D.C. Circuit Whacks CMS’ Wacky WAC Disclosure Rule

June 19, 2020By Faraz Siddiqui & Alan M. Kirschenbaum

On Tuesday, June 16, the U.S. Court of Appeals for the District of Columbia Circuit affirmed a district court decision to vacate the May 2019 Drug Price Transparency rule published by the Centers for Medicare & Medicaid Services (CMS).  As we reported when the rule was issued, the rule would have required pharmaceutical manufacturers to disclose the Wholesale Acquisition Cost (WAC) in Direct-To-Consumer (DTC) television advertisements for certain prescription drugs and biological products.  See 84 Fed. Reg. 20,732 (May 10, 2019) (“Disclosure Rule” or “Rule”).

According to CMS, the Rule was designed to invite public scrutiny into manufacturers’ list prices and to give consumers price information that could help them make critical health care decisions.  The Rule was immediately challenged by a group of pharmaceutical manufacturers on Administrative Procedures Act (APA) and First Amendment grounds. On July 8, 2019, the District Court of the District of Columbia published a memorandum opinion vacating the Rule on APA grounds while declining to reach the Constitutional argument. See Merck & Co. v. HHS, 385 F. Supp. 3d 81 (D.D.C. 2019).

On appeal, the Circuit Court reviewed de novo the district court’s interpretation of 42 U.S.C. §§ 1302(a) and 1395hh(a)(1), the two statutes that CMS used as its authority for the Disclosure Rule.  Unlike the district court, which ruled at Chevron Step One that the statute unambiguously foreclosed any regulation of pharmaceutical advertisements or price disclosure requirements, the Circuit court assumed that the statutes conferred “some relevant regulatory authority” in these areas, and proceeded to a Step Two analysis to decide that the Rule fell outside any reasonable reading of the Agency’s general administrative authority.

The text of the statute authorizes CMS to promulgate regulations that are “necessary to the efficient administration of the functions” of CMS,” see 42 U.S.C. § 1302(a), or “necessary to carry out the administration of the insurance program” under the Medicare Act, see 42 U.S.C. § 1395hh(a)(1).  The court explained that, “for a regulation to be ‘necessary’ to the programs’ ‘administration,’ . . .  the Secretary must demonstrate an actual and discernible nexus between the rule and the conduct or management of Medicare and Medicaid programs,” the “focus must also be on those two programs,” and have an effect on them that is “more than tangential.”  Instead, she found that the Disclosure Rule “bears at best a tenuous, confusing, and potentially harmful relationship to the Medicare and Medicaid programs.”

CMS had argued that the rule was necessary for the “efficient administration” of Medicare and Medicaid because price transparency will reduce wasteful and abusive increases in drug and biologics list prices. Judge Millett disagreed with the Agency for four reasons. First, as the government acknowledged, WAC “has no meaningful relationship” to what the federal and state governments pay for the drugs under Medicare Part B, Medicare Part D, and Medicaid,  and WAC is “even further removed” from what beneficiaries pay under these programs (deductibles and copays).  Second, beneficiaries, who are largely unaware of how their payments are computed, will likely be confused and deterred by high prices listed in the advertisements that they will almost never pay and that they are unlikely to understand.  Third, TV advertisements are not targeted to Medicare/Medicaid recipients but are accessible to healthcare consumers not covered by these federal programs. According to Judge Millett, this “increases the distance between the Disclosure Rule and any actual administration” and shows an example of the Rule’s administrative overreach. Fourth, and finally, Judge Millett noted that the regulation was “sweeping” in nature and scope and may have broad implications, not least of which was that it “implicate[d] a substantial constitutional question”—even if, as CMS argued, the cost of compliance was low.

Like the lower court’s decision, this decision did not reach the constitutional question raised by the manufacturers – i.e., whether the WAC disclosure rule compelled speech in violation of the First Amendment.  Certain states, such as New Hampshire, Oregon, and Vermont, have enacted statutes and issued implementing regulations that require manufacturers to report WAC information on certain new drugs and drugs whose WACs have increased, and also require this WAC information to be published on a government web site for public access.  Judge Millett’s conclusion that WAC is information that consumers are “unlikely to understand,” that may “generate harmful confusion,” and that “bears at best a tenuous, confusing, and potentially harmful relationship” to government programs throws some doubt, not only on the wisdom of disseminating WAC information to consumers, but also on whether such WAC consumer disclosure laws and their implementing regulations pass Constitutional muster.