On October 11, 2018, the Centers for Medicare and Medicaid Services (“CMS”) proposed a requirement that direct-to-consumer (DTC) television advertisements for prescription drugs or biological products (“biologics”) include the product’s “list price.” Regulation to Require Drug Pricing Transparency, 52 Fed. Reg. 52789 (Oct. 18, 2018).  The “Regulation to Require Drug Pricing Transparency,” 42 C.F.R. §§403.1200 to 403.1203 (proposed), applies only to drugs and biologics covered by Medicare or Medicaid.  The rationales for the proposed rule are: (1) to apply downward pressure to drug and biologic prices, and (2) enable that Medicare and Medicaid beneficiaries to make informed decisions regarding drugs and biologics, taking into account their out-of-pocket costs.

THE REGULATION’S RATIONALE

CMS posits that “[m]arkets operate more efficiently when consumers have relevant information about a product, including its price, . . . alternative products[,] and their prices . . .” 52 Fed. Reg. at 52790.  CMS explained that consumers cannot easily ascertain drugs’ and biologics’ actual or list prices.  Moreover, “[t]hird-party payment” is “a dominant feature of health care markets,” distinguishing them from the markets for other consumer goods.  That aspect of the pharmaceutical market “causes distortions,” id., including pharmaceutical manufacturers’ tendency to avoid price competition (at least on the basis of list price).   Pharmaceutical companies face little market pressure to voluntarily disclose their products’ list prices.  Id.  And actual prices vary greatly, pharmacy benefit managers charge as many as ten different prices to third-party payors depending on the design of third-party payor’s benefit plan.  Id.  CMS argued that pricing transparency would moderate drug and biologic price increases. Id.

As legal authority for its proposed action, CMS cited the Secretary of Health & Human Services’ broad power to issue regulations embodied in sections 1102 and 1871 of the Social Security Act, 42 U.S.C §§1302(a), 1395hh(a)(1) (2012).  Id. The impact of pharmaceutical prices and rates of utilization on the cost of the Medicare and Medicaid programs, and the Secretary’s mandate to minimize unreasonable program expenditures, provided the “nexus” between the Secretary’s responsibilities and the proposed regulation.  Id. at 52791.  CMS noted that Congress had recognized the value of drug price transparency in two provisions of the Social Security Act, but acknowledged that Congress had not “explicitly provided HHS with authority to compel the disclosure of list prices to the public.” Id.  Nevertheless, the cost of drugs and biologics to the federal government, Medicare beneficiaries, and State Medicaid programs had increased “at an alarming rate,” and in the Secretary’s view “DTC advertising without price transparency has a direct nexus to these trends of increasing price and utilization” (i.e., the increased use of pharmaceuticals).  Id.

In CMS’s view, “[p]rice transparency will help improve the efficiency of Medicare and Medicaid programs by reducing wasteful and abusive increases in drug and biological list prices.”  It will incentivize manufacturers to reduce their list prices and provide consumers with information to help them play an “active and well informed” role “in their health care decision-making.”  Id. at 52792.

The $4.2 billion pharmaceutical companies spent on television advertising in 2017 appeared to CMS to affect drug utilization; “consumers exposed to drug advertisements can exert sufficient pressure on their physicians to prescribe the advertised product.”  Id.  More informed decision-making by consumers, namely taking into account the advertised drugs’ cost, would reduce individual Medicare beneficiaries’ expenses and “positively affect the shared taxpayer responsibility to fund the Medicare and Medicaid drug benefit programs.”  Id.

CMS acknowledged that “[c]onsumers may be able to obtain some pricing information by going online to the websites of larger chain pharmacies.”  But unfortunately consumers do not seek such information: (1) because physicians rather than patients control the writing of the prescription, and (2) “meaningful price shopping is . . . hindered because the average consumer has no anchor price, such as an MSRP for automobiles, to gauge the reasonableness of the various price quotes.”

CMS noted that the list price disclosure mandate was “consistent with First Amendment jurisprudence,” particularly commercial speech doctrines permitting government to mandate provision of factual, noncontroversial information and permitting the federal government greater leeway to regulate broadcasters licensed to use the public airwaves.  Id. at 52793.

The mandated disclosure requirements applied to all advertisements on television, which the CMS defined to include broadcast, cable, streaming, and satellite transmission. Id. at 52794.  CMS had tentatively concluded that application of the requirement to other communications media was unwarranted, but sought comment on that issue.  Id. at 52795.  The proposed regulation specified that the price disclosure had to be conveyed “in a legible textual statement at the end of the advertisement.”  Id. at 52794; see, 42 C.F.R. §403.1203 (proposed).

The Secretary would maintain a publicly-available list of drugs and biologics advertised in violation of the price disclosure requirement, but otherwise planned to rely on private actions brought pursuant to the Lanham Act, 15 U.S.C. 1125(a) (2012), prohibiting unfair competition in the form of false or misleading advertising, to enforce the regulation.  Id. at 52794.  Because “it would be counterproductive if th[e] [proposal] were to increase transactional costs in defending meritless litigation,” the proposed rule would preempt any state court claims based on any pricing statement required by the rule. Id. at 52794; see, 42 C.F.R. §403.1204(b) (proposed).  Betraying its distrust of consumer litigation, CMS explained that the risk of meritless Lanham Act litigation was “acceptably low,” because such litigation “normally involve[s] sophisticated parties doing business in the same sector” as the defendant company.  52 Fed. Reg. at 52794.  The Lanham Act confers a cause of action only upon competitors, not consumers.  POM Wonderful LLC v. Coca-Cola, 573 U.S. —, 134 S. Ct. 2228, 2234 (2014).

The proposed regulation did specify that in disclosing the list price the advertisement was also to advise viewers that “[i]f you have health insurance that covers drugs, your cost may be different.”  42 C.F.R. §403.1202 (proposed); 52 Fed. Reg. at 52799.  CMS did consider specifying disclosure of some other price rather than the list price.  Id. at 52798.  It rejected the alternatives, but not because their use in advertisements would be deceptive or misleading or would provide less useful or accurate information to consumers.  Rather, CMS chose the list price to minimize the regulatory burden on pharmaceutical companies.  In particular, due to the variation in the prices paid by distributors, pharmacies, others in the supply chain, as well as patients, pharmaceutical companies would encounter difficulties in reporting any price other than the drug’s list price.  Id.

THE UPCOMING PART

In the second and installment of this series, I will discuss the potentially anomalous consequences of the proposed rule, CMS’s questionable assertion of authority to adopt such a rule, the First Amendment constraints on the proposal, and an alternative proposal that avoids the statutory authority and First Amendment questions.

I anticipate uploading Part II on this coming Tuesday or Wednesday.