In an informative decision for challenging rules that portend government overreach, the US Court of Appeals for the District of Columbia Circuit upholds the invalidation of the Centers for Medicare and Medicare Services’ drug pricing disclosure rule as exceeding statutory authority and rejects the government’s frequent reliance for CMS rulemaking authority based on the “efficient administration” of the Medicare program.
The US Court of Appeals for the District of Columbia Circuit rejected an attempt by the Trump administration to require drug manufacturers to disclose their wholesale acquisition costs for drugs that are advertised on television, finding the disclosure regulation “largely untethered” to the Medicare and Medicaid statutory schemes from which the Centers for Medicare and Medicaid Services (CMS), a component of the US Department of Health and Human Services (HHS), drew its rulemaking authority.
In May 2019, CMS adopted a rule requiring pharmaceutical manufacturers to include a textual statement in any advertisement for a drug covered by Medicare or Medicaid programs the list price for a 30-day regimen or a typical course of treatment. CMS claimed the authority for adopting the regulation arose from its general rulemaking authority to “prescribe such regulations as may be necessary to carry out [and] make and publish such rules and regulations . . . as may be necessary to the efficient administration of” the Medicare program. CMS urged that the Disclosure Rule would further its “efficient administration” of the Medicare program by providing greater transparency in the pricing of drugs covered by the program.
A number of drug manufacturers challenged the rule, claiming that it exceeded CMS statutory authority under the Administrative Procedures Act and violated the First Amendment. A DC district court threw out the Disclosure Rule, finding it to be beyond the agency’s rulemaking authority.
CMS sought reversal in the DC Circuit, citing its substantial authority to administer the Medicare program and the efficiencies offered by reducing abusive pricing practices. The DC Circuit acknowledged that CMS’s authority is “undoubtedly broad” but reminded the agency that it is “not boundless.” According to the court, CMS had stretched its authority beyond the statutory grant of power to “administer” the Medicare and Medicaid programs and instead was effectively establishing a broader legislative policy.
Specifically, the court found that “for a regulation to be ‘necessary’ to the programs’ ‘administration’ . . . [the agency] 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 court found that the Disclosure Rule was not sufficiently connected to informing Medicare beneficiaries and Medicaid recipients in furtherance of the administration of those programs. That is, the wholesale acquisition cost that was subject to the publication requirement was not related in a meaningful way to the price ultimately paid by the Medicare and Medicaid program beneficiaries. In effect, the Disclosure Rule appeared to be an attempt to address broader non–Medicare/Medicaid consumer pricing issues for drugs. Thus, the court rejected CMS’s attempt to use its authority to administer the Medicare and Medicaid programs to leverage a broader public regulation.
The court’s opinion presents an example of the judiciary’s increasing unwillingness to rubberstamp agency rulemaking even under Congress’s otherwise broad grant to HHS to “efficiently administer” the Medicare and Medicaid programs. The agency must stay within the scope of its statutory scheme and within the plain language of the dictates of the legislation.
For those healthcare organizations that find CMS’s pricing transparency rule to be highly problematic because it requires pricing disclosure without any tangible nexus to the Medicare program, this drug pricing decision bodes well. The American Hospital Association has challenged that rule in court. It is quite possible that the court in that case will look favorably at this decision and rule in a similar fashion.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:
Michele L. Buenafe
Scott A. Memmott
Albert W. Shay
Howard J. Young
Jacob J. Harper
Eric J. Knickrehm
Jonelle C. Saunders
Mark B. Stein
W. Reece Hirsch
 Merck & Co., Inc. v. Dep’t of Health & Human Servs., Dkt. No 19-5222 (June 16, 2020 D.C. Cir.).
 84 Fed. Reg. 20,732 (May 10, 2019) (Disclosure Rule).
 42 U.S.C. § 1302(a) and 42 U.S.C. § 1395hh(a)(1).
 Merck at 8.
 Id. at 11.
 Id. at 12.
 84 Fed. Reg. 65,464 (Nov. 27, 2019).
 Am. Hosp. Assoc. v. Azar, Civil Action No. 1:19-cv-3619 (CJN).