US drug pricing overhaul: The Inflation Reduction Act (IRA) and the Executive Order (EO) on Most-Favored-Nation (MFN) drug pricing in focus

The Inflation Reduction Act (IRA), signed into law in August 2022, marked a historic shift in US healthcare policy by granting Medicare the authority to negotiate prices for certain high-cost prescription drugs. This provision, long resisted by the pharmaceutical industry, aims to reduce federal spending and out-of-pocket costs for seniors. The law also includes caps on insulin prices and annual out-of-pocket costs for Medicare beneficiaries.

Under the IRA, the Centers for Medicare & Medicaid Services (CMS) can negotiate prices for select high-expenditure, single-source drugs covered under Medicare Part B and Part D. The programme targets drugs that lack generic or biosimilar competition and have been on the market for a specified period – seven years for small-molecule drugs and eleven years for biologics. The first round of negotiations began in 2023, with prices set to take effect in 2026. Among the drugs selected was Farxiga, a diabetes medication manufactured by AstraZeneca.

Pharmaceutical companies, including AstraZeneca, filed lawsuits challenging the constitutionality of the IRA’s negotiation provisions. They argued that the law violates due process and amounts to coercive price controls and that the programme infringes upon their constitutional rights and could negatively impact innovation. However, in May 2025, the 3rd US Circuit Court of Appeals upheld a lower court ruling dismissing AstraZeneca’s challenge. The court found that the company failed to demonstrate a specific injury or a violation of its constitutional rights.

This ruling is a significant victory for the Biden-era policy and sets a precedent for similar cases brought by other drugmakers. The decision reinforces the government's ability to implement cost-containment measures in Medicare, despite industry opposition. Legal scholars and policy analysts have noted that, while the IRA’s negotiation framework is limited in scope – initially targeting only a small number of drugs – it represents a foundational shift in US drug pricing policy. Publications in journals like The New England Journal of Medicine and Health Affairs have highlighted the potential for broader reforms and the importance of legal clarity in sustaining the future of the programme.

As of mid-2025, other pharmaceutical companies are still pursuing appeals, but the AstraZeneca ruling may influence the outcomes of those cases. The industry continues to lobby for legislative changes, but the courts have so far upheld the government's authority under the IRA.

Legal challenges and proceedings

Multiple pharmaceutical companies and industry associations have filed lawsuits challenging the constitutionality of the IRA's drug price negotiation provisions. Key plaintiffs include: 

• AstraZeneca: Argued that the negotiation programme violates the Administrative Procedure Act (APA) and the Fifth Amendment's Due Process Clause. On 8th May 2025, the Third Circuit Court of Appeals dismissed the case, stating that AstraZeneca failed to demonstrate specific harm or a violation of due process rights. The court emphasised that drugmakers do not have a protected right to sell medications to Medicare at prices higher than what the government deems acceptable. Mintz
• Johnson & Johnson and Bristol Myers Squibb: Filed lawsuits claiming that the IRA's provisions constitute an unconstitutional taking of property without just compensation, violating the Fifth Amendment. In April 2024, a federal judge in New Jersey dismissed their lawsuits, stating that participation in Medicare is voluntary and that the government is not obligated to purchase drugs at prices set by manufacturers. Both companies have indicated plans to appeal the ruling. Reuter 
• Merck & Co.: Contended that the IRA compels speech in violation of the First Amendment and results in an uncompensated taking under the Fifth Amendment. The lawsuit is ongoing, with courts yet to rule on the merits of these claims. Merck argues that the negotiation process forces the company to agree that the discounted prices are fair, which it views as compelled speech. BioSpace
• Novo Nordisk and Boehringer Ingelheim: Challenged CMS' implementation guidance, alleging that it exceeds the agency's statutory authority and violates the APA. These cases focus on the definitions of "qualifying single source drugs" and "bona fide marketing", arguing that CMS' interpretations are inconsistent with the IRA's text. The lawsuits are ongoing, with courts yet to issue final rulings.
• Pharmaceutical Research and Manufacturers of America (PhRMA): Asserted that the IRA imposes excessive fines and violates the non-delegation doctrine by granting CMS too much discretion without clear congressional guidelines. While some courts have dismissed these claims, others have allowed them to proceed, indicating a lack of consensus on these legal arguments. Initially, a federal judge in Texas dismissed PhRMA's lawsuit on jurisdictional grounds. However, in September 2024, the Fifth Circuit Court of Appeals reversed this decision, allowing the case to proceed. The court has not yet ruled on the merits of PhRMA's claims. Fierce Pharma

Overall, the courts have largely upheld the IRA's provisions, emphasising the voluntary nature of participation in Medicare and the government's authority to negotiate prices for the drugs it purchases. However, several appeals are pending, and the outcomes could have significant implications for the pharmaceutical industry and federal healthcare policy.

Executive Order (EO) on Most-Favored-Nation (MFN) drug pricing intersection with the Inflation Reduction Act (IRA)

Signed on 12th May 2025, the EO titled “Delivering Most-Favoured-Nation Prescription Drug Pricing to American Patients” aims to:

• Ensure US drug prices do not exceed those in other developed nations.
• Direct the Department of Health and Human Services (HHS) to set price targets aligned with MFN pricing.
• Encourage pharmaceutical companies to voluntarily adjust prices.
• If voluntary compliance fails, HHS is instructed to prepare rulemaking to enforce MFN pricing.

The Inflation Reduction Act already allows Medicare to negotiate prices for certain high-cost drugs. The Trump EO:

• Builds upon the IRA’s framework but extends beyond it by targeting broader pricing disparities, not just Medicare-covered drugs.
• Does not repeal or amend the IRA directly, but it adds pressure on pharmaceutical companies by introducing a parallel pricing mechanism.
• May influence future rulemaking or legislative efforts to modify the IRA, especially regarding the so-called “pill penalty”* and biologics vs small-molecule drug treatment. 

_{(*The “pill penalty” refers to a provision in the Inflation Reduction Act (IRA) that imposes earlier Medicare price negotiations on small-molecule drugs (typically oral medications) compared to biologics (complex injectable therapies).)}

Industry response and strategic adjustments

In response to the IRA and the EO and their potential impact on revenues, pharmaceutical companies are exploring various strategies:

• Product reformulation: Some companies are developing new formulations of existing drugs, such as subcutaneous versions, to reset the negotiation eligibility clock. However, recent CMS guidance suggests that these new formulations may not be exempt from earlier price negotiations, potentially limiting the effectiveness of this strategy.
• Research and development focus: Companies like AstraZeneca are shifting investment towards biologics, which have a longer exclusivity period before becoming subject to price negotiations compared to small-molecule drugs. This strategic pivot aims to mitigate the financial impact of the IRA's provisions. 
• Exemption optimisation: Companies are lobbying for extended exemption periods, especially for small-molecule drugs, to match the 13-year window biologics enjoy. The MFN EO supports this by directing Health & Human Services to explore aligning these timelines, potentially delaying negotiation eligibility.
• Legal and policy challenges: Several firms and industry groups are challenging the IRA’s constitutionality, particularly the negotiation mandate, arguing it violates due process and takings clauses. These legal efforts aim to delay or weaken enforcement of price controls.
• Deal structuring and licensing adjustments: New licensing agreements now include clauses that account for IRA-related risks. Companies are reassessing M&A strategies, especially for assets nearing the IRA’s negotiation window.
• Portfolio rebalancing: Firms are prioritising orphan drugs, oncology, and rare disease treatments, which often enjoy longer exclusivity and are less exposed to Medicare pricing. Some are divesting or de-emphasising products heavily reliant on Medicare Part D revenues.
• Stakeholder engagement and transparency campaigns: Companies are launching public campaigns to highlight the potential negative impact of price controls on innovation. They are also working with patient advocacy groups to build support for policy revisions.

Conclusion

The combined force of the Inflation Reduction Act’s drug price negotiation programme and the 2025 Executive Order on Most-Favoured-Nation pricing marks a pivotal shift in US pharmaceutical policy. While the IRA targets Medicare-specific cost reductions through direct negotiation, the EO introduces a broader international pricing benchmark that could influence both public and private markets. 

Despite ongoing legal challenges from the pharmaceutical industry – particularly around the IRA – courts have largely upheld the government's authority to implement these reforms. In the short term, the EO may encourage voluntary price adjustments or provoke further legal scrutiny. Over the medium to long term, if fully implemented through rulemaking, it could either complement or complicate the IRA’s framework, reshaping the landscape of drug pricing, innovation incentives, and market dynamics across the healthcare system.

Together, these policies signal a new era of pricing accountability and regulatory oversight, with significant implications for drug development strategies, market access, and patient affordability.

About the author

Navin Joshi is VP and global head MA&P & HEOR at Lifescience Dynamics. With over 25 years of experience in health service and pharmaceutical industry, he has been leading initiatives with multiple pharmaceutical companies, ranging from BD&L to medical affairs support, PRMA strategies, and sales and marketing. Joshi worked for two years as principal consultant at Clarivate and 14 years as senior director leading teams in Global, Regional, and Corporate businesses at GSK. He also worked for 14 years as marketing manager and head of UK NHS affairs at MSD. Prior to transitioning into the pharmaceutical industry, Joshi built a strong foundation in healthcare as a pharmacist.