Mandating Drug Price Transparency (Part II)

by Bernard Bell — Tuesday, Oct. 30, 2018

Drug prices have captured political leaders’ attention.  See, e.g., Robert Pear, Big Pharma’s Nightmare: Trump Crossing the Aisle to Curb Drug Prices, N.Y.TIMES A23 (Oct. 21, 2018); Robert Langreth, Quicktake: Drug Prices, BLOOMBERG (Jan. 25, 2016)(updated May 11, 2018).  On October 11, 2018, the Centers for Medicare and Medicaid Services (“CMS”) took a modest step toward moderating drug prices by proposing a requirement that direct-to-consumer (DTC) television advertisements for any prescription drug or biological product (“biologic”) include its “list price.” Regulation to Require Drug Pricing Transparency, 52 Fed. Reg. 52789 (Oct. 18, 2018).  Part I of this two-part series summarized the Federal Register notice outlining the proposal and CMS’s reasoning.  This post discusses the regulation’s potentially anomalous impact, CMS’s questionable authority to promulgate the rules, First Amendment constraints, and an alternative proposal.

THE PROPOSED REGULATION’S POTENTIALLY ANOMALOUS IMPACT

As CMS notes in the preamble to the proposed rules, the medical market is an unconventional one in which pricing does not fully serve its typical resource allocation function.  Because of the pervasive role of insurance, consumers do not directly bear the bulk of medical or pharmaceutical costs.  Accordingly, influencing consumer incentives may have a more modest impact on the “consumption” (i.e., utilization) of pharmaceutical products than on the consumption of most other retail products and services, for which consumers directly bear the full cost.  See, Bernard Bell, Hatch-Waxman and Defective Generic Drug Labels: The Disjunction Between Federal Drug Safety Law and State Warning Defect Law (Part II) (noting the “disjunction between making the decision to use the drug and paying for it”).  Granted, many people lack prescription drug coverage, and even by Medicare Part D recipients must grapple with full cost of pharmaceuticals while their total expenditures fall within the “doughnut hole.”  In part, the limited impact of price has upon consumption is also attributable to the essential nature of pharmaceutical products and, often, the lack of readily available substitutes, making the demand for many pharmaceuticals inelastic.

CMS explicitly seeks to tamp down consumer demand for pharmaceuticals.  However, by focusinf on the “list price,” which often exceeds the price paid by the consumer or third party payors (whether Medicare, Medicaid, or private plans), the proposed regulation may over-deter consumption of some drugs or biologics.  In effect, the required disclosure suggests to the consumer that the price is greater than it is in reality.  Moreover, markets for drugs and biologics are often monopolized, due to the existence of a period of patent exclusivity, and often there may be few viable substitutes for a drug.  In such a context, theoretically, reducing demand may increase the drug’s or biologic’s price, as a patent holder seeks to recoup research and development costs over a smaller customer base during the period of patent exclusivity.  In addition, by requiring pharmaceutical companies to overstate the actual cost to most consumers, the proposed regulation undermines its second stated goal, furthering informed patient decision-making.  Some television viewers may hear the list price of an advertised drug and decide to forgo discussing the usefulness of the drug with their physician, even though the price is both lower than advertised and one they could afford.  The routine CMS-mandated disclaimer that the price could be lower for those covered by insurance may not fully counteract this effect.

LEGAL HURDLES

The proposed regulation faces at least two significant legal hurdles, CMS’s lack of statutory authority and the First Amendment limitations on the regulation of commercial speech.  CMS’s analysis of each issue is deficient.

CMS’ Lack of Regulatory Authority

Nothing in the statutes CMS cite explicitly confer upon the agency any authority over drug and biologic advertising.  CMS asserts a broad view of the Secretary’s general authority to promulgate regulations under the Social Security Act, a view atypical of the conservative textualist approach that seeks to cabin expansive agency authority.    CMS’s citation of Mourning v. Family Publications Services, 411 U.S. 356 (1973) is telling.

In Mourning, a narrow five-Justice majority reversed a Fifth Circuit ruling, and held that under the Truth in Lending Act the Federal Reserve Board could reach installment contracts that were not subject to a finance charge, so as to prevent circumvention of requirements the Act imposed upon credit transactions that imposed finance charges upon consumers.  Id. at 361-62, 369-73.  The case was near the boundary of appropriate interpretation even under the purposive approach to statutory interpretation extant at the time, and the validity of its approach in our current textualist era has been questioned.  See, e.g., Chamber of Commerce v. NLRB, 721 F.3d 152, 159-60 (4th Cir. 2013) (rejecting the Mourning approach and refusing to presume a delegation of power solely from the absence of an express provision withholding of such power); Colorado River Indian Tribes v. National Indian Gaming Commission, 383 F. Supp. 2d 123, 143–44 (D.D.C. 2005), aff’d, 466 F.3d 134, 139 (D.C.Cir.2006)).  As the District Judge explained in Chamber of Commerce v. NLRB, 856 F. Supp. 2d 778 (D.S.C. 2012), “courts have declined to follow th[e] [Mourning] approach when doing so would give the agency ‘limitless power to write new law, without any regard for the language or legislative history of the governing statute, so long as it arguably fits within the purposes of the statutory scheme.’”  Id. at 789-91 (citing Colorado River Indian Tribes).

Indeed, Congress has assigned authority over pharmaceutical advertising to the Food and Drug Administration (“FDA”) and the Federal Trade Commission (“FTC”).  See generally, Francis B. Palumbo & C. Daniel Mullins, The Development of Direct-To-Consumer Prescription Drug Advertising Regulation, 57 FOOD DRUG LAW J. 423 (2002)(discussing history of control over pharmaceutical advertising).  The FTC regulates advertising of over-the-counter medications pursuant to its authority to prevent unfair and deceptive trade practices, 15 USC §§45, 52 (2012).   The FDA has authority over prescription drug advertising.  Indeed, the statute delineating the FDA’s jurisdiction requires disclosure of only the drug’s generic name and formula, and a brief summary describing the effectiveness of the drug and its risks. 21 U.S.C. § 352(n) (2012).  With respect to price information, the subsection merely states that nothing the 1971 International Convention on Psychotropic Substances, “shall be construed to prevent drug price communications to consumers.”  Id.

Gonzales v. Oregon, 546 U.S. 243 (2006), is instructive in this regard.  There the Court held that the Attorney General could not use his power to deny, suspend, or revoke physician’s prescription writing privileges, a power conferred upon the Attorney General by the Controlled Substance Act, to issue an interpretive rule declaring that assisting suicide was not a ‘legitimate medical purpose’ for prescribing controlled substances. (The Attorney General had allegedly threatened to revoke the prescription-writing privileges of doctors who prescribed pharmaceuticals to terminally-ill patients under Oregon’s Death With Dignity Act.)  In part, the Attorney General could not promulgate the challenged interpretive rule because “[t]he [Controlled Substance Act] allocates decisionmaking powers among statutory actors so that medical judgments, if they are to be decided at the federal level . . ., are placed in the hands of the Secretary” of Health and Human Services.  Id. at 265.  In interpreting statutes that explicitly divide authority between federal agencies, the Court explained, it presumes “Congress intended to invest interpretive power in the administrative actor in the best position to develop” “historical familiarity and policymaking expertise.” Id. at 266-67 (citing Martin v. Occupational Safety and Health Review Commission, 499 U.S. 144, 153 (1991)).

Granted, the constraints on CMS are less explicit than the limitations upon the Attorney General at issue in Gonzales v. Oregon, id. at 265-67.  Moreover, the Secretary of Human Services exercises authority over both CMS and the FDA, albeit under distinctly different delegations of authority from Congress and by means of separate agencies within HHS. (See here and here.)  Nevertheless Gonzales v. Oregon supports the proposition that the FDA, rather than CMS, possesses authority to regulate prescription drug advertising.

At best, CMS’s assertion of jurisdiction would result in divided regulatory authority over prescription drug advertising depending on subject matter of a statement, with the FDA regulating statements regarding the drug’s efficacy and risks and CMS regulating statements (or omissions) regarding pricing.  Such divided jurisdiction seems a bit odd, and might well result in the two agencies working at cross-purposes.  It is doubly odd because the FTC would seem the more natural agency to address deceptive or confusing statements regarding the price of consumer goods.

Note that the Federal Communications Commission (“FCC”) has authority to regulate broadcasters in “the public convenience, interest, and necessity,” 47 U.S.C. §§303, 307(a), 309(a) (2012), a mandate equally as capacious as the Secretary’s under the Social Security Act.  And Congress’ grant of authority to the FCC is directed specifically at broadcasting.  But after a brief foray into regulating tobacco advertising over the airwaves in the 1960’s and 1970’s, the FCC questioned whether it “has a mandate so broad as to permit it ‘to scan the airwaves for offensive material with no more discriminating a lens than the “public interest” or even the “public health.”’” Fairness Report, 48 F.C.C.2d 1 ¶68, n.22 (1974) (quoting Banzhaf v. FCC, 405 F. 2d at 1082, 1099 (D.C. Cir. 1968), cert. denied sub nom., 396 U.S. 842 (1969)).

Moreover, in enacting the Medicare Part D prescription drug benefit program, Congress prohibited CMS from negotiating with pharmaceutical companies over drug prices. 42 U.S.C. §1395w-111(i) (2012).  Arguably it would be odd for Congress to prohibit CMS from using its purchasing power to lower drug costs reimbursed under Medicare Part D, but implicitly authorize CMS to regulate commercial speech in an effort to lower drug prices more generally.  The power to compel speech, which has clear First Amendment implications, seems more the more serious of the two powers, and the least likely for Congress to confer upon any agency, particularly CMS.  On the other hand, section 1395w-111(i) makes clear that the limitation on negotiating drug prices is intended “to promote competition.”  The requirements CMS seeks to impose upon advertising arguably enhances competition in a way that the Government’s use of its purchasing power to lower prices does not.

The First Amendment Constraints

Enhanced Power over Broadcasting: Red Lion Broadcasting

CMS relies on the special authority to regulate speech upheld in Red Lion Broadcasting v. FCC, 395 U.S. 367, 390, 394 (1969).  CMS noted that its proposed rule would operate “in the context of broadcast advertisements, an area in which the Supreme Court historically has recognized that the government may take special steps to help ensure that viewers receive appropriate information.”  52 Fed. Reg. at 52790, 52793.  But Red Lion, an almost 50-year-old precedent, is questionable authority, as the agency primarily assigned to regulate broadcasting, the FCC, has concluded, In re Complaint of Syracuse Peace Council, 2 FCC Rcd. 5043, ¶¶76, 82-97  (1987), pet’n for review denied, Syracuse Peace Council v. FCC, 867 F.2d 654 (D.C. Cir. 1989), cert. denied, 493 U.S. 1019 (1990).

Moreover, Red Lion never applied to the regulation of advertisers’ choice of content for their televised commercial messages.  Rather Red Lion held that the FCC could impose upon broadcasters an obligation to provide adequate coverage to public issues and to do so fairly in a manner that “accurately reflects the opposing views” on such issues.  Red Lion, 395 U.S. at 377, 394 (“[t]o condition the granting or renewal of licenses on a willingness to present representative community views on controversial issues is consistent” with the First Amendment); see generally, id. at 375-86 (discussing the history of the FCC’s “fairness doctrine”).  Even the FCC acknowledged that its short-lived efforts to regulate the content of tobacco advertisements did not fit comfortably into the fairness doctrine, Fairness Report, 48 F.C.C.2d at ¶68 & n.22.  The fairness doctrine upheld in Red Lion is a far cry from a rule compelling advertisers to include particular information in broadcast advertisements, especially arguably misleading information.  Nor should CMS be allowed to regulate speech on a rationale not “properly the business of the agency.”  See, Hampton v. Mow Sun Wong, 426 U.S. 88, 115, 116 (1976)(Civil Service Commission could not use foreign policy consideration to justify its restriction on aliens’ employment by the federal government).

At an even more basic level, CMS fails to recognize the distinct First Amendment analysis applying to over-the-air, cable, satellite, and internet broadcasting.  Given broadcasters’ use of the scarce public airwaves, the First Amendment places far fewer constraints upon Government regulation of over-the-air broadcasting.  See, e.g., Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622, 637-40 (1994)(cable broadcasting); Ashcroft v. American Civil Liberties Union, 535 U.S. 564, 594-95 (2002)(internet sites); Reno v. American Civil Liberties Union, 521 U.S. 844, 868-70 (1997)(internet sites); HARVEY L. ZUCKERMAN, ET AL. MODERN COMMUNICATIONS LAW §2.3 (1999).

Compelled Commercial Speech

Perhaps in the context of commercial speech, government bodies can require a speaker to provide factual, non-controversial information.  National Institute of Family and Life Advocates v. Becerra, — U.S. —, 138 S. Ct. 2361, 2372, 2376 (2018) (‘‘NIFLA’’); Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 651 (1985).  But finding such requirements consistent with the First Amendment generally requires the government to show that the mandatory disclosure requirement is designed “to dissipate the possibility of consumer confusion or deception.” Id. at 651 (quoting In re R.M.J., 455 U.S. 191, 201 (1982)).  Pharmaceutical companies’ DTC television advertising does not appear to be deceptive, or even confusing, at least with respect to pricing.  Indeed, at most, it is the absence of comparative price information at the point of sale that could be considered deceptive or confusing.  CMS’s chief complaint is not consumers’ inability to ascertain the cost of a drug or biologic, but their failure to place sufficient focus on pricing to make decisions that exert downward pressure on drug prices and reduce utilization rates.

CMS does not cite any cogent analogies in support of its First Amendment analysis.  CMS seeks to regulate communications that occur well before the point of sale.  When a potential consumer views a television ad for a prescription drug or biologic, they must discuss the matter with their physician to obtain a prescription, as CMS recognizes, 52 Fed. Reg. at 52792.  Only after doing so can the consumer purchase the product.  The regulations and cases CMS cites largely require provision of information at the point of “sale.”

CMS cites several regulations that involve disclosing the terms of consumer finance transactions and requirements that the price and octane rating of fuel be posted at fuel pumps. 52 C.F.R. at 52793-94.  CMS cites two cases upholding mandatory disclosure requirements promulgated by federal agencies.  The regulation at issue in Discount Tobacco City & Lottery v. United States, 674 F.3d 509, 524 (6th Cir. 2012), requiring that cigarette packaging contain graphic images of smoking’s deleterious health effects, involves information to be considered at the point of purchase, or even later, when the tobacco product is consumed.

The regulation challenged in Spirit Airlines, Inc. v. United States Department of Transportation, 687 F.3d 403 (D.C. Cir. 2012), cert. denied, 569 U.S. 903 (2013), specified that if an airline mentioned the airfare for a trip in an advertisement, it had to state the total price of the ticket, including fees and taxes.  Though the regulation encompassed pre-point-of-sale advertising, it is readily distinguishable from CMS’s proposed drug price transparency regulation.  The “total price” regulation did not require the airline to include any price in its advertising, it merely specified that if a price is communicated it must be the actual total cost to consumers.  14 C.F.R. § 399.84(a) (total price requirement applies to any advertisements “that states a price for . . . air transportation”).  Moreover, the total price regulation combated the industry’s practice of understating the “true” cost of airline tickets, Final Rule, Enhancing Airline Passenger Protections, 76 Fed. Reg. 23110, 23142-23143 (April 25, 2011); CMS directs pharmaceutical manufacturer’s to overstate pharmaceuticals’ “true” cost to consumers.

Moreover, while the list price may not be controversial in terms of stating an opinion or in terms of touching upon a divisive social issue, such as abortion, it is controversial in another way.  Announcing the “list price” of a drug may well be deceptive because many consumers will not be required to pay that price.

In addition, CMS fails to distinguish cases involving government prohibitions on commercial speech, including price advertising, and those involving compelled government speech.  CMS’s use of Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, 425 U.S. 748, 763–64 (1976) provides the prime example.  While the Court held in Virginia State Board of Pharmacy that there is a strong societal interest in permitting manufacturers and retailers to provide price information, that does not mean there is a strong societal interest in compelling them to do so, especially not as an indirect means of imposing price discipline on an industry.  Clearly a government power to compel a speaker to broach a particular subject in its commercial speech does not follow from commercial speakers’ right to voluntarily broach that subject despite the government’s disapproval.

AN ALTERNATIVE APPROACH

CMS does have an available alternative that falls well within its authority and does not raise First Amendment problems.  CMS could require all makers of drugs and biologics covered by Medicare or Medicaid to submit and regularly update the list price of its covered drugs and biologics.  CMS could then make that information available on its website.  Surely CMS can compel pharmaceutical makers to provide such information, and nothing in the First Amendment limits the Government’s ability to engage in its own speech.  Indeed, presumably the Government could require pharmaceutical makers to provide additional information, such as the standard discounts it provides for its drugs and biologics or either the median or average price charged to pharmacy benefit managers.

As CMS itself notes in its preamble to the proposed regulation, the Secretary of Agriculture takes precisely such an approach with respect to with respect to the prices for lamb and “boxed beef.”  In particular, the Secretary requires packer processing plants report their sales price for lamb daily and their sales price for “boxed beef” twice a day. See, 7 C.F.R. §§59.301(a) & (b) (2018) (lamb sales price); 7 C.F.R. §59.104(a)(1) (2018) (‘‘boxed beef’’ sale price).  The Secretary then releases that information to the public.

CONCLUSION

No doubt other approaches can more effectively lower drug prices than the proposed price transparency rule.  Such approaches could include allowing CMS to negotiate with pharmaceutical companies over drug prices or allowing importation of pharmaceuticals from foreign countries.  Indeed, just this past week, President Trump proposed that the prices Medicare pays for drugs should be based on prices paid in other advanced industrial countries.  Robert Pear, Proposal to Lower Drug Costs Based on Global Pricing, N.Y.TIMES A14 (Oct. 26, 2018).  But, as shown above, CMS’s proposed price transparency regulation is vulnerable to challenge and could be counterproductive.

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