Court of Appeals Affirms Judgment that Struck Down Rule Mandating Price Disclosure in Pharmaceutical Ads

Holland & Knight's July 2019 Healthcare Law Update reported on a decision by the U.S. District Court for the District of Columbia that struck down a final rule promulgated by the U.S. Department of Health and Human Services (HHS), together with the Centers for Medicare & Medicaid Services (CMS), that required a specific price disclosure in direct-to-consumer (DTC) television ads for prescription drugs. Specifically, the rule required such advertisements to include a statement of the products' wholesale acquisition cost (WAC) in a specified format: "The list price for a [30-day supply of][typical course of treatment with][name of product] is [list price]. If you have health insurance that covers drugs, your cost may be different."

Neither the Social Security Act – which includes the statutory provisions establishing the Medicare and Medicaid programs – nor the Federal Food, Drug, and Cosmetic (FD&C) Act – which established the Food and Drug Administration (FDA) and provides for detailed regulation of drugs and biologics – authorize the regulation of price or compelled disclosure of price information in advertisements. Indeed, the FDA has in the past responded to controversy over drug prices by taking the position that the FD&C Act does not authorize it to require price disclosure. Given the absence of express statutory authority to adopt regulations compelling price disclosure, HHS and CMS based the rule on their general authority to promulgate regulations to promote the "efficient administration" of Medicare and Medicaid.

In July 2019, the district court ruled in favor of challengers to the rule, which were a group of pharmaceutical companies and a trade association. Rejecting the government's argument that the Social Security Act's general grant of rulemaking authority to promulgate regulations necessary to "administration" of the Medicare and Medicaid programs authorized HHS and CMS to make rules directly regulating the conduct of pharmaceutical companies, which are "not direct participants in the Medicare or Medicaid Programs," the district court invalidated the rule as beyond the power granted to HHS and CMS by statute. The companies also raised a First Amendment challenge, arguing that the rule unconstitutionally compelled misleading speech with which they disagreed, in large part because there is very little connection between a product's WAC and the price that patients pay at the pharmacy counter. The district court did not reach the constitutional challenge because it struck down the rule on statutory grounds.

The government appealed the district court's judgment to the U.S. Court of Appeals for the District of Columbia Circuit. On June 16, the court of appeals affirmed the district court's judgment striking down the rule. Like the district court, the court of appeals resolved the case on statutory grounds and thus had no occasion to reach the constitutional challenge.

The court of appeals largely focused on the scope of rulemaking authority that is granted by statutory language authorizing the promulgation of rules for "administration" of a federal program. Specifically, the provisions of the statute at issue here authorized regulations "as may be necessary to the efficient administration" of the functions assigned to the agency, and "such regulations as may be necessary to carry out the administration" of the Medicare program. The court observed that "administration" was the "central focus" of both provisions granting rulemaking authority. Turning to contemporaneous dictionaries, the court explained the "administration" referred to "management and direction" of a program. Thus, a regulation that was "necessary" to the programs' "administration" must have "an actual and discernible nexus between the rule and the conduct of the Medicare and Medicaid programs." In simpler terms, the court held that this required more than a "hoped-for trickle-down effect" on the programs.

The court of appeals canvassed the reasons why the rule was not directed to "administration" of the Medicare and Medicaid programs. First, a product's WAC bears "little meaningful relationship" to the price paid by either by the beneficiaries or the government. Second, disclosure of the WAC was similarly unhelpful as a means of informing consumers of the price of drugs. Third, the rule did not specifically target advertising aimed at Medicare or Medicaid recipients, but applied without distinction to all television advertisements directed to the public at large. Fourth, the sweeping nature of the rule would suggest – if HHS and CMS did indeed have the authority to promulgate it – that the statute gave the agencies "unbridled power to promulgate any regulation with respect to drug manufacturers that would have the arguable effect of driving down drug prices," based simply on the financial benefit to the Medicare and Medicaid programs.

Although the court closed with the caveat that "nothing in this opinion holds that the Secretary is categorically foreclosed from regulating pharmaceutical advertisements," it left little doubt that compelled price disclosure of the type required by the rule was beyond the agencies' authority, writing 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." It closed with the observation that while the secretary's authority to promulgate rules governing these programs is broad, it "does not allow him to move the goalposts to wherever he kicks the ball."

Absent the discretionary grant of rehearing by the full court of appeals or review by the Supreme Court, which are rarely granted and unlikely here, the decision of the court of appeals represents the last and final word on the DTC rule.