Appeals Court Upholds Invalidation of Rule Requiring Price Disclosures in DTC TV Ads

J.W. Schomisch
June 18, 2020 at 01:58 PM EST
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The U.S. Court of Appeals for the District of Columbia upheld a district court ruling that a Center for Medicare & Medicaid Services (CMS) rule requiring manufacturers to disclose the wholesale acquisition cost of drugs in direct-to-consumer television ads was invalid.

The appeals court emphasized that the opinion does not “categorically” foreclose the Department of Health and Human Services “from regulating pharmaceutical advertisements. We leave that question for another day and hold only that no reasonable reading of the department’s general administrative authority allows the Secretary to command the disclosure to the public at large of pricing information that bears at best a tenuous, confusing, and potentially harmful relationship to the Medicare and Medicaid programs. Although the Secretary’s regulatory authority is broad, it does not allow him to move the goalposts to wherever he kicks the ball.”

In May 2019, CMS issued a final rule that required DTC television advertisements of prescription drugs and biological products for which payment is available through or under Medicare or Medicaid to include the wholesale acquisition cost or list price of that drug or biological product.

The following month, three drug companies – Amgen, Merck and Eli Lilly – and the Association of National Advertisers sued the federal government to stop the requirement. The lawsuit contended the rule “exceeds HHS’s statutory authority, violates the First Amendment, and should therefore be set aside.”

In July, the U.S. District Court for the District of Columbia granted three drug companies' motion to stay in the case (Merck & Co., Inc. v. U.S. Department of Health and Human Services, No. 19-cv-01738 (APM) (D.D.C. July 8, 2019)). HHS appealed the district court decision in August.

The government based its authority to set the rule on two sections of the Social Security Act. The appeals court found “the department acted unreasonably in construing its regulatory authority to include the imposition of a sweeping disclosure requirement that is largely untethered to the actual administration of the Medicare or Medicaid programs. Because there is no reasoned statutory basis for its far-flung reach and misaligned obligations, the Disclosure Rule is invalid and is hereby set aside.”

The government argued the rule fell within the Social Security Act provisions because it would “improve the efficient administration of the Medicare and Medicaid programs by improving drug price transparency and informing consumer decision-making, both of which can increase price competition and slow the growth of federal spending on prescription drugs.”

The appeals court noted that while “the Secretary’s administrative authority is undoubtedly broad … it is not boundless. To qualify as administering the Medicare or Medicaid statutes, a program of such intrusive regulation must do more than identify a hoped-for trickle-down effect on the regulated programs.”

For a regulation to be “necessary” to a program’s “administration, the Secretary must demonstrate an actual and discernible nexus between the rule and the conduct or management of Medicare and Medicaid programs. The regulation’s operational focus must also be on those two programs, and the rule’s effect must be more than tangential,” the court said.

The decision noted “the Secretary would be hard pressed to defend as necessary to program administration a rule forbidding vending machines or smoking breaks at businesses that employ Medicare or Medicaid recipients just because those measures could promote healthier living and thereby reduce program costs. In other words, the further a regulation strays from truly facilitating the ‘administration’ of the Secretary’s duties, the less likely it is to fall within the statutory grant of authority. The Disclosure Rule strays far off the path of administration for four reasons,” the appeals court concluded. The four reasons are:

  • Disclosure of a pharmaceutical’s “list price” – its wholesale acquisition cost – bears little meaningful relationship to the price that either the federal government or Medicare and Medicaid beneficiaries pay for drugs. The government contended “the wholesale acquisition cost is closely connected to the price Medicare participants pay,” in that Part D beneficiaries who are responsible for coinsurance “effectively pay a percentage of a metric that is closely related” to the wholesale acquisition cost. “But to state that what some Medicare beneficiaries pay is at best three steps removed from the disclosed wholesale acquisition cost only highlights the gulf between the Disclosure Rule and the actual operation of the Medicare program,” the court said. “It is difficult to see how requiring the disclosure of wholesale acquisition cost to consumers generally promotes price transparency in any material way, or how it is otherwise related to the ‘administration’ of either Medicare or Medicaid.”
  • As to the government’s claim that disclosure of the wholesale acquisition cost “may inform” consumers’ “critical health care decisions related to their treatment with prescription drugs or biological products,” the court found “the rule again leaves unclear if this point is aimed at Medicare and Medicaid consumers, or consumers generally.” In addition, “while agencies often can regulate based on educated judgments about probabilistic outcomes, that is not what is going on here. Maybe informing consumers about a price that Medicaid and Medicare customers will almost never pay, and that they are unlikely to understand, unlashes the disclosure from its claimed administrative mooring. … Generating potentially harmful confusion through disclosures to the general public of information that is largely disconnected from Medicare and Medicaid pricing is not a plausible means of administering the programs.”
  • The Disclosure Rule regulates advertising directed at the general public and not communications targeted specifically, or even predominantly, to Medicare or Medicaid recipients. “That further increases the distance between the Disclosure Rule and any actual administration of those programs. Standing alone, that factor might not foreclose the Secretary’s interpretation of his authority, but it opens another fissure between the required disclosure and the programs’ administration, particularly when combined with the marginal relevance of the wholesale acquisition cost in the first place,” the court said.
  • The “nature and scope of the authority being claimed by the” department underscores the unreasonableness of the department’s claim that it is just engaged in general “administration.” “As the Supreme Court has explained: ‘courts should not lightly presume congressional intent to implicitly delegate decisions of major economic or political significance to agencies,’” the court concluded.

“The department’s construction of the statute would seem to give it unbridled power to promulgate any regulation with respect to drug manufacturers that would have the arguable effect of driving down drug prices – or even healthcare costs generally – based on nothing more than their potential salutary financial benefits for the Medicare or Medicaid program. This suggests a staggering delegation of power, far removed from ordinary administration. Could the department dictate salaries at pharmaceutical companies that make or sell products ‘for which payment is available, directly or indirectly, under’ Medicare or Medicaid? Could it superintend pharmaceutical companies’ business operations to cut costs? Surely not. But the department’s reasoning suggests that such regulations would be fair game as long as they ultimately resulted – even indirectly – in reduced Medicare or Medicaid expenditures or increased price competition,” the appeals court said.

The decision noted the department countered that the “rule is not of major significance because compliance costs would be low. But that is hardly the only measure of significance. The Disclosure Rule at least implicates a substantial constitutional question concerning the government’s authority to regulate the public speech of companies just because some percentage of the audience is involved in a governmental program from which the businesses indirectly derive financial benefit,” the court concluded.