United States: District Court Strikes Down Rule Mandating Price Disclosure In DTC Pharmaceutical Advertisements

Charles A. Weiss is a Partner in Holland & Knight's New York office.

The U.S. Department of Health and Human Services (HHS), together with the Centers for Medicare & Medicaid Services (CMS), in May 2019 published a final rule requiring direct-to-consumer (DTC) television ads for prescription drugs 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." The statement is not required if the disclosed WAC would be less than $35, or if the product is ineligible for Medicare/Medicaid reimbursement. Few (if any) drugs advertised on television would not be covered by the rule.

In June 2019, a group of industry participants filed suit against HHS and CMS in the District of Columbia, challenging the legality of the rule and seeking a stay of its mandate pending full resolution on the merits. They challenged the rule on two grounds: (1) The rule exceeds the agencies' authority under the Social Security Act, and (2) the rule violates the First Amendment as impermissible compelled speech. Moreover, they argued that the rule compels a false statement because a product's WAC is not a "list price" that translates into what patients — even uninsured patients — pay at the pharmacy counter.

In support of their first argument, the plaintiffs presented declarations from professors at the Kellogg School of Management at Northwestern University and the Yale School of Management which argued that when HHS formally announced in May 2018 that it was considering price disclosure requirements for DTC ads, HHS stated that it would look to the Food and Drug Administration (FDA) to consider inclusion of prices. However, the FDA has in the past taken the position that its enabling statute, the Food, Drug, and Cosmetic (FD&C) Act, does not authorize it to require price disclosure. Whether driven by the FDA's historical position regarding the scope of its own authority or for other reasons, the government instead based the DTC rule on CMS' general authority to promulgate regulations to promote the "efficient administration" of Medicare and Medicaid. The plaintiffs argued this foundation is too weak.

Most discussion of the DTC rule has concerned the plaintiffs' second argument that it amounts to "compelled speech" in the commercial context. The government argued for review under the relatively deferential Zauderer standard, after a 1985 Supreme Court case holding that a state could require certain fee disclosures in attorney advertising. In general terms, Zauderer provides that mandated disclosure of "purely factual and uncontroversial information" concerning issues such as price does not run afoul of the First Amendment so long as the requirements are not "unjustified" or "unduly burdensome." The plaintiffs disputed the government's reliance on Zauderer, arguing that the WAC price is not the price at which drugs are sold at retail, and is essentially unrelated to the price paid by the vast majority of consumers.

Rather than the deferentialZauderer standard, the plaintiffs relied on the familiar Central Hudson test after a 1980 Supreme Court decision that invalidated a ban on utility companies' promotion of electricity usage (intended to support conservation efforts in the 1970s), which generally applies to regulation of commercial speech. To pass muster under the Central Hudson standard, regulation of commercial speech must (i) directly advance a substantial government interest, and (ii) be narrowly tailored to achieve it. Here, the challengers argued that the rule will neither provide meaningful price information to consumers (because of the mismatch between WAC and the actual price paid at the pharmacy counter, especially for patients with insurance), nor will it rein in drugs costs borne by the Medicare and Medicaid programs. Moreover, the plaintiffs stated that there are other and better ways to communicate to patients what their actual costs are likely to be for the advertised drugs.

The government's opposition brief played into certain of the plaintiffs' arguments by defending the propriety of embarrassing pharmaceutical companies through compelling disclosure of oftentimes eye-popping WAC prices. For example, the government wrote that if manufacturers "are embarrassed by their excessive prices and thus lower them," that is an objective of the rule and is achieved in a constitutional manner. Similarly, said the government, by "increasing price transparency and exposing overly costly drugs to public scrutiny, the DTC rule helps to incentivize the manufacturers to reduce their list prices." In addressing the public interest, the government contended that the rule "will play an important role in combatting out-of-control prescription drug prices that are threatening the long-term viability of Medicare and Medicaid and that are unfairly draining the bank accounts of more Americans every day."

The plaintiffs' reply brief made the point that the government's brief showed that the DTC rule is more about grandstanding and scoring political points than providing consumers with actionable information about the likely out-of-pocket cost of a prescription for a drug they see advertised on television. They wrote that "HHS candidly admits that one of the Rule's key 'objectives' is to shock consumers and 'embarrass[]' manufacturers. It is designed to increase 'public scrutiny' on manufacturers by forcing them to display a 'list' price that is worlds apart from the actual price for most of the intended audience of consumers."

At oral argument on July 2, 2019, the court closely questioned both sides and inquired if it might finally resolve the case on the merits instead of ruling only on the plaintiffs' application for a stay. The court ruled in favor of the plaintiffs on July 8, striking down the rule on the eve of its effective date on statutory grounds while avoiding the First Amendment issues under the doctrine of "constitutional avoidance." Specifically, the court held that the Social Security Act's general grant of rulemaking authority to promulgate regulations necessary to "administration" of the Medicare and Medicaid programs did not suggest that Congress intended to authorize HHS and CMS to make rules directly regulating the conduct of "market actors that are not direct participants in the Medicare or Medicaid Programs" and that:

Pharmaceutical manufacturers are not health care providers, private plan carriers, or beneficiaries—each of whom plays a direct role in the public health insurance programs. They do not receive payment for their products from CMS. Their pricing decisions, of course, affect the cost of pharmaceutical benefits offered under the Medicare and Medicaid programs. But those decisions impact program costs in an indirect way. The plain statutory text simply does not support the notion—at least not in a way that is textually self-evident—that Congress intended for the Secretary to possess the far-reaching power to regulate the marketing of prescription drugs.

Elaborating on its reasoning, the court reviewed a number of provisions of the Social Security Act and noted the difference in scope between regulating program participants and reaching more broadly to the overall healthcare market:

What these provisions have in common is this: each contains a congressional directive that concerns the day-to-day running and operation of Medicare and Medicaid as public health insurance programs, and each is directed in some way to a program participant or the program itself. None authorize HHS, in the name of attempting to reduce the costs, to regulate the health care market itself or market actors that are not direct participants in the insurance programs.

The court also pointed to the absence of authority in the FD&C Act to promulgate rules mandating price disclosure, despite the comprehensive regulation of pharmaceutical advertising otherwise provided for therein: "Congress deliberately and precisely legislated in the area of drug marketing under the [FD&C Act]. Such purposeful action demonstrates that Congress knows how to speak on that subject when it wants to."

Having found that HHS lacked authority to promulgate the rule, the district court did not have to reach the First Amendment challenge or resolve other points of contention raised in the parties' respective submissions. The district court entered final judgment on the merits in favor of the plaintiffs. Accordingly, the government's next step, if it still wishes to defend the rule, will be to appeal or seek and receive express authority from Congress.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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