D.C. Circuit Rejects Trump Administration's Drug Price Disclosure Rule

A unanimous panel concludes the Department of Health and Human Services Lacked Statutory Authority to Impose the Rule

Last year, the Trump Administration finalized a rule requiring pharmaceutical manufacturers to disclose drug prices in their advertisements. The theory was that this rule would help control pharmaceutical drug costs, even though stated prices for prescription drugs are not the prices that most consumers pay.

Pharmaceutical companies sued alleging that HHS lacked the statutory authority to impose the rule, and that the disclosure requirement violated the First Amendment. The district court agreed with the former argument, and this morning a unanimous panel of the D.C. Circuit agreed in Merck & Co. v. U.S. Dept. of Health & Human Services.

Judge Millett wrote for the panel, joined by Judge Henderson and Senior Judge Edwards. Her opinion begins:

In May 2019, the United States Department of Health and Human Services' Centers for Medicare and Medicaid Services published a rule that broadly requires drug manufacturers to disclose in their television advertisements the wholesale acquisition cost of many prescription drugs and biological products for which payment is available under Medicare or Medicaid. See Regulation to Require Drug Pricing Transparency, 84 Fed. Reg. 20,732 (May 10, 2019) ("Disclosure Rule" or "Rule"). In the overwhelming majority of cases, the price that the Disclosure Rule compels manufacturers to disclose bears little resemblance to the price beneficiaries actually pay under the Medicare and Medicaid programs.

A number of drug manufacturers challenged the rule on statutory and constitutional grounds, and they prevailed in district court. We affirm. 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 panel concluded that while HHS has been delegated broad and substantial rulemaking authority, it had not been delegated the authority to take this sort of action. Emphasizing that federal agencies only have that authority that has been delegated to them by Congress, the court noted that it was not enough for the Department to assert a "reasonable" relationship between its rule and the statutorily authorized programs it administers.

From the opinion:

Section 1302(a) directs the Secretary to "make and publish such rules and regulations, not inconsistent with [the Social Security Act], as may be necessary to the efficient administration of the functions with which [the Secretary] is charged under" the Medicare and Medicaid programs. 42 U.S.C. § 1302(a) (emphasis added). Similarly, Section 1395hh(a)(1) directs the Secretary to "prescribe such regulations as may be necessary to carry out the administration of the insurance programs under" the Medicare Act. Id. § 1395hh(a)(1) (emphasis added).

The Department argues that, under Chevron Step Two, it reasonably concluded that the Disclosure Rule is "necessary" to the "efficient administration" of the Medicare and Medicaid programs because the "price transparency" that it introduces will "improve the efficiency of Medicare and Medicaid programs by reducing wasteful and abusive increases in drug and biological product list prices[.]" . . . In particular, the Secretary reasons, the Disclosure Rule will (i) incentivize manufacturers "to reduce their list prices by exposing overly costly drugs to public scrutiny," thereby reducing program costs, and (ii) provide "consumers with more information to better position them as active and well-informed participants in their health care decision-making." . . .

Neither of those arguments holds up. The Secretary's administrative authority is undoubtedly broad. . . . But 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.

Instead, to fall within the Secretary's regulatory authority, rules must be "necessary to the efficient administration of the functions with which [the Secretary] is charged[,]" 42 U.S.C. § 1302(a) (emphasis added), or "necessary to carry out the administration of the insurance programs under" the Medicare subchapter of the Social Security Act, id. § 1395hh(a)(1) (emphasis added). "[A]dministration" is the central focus of both definitions. When the Social Security Act was enacted in 1935, this meant "the practical management and direction of" its various programs (including eventually Medicare and Medicaid), as well as their "management" and "conduct."

So for a regulation to be "necessary" to the programs' "administration," 42 U.S.C. §§ 1302(a), 1395hh(a)(1), 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 panel went on to point out that the Department's preferred interpretation of its authority would give it near-boundless power.

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 breadth of the Secretary's asserted authority is measured not only by the specific application at issue, but also by the implications of the authority claimed.

Although the court panel did not echo the "major questions" doctrine, there are echoes of such arguments in its analysis. It's a useful reminder that agencies need to be able to identify the source of any regulatory authority they wish to exercise.