The Final Rule’s Impact on Drug Pricing Transparency

Health Update

Editor’s Note: On May 8, the administration issued the much-anticipated final rule requiring drug manufacturers to disclose wholesale acquisition prices in their broadcast advertising. The debate around the rule has been raging since October, when the proposal was first published. Set to go into effect on July 9, the rule could have a major impact on how life sciences companies promote to their customers. With both strong supporters and vocal opponents, it also could face a myriad of legal challenges in the months ahead.

In a new webinar, Manatt Health describes the new rule and its potential impact. In part 1 of our article summarizing the webinar, below, we discuss the rule’s content and what’s likely to come next, including its prospects for judicial review based on First Amendment and other issues. Watch for part 2 of our summary in the July “Health Update,” revealing how the new rule will affect promotional practices. Click here to view the full webinar free on demand—and here to download a free copy of the webinar presentation.

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How Did We Get Here?

In May 2018, the President and the Department of Health & Human Services (HHS) rolled out the Drug Pricing Blueprint, outlining the administration’s agenda for dealing with high drug prices. The Blueprint contained dozens of possible ideas, including one that called on the Food and Drug Administration (FDA) to evaluate the inclusion of drug list prices in direct-to-consumer (DTC) advertising. The proposal to include drug prices in DTC ads became a surprise hit that was widely covered in the media. The FDA quickly formed a working group to assess the proposal—and just as quickly, the issue moved from the FDA to the Centers for Medicare & Medicaid Services (CMS) after the FDA did not take any regulatory action.

The shift to CMS was an interesting turn of events, since prescription drug advertising had been, until this proposal, within the sole purview of the FDA. CMS has never regulated prescription drug advertising. The shift may have been the result of the FDA not believing that the issue of including drug pricing was within its core competency or core mission to evaluate.

In October 2018, we saw the release of a proposed rule, requiring drug advertisers to include pricing information in DTC advertising. Like the original announcement in May, the proposed rule received an enormous amount of positive attention from both healthcare stakeholders and the public. It was hailed as a step in the right direction, encouraging greater transparency in healthcare pricing, as well as greater accountability for prescription drug costs. After a public comment period, CMS released the final rule requiring drug pricing transparency on May 8, 2019.

The Content of the Final Rule

The final rule’s main requirement is simple. All televised drug advertisements must contain a contextual statement indicating the current list price for a 30-day regimen or a typical course of treatment, whichever is more appropriate. The regulation has the exact text that must be included:

“The list price for a [30-day supply of] [typical course of treatment with] [name of prescription drug or biologic product] is [insert list price]. If you have health insurance that covers drugs, your cost may be different.”

There are also requirements around how the text must be presented. The text must appear at the end of the advertisement in a “legible manner.” According to the rule, a “legible manner” means that the text is “placed appropriately and is presented against a contrasting background for sufficient duration and in a size and style of font that allows information to be read easily.”

The rule is effective as of July 9, 2019, giving advertisers just 60 days to meet the new requirements. There are a couple of narrow exceptions. First, ads are not required to include the list price for drugs that cost less than $35. Second, since technically this is a Medicare and Medicaid regulation, drugs that are not provided to Medicare and Medicaid beneficiaries are not subject to the requirements.

What Is the List Price (and Is It Helpful)?

The new rule requires manufacturers to include the list price in DTC advertisements. The list price is defined as the Wholesale Acquisition Cost (WAC)—the price that manufacturers report in wholesale price guides as the amount at which they sell drugs to wholesalers. The rule requires that the price information be current. The price in an advertisement must reflect the WAC in effect during the first day of the quarter in which the ad aired.

Is including the list price helpful to consumers? In reality, very few consumers actually pay the list price. As noted above, the list price is the amount the wholesaler pays to the manufacturer. It is not the amount that a consumer would pay at the pharmacy. Therefore, there are understandable concerns that consumers will find the list price confusing since it very often is significantly higher than the amount they are charged when they pick up their prescriptions.

There are, however, situations when it is useful for consumers to know the list price of a drug. First, for a consumer who is uninsured, the list price would be a fairly accurate reflection of what he or she will have to pay for a prescription. Second, even for consumers who are insured, the list price can be helpful in calculating coinsurance. For example, if their plan calls for them to be responsible for 20% of the drug’s cost, the WAC lets them calculate the amount they will owe for the prescription. In justifying the rule, CMS points to several studies that suggest consumers can more accurately predict their drug costs when they know the WAC.

What Other Information Can Manufacturers Include?

In addition to the list price for their own drugs, manufacturers can include price information for their competitors. CMS, however, does not define what qualifies a drug as a competing product, leaving the door open for “gaming” the system. For example, two drugs may treat the same condition, but one may be curative while the other just manages the symptoms. Putting those prices side by side with no context could be misleading.

In addition, manufacturers may choose to include information letting consumers know that costs may be higher for a drug that is typically used in combination with another drug. Although some commentators believed that the final rule should require manufacturers to list the cost for other products that need to be purchased in combination with the advertised drug, CMS declined to impose that requirement. It did, however, leave the option open for manufacturers to share information on the costs of combination products to give consumers a more accurate view of the total price of treatment.

What Is a Television Advertisement?

It seems like it would be easy to define a television advertisement, but it actually can be complicated. The regulation says that television ads include “broadcast, cable, streaming or satellite.” Consider the word streaming. It suggests that television programs viewed over the Internet that are accompanied by advertisements would be subject to the rule, in some cases. But CMS doesn’t explain in which cases—and it remains unclear which types of advertising appearing on the Internet would need to meet the rule’s requirements. For example, would ads appearing on streaming services, such as Hulu, need to comply with the rule and include drug prices? Would YouTube be treated differently than Hulu since the majority of its content is user generated? What about media company web sites, such as CNN or the New York Times?

In today’s complex media world, there are not necessarily clear lines dividing the channels. CMS provides no guidance on these areas of uncertainty, ensuring that there will be a lot of confusion. The lack of guidance suggests that CMS’s focus was not on implementation—and many of these questions ultimately will be sorted out through litigation.

How Will the Rule Be Enforced?

CMS made it clear that neither it nor any other federal agency will actively enforce the rule, and consumers will have no standing to enforce. CMS will simply monitor DTC ads and publicize a list of violators. Beyond that, CMS anticipates that the only enforcement will be lawsuits under the Lanham Act, with one manufacturer suing another for failure to comply with the rule.

The Lanham Act prohibits unfair competition in the form of false or misleading advertisements. The statute defines false and misleading ads as those “likely to cause confusion or to cause a mistake…as to the origin, sponsorship or approval of [the product]” or that “misrepresent the nature, characteristics, qualities or geographic origin [of the product].” For a suit to succeed, the plaintiff must show damages.

There are several disincentives for Lanham Act suits. Even if a manufacturer could prove that an ad was misleading, it is unclear how it would prove damages. In addition, these suits can be costly, particularly because there’s little precedent in this area. Manufacturers also know that if they initiate these lawsuits, it means that they are more likely to be sued at some point.

Does the Final Rule Pre-empt State and Local Law?

The final rule pre-empts state and local law to the extent that these laws impose “any requirement concerning the disclosure in a television advertisement of the pricing of a prescription drug or biological product, which is different from, or in addition to” the requirements of the final rule. CMS pre-empted state laws to avoid meritless lawsuits that could increase drug costs.

There is, however, still potential for state rule. First, a state could adopt and enforce a statute that mirrors the federal law. Second, the pre-emption only applies to television advertising. A state could decide to regulate print, radio or Internet ads that the rule doesn’t cover.

What Happens Next?

There are no further HHS actions or guidance expected. The next step would be the creation and publication of the list of products identified as being in violation of the rule. The regulation talks about a yearly list but does not provide any timetable for its creation or any process for identifying violators. In addition, there is no due process defined for manufacturers to be notified in advance of a violation or to dispute their inclusion on the list.

What Is the Outlook for Litigation?

We are likely to see some action in the courts, both before and after the July 9 implementation date. There are two main possible areas of legal objection:

1. The rule itself is beyond CMS’s statutory authority.

This objections says that Congress did not give the government the power to require that pricing information be included in drug advertising. Courts usually try to decide first whether there even is the authority to issue a regulation. If not, they don’t need to get into constitutional issues.

It is clear that Congress did not specifically grant HHS, CMS, FDA or any part of the federal government the authority to regulate pharmaceutical advertising in this way. Instead, HHS relied on general statutory language that it has “the authority to promulgate regulations as necessary for the efficient administration of Medicare and Medicaid.” HHS cited that beneficiaries need to have information on drug pricing to participate properly in the Medicare and Medicaid programs.

In reviewing authority, the courts apply the Chevron test, named for a famous case. The Chevron test has two prongs. First, if the statute speaks directly to the question involved, the court should defer to the agency’s interpretation. CMS and HHS don’t claim that the statute speaks directly to the question, so we need to move to the second prong of the test, which addresses the question of whether the interpretation of the statute is permissible and reasonable.

One way to resolve the issue would be for Congress to give HHS, CMS or FDA the authority to regulate the publication of drug pricing in advertising. Some members of Congress already have introduced legislation to this effect. It is possible that Congress will step in to deal with a statutory challenge to the rule.

2. The final rule violates the First Amendment of the United States Constitution.

The First Amendment protects free speech. Many people think of the First Amendment in terms of protecting our ability to say what’s on our minds. The First Amendment, however, also protects commercial speech. In addition, it protects people’s right not to speak. For example, the government can’t require someone to say the Pledge of Allegiance. The final rule is forcing manufacturers to say something (share their pricing)—and even providing them with the words they need to recite.

This is an unsettled area of the law. A review of the Supreme Court’s decisions, however, shows a trend toward increased protection of free speech, particularly commercial speech.

If a court were to review the final rule under the Constitution, there are two main tests it would consider. The first is the Zauderer test, named after a Supreme Court case. Zauderer upheld a statute that forced lawyers to disclose that they take cases on a contingency fee basis (Zauderer v. Office of Disciplinary Counsel, 471 U.S., 626 (1985)). The reasoning was that the information lawyers were required to disclose was “purely factual and uncontroversial.”

There are different views on whether the WAC meets the Zauderer test. CMS would say the WAC is factual and nondeceptive. It is the price that wholesalers pay manufacturers. In contrast, manufacturers or others who oppose the regulation could say the WAC is not factual—and could be deceptive and confusing—because it is not the price everyone seeing the ad will pay. In terms of being controversial, certainly many people would agree there is a lot of controversy around whether disclosing the WAC is or is not helpful to the public.

If the rule doesn’t pass the Zauderer test, it would face the more stringent Central Hudson test, which was adopted by the Supreme Court in 1980. The Central Hudson test says that government can regulate speech under three conditions—(1) when there is a substantial government interest, (2) when the regulation directly advances the government interest and (3) when the regulation is no more extensive than needed to advance that interest (Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557 (1980)).

Reasonable people will differ about whether the rule meets these standards. If we look at the second condition, for example, CMS would argue that the rule does advance the government’s interest by ensuring that people in the Medicare and Medicaid programs make good choices about the drugs that they take. Opponents would say that the regulation does not advance the government’s interest because it doesn’t directly affect the price of drugs.

Who Are the Potential Litigants?

Any challengers to the rule would have to have standing. They would need to be directly impacted and able to prove they would suffer damages if the rule were implemented.

The main drug trade association, BioPharma, could be a litigant as could any drug manufacturer. While legal actions represent a real threat to implementation, however, the politics of drug pricing may be more of a determining force than the courts in shaping the regulation’s fate. Given all the challenges to prescription drug pricing, the drug industry as a whole or even manufacturers individually might not be anxious to take on this fight, particularly given that the rule is unlikely to have any commercial impact. (After the webinar, on June 14, three drugmakers and the Association of National Advertisers filed a lawsuit to stop the Trump administration from requiring television ads to include pricing, claiming that HHS overstepped its authority and that the rule will mislead patients about how much they have to pay.)

Other possible litigants are the people who sell television advertising. They expressed in their comments opposing the rule that they believe it would have a chilling effect on advertising, leading them to lose business. They might have to wait until the regulation has been implemented to prove damages, but they certainly could be litigants.

NOTE: Watch for part 2 of our summary in July, focused on how the rule could impact promotional practices.