CLIENT ALERT / US POLICY
June 3, 2025
Read time: 5 min
On May 21, 2025, the Federal Trade Commission (FTC) issued its third round of warning letters – and its first under the Trump administration – against pharmaceutical manufacturers for allegedly improper listing of patents in the Food and Drug Administration’s (FDA) Orange Book. The FTC made clear that its prerogative under President Trump’s leadership is to seek “transparent, competitive, and fair healthcare markets.”
The FTC issued renewed warning letters to drugmakers that did not delist previously challenged Orange Book listings, disputing more than 200 patents across 17 brand-name pharmaceuticals. The patents relate to device components of combination drug-device products treating asthma, diabetes, and chronic obstructive pulmonary disease (COPD). The FTC alleges the device patents constitute improper listings that allow brand-name manufacturers to delay – or even prohibit – generic competition. These patents were previously the subject of warning letters the FTC issued in November 2023 and April 2024 to more than a dozen pharmaceutical manufacturers. Although some manufacturers delisted patents in response to the initial warning letters, others chose to continue listing the targeted patents in the Orange Book.
Background
The FTC issued a policy statement in 2023 under Chair Lina Khan declaring that “improper” pharmaceutical patent listings in the Orange Book may constitute an unfair method of competition in violation of Section 5 of the FTC Act. The patents are listed for the purpose of putting generic rivals on notice to deter patent infringement. The FDA, however, takes only a ministerial role as to listing patents and does not assess whether patents are properly listed in the Orange Book. Following the 2023 policy statement, the FTC issued a series of warning letters to manufacturers. We previously explored the FTC’s renewed stance against Orange Book listings and the listing dispute involving Teva Pharmaceutical Industries in this article.
In the FTC’s recent warning letters, the agency cites the December 2024 US Court of Appeals for the Federal Circuit decision in Teva Branded Pharm. Prods. R&D, Inc. v. Amneal Pharms. of N.Y., LLC as support for their assertion that the previously identified patents are improperly listed. The Federal Circuit affirmed a lower court’s order requiring Teva to delist five patents associated with its ProAir® HFA inhaler, a drug-device combination product, from the Orange Book. The court found Teva had improperly listed its ProAir HFA inhaler patents in the Orange Book for primarily two reasons:
- First, Teva had misinterpreted the requirements set forth in the listing statute by arguing that the term “drug” encompasses any component of an article that treats a disease, and therefore its patents claiming the device components would also “claim the drug.” The Federal Circuit rejected this argument, holding that determining whether a patent is properly listed “requires what amounts to a finding of patent infringement,” and the mere fact that a product could infringe a patent does not mean the patent “claims” the underlying drug.
- Second, Teva argued that a patent can be listed when it claims any part of the product other than the active ingredient, and therefore its patents that claim the device component are valid. The Federal Circuit rejected this argument, holding that in order for a patent to claim the “drug” and be listed in the Orange Book, the patent must claim at least the active ingredient of the approved product, as the active ingredient provides the primary mode of action of the drug.
The Federal Circuit subsequently denied Teva’s request for an en banc rehearing in March 2025. Notwithstanding Teva’s petition seeking Supreme Court review, Teva must now delist the five patents.
What’s Next
On the day following the Federal Circuit’s opinion, the FTC issued a press release applauding the Federal Circuit’s holding and reiterating its position that, due to the 30-month statutory stay triggered by listing patents in the Orange Book, improper listings can negatively affect competitive conditions permitting generic entry of competing drug products. The press release, however, was issued in the waning days of Chair Khan’s tenure with a Democratic majority at the FTC, and practitioners and industry stakeholders alike questioned whether the FTC’s policy on Orange Book listings would continue under a Republican-led FTC. The recent warning letters suggest that, under current Chair Andrew Ferguson, the FTC appears to be sticking to the prior administration’s policy and remains focused on enhancing competition between brand-name and generic pharmaceuticals to lower healthcare costs.
The Federal Circuit’s decision vindicated the FTC’s position against improper listings in the Orange Book and likely empowered the agency to undertake the most recent enforcement efforts despite the change in administration. The agency’s continued scrutiny of patent listings in the Orange Book indicates it is possible the FTC may pursue enforcement actions concerning its Orange Book challenges in the future. Therefore, brand-name manufacturers are advised to carefully review their current listings, paying particular attention to the underlying claim of the patent, as patents that do not claim the active ingredient in the drug may be considered improperly listed. Brand-name manufacturers are encouraged to proactively seek counsel when conducting such reviews to ensure compliance.
For more information, please contact your regular McDermott lawyer or one of the authors.
US Copyright Office Issues Report Addressing Use of Copyrighted Material to Train Generative AI Systems
CLIENT ALERT / US POLICY
May 30, 2025
Read time: 9 min
Overview
On May 9, 2025, the US Copyright Office (“USCO”) released a highly anticipated pre-publication version of the third and likely final installment of its Report on Copyright and Artificial Intelligence – Part 3: Generative AI Training (the “Report”).[1]
The very next day President Trump dismissed the Register of Copyrights and Director of the USCO, Shira Perlmutter – two days after dismissing Carla Hayden, the Librarian of Congress.[2]Perlmutter has since sued President Trump and the acting Librarian of Congress seeking an injunction blocking her removal.[3]
It is unclear whether Trump’s dismissals (1) were related to the content of the Report (which was critical of some of the arguments advanced by those who favor free use of copyrighted material to train AI models), (2) prompted the unusual pre-publication of the Report or (3) will affect the issuance or content of the final Report.
Regardless, the Report addresses an unsettled question underlying dozens of pending copyright AI lawsuits: does the use of copyrighted works without permission to develop and deploy generative AI (“GenAI”) models qualify as “fair use?”[4] This is the billion dollar question facing GenAI companies whose business model is predicated on such use.
For private fund managers and others who are increasingly looking to harness the power of GenAI and navigate the attendant legal risk, the Report is particularly timely.
While the Report notes that any fair use analysis must be context-specific, it does offer some helpful general guidelines in assessing fair use for GenAI. According to the Report, transformative use and market effects will be the most significant fair use factors that judges will assess in ruling on GenAI companies’ use of copyrighted material. As detailed below, these factors tend to weigh for or against fair use depending on the circumstances – and one federal judge appears poised to rule broadly in favor of fair use for GenAI.
Ultimately, the Report does not recommend immediate government intervention on fair use or compulsory licensing issues related to GenAI. Instead, it advises allowing the nascent licensing market for GenAI training data to evolve organically. To address potential gaps in data offerings and market inefficiencies, the Report explores alternative mechanisms, including extended collective licensing schemes, which could provide broader and more efficient licensing solutions by aggregating rights on behalf of multiple copyright holders.[5]
Fair Use Factors
For private fund managers contemplating using GenAI in their investment process, the Report’s discussion of the fair use factors is worth examining.
In addressing the first fair use factor (the purpose and character of the use), the Report notes that determining whether an AI output is transformative is context-dependent. Some use cases are clearly permitted, others clearly are not.[6] Of note to private fund managers, using GenAI for noncommercial research or analysis where portions of the copyrighted works are not reproduced in the outputs is, according to the Report, likely to constitute fair use.[7] However, using unlawfully accessed material (via pirated works or by circumventing paywalls) to train a GenAI model that produces unrestricted competing content would not constitute fair use.[8]
Also of note for private fund managers, the Report highlights that when retrieval-augmented generation (“RAG”) searches[9] summarize the retrieved copyrighted works rather than providing hyperlinks to the original source, such outputs are less likely to be considered transformative and, therefore, may not qualify as fair use.[10]
In addressing the second factor (the nature of the copyrighted work), the Report notes that any analysis must be context-specific but a fair use finding is less likely if the material used to train the GenAI is “more expressive” or “previously unpublished.”[11]
In addressing the third factor (the amount and substantiality of the use), the Report concludes that under certain circumstances, use of an entire work may not in fact weigh against fair use.[12]
In addressing the fourth factor (market effects), which the Supreme Court has designated as “undoubtedly the single most important element of fair use,”[13] the Report identifies several potential harms, including lost sales, lost licensing opportunities, RAG-related substitution and market dilution. Here, the USCO wades into “uncharted territory,”[14] as no court has yet recognized that market dilution can be applied when AI-generated content competes with human-created works.[15] However, the Report argues that while many GenAI applications promise great public benefits, the sheer unprecedented volume of such applications could pose significant harm to the market for copyrighted works.[16] If courts apply this theory of market dilution, rightsholders may be able to block any use that might have a general effect on the market for copyrighted works, even if it doesn’t specifically impact the rightsholder. Further, the Report emphasizes that where licensing options already exist – or are reasonably likely to develop – the loss of licensing opportunities will disfavor fair use.[17]
Ultimately, the USCO concludes that fair use analysis of GenAI applications must remain on a case-by-case basis, but the first and fourth factors will carry “considerable weight.”[18]
Licensing
The Report outlines four general licensing options: voluntary direct licensing, voluntary collective licensing, extended collective licensing (“ECL”) and compulsory licensing.
- Voluntary direct licenses are negotiated on a case-by-case basis between individual rightsholders and AI developers.
- Voluntary collective licensing agreements typically involve collective management organizations (“CMO”s) that are authorized by multiple rightsholders to negotiate licenses and administer royalty collection and distribution on their behalf.[19]
- ECL builds on the voluntary collective agreement model to cover the works of all relevant rightsholders in a particular category – even those who haven’t actually joined the CMO – while providing an opt-out mechanism for non-participant rightsholders to negotiate separately.[20]
- Compulsory licensing is a statutory framework that permits use of copyrighted material without the rightsholder’s direct consent, subject to government oversight and often complex rate-setting procedures.[21]
Voluntary direct and collective licensing markets for GenAI have already emerged, with others in development.[22] Licensing at scale, however, raises several practical concerns including cost structure, impact on model quality and antitrust issues. Licensing large volumes of copyrighted works at market rates could be prohibitively expensive, particularly given the vast datasets required to train modern AI models. Moreover, if models can only be trained on licensed works, the resulting models may be “tainted by bias and inaccuracy.”[23] There are also antitrust concerns that big tech companies could crowd out smaller developers who might not be able to afford to negotiate broad data licenses.[24] The USCO argues these concerns shouldn’t factor into the fair use analysis, and defers to the Department of Justice for guidance (including a possible antitrust exemption) and the Federal Trade Commission for enforcement.[25]
The Report ultimately advocates for the growth of voluntary licensing regimes for copyrighted works, which can facilitate AI innovation while protecting rightsholders. To support this approach, the Report further argues that ECL could address market inefficiencies without the market risks from “premature” statutory approaches such as compulsory licensing, which may stifle innovation and distort market incentives.[26]
Litigation
The Report is already impacting pending copyright AI lawsuits. While the USCO defers to the courts to “weigh the statutory factors together” and calls it impossible to prejudge litigation outcomes,[27] federal courts can and have deferred to the legal interpretations of agencies such as the USCO, depending on their thoroughness, validity and persuasiveness.[28] As no definitive case law exists on the use of copyrighted material for training GenAI,[29] content owners have already jumped on the Report, citing it as supplemental authority in a detailed counter to the fair use defense in two pending cases.[30] Interestingly, in a May 22, 2025 hearing in a federal case against Anthropic PBC in California, Judge William Alsup said he was leaning “toward finding Anthropic PBC violated copyright law when it made initial copies of pirated books, but that its subsequent uses to train their GenAI models qualify as fair use.”[31] Alsup appeared sympathetic to Anthropic’s argument that its use is “transformative in the extreme” but also might make Anthropic pay for its initial use, noting: “I have a hard time seeing that you can commit what is ordinarily a crime, but get exonerated because you end up using it for a transformative use.”[32] Alsup could be the first judge in the nation to rule on fair use in the GenAI context. And if his reasoning on the fair use factors survives appeal and is adopted by other courts, it could augur well for developers of GenAI, even if the Report itself provides litigation ammunition for content owners.
Takeaways
Overall, the Report provides some instructive – if not legally binding – guidance for AI companies, copyright owners and private fund managers.
For AI companies and downstream users, the Report suggests that implementing effective guardrails to prevent infringing outputs will weigh in favor of fair use and recommends leveraging existing and emerging data licensing frameworks to train AI models. The Report also flags for AI companies that knowingly training AI models on pirated datasets would almost certainly exceed the boundaries of fair use.[33] In such cases, and possibly others, courts may be less inclined to accept arguments about transformative use or net societal benefits of GenAI – particularly when such use poses foreseeable market harm to content owners.[34]
For copyright owners, the Report encourages creators to pursue organized approaches to collective licensing via CMOs while recognizing market dilution as a potential harm from unrestrained AI training. The Report also notes that copyright owners ideally shouldn’t be required to opt out of the use of their material for training AI models.
For private fund managers, the Report offers some guidance that certain non-commercial research uses of GenAI may constitute fair use but that other uses (RAG searches) may not, and therefore carry greater risk. Given the volatility at the Copyright Office and the rapid technological and legal developments in the AI space, private fund managers who use GenAI should continue to pay close attention to this area.
Authored by and Steven Appel.
If you have any questions concerning this Alert, please contact your attorney or one of the authors.
CMS Requests Hospitals Submit Gender-Affirming Care Data
ARTICLE / US POLICY
May 29, 2025
Read time: 2 min
On May 28, 2025, the Centers for Medicare & Medicaid Services (CMS) sent a letter to “select hospitals” that provide gender-affirming care services, requesting information about how those hospitals adhere to quality standards regarding medical interventions for gender dysphoria in minors, as well as financial data for gender-affirming care procedures provided at the hospitals and paid, in whole or in part, by the federal government.
CMS likely considers the request to be within its authority to enforce Medicare and Medicaid conditions of participation as evidenced by the letter’s reference to CMS’s “obligation to ensure baseline quality standards.” CMS also cites previous Trump administration actions regarding gender-affirming care for minors as support for the request, including the original executive order, a report from the US Department of Health and Human Services (HHS) reviewing best practices for gender dysphoria treatment (GAC report), and a quality and safety special alert memo for hospitals. Despite these actions, no statutory or regulatory changes to hospitals’ ability to continue providing gender-affirming care services have been promulgated to date. As a result, the letter raises several questions, such as those outlined in this FAQs document.
For information on the recent United States v. Skrmetti decision, download our related FAQs document which outline key takeaways for providers, hospitals, health systems, health plans, and employer plan sponsors who are navigating the implications of the ruling.
The Proposed US Tax Regime for Non-US Investors and Companies
CLIENT ALERT / US POLICY
May 29, 2025
Read time: 8 min
On May 22, 2025, the US House of Representatives narrowly passed a sweeping $3.8 trillion tax reconciliation package known as the One Big Beautiful Bill Act. The legislation now moves to the US Senate, where significant modifications are anticipated given early signals from key Republican senators expressing intent to revise various tax measures. As negotiations progress, specific provisions, including the proposed Section 899 described herein, may evolve significantly.
Proposed Section 899 introduces a US surtax that could impact investors from countries imposing taxes that the United States considers unfair to US businesses. Importantly, the proposal is intended to serve as a diplomatic negotiating tool aimed at persuading foreign governments to withdraw or avoid adopting taxes, including undertaxed profits rules (UTPRs), digital services taxes (DSTs), and diverted profits taxes (DPTs), that the US considers unfair or extraterritorial. However, if enacted as drafted without achieving the intended withdrawal of the targeted taxes, this rule could increase tax burdens on closely held companies, ultra-high-net-worth families, family offices, multinational corporations, and sovereign investors alike.
Below, we summarize who is impacted, the key implications, practical examples, and immediate actions you should consider.
Who Is Impacted?
The surtax applies broadly to investors (applicable persons) from designated countries deemed “discriminatory.” This includes:
- Foreign governments (including Section 892 sovereign investors), individuals, and corporations that are tax resident in listed jurisdictions
- Non-US corporations that are more than 50% owned by applicable persons (applying Section 958(a) rules)
- Partnerships or other entities that the US Department of the Treasury (Treasury) Secretary may designate as applicable persons by regulation
- Trusts with majority beneficial ownership held by applicable persons
- Private foundations created or organized in a listed jurisdiction.
Notably, non-US corporations that are majority-owned by US persons are excluded from “applicable person” status (Majority US Owner Exception) and thus are not subject to the surtax. Additionally, once an entity qualifies as an applicable person, it remains “tainted” until a full year passes without any connections to a listed jurisdiction.
Practical Insight: Non-US multinationals and many closely held businesses and ultra-high-net-worth families may become subject to this surtax because of measures their home countries have applied against large multinational corporations. Most US multinational groups likely will not be affected by Section 899 because of the Majority US Owner Exception. However, to the extent such multinationals own minority interests in non-US joint venture vehicles or companies, it is possible that they may be indirectly impacted.
While it appears that US funds owning majority stakes in non-US corporations may also qualify for the Majority US Owner Exception, the proposed Section 899’s reference to “partnerships and other entities designated by Treasury regulation” provides some uncertainty. It is possible that this language may be intended to police against the use of US partnerships in settings where the majority owners are residents of affected jurisdictions.
Notably, even if a non-US company is tax-resident in a nondiscriminatory jurisdiction, Section 899 can still apply if the company is majority owned by tax residents of discriminatory jurisdictions.
When Is a Country “Discriminatory”?
A country becomes “discriminatory” when it implements taxes the US considers unfair, including:
- DSTs
- DPTs
- Organization for Economic Cooperation and Development Pillar Two measures, notably UTPRs
- Any additional taxes the Treasury designates as unfair or discriminatory.
The Treasury will maintain and publish a quarterly updated list of these jurisdictions. Some examples of key jurisdictions and regions that may be affected by this rule include most of Europe, Asia-Pacific (e.g., Australia, India, South Korea, and Japan), Canada, and certain jurisdictions in the Middle East. This list is not intended to be exhaustive.
The Surtax’s Impact and Types of Income Affected
The surtax starts at 5%, increasing annually by 5% and capped at 20% after four years. It applies to certain key categories of income from US sources:
- US Sourced-Passive Income (FDAPI): Includes dividends, interest, rents, and royalties from US sources; standard withholding (30%) could reach 50%.
- US Real Estate Investments (FIRPTA): Income from selling US real estate or real estate investment trusts (REITs) and partnership distributions, with current withholding (15%) potentially rising to 35%.
- US Business Income (ECI) for non-US Corporations: Active business profits earned by non-US corporations in the US become significantly more costly.
- US Branch Profits Tax: Increased taxes on profits sent from US branches back to non-US parent companies.
- Private Foundation Investment Income: Significantly higher US tax rates on investment income earned by non-US private foundations.
Practical Insight: Investors should carefully evaluate whether their income falls within these categories. For example, they may wish to review their structures and income stream profiles (character and sourcing) to determine if it is possible to qualify such income as “foreign sourced” rather than US-sourced. The location of the business’ assets, personnel, customers, and the jurisdiction of the payors are relevant to this analysis.
Importantly, proposed Section 899 does not appear to affect a non-US person’s capital gain income from being excluded from US tax (e.g., sale of public company stock).
Implications Under the Base Erosion and Anti-Abuse Tax (Beat)
Non-US corporations (those with more than 50% ownership from affected countries) currently subject to the BEAT may face a harsher version of the BEAT regime, presenting key opportunities for planning. Generally speaking, the BEAT applies to companies (with average annual gross receipts of at least $500 million) that make base-eroding deductible payments (e.g., interest, royalties) to non-US affiliates. Under the proposed regime, the following modifications of the normal BEAT rules would apply to affected taxpayers:
- A fixed 12.5% BEAT rate (vs. 10%).
- The elimination of the 3% threshold, meaning even minor deductible payments to non-US affiliates can trigger the BEAT.
- The treatment of capitalized amounts as deductions, significantly limiting structuring flexibility.
Timing and Implementation
The surtax applies starting from the tax year following the latest of:
- 90 days after Section 899 is enacted into law
- 180 days after a foreign country adopts a triggering tax
- The first day the foreign tax becomes effective.
Given these short timelines, rapid evaluation of exposure and immediate planning is essential.
Treaty Implications
Though the law doesn’t explicitly override US income tax treaties, official legislative explanations suggest US treaty-reduced withholding rates would also be subject to the 5% incremental surtax increases annually. This would substantially affect withholding tax planning for investors relying on treaty benefits.
With respect to the portfolio interest exemption (PIE), the House Report explicitly states that the surtax “does not apply to portfolio interest, to the extent that portfolio interest is excluded from the tax imposed on FDAP income.” Nonetheless, in light of a possible interpretation that the PIE effectively establishes a zero rate of tax to which Section 899 could apply, we anticipate that Congress and the Treasury will hear calls for statutory or regulatory clarification to align explicitly with the House Report.
Traps for the Unwary and Open Questions
Proposed Section 899 appears largely self-executing and would be consequential for affected taxpayers. Many unanswered questions remain, and investors will likely face substantial practical challenges navigating the new rules.
Notably, the proposed surtax impacts private investors, individual taxpayers, and family offices who could find themselves impacted by Section 899 because of measures their home countries implemented to target large multinational corporations. Specific traps and challenges for non-US taxpayers include:
- Avoiding missteps around entity residency and beneficial ownership documentation (simply forming in neutral countries like Cayman or Luxembourg may not suffice)
- Assessing ultimate beneficial ownership of companies, particularly where the company itself is not a resident in a discriminating jurisdiction
- Meting compliance burdens with withholding agents – systems, documentation, and procedures may require rapid and extensive updating.
Given these challenges, clients should closely monitor tax legislation developments, including observing which countries adopt or decide to terminate a deemed discriminatory tax from applying to US taxpayers.
Immediate Planning Recommendations
To mitigate potential exposure:
- Monitor US Legislation: Closely track the progress of the bill and future Treasury announcements.
- Monitor Non-US Legislation: Closely track whether the affected foreign country approves, revokes, or modifies the discriminatory taxes.
- Clarify Effective Dates: Precisely map timing triggers based on jurisdiction-specific developments.
- Review Current Structures: Immediately analyze entity residency, ownership residency composition, and potential US tax leakage points.
- Character and Source Analysis: Evaluate the potential to reclassify certain income streams as non-US-source based on intellectual property, tangible assets, personnel, or payment sources.
- Restructuring Opportunities: Assess shifting entity residency or increasing US ownership above 50% (statutory carve-outs), utilize treaty-protected intermediaries, or implement domestically controlled REIT structures.
- Review Current and Proposed Transactions: Oftentimes, current and future payments to non-US sellers and non-US lenders can attract US withholding tax. Parties should review the transaction structure and corporate documents to access such exposure.
- Model Economic Impact: Prepare cash-flow analyses, internal rate of return scenarios, and revised after-tax return calculations to assess investment impacts.
- Withholding Preparedness: Engage withholding agents now, updating documentation, gross-up clauses, and compliance procedures.
The Bottom Line
If enacted, Section 899 would operate like an automatic sanctions regime embedded directly into US tax law. It is intended primarily as a diplomatic measure designed to discourage and eliminate extraterritorial and discriminatory foreign taxes imposed by other countries. Diplomatic negotiations may result in the withdrawal of such taxes, such that proposed Section 899 is never implemented or has a negligible practical impact. However, investors and companies must actively plan for the possibility that diplomatic objectives may not be met, making proactive evaluation and strategic planning essential to mitigate potential tax exposure.
Please reach out to your regular McDermott lawyer or the authors of this article for tailored guidance addressing your specific exposure and planning solutions.
One Big Beautiful Bill Act Has Many Impacts for Nonprofit Health Systems
CLIENT ALERT / US POLICY
May 29, 2025
Read time: 5 min
The US House of Representatives passed its One Big Beautiful Bill Act on May 22, 2025 (the Act), but nonprofit health systems may not find much about the Act that’s attractive. If passed by the US Senate and signed into law, the Act would threaten already thin operating margins at nonprofit hospitals and health systems by expanding the executive compensation excise tax, taxing parking and similar employee benefits, potentially altering funds flow arrangements for academic medical centers, and increasing demand for financial assistance through sweeping Medicaid and Health Insurance Marketplace changes.
Nonprofit Hospitals Face Challenging Financial Environment
Nonprofit hospitals have made slow but steady progress in recovering from the financial hangover that COVID-19 induced, exacerbated by increased contract labor expenses and lingering inflation. Fitch Ratings determined that even with this improvement, the median operating margin for nonprofit hospitals was only 1.2% in 2024. Any increase in operating expenses or decrease in reimbursement that results from the Act may push many nonprofit hospitals across the thin line that separates profitability from financial distress.
The Act May Increase Nonprofit Hospital Operating Expenses
The Act would increase nonprofit hospital operating expenses in two primary ways:
- Expanding the executive compensation excise tax.
- Taxing parking and similar employee benefits.
As part of the Tax Cuts and Jobs Act of 2017 (TCJA), Congress imposed a 21% excise tax on compensation paid by charitable organizations exceeding $1 million and on certain excess parachute payments. The excise tax applies to the organization’s top five highest compensated employees during both the current tax year and any prior tax year beginning after December 31, 2016. The excise tax does not apply to compensation provided in exchange for medical services.
The One Big Beautiful Bill Act would significantly expand the scope of the excise tax by applying it to all employees of a charitable organization who receive compensation exceeding $1 million or an excess parachute payment. The Act would not eliminate the medical services compensation exception, but the reach and financial consequences of the expanded excise tax could be significant for nonprofit hospitals and health systems that compete with privately held or publicly traded organizations for executive or administrative talent.
The Act also threatens to increase nonprofit hospitals’ operating expenses by resurrecting a tax on parking and other qualified transportation fringe benefits made available to employees. Congress first included this so-called “parking tax” as part of the TCJA. The tax requires charitable organizations to treat the amount of qualified parking and transportation fringe benefits as unrelated business income for federal tax purposes. The complexities of taxing a business expense as income led to widespread criticism of the parking tax, and Congress retroactively repealed the tax in 2019.
The Act May Disrupt Funds Flow Arrangements, Charitable Conditions
The Act contains other provisions that may have a direct or indirect impact on nonprofit health system operations or funds flow, such as:
- Increasing the tax on net investment of colleges and universities from 1.4% up to 21% (based on endowment value per student). The magnitude of this tax may result in university sponsors of academic medical systems seeking to renegotiate funds flow arrangements to recapture a portion of revenue lost to the tax.
- Increasing the excise tax on private foundations up to 10% (based on assets of $5 billion). This tax may decrease the amount of funding that private foundations are willing to contribute to nonprofit health systems.
Medicaid, Health Insurance Marketplace Changes May Increase Demand for Financial Assistance
The Act contains sweeping changes to Medicaid and Health Insurance Marketplaces, as discussed in greater detail in the McDermott+ Reconciliation Roadmap Resource Center. The Congressional Budget Office has not conducted a full analysis of the passed bill but estimated an increase in the number of uninsured by each committee proposal, with 7.6 million uninsured as a result of the Medicaid provisions and, at a minimum, an additional 2.1 million individuals under the Marketplace reforms by 2034. As a result, nonprofit hospitals and health systems can expect to bear the financial burden of caring for those displaced by these cuts.
What’s Not in the Act and What May Come Next
Earlier versions of the Act contained provisions that likely would have resulted in decreased revenue or increased operating expenses for nonprofit hospitals and health systems. For example, the version of the Act that passed the House Ways and Means Committee would have automatically taxed name and logo revenue as unrelated business income.
The Act now moves to the Senate, where notable Republicans, including Senator Rand Paul (R-KY) and Senator Ron Johnson (R-WI) have already called for significant changes to the Act. The goal remains to finish and pass the reconciliation package by July 4, 2025.
FAQs for Healthcare Entities Navigating Rights of Conscience Refusals
FAQS / US POLICY
May 27, 2025
Read time: 2 min
The US Department of Health and Human Services (HHS) Office for Civil Rights (OCR) recently opened a compliance review of a hospital based on a complaint that an ultrasound technician faced potential termination due to a refusal to conduct ultrasounds for abortion procedures. In its announcement of the investigation, OCR stated that “health care professionals should not be coerced into, fired for, or driven out of the profession for declining to perform procedures that Federal law says they do not have to perform based on their religious beliefs or moral convictions.” This is the second such investigation that OCR has initiated in 2025, following an investigation into an alleged termination of a nurse who requested religious accommodation to avoid administering puberty blockers and hormones to minors seeking gender-affirming care.
In light of these investigations and in recognition of Executive Order 14291, which was signed by US President Donald Trump on May 1, 2025, and establishes the Religious Liberty Commission, hospitals, health systems, and healthcare providers may wish to revisit our prior guidance and webinars while dusting off their policies and procedures related to rights of conscience and requests for religious accommodations. This resource outlines key questions to keep in mind.
Enforcement of Mental Health Parity Regulations Suspended: Takeaways for Plan Sponsors and Health Insurance Issuers
CLIENT ALERT / US POLICY
May 21, 2025
Read time: 5 min
In January 2025, The ERISA Industry Committee (ERIC) filed a complaint against the US Departments of Labor, Health and Human Services, and the Treasury (the departments) seeking to invalidate the 2024 final regulations under the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) and the Consolidated Appropriations Act, 2021 (CAA). The US Department of Justice recently filed a motion for abeyance in the pending litigation, requesting that the court pause its review of the case and announcing that the Trump administration will stay enforcement of the final regulations to give the government an opportunity to reconsider the rule, “including whether to issue a notice of proposed rulemaking, rescinding or modifying the regulation.” The motion was approved on May 9, 2025.
On May 15, 2025, the departments issued a communication titled “Statement of U.S. Departments of Labor, Health and Human Services, and the Treasury Regarding Enforcement of the Final Rule on Requirements Related to the Mental Health Parity and Addiction Equity Act.” The departments’ action is at least partially in response to Executive Order 14219, titled “Ensuring Lawful Governance and Implementing the President’s ‘Department of Government Efficiency’ Deregulatory Initiative,” which directs federal agencies to review regulations to identify those that may impose undue burdens on small businesses or significant costs upon private parties that are not outweighed by public benefits.
The statement is significant, as it advises that the departments “will not enforce the 2024 Final Rule or otherwise pursue enforcement actions, based on a failure to comply that occurs prior to a final decision in the litigation, plus an additional 18 months.” Notably, the relief applies only to those portions of the 2024 Final Rule that are newly added since the 2013 Final Rule. The statement reinstates the 2013 Final Rule, as interpreted by “FAQs About Mental Health and Substance Use Disorder Parity Implementation and the Consolidated Appropriations Act, 2021 Part 45.” The departments also note that MHPAEA’s statutory obligations, as amended by the CAA, continue to apply. In the case of the application of the MHPAEA rules within the jurisdiction of the department of Health and Human Services (i.e., the rules that apply to carriers), the statement encourages states, which are the primary enforcers of MHPAEA, to adopt a similar approach to enforcement.
The statement restores the status quo that was in effect before the adoption of the 2024 Final Rule, with at least three immediate consequences:
- The 2024 Final Rule’s “relevant data” requirement is suspended. Thus, compliance with the mental health parity requirements will no longer be tested on outcomes. Rather, the standard that applies temporarily is in the preamble to the 2013 final regulation (i.e., outcomes are not determinative of compliance).
- The 2024 Final Rule’s controversial “meaningful benefit” requirement is also suspended. This is the requirement that a plan that provides any benefits for a mental health condition or substance use disorder in any classification of benefits must provide meaningful benefits for that mental health condition or substance use disorder in every classification in which medical/surgical benefits are provided. For this purpose, a plan does not provide meaningful benefits unless it also provides benefits for a core treatment for the mental health condition or substance use disorder in each such classification.
- The 2024 Final Rule’s “fiduciary certification” requirement is suspended, at least temporarily. Absent the suspension, the 2024 Final Rule required fiduciaries to certify that they commissioned and reviewed an analysis of their compliance with the MHPAEA nonquantitative treatment limitations (NQTLs) requirements and that they selected and monitored their NQTL vendor.
One important obligation that remains is the requirement to prepare and make available an NQTL comparative analysis. The continued application of the CAA also means that plan sponsors and health insurance issuers must continue with their compliance efforts.
With respect to ongoing plan audits and investigations, the departments offered little insight as to how they may approach review or if their enforcement efforts may change moving forward. The statement notes that “The Departments will also undertake a broader reexamination of each department’s respective enforcement approach under MHPAEA” and that “the Departments may make updates to the subregulatory guidance implementing MHPAEA, including FAQs Part 45,” suggesting that some relief may be forthcoming. Additional guidance on the impact of the departments’ statement on these ongoing audit and enforcement activities would be welcome.
Action Items
Plan sponsors and health insurance issuers should continue to make good-faith efforts to comply with the MHPAEA guidance, as modified by the CAA. This includes, for example, preparation and maintenance of a written NQTL comparative analysis and ongoing review of benefit plans for compliance as applied to the plans’ written terms and operation.
For more information on these changes, please contact your regular McDermott lawyer or one of the authors listed below.
DOJ Unveils New Plan for White-Collar Crime and Corporate Enforcement
CLIENT ALERT / US POLICY
May 14, 2025
Read time: 9 min
The US Department of Justice’s (DOJ’s) current approach to corporate criminal enforcement has come into focus with the issuance of a new White-Collar Enforcement Plan and several revised policy documents. The changes, which represent the first substantive updates to DOJ’s white-collar enforcement policies under the new presidential administration, were announced by Matthew R. Galeotti, Head of the Criminal Division, on May 12, 2025.
Galeotti expressed that the Criminal Division is “turning a new page on white-collar and corporate enforcement” due to a perception that prior approaches have “come at too high a cost for businesses and American enterprise.” The new approach attempts to address the burden that investigations, enforcement, and post-resolution requirements can place on US businesses, while also underscoring that DOJ remains committed to enforcement in the white-collar space.
In addition to the White-Collar Enforcement Plan, DOJ issued revised versions of the following:
- Corporate Enforcement and Voluntary Self-Disclosure Policy
- Memorandum on Selection of Monitors in Criminal Division Matters
- Corporate Whistleblower Awards Pilot Program
In many respects, the revised policies cover familiar ground. They seek to incentivize voluntary self-disclosure, increase transparency for companies entering into criminal resolutions with DOJ, ensure that monitors are deployed appropriately, and reward whistleblowers. Priority focus areas for enforcement include some familiar topics (such as waste, fraud, and abuse) and others that are consistent with administration priorities (such as trade and customs fraud, including tariff evasion). There are also some significant shifts reflected in the revised policies, including:
- An increased openness to early termination of corporate criminal resolutions;
- A directive to prosecutors to minimize the length of investigations;
- Fee caps for monitorships, and fewer monitors overall; and
- A more definitive path to declination, among other things.
These and other changes are discussed in more detail below.
White-Collar Enforcement Plan
DOJ’s current approach to corporate criminal enforcement is broadly outlined in a memo to Criminal Division personnel titled “Focus, Fairness, and Efficiency in the Fight Against White-Collar Crime.” The memo, also referred to as the “White Collar Enforcement Plan,” starts by acknowledging that white-collar crime “poses a significant threat to U.S. interests.” However, it also states that “overbroad and unchecked” enforcement can burden US businesses and harm US interests. The memo then describes several policy changes that are aimed at addressing this concern, including:
- New priority areas of focus: The Criminal Division will prioritize investigating and prosecuting white-collar crimes in the following areas:
- Waste, fraud, and abuse, including healthcare fraud and federal program and procurement fraud;
- Trade and customs fraud, including tariff evasion;
- Fraud perpetrated through variable interest entities (VIEs), including, but not limited to, offering fraud, “ramp and dumps,” elder fraud, securities fraud, and other market manipulation schemes;
- Fraud that victimizes US investors, individuals, and markets, including, but not limited to, Ponzi schemes, investment fraud, elder fraud, servicemember fraud, and fraud that threatens the health and safety of consumers;
- Conduct that threatens national security, including threats to the US financial system by gatekeepers, such as financial institutions and their insiders that commit sanctions violations or enable transactions by cartels, transnational criminal organizations (TCOs), hostile nation-states, and/or foreign terrorist organizations;
- Material support by corporations to foreign terrorist organizations, including recently designated cartels and TCOs;
- Complex money laundering, including Chinese Money Laundering Organizations and other organizations involved in laundering funds used in the manufacturing of illegal drugs;
- Violations of the Controlled Substances Act and the Federal Food, Drug, and Cosmetic Act (FDCA), including in connection with fentanyl and opioids;
- Bribery and associated money laundering that impacts US national interests, undermines US national security, harms the competitiveness of US businesses, and enriches foreign corrupt officials; and
- Crimes involving digital assets that victimize investors and consumers, use digital assets in furtherance of other criminal conduct, or facilitate significant criminal activity.
It is notable that this list of priority areas for enforcement includes certain types of bribery and foreign corruption, given the pause that was placed on Foreign Corrupt Practices Act (FCPA) enforcement by an executive order in February 2025.
- Early termination of corporate criminal resolutions: DOJ is currently reviewing the terms of all existing agreements between companies and the Fraud Section and/or the Money Laundering and Asset Recovery Section (MLARS) to determine whether early termination is appropriate. Going forward, the terms of such agreements should not exceed three years, and agreements should be assessed regularly to determine if they should be terminated early. Factors that weigh in favor of early termination include:
- The duration of the post-resolution period;
- Whether there has been a substantial reduction in the company’s risk profile;
- The extent of remediation;
- The maturity of the company’s compliance program; and
- Whether the company self-reported the misconduct.
- Minimizing the length of investigations: Criminal Division prosecutors must now “take all reasonable steps to minimize the length and collateral impact of their investigations” and “move expeditiously to investigate cases and make charging decisions.” DOJ will track investigations to ensure they are “swiftly concluded.”
- Review of all existing monitorships: The Criminal Division is working with DOJ leadership to undertake an individualized review of all existing monitorships to determine whether each monitor is still necessary. In performing this review, DOJ is following principles outlined in the newly updated monitor selection memo, described in more detail below.
The White Collar Enforcement Plan also discusses revisions to DOJ’s Corporate Enforcement and Voluntary Self-Disclosure Policy and monitor selection memo, which are discussed below.
Corporate Enforcement and Voluntary Self-Disclosure Policy
DOJ has long sought to incentivize voluntary self-disclosures, which are important to DOJ’s current goal of increasing efficiency in investigations, as they allow prosecutors to more quickly identify relevant facts and culpable individuals. The revised Corporate Enforcement and Voluntary Self-Disclosure Policy offers greater benefits to companies that voluntarily self-disclose misconduct, along with other changes:
- Clearer path to declination: The path to a declination is now clearer under the revised Policy. The Criminal Division will decline to prosecute a company for criminal conduct when it voluntarily self-discloses, fully cooperates, timely and appropriately remediates, and there are no aggravating circumstances. This contrasts with the prior version of the Policy, which only promised a presumption of declination in such circumstances.
- Fewer requirements to overcome aggravating factors: The revised Policy states that prosecutors have discretion to recommend a declination – even if aggravating factors are present – based on a weighing the severity of those factors against the company’s cooperation and remediation. The prior version of the Policy was more prescriptive and outlined specific requirements (such as “extraordinary” cooperation and “immediate” voluntary self-disclosure) for a company to qualify for a declination if aggravating factors were present.
- More clarity for companies that do not qualify for declinations: Companies that do not meet all of the requirements for a declination now have more certainty about the form of resolution they will face. Specifically, companies that self-report misconduct in good faith, cooperate, and remediate, but do not meet all of the voluntary self-disclosure requirements (because, for instance, DOJ was already aware of the misconduct) will generally receive a non-prosecution agreement with a term fewer than three years, no independent compliance monitor, and a penalty reduction of 75% off the low end of the US Sentencing Guidelines fine range. The same is true where aggravating factors preclude a declination, but the company has voluntarily self-disclosed, cooperated, and remediated.
- Streamlined requirements: The revised Policy is generally simpler than the prior version, although many of the principles remain the same. It also includes a flowchart to visually depict the path to a declination and other resolution types.
Monitor Selection Memo
The revised monitor selection memo updates the DOJ’s internal policies governing the imposition, selection, and oversight of independent compliance monitors in corporate criminal resolutions. While it retains the foundational principles outlined in prior guidance, the 2025 update introduces more detailed criteria for both the imposition and governance of monitorships.
Additional considerations for imposing a monitor:
- Impact on US interests: Prosecutors should evaluate whether imposing a monitor would mitigate the risk of repeat misconduct that significantly affects US interests, including sanctions evasion; threats to the US economy; foreign bribery that significantly impacts US interests; trade fraud; tariff evasion; procurement and healthcare fraud; and crimes supporting cartels, TCOs, narcotics trafficking, or terrorist organizations.
- Third-party assistance in pre-resolution remediation: Prosecutors should assess whether a company’s voluntary, pre-resolution engagement of third-party consultants, auditors, or other experts to enhance or remediate its compliance program obviates the need for a monitor.
Updated guidance on monitorship governance is as follows:
- Monitor selection process: The selection process should include an evaluation of whether the candidate’s proposal is cost-efficient and avoids unnecessary burdens on the company’s operations.
- Cost controls: Monitors must submit a detailed budget with their initial work plan, adhere to hourly rate caps, submit an updated budget for DOJ approval before beginning each phase of the monitorship, and obtain prior written approval from DOJ before being paid for any cost overruns.
- Communication and oversight: Resolution agreements will require at least biannual tripartite meetings between DOJ, the company, and the monitor to align expectations, promote DOJ oversight, and prevent monitor overreach.
Corporate Whistleblower Awards Pilot Program
DOJ announced that it is leaving in place and expanding the Corporate Whistleblower Awards Pilot Program, which the Biden administration had announced earlier last year. The purpose of the program was to address misconduct that existing federal whistleblower programs do not already cover. The updated program expands the subject areas for qualifying whistleblower tips to align with DOJ’s recently announced enforcement priorities, adding the following subject areas:
- Procurement and federal program fraud;
- Trade, tariff, and customs fraud;
- Violations of federal immigration law;
- Violations involving sanctions or material support of foreign terrorist organizations; and
- Violations that facilitate cartels and TCOs, including money laundering, narcotics, and Controlled Substances Act violations.
If an individual helps DOJ discover previously unknown misconduct relating to the specified priority enforcement areas, the whistleblower can qualify for a monetary share of any resulting civil or criminal forfeiture action. However, DOJ’s announcement underscored that tips must result in forfeiture for whistleblowers to be eligible for a reward.
Conclusion
The announcement of the White Collar Enforcement Plan and associated policy revisions provide significant insight into how DOJ will approach white-collar enforcement in this administration. The coming months will offer additional clarity as we see these revised policies in practice. We also expect further guidance to be issued related to FCPA enforcement, consistent with the recent executive order on the topic. In the meantime, companies should stay vigilant to compliance risks, particularly in areas that DOJ has identified as priorities for investigation and prosecution.
New EO Targets Prescription Drug Costs – and Drug Manufacturers, Hospitals, and Health Centers
CLIENT ALERT / US POLICY
May 2, 2025
Read time: 13 min
On April 15, 2025, President Trump signed an executive order (EO) aimed at addressing the cost of prescription drugs. This EO, titled “Lowering Drug Prices by Once Again Putting Americans First,” outlines specific directives in 13 sections, designed to reduce drug prices and improve access for US patients. The EO signals the Trump administration’s renewed focus on reducing patient out-of-pocket drug costs and amounts paid for drugs by federal healthcare programs, including via policies that may result in materially lower payments from Medicare to hospitals for outpatient drugs.
Summary of the EO
| Category | Description | Action | Proposed Timeline |
|---|---|---|---|
| Administrative | |||
| Section 1 |
|
N/A | N/A |
| Section 2 |
|
N/A | N/A |
| Section 14 |
|
N/A | N/A |
| Inflation Reduction Act (IRA)* | |||
| Section 3(a) |
|
Guidance | 60 days |
| Section 3(b) |
|
Guidance | 180 days |
| Section 3(c) |
|
Legislation | Not specified |
| Lowering Costs to the Government and Patients | |||
| Section 4 |
|
Regulations | 1 year |
| Section 5 |
|
Regulations | 180 days |
| Section 6 |
|
Policy recommendations | 180 days |
| Section 7 |
|
Legislation | 90 days |
| Section 11 |
|
Regulations | 180 days |
| Increasing Competition and Transparency to Lower Drug Costs | |||
| Section 8 |
|
Policy recommendation | 90 days |
| Section 9 |
|
Legislation, regulation | 180 days |
| Section 10 |
|
Action not specified | 90 days |
| Section 12 |
|
Regulations | 180 days |
| Section 13 |
|
Policy recommendation | 180 days |
*For more information about the IRA, catch our “Predicting the Future Under the IRA” webinar and read the client alerts “CMS Issues Guidance on Medicare Prescription Drug Inflation Rebate Program” and “CMS Issues Medicare Drug Price Negotiation Initial Guidance, First Inflation Rebate List.”
**This program was first issued under a rule from the first Trump administration that allowed states to import drugs under certain circumstances with US Food and Drug Administration (FDA) authorization. So far, only Florida has been authorized to do so.
Key Takeaways
The EO includes several directives that could have broader implications for stakeholders across the spectrum of drug pricing interest groups. With the noted exception of the proposal to remove the “small molecule” disincentives from the IRA, which would increase federal expenditures, the provisions of the EO appear intended to drive down the prices that the federal government pays for drugs and reduce out-of-pocket costs for patients, with many provisions designed to do both. While much of the EO focuses on reducing drug costs to federal payment programs, private payors are also targeted through efforts to increase transparency in their compensation models. In the fact sheet accompanying the EO, President Trump emphasizes that the EO builds on his efforts to lower prescription drug prices during his first term and highlights the importance of transparency and competition in the pharmaceutical market. The administration has also explicitly noted that the EO seeks to correct perceived shortcomings of the MDPNP established under the IRA, which they claim has not delivered the expected savings.
It is notable that the EO itself appears to include self-implementing directives, but most of the provisions would require additional steps by federal agencies or Congress. In a departure from other administration policies, many of the changes described in the EO specifically require promulgation of, and public comments on, guidance or regulations. To the extent that statutory changes would be required to effectuate certain changes, doing so would require additional coordination with Congress and alignment on the underlying policies from both houses of Congress. Because of the timelines typically required for promulgating new regulations and making statutory changes, it currently seems likely that any material changes to drug pricing policies deriving from the EO would not be implemented in 2025, and could take significantly more time.
Key Provisions for Healthcare Providers to Watch
Provisions of the EO would make material changes to reimbursement and grant policies for hospitals and federally qualified health centers (FQHCs).
Sections 5 and 11 direct the secretary to engage in activities that may reduce payments for drugs and drug administration, respectively, paid to hospitals under Medicare Part B. Section 5 is particularly important for hospitals to understand, as much of the discussion following the release of the EO has been related to the similarities in the EO proposal to the reduction in 340B payments made to hospitals under Part B that the US Supreme Court subsequently determined to be unlawful. For additional information, see our Policy Update.
The statutory provision cited in the EO (1833(t)(14)(D)(ii)) is not specific to payments for 340B drugs. It can be used to reduce payments for drugs paid under Part B to all hospitals paid under the Medicare Outpatient Prospective Payment System (OPPS). The statute establishes that payment for drugs under OPPS should be at “average acquisition cost.” However, such payments can only be implemented following a survey of hospital drug costs. Because no survey has been conducted, the statute provides for use of the current payment methodology of average sales price plus 6%. In other words, the current OPPS methodology is an exception or placeholder until a survey of drug acquisition costs is conducted across all hospitals.
If CMS were to conduct such a survey that provided accurate and reliable results, the statute suggests that CMS could use that survey to reduce payments for drugs under OPPS to “average acquisition cost” for all hospitals paid under OPPS – not just 340B hospitals. Importantly, on June 15, 2022, the Supreme Court did not find the 340B payment cuts from the first Trump administration unlawful because of a determination that the statutory provision itself was inappropriate such that CMS can’t use a survey to reduce drug costs under OPPS. Instead, the Supreme Court found the payment cuts unlawful because CMS did not conduct the required survey prior to reducing payments to 340B hospitals.
Of course, development and completion of a valid survey that could generate data that could defensibly be used to reduce hospital drug payments would take a considerable amount of time. If CMS were to attempt to conduct such a survey, hospitals should very closely review the methodology of the survey and, if needed, consult legal counsel to review the survey’s instructions before responding. Depending on how CMS moves forward with any payment cuts under Section 5 of the EO, the survey used to collect the necessary data and how that data is used may be subject to future litigation.
Section 11’s directive could also affect payments to hospitals under OPPS. The text implies that the current OPPS payment methodology could encourage drug administration in hospital outpatient departments, rather than physician offices, presumably because payment is greater under OPPS. Drug administration reimbursement rates have not been widely viewed as the reason that a Medicare patient may receive drugs in a hospital outpatient department rather than a physician office. Because of the site neutral payment provisions that have been in place since 2018, many hospital outpatient departments also are already reimbursed by Medicare for drug administration at the same amount that would be applicable if the drugs had been administered in a physician office. Similar to the Section 5 provisions, hospitals should track the progress of Section 11, including the assumptions and data on which any payment reductions may be based. The US House of Representatives passed a provision requiring Medicare to reimburse off-campus hospital outpatient departments at the physician fee schedule level for drug administration services in the 2023 Lower Costs, More Transparency Act, but the policy was not taken up by the Senate.
The EO also directly targets grant funds received by FQHCs under Section 330(e) of the Public Health Service Act. Section 7 directs HHS to condition such grants on FQHCs passing along discounts that they receive on insulin and injectable epinephrine through the 340B program to specific categories of low-income patients. The EO is unclear on exactly how HHS is expected to implement this change in grants policy, but it seems likely that doing so would require statutory changes. Similar proposals have previously been incorporated into proposed legislation. FQHCs are already required to use funds generated from sales of 340B drugs to support services within the scope of the federal FQHC grant, and less than 20% of FQHC patients are uninsured. By requiring FQHCs to pass discounts directly to patients who are generally insured, this provision will transfer the benefit of the discount from FQHCs to commercial and federal payors. Consequently, FQHCs may have reduced funds to use on essential services to serve their communities.
Healthcare providers should also keep an eye on the implementation of Section 4, which calls for rulemaking to establish Medicare demonstration programs that would lower drug costs. This could include demonstration programs that reduce government payments to providers for drugs. The statutory provision cited in Section 4 (42 U.S.C. 1315a(b)(2)) refers to demonstration programs overseen by the CMS Center for Medicare and Medicaid Innovation.
Provisions for Manufacturers to Watch
Drug manufacturers received conflicting messages from the administration in the EO’s provisions. Section 3(c) provides the proposal that is perhaps the most “favorable” to industry stakeholders in directing CMS to work with Congress to modify the IRA MDPNP to remove provisions viewed as unfavorable to investment in small molecule drugs, referred to as the “pill penalty.” This proposal would not remove small molecule drugs from the MDPNP. Rather, it would extend the period of time between FDA approval and negotiated pricing under the MDPNP from nine years to 13 years, consistent with the period of time provided for biologics. While drug manufacturers have advocated for this change, they would still need to convince Congress to act. Congress would need to be willing to pay for the change, which is likely to cost $10 billion dollars over a decade. The EO appears to include other provisions that are not as favorable to manufacturers.
The EO also requests that Congress make “other reforms to prevent any increase in overall costs to Medicare and its beneficiaries.” While this could be intended to refer specifically to the Section 3(b) directives targeting IRA provisions that the administrative views as increasing Medicare Part D premiums, it could also result in changes that expand the number of drugs eligible for negotiation or accelerate the timeframe for implementation of the negotiated prices.
While less specific, Section 3(a) could also provide some benefits to drug manufacturers through more accommodating provisions related to the effectuation of the MDPNP-negotiated prices. This provision is somewhat cryptic in that it suggests that changes to the MDPNP guidance are needed to facilitate implementation (thereby presumably making the negotiated prices easier to access), but also calls for changes to “minimize any negative impacts of the maximum fair price on pharmaceutical innovation within the United States.”
In line with the mixed messages of Section 3, Sections 4 and 6 appear to similarly direct reductions to payments for drugs from Medicare and Medicaid. This would seem to require reductions in drug prices, or at least in government payment rates, which would in turn place price pressures on manufacturers. Section 5 also suggests that manufacturers are not currently meeting their obligations to provide rebates to states under the Medicaid Drug Rebate Program and implies that changes could be made to increase compliance.
To the extent that the EO might be considered manufacturer-favorable, this assessment might appear to wane as the EO goes on. Sections 9, 10, and 13 appear to directly target actions by manufacturers that are viewed as increasing drug prices in the United States. Section 10 in particular addresses expanding opportunities for reimportation of drugs from Canada. These provisions are consistent with the frequent administration talking point that drugs should not be more expensive in the United States than in other countries.
Conclusion
While it is uncertain which provisions of the EO, if any, will be eventually implemented, all stakeholders with an interest in how the US government influences drug prices and costs should carefully review the provisions of the EO and begin to prepare for potential changes to existing regulations and laws. Stakeholders should ensure that they are actively following the various guidance, regulations, legislation, and policy recommendations that derive from the EO, and should also ensure that they are involved in the process of moving the provisions of the EO from paper to the real world. Stakeholders can best position themselves to reduce any negative outcomes from the EO by taking care to understand what is and is not contained in the EO, the potential pathways that could be used to effectuate the EO’s directives, and how various proposals would affect amounts paid and received for drugs.
If you have any questions or are seeking guidance regarding the EO, please contact one of the authors.
Antitrust Under Trump: May 2025 Updates
ARTICLE / CLIENT ALERT / US POLICY
May 2, 2025
Read time: 6 min
As the Trump administration’s antitrust landscape continues to develop, companies should stay alert to key changes in merger filing requirements, remedy expectations, agency personnel, and more. The Federal Trade Commission (FTC) is under pressure as Congress is considering merging its competition mandate into the US Department of Justice (DOJ). Meanwhile, the fired FTC commissioners continue to fight for reinstatement. Signs indicate that the agencies plan to streamline the merger review process, and that the new administration will prioritize deregulation of American business to promote small business, manufacturing, and agriculture.
Below is a high-level review of recent developments that could impact business strategy, dealmaking, and compliance.
US House Panel Considering One Agency Act to Eliminate FTC Competition Authority
- A Republican-sponsored bill seeking to consolidate agency antitrust powers, the One Agency Act, was scheduled to be marked up by the US House Judiciary Committee.
- The bill would allow the antitrust agencies one year to implement the transition, wherein the FTC will transfer its antitrust functions, employees, assets, and funding to the DOJ’s Antitrust Division.
- The bill also allocates funding for the consolidation of the two agencies, and it grants the DOJ the power to require businesses to file annual or special reports – or answers in writing to specific questions – about their organization, practices, management, and relationships with other businesses. This new power mirrors the FTC’s ability to conduct industry studies to better understand competition in those industries.
Commissioner Holyoak Wants More Early Termination Requests
- To achieve a friendlier merger review process and create a more predictable antitrust environment through the granting of early termination, FTC Commissioner Melissa Holyoak reminded parties at a University of California, Berkeley, forum that the FTC will grant early termination requests where possible.
- Concerned that merging parties might be “gun-shy” about submitting for early termination, Holyoak explained that the requests will help reduce the workload of FTC staff and help parties close transactions sooner.
The Continuing Saga of the Fired FTC Commissioners
Democratic Attorneys General Support Terminated FTC Commissioners
- As we reported earlier, FTC Commissioners Rebecca Slaughter and Alvaro Bedoya filed a lawsuit against President Trump and the remaining FTC commissioners, claiming that their termination was unlawful because Supreme Court precedent from 1935 in Humphrey’s Executor protects FTC commissioners from removal by the president for political reasons.
- Attorneys general from 20 states as well as the District of Columbia have filed a joint amicus brief in support of former FTC Commissioners Slaughter and Bedoya.
- The amicus brief argues that President Trump’s termination of Slaughter and Bedoya violates long-standing federal law preventing the removal of FTC commissioners by the executive office for reasons other than inefficiency, neglect of duty, or malfeasance in office.
- The brief went on to argue that the FTC was deliberately established by Congress as an independent and bipartisan body, and that the FTC’s bipartisan nature is a vital part of its success.
Trump, Remaining FTC Commissioners Argue to Uphold Termination of Former Commissioners Slaughter and Bedoya
- In response to Bedoya and Slaughter’s motion for expedited summary judgment, Trump and Commissioners Ferguson, Holyoak, and Meador filed a brief arguing that the more recent Supreme Court opinion in Seila Law made Humphrey’s Executor removal restrictions unconstitutional because Congress may not restrict the president’s power to remove officers of agencies exercising executive power.
- In their brief, Trump and the commissioners argued that the FTC today exercises substantial executive power – such as the ability to seek injunctions, conduct investigations, and impose monetary penalties – that the FTC in 1935 did not exercise because its authority was limited to preparing reports and recommendations on unfair competition for Congress and the judiciary.
- They also argued that Slaughter and Bedoya’s seeking of reinstatement rather than backpay is unwarranted and that the president should not be forced to retain officers performing executive functions that he no longer believes should wield that power
- Twenty-one other states have filed papers arguing in support of Trump’s authority to dismiss the commissioners, including the Arizona State Legislature, despite the Arizona attorney general joining the amicus brief against the terminations.
FTC Offering Staff Deferred Resignation Program
- The Office of Personnel Management has granted the FTC the ability to offer buyouts to eligible FTC employees through the Voluntary Early Retirements or Voluntary Separation Incentive Payments programs.
Chair Ferguson Objects to Comparison to Lina Khan
- In an editorial, The Wall Street Journal editorial board compared FTC Chair Andrew N. Ferguson to former Chair Lina Khan, pointing to the new administration’s support of continued antitrust regulation of American business. Ferguson vigorously disagreed with the comparison.
- Ferguson, speaking at the Semafor World Economy Summit, explained that though he, like Khan, believes in strong antitrust enforcement where he thinks a merger is anticompetitive and he can prove it in court, he distinguished himself by saying that if those things are not true, he will get out of the way and will not abuse the process to dry up deal flow as the previous administration did.
Slater Doubles Down on “America First Antitrust”
- In her first public address as the assistant attorney general of the Antitrust Division, delivered at Notre Dame Law School, Slater echoed her own earlier statements regarding the new administration’s interest in promoting populist or “America First” antitrust policies.
- “America First Antitrust” will support the needs of “forgotten” workers and consumers, small businesses, manufacturing, and family-owned agribusiness, according to Slater.
- She went on to say that deregulation and transparency are key to these efforts, asserting that federal regulations impede the benefits of a free market, and that antitrust enforcement should be understandable to everyone, even farmers in Indiana or Iowa.
As the Trump administration’s approach to antitrust takes shape through political appointments, policy statements, speeches, and enforcement actions, McDermott’s antitrust team continues to track new developments. We are providing important updates on issues pertinent to clients. Stay tuned for more at-a-glance reviews of relevant policy as it is being created.
View our earlier insights on antitrust under the Trump administration.
