limited in application to Medicare Part B. This Legal Sidebar provides relevant background about HHS's efforts to implement the 2020 EO and analyzes selected legal issues related to the HHS Secretary's authority to implement MFN pricing as directed in the 2025 EO. Because the May 20, 2025, press release from HHS mentions that the agency expects manufacturers to offer MFN pricing "across all markets," this Legal Sidebar also explores the HHS Secretary's authority to impose MFN pricing for drugs in federal health care programs (e.g., Medicare, Medicaid, and the Children's Health Insurance Program (CHIP)) as well as in private markets. The Sidebar concludes with an analysis of how the MFN prices might interact with other existing federal programs, particularly the Medicare Drug Price Negotiation Program, which Congress created in the Inflation Reduction Act of 2022 (IRA).

The 2020 EO

On September 13, 2020, during his first term, President Trump issued EO 13948, "Lowering Drug Prices by Putting America First," which stated that "[i]t is unacceptable that Americans pay more" for prescription drugs than consumers in other countries. The 2020 EO set forth a new policy that Medicare should not pay more than the MFN price, which it defined as "the lowest price, after adjusting for volume and differences in the national [GDP], for a pharmaceutical product that the drug manufacturer sells in a member country . . . that has a comparable per-capita [GDP]." The 2020 EO directed the HHS Secretary to "test a payment model" under which the government would pay no more than the MFN price for certain drugs and biologics under Medicare Parts B and D. The 2020 EO also directed the Secretary to use his authority in Social Security Act (SSA) section 1115A, which established the Center for Medicare and Medicaid Innovation, to create a new payment model for Medicare Part D to pay no more than the MFN price for drugs under that program. The 2020 EO was issued prior to Congress's enactment of the IRA, which gave the HHS Secretary the explicit authority to regulate the prices of certain single-source, high-cost Medicare Parts B and D drugs for the first time.

Pursuant to the 2020 EO and using its authority in SSA section 1115A, the Center for Medicare and Medicaid Services (CMS), an operating division of HHS, issued an interim final rule (IFR) on November 27, 2020, outlining a new payment model for Medicare Part B drugs and biologics based on the MFN. The Administration made the rule effective without the usual notice-and-comment process under an exception in the Administrative Procedure Act (APA) that allows the agency to waive the notice-and-comment requirement for good cause. The IFR stated that good cause existed for issuing the rule without notice and comment due to "dramatic increases" in Part B drug prices combined with health and economic strains from the COVID-19 pandemic.

Shortly after CMS issued the IFR, drug manufacturers and trade associations challenged it in court. The complaints in these cases made a variety of procedural and substantive arguments, including that CMS lacked good cause to waive the APA's notice-and-comment requirement; that the IFR violated the Constitution's separation of powers, bicameralism requirements, and the nondelegation doctrine; and that the IFR exceeded the HHS Secretary's authority under SSA section 1115A.

The U.S. District Court for the District of Maryland granted a temporary restraining order against the IFR on December 23, 2020. Shortly thereafter, the U.S. District Courts for the Southern District of New York and the Northern District of California both issued preliminary injunctions to a similar effect. In both cases, the courts found that the balancing of the equities favored the plaintiffs and that the Administration failed to demonstrate good cause for issuing the MFN rule without notice and comment. The Maryland District Court observed that cases in which the government had previously demonstrated good cause (e.g., instances involving national security or life-threatening safety issues) were "readily distinguishable" from a rule "aiming to 'alleviate general financial instability' by reducing the cost of Medicare Part B drugs." The New York District Court was similarly unpersuaded by CMS's rationale for good cause, finding "‍[t]he risks of high drug prices are unlikely to support a finding of good cause because CMS was aware of this problem for years and failed to act." CMS later withdrew the IFR, and courts dismissed the legal challenges.

The 2025 EO

Like the 2020 EO, section five of the 2025 EO states that American consumers pay higher prices than other countries and thus directs CMS to "communicate [MFN] price targets" to manufacturers by June 11, 2025. Unlike the 2020 EO, the 2025 EO neither defines "MFN price" nor provides any instruction as to how the Secretary should calculate the MFN price. The 2025 EO provides that absent "significant progress" toward lowered prices, the Secretary of HHS "shall propose a rulemaking plan to impose [MFN] pricing" on manufacturers. Neither the 2025 EO nor its accompanying fact sheet provides any statement of the HHS Secretary's legal authority to issue such rules. The 2025 EO also does not say whether the rulemaking plan would be applied exclusively to federal health care programs—such as Medicare, Medicaid, and CHIP—or if HHS should attempt to reach drug prices paid by private parties, including employer-sponsored private health plans.

Additionally, unlike the 2020 EO, which was limited to implementing the MFN price for certain Medicare drugs, the 2025 EO is not limited to reducing prescription drug prices through the implementation of MFN pricing alone. In addition to sending price targets to manufacturers of single-source drugs and using rulemaking to impose MFN pricing, section four of the 2025 EO directs the HHS Secretary to "facilitate direct-to-consumer purchasing programs for pharmaceutical manufacturers," so that they may sell their products directly to American consumers. The 2025 EO does not further explain what such direct purchasing might look like. It is unclear how the Secretary would facilitate direct-to-consumer purchasing. Drug manufacturers generally offer lower prices to purchasers such as medical providers (e.g., hospitals) or health plans; the lower prices are based on the volume of drugs purchased or other incentives like formulary placement.

The 2025 EO also includes directives for the HHS Secretary to explore other mechanisms "to the extent consistent with law" to lower domestic drug prices if manufacturers do not make "significant progress" towards reducing costs. For example, under section five, the Food and Drug Administration (FDA), an operating division of HHS, is directed to consider modifying or revoking drug approvals for drugs that are ineffective, unsafe, or improperly marketed. The 2025 EO also directs the FDA to consider case-by-case drug importation waivers using its authority in the Federal Food, Drug, and Cosmetic Act (FDCA). The 2025 EO does not provide further information about the modification of drug approvals or the importation of drugs.

Potential Legal Authorities for the MFN Rule

As the Supreme Court has stated, executive branch agencies, including HHS, "are creatures of statute [and] accordingly possess only the authority that Congress has provided" to them. Thus, if the HHS Secretary were to implement a rule on MFN pricing in accordance with the 2025 EO by taking actions "consistent with law," he would need to rely on an existing statute giving him that authority. This section explores potential legal authorities that the HHS Secretary could use to regulate prescription drug prices in both federal health care programs and the private market, and the potential limitations of these authorities.

Federal Health Care Programs

The Medicare, Medicaid, and CHIP programs, which are authorized in the SSA, currently pay for drugs in different ways. For example, under Medicare Part B, HHS reimburses hospitals for certain outpatient drugs provided to Medicare beneficiaries based on a statutory formula that generally allows HHS to reimburse hospital outpatient drug purchases at 106% of the drug's average sales price. Under Medicare Part D, prescription drug coverage is provided through private prescription drug plans, which develop formularies specifying how much the plan will pay for a drug, with costs often varying among plans. Additionally, in accordance with the IRA's changes to the SSA, certain single-source, high-cost Part D drugs are now subject to price negotiation through the Medicare Drug Price Negotiation Program, and Part B drugs will become eligible for selection for price negotiation starting in 2026.

The SSA contains several provisions giving the HHS Secretary flexibility to create projects (often called "demonstrations" or "models") to test ways to improve the quality and efficiency of certain federal health care programs, including Medicare, Medicaid, and CHIP. In general, the demonstration authorities in the SSA allow the Secretary to waive certain payment rules and requirements that normally apply to federal health care programs to test new methods of paying for items or services. It is possible that the HHS Secretary could point to the existing authority to create a payment demonstration in SSA sections 1115A or 402 to implement an MFN pricing model for one or more federal health care programs.

SSA 1115A

As explained above, during the first Trump Administration, HHS promulgated an IFR to implement MFN pricing for Medicare Part B, relying on the authority in SSA section 1115A (42 U.S.C. § 1315a). Congress enacted section 1115A as part of the Patient Protection and Affordable Care Act. Section 1115A waivers allow the Secretary to test "innovative payment and service delivery models" in Medicare, Medicaid, or CHIP, while preserving quality of care. The statute limits the initial testing of "Phase I" models to addressing "defined population[s] for which there are deficits in care leading to poor clinical outcomes or potentially avoidable expenditures." The Secretary is authorized to test many different categories of models under the statute, including varying payments for physicians and directing contracts with providers and suppliers. The Secretary may terminate a model at any time, and the statute requires the Secretary to evaluate models by analyzing both the quality of care they provide and their changes to federal spending. After conducting such an evaluation, the Secretary may undertake a "Phase II" expansion of the model's duration and scope, "including implementation on a nationwide basis."

In the IFR implementing the 2020 EO, HHS proposed to select 50 Medicare Part B drugs "with high annual spending" based on the Healthcare Common Procedure Coding System and apply MFN payments to those drugs. The Department planned to make participation in the model mandatory for most Medicare-participating providers and suppliers, who would be automatically enrolled in the program when they submitted a selected Part B drug claim for payment. HHS also planned to implement the MFN payment model nationwide, pointing to a provision of the statute providing that the Secretary "may elect to limit testing of a model to certain geographic areas" as indicating that geographic limitation is within his discretion. Although stakeholders challenged the MFN IFR implementing the 2020 EO, including the nationwide application, as exceeding the Secretary's authority under section 1115A, the court never reached the merits of those arguments.

To date, courts have not substantively addressed the scope of the HHS Secretary's authority under section 1115A. If the HHS Secretary were to implement the 2025 EO by promulgating a rule under the authority in SSA section 1115A, CMS would likely need to follow APA notice-and-comment procedures, given prior court decisions enjoining the 2020 IFR. As before, drug manufacturers or other industry stakeholders could challenge a new MFN rule as exceeding the Secretary's authority under the statute. Manufacturers might make similar arguments that an MFN rule under SSA section 1115A violates the statute's limitation that Phase I models address "defined populations." A manufacturer might also argue that, read in context, the statute implies that the Secretary may not carry out nationwide implementation of a model until Phase II. HHS might in turn respond that the statute's limitation of models to certain geographic areas is permissive and thus implementing a nationwide model immediately is within the Secretary's discretion.

SSA 402

Section 402 of the SSA (42 U.S.C. § 1395b-1) gives the HHS Secretary the authority to create a demonstration project to determine whether certain payment changes to Medicare, Medicaid, or CHIP would "increas[e] the efficiency and economy of health services." During the Biden Administration, the HHS Secretary used this authority to create a demonstration program intended to stabilize Medicare Part D premiums, and it has also been used to create special projects to test the efficiency of bundled payments for procedures like cataract surgery. Similar to the 1115A waiver, to carry out the project, the Secretary may, after obtaining the "advice and recommendations" of relevant specialists, waive compliance with certain Medicare payment requirements insofar as they "relate to reimbursement or payment on the basis of reasonable cost." For example, the statute expressly permits the Secretary to waive certain federal health care program payment requirements for items and services specified in the demonstration project and to pay for costs "in excess of [what] would otherwise be reimbursed" or paid for by Medicare.

Courts and the Government Accountability Office (GAO) have analyzed the Secretary's authority under section 402, specifically with respect to the authority to waive certain Medicare payment rules. For example, a few appellate courts have upheld the HHS Secretary's authority to carry out other demonstration projects under section 402, rejecting arguments that the projects exceeded the Secretary's waiver authority. These projects differed from what the 2020 EO contemplated in that they were limited to specific geographic areas, and enrollment in the projects was voluntary for both providers and beneficiaries. In addition, section 402 does not set a duration for the demonstration projects, but at least one court has found that they are time-limited. GAO has also weighed the scope of the Secretary's authority under section 402, evaluating whether CMS had the authority to implement a performance incentive plan for Medicare Advantage plans. GAO concluded that the Secretary likely could not use section 402 for such a project, noting structural flaws in the particular program's design, among other issues. As part of its analysis, GAO observed that federal courts have yet to weigh in on the particular criteria that CMS must meet under the statute.

Private Health Plans

While the 2025 EO remains silent regarding the private health insurance market, the press release contains language implying an intent to impose MFN pricing "across all markets." It is unclear what existing statutory authority the HHS Secretary might leverage to take such action. Private health insurance coverage, including coverage offered by private-sector employers and health insurers in the group and individual markets, is the most common form of health coverage in the United States. Many private health benefit plans include a prescription drug benefit that helps enrollees pay for prescription drug costs. Prescription drug plans typically include formularies listing the drugs covered by the plan and specify different levels of enrollee prescription cost-sharing via drug "tiers." Additionally, many health plans contract with pharmacy benefit managers to design and administer their prescription drug benefits.

In general, private health plans, drug manufacturers, pharmacy benefit managers, and other parties enter into private contracts to provide drug benefits to plan participants, and the U.S. government is not a party to these agreements. The HHS Secretary's authorities in the SSA, discussed above, do not include authority to test health plan payment models outside of Medicare, Medicaid, or CHIP. By their terms, the payment demonstration authorities in the SSA are limited to the context of federal health care programs. As a result, it is not clear what existing authority the HHS Secretary could use to impose MFN pricing on private health payers. An attempt by HHS to dictate the prices that private health plans pay for certain single-source drugs is likely to be challenged in court by drug companies. In other contexts, drug manufacturers have argued that government attempts to lower their prices were a deprivation of property and constituted a taking under the Due Process and Takings Clauses of the Fifth Amendment.

Potential Interactions with Other Laws

Two years after the 2020 EO was issued, Congress enacted the IRA, creating the Medicare Drug Price Negotiation Program, which enabled the HHS Secretary to negotiate the prices of certain high-cost, single-source drugs for the first time. The statute creating the program explicitly requires the Secretary to "establish a Drug Price Negotiation Program," and to "negotiate . . . maximum fair prices" (MFPs) that Medicare will pay for selected drugs. The IRA also provides that during the negotiation process, the Secretary may not offer a manufacturer a price that is higher than a ceiling amount or, for certain small biotech companies' drugs in particular years, lower than a floor amount. When determining the initial offer for the MFP, the statute also requires the Secretary to consider a variety of factors, including the manufacturer's costs of research, development, and production; any federal financial support the manufacturer already received during the development process; and any therapeutic alternatives.

Despite facing multiple legal challenges, which remain ongoing, regarding both Congress's authority to enact the law and HHS's implementation of it, the program is currently in its second round of annual negotiations, with 25 Medicare Part D drugs selected for negotiation during the program's first two years. Earlier this year, CMS released guidance that will be used to implement the program's third year, and the selection of price-negotiated drugs will include those paid for by both Medicare Parts B and D.

In the event that the HHS Secretary intends to apply the MFN price to drugs paid for by both Medicare Parts B or D, it is unclear how the policy would interplay with the Secretary's authority and ability to negotiate certain Medicare drug prices. For example, it is possible that drugs subject to the MFN could also be subject to an MFP under Medicare, because the Administration has stated that it intends for the MFN policy to apply to single-source drugs, as is the case for the drugs selected for Medicare price negotiation. If the MFN price were to exceed the IRA's ceiling price, this difference could create conflicts between the MFN and MFP. Moreover, if a single-source drug has an MFN price based on the drug's price in other countries, it could frustrate the Secretary's efforts to offer an MFP based on the factors set forth in the IRA.

Alongside the potential interplay with the Medicare Drug Price Negotiation Program, the MFN price could also potentially conflict with other government pricing initiatives, including the 340B Drug Discount Program, which requires manufacturers participating in Medicaid to lower outpatient prescription drug costs for certain purchasers. Additionally, it is unclear whether and if potential tariffs on pharmaceutical goods would frustrate the establishment of MFN pricing. Legal issues could also arise with the policy's interaction with intellectual property rights, particularly patents, which play an important role in both the development and pricing of prescription drugs in the United States.