Merck, et al. v. United States Department of Health and Human Services

Ralph F. Hall*

Why It Made the List

There are two core reasons why Merck et al. v U.S. Department of Health and Human Services[1] (“Merck”) is a top case for 2020. First, drug pricing is one of the hot issues of our time. Lawsuits that address (and in this case overturn) efforts to address drug pricing merit our attention.

Second, recent events have increased the focus on administrative law matters. For example, see the announcement from Health and Human Services (“HHS”) that certain premarket submissions could not be required for laboratory developed tests (“LDTs”) because FDA did not follow certain administrative law requirements in that FDA had not used notice and comment rule making.[2] In addition to the specific effort to address drug pricing, this case also addresses some broader administrative law questions of relevance to FDA.

Discussion

For many years, policy makers have tried to address the pBackgrounderceived high cost of drugs in America.[3] This debate and the concerns over drug pricing goes back over four decades. In fact, The Drug Price Competition and Patent Term Restoration Act of 1984 (generally referred to as the Hatch Waxman Act) was a major effort to reduce drug pricing by increasing generic competition.[4] Over time there have been a plethora of policy proposals coming from many sectors—some of which have resulted in statutes or regulations or have triggered changes within the private sector. These policy suggestions or initiatives include increasing generic drug competition; permitting the government to negotiate drug pricing; limitations on price increases; permitting the importation of drugs from other countries, particularly Canada; limiting patent settlements and licensing; increased antitrust enforcement; and utilizing an international drug price index. For example, in 2013, the Supreme Court weighed in on antitrust aspects of pharmaceutical patent settlements and licensing,[5] and just recently in September 2020, the Trump Administration finalized a rule permitting the importation of certain drugs from Canada.[6]

One policy approach advocated by a number of stakeholders was to mandate that pharmaceutical companies publicly disclose certain drug price information to the consumer/user/final purchaser. While the consumer picking up a prescription at the drug store would know the cost to that person (particularly the co-pay), the consumer would not know the acquisition cost of that drug or of substitutable drugs (generally generics).

It was hoped that by making the acquisition cost/price of drugs publicly available, drug prices would decline because of one or more of three dynamics:

• By having more information, consumers (perhaps within the aid of health care professionals such as doctors and pharmacists) would be able to pick the cheaper of several interchangeable alternatives;
• Publicizing “high” or “unfair” prices could create public pressure or a public backlash, which would compel the manufacturer or distributor to reduce prices; or
• Finally, making acquisitions costs and other price related information publicly available could increasing the negotiating power of government or commercial drug purchasers.

In 2018, the Trump Administration acted to effectuate this policy approach when it started the process to mandate such disclosure by rule.

The Rule Itself

As one part of an overall program to reduce drug prices, HHS issued a rule that mandated the disclosure in television ads of the Wholesale Acquisition Cost (WAC) of many prescription drugs. The final rule was promulgated over the objection of a number of stakeholders, primarily drug companies and related entities. [7]

While the objectors strongly factually questioned whether the mandated disclosures would actually reduce drug prices,[8] the objectors also filed suit against HHS. In this lawsuit, they raised a number of legal issues—including First Amendment claims, lack of statutory authority to promulgate such a rule, and numerous issues with the relevance, accuracy, or value of the information being disclosed.

In essence, this rule mandated that direct to consumer (DTC) advertisements for drugs and biologics[9] include in the advertisement the WAC or list price of that drug.[10] The rule modified certain provisions of federal health care programs (primarily Medicare Parts B and D as well as certain Medicaid provisions). While the rule technically only applied to drugs sold under such government payment programs, it was expected that private purchasers would benefit from this information as well.

Obviously, any administrative agency must have statutory authority before it can issue any rule or regulation. In this situation, HHS asserted that it had the statutory authority to issue this rule based on two statutory grants of authority. Specifically, HHS stated:

We proposed to use our authority under sections 1102 [42 U.S.C. §1302] and 1871 [42 U.S.C. §1395hh] of the Social Security Act to require manufacturers to disclose their list prices in DTC television advertisements.[11]

Once the rule was finalized in 2019, litigation immediately followed. The plaintiffs, among other arguments, asserted that the rule violated their First Amendment rights and also was issued without statutory authority.

In July 2019, the District Court stayed the rule, ruled that HHS did not have the statutory authority to issue this rule, and vacated the rule. The District Court did not reach the constitutional question.[12]

The government appealed, and in June 2020, the Court of Appeals affirmed the District Court.

Key Issues

Conceptually, the case raises two key legal issues.

First, the plaintiffs raised fascinating First Amendment issues. The plaintiffs argued that the rule unconstitutionally forced the drug companies to make speech that the companies did not desire to make.[13] Second, the plaintiffs asserted that HHS did not have the statutory authority to issue this rule. More specifically, did HHS have the authority to issue this rule under either §1302 or §1395hh?

Remember, courts generally avoid reaching constitutional questions if there is some other basis, such as a statutory question, that resolves the case. In this case, the assessment of the statutory basis for the rule (or, in this case, the lack thereof) resolved the case and so the constitutional issues were not addressed at either the district court or appellate court level (and will not be further discussed here).[14]

To start, it is “black letter law” that an administrative agency must have statutory authority before it can legally issue any rule or regulation. As the appellate court stated: “[A]n agency . . . has no power to act . . . unless and until Congress confers power upon it.”[15]

As set forth in the rule itself, HHS relied on §1302 and §1395hh as its authority to issue this rule. Both provisions, interestingly, deal with the “administration” of certain federal health care beneficiary programs. Neither specifically addresses drug prices or information disclosures.

Section 1302(a), in relevant part, gives the Secretary the power 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.”[16]

Section1395hh(a)(1) provides somewhat similar power to HHS. It states: “[The] Secretary shall prescribe such regulations as may be necessary to carry out the administration of the [Medicare] insurance programs.”[17]

The key in both statutory provisions is that the power has been delegated by Congress to HHS to create rules and regulations for the “administration” of the responsibilities of the Secretary of HHS. So, the clear question that faced the appellate court is whether mandating the disclosure of WAC information is within this grant of authority to “administer” these federal beneficiary programs.

Obviously, the plaintiffs said “no” and HHS said “yes.”

The Court of Appeals agreed with the plaintiffs and held that these general grants of authority to “administer” these programs did not include the power to mandate the disclosure of WAC or list prices. As such, the rule was invalid and the court did not need to reach the constitutional question.

Analysis

To begin, the case involves an agency’s interpretation of its authorizing statute and thus triggers a Chevron discussion. The Court started by discussing whether the rule in question falls under either Chevron Step One (has the legislature directly spoken to the issue) or under Chevron Step Two (if the statute is ambiguous, the Court will uphold HHS’ construction of the statute if it is a “reasonable interpretation”).[18]

The Court found that there was not a reasonable basis for HHS’ interpretation of these two provisions. In reaching this result, the Court set forth four reasons why the rule “strays far off the path of administration.”[19]

First, neither the WAC nor the list price bears any meaningful relationship to the actual price that either the government or beneficiaries pay for drugs. In fact, the government could not articulate a rational connection between the WAC and prices paid by beneficiaries. The government even stated at oral argument that the WAC is “a price that’s rarely paid.”[20] The Court further pointed out that no state has adopted the WAC as the applicable price. Rather, actual prices paid are based upon a slew of other factors including co-pay levels, varying discounts, average sales prices, and negotiated prices. As such, the Court could not find a reasonable basis for agreeing with HHS that the “administration” of these health care programs is advanced by this rule.

Second, the Court rejected HHS’ argument that the there is a connection between the “administration” of these health programs and this mandated disclosure of the WAC as a means to inform consumer decisions. Because of the at best attenuated relationship between the WAC and what consumers pay, such information will not inform such decisions and may, in fact, further confuse consumers. Again, no connection to the administration of the programs at issue.

Third, the disclosure rule is aimed at all consumers, not just Medicare or Medicaid beneficiaries. This fact further distances this rule from the actual administration of these programs. Its breadth was too wide.

Finally, the breadth and impact of this rule negates the argument that the rule is administrative. The Court reiterated that courts should not lightly assume some congressional delegation of power to make major economic, policy, and political decisions without some explicit statement of congressional intent.[21] In doing so, the Court cited the Supreme Court’s statement in Utility Air Regulatory Grp. v. EPA: “When an agency claims to discover in a long-extant statute an unheralded power to regulate ‘a significant portion of the American economy,’ we typically greet its announcement with a measure of skepticism.” [22] There is a significant difference between major policy decisions and “administering” a government program.

HHS’ expansive reading of what could be include within the “administration” of these programs would, in the Court’s view, give HHS almost unbridled power and would be a “staggering” delegation of power.

In the end, the Court viewed “administration” as applying to the “practical management and direction of” the various programs within HHS—not major policy initiatives.[23] This rule strays far from the standard concept of “administration” of a program being the processes by which the program works and not the substantive policies of the program. HHS could not bridge the chasm between what could be legitimately viewed as administrative processes and this highly substantive rule.

Impact

This decision has two key impacts and leaves open a serious question for later cases.

First, without a more explicit delegation of authority from Congress, HHS does not have the tool of mandating disclosure of certain price or cost information in direct to consumer ads. Rather, HHS needs to find other tools to address drug pricing or needs to have Congress pass some explicit authorizing statute.

Second, and more broadly, this decision reminds all stakeholders that there are limits to an administrative agency’s authority. Among other limitations, the agency must have statutory authority before enacting new rules—particularly those with major social, economic, policy, or political impacts. As FDA issues new programs, rules, or policies, the question must always be asked as to whether such actions are within powers granted by Congress to FDA. Courts will not “rubber stamp” agency assertions of authority.

Other events such as HHS’ recent LDT announcement and the HHS announcement that all new rules require the explicit approval of the Secretary[24] may further build on the requirements for and limits on agency actions.

Finally, the Court did not address the First Amendment issues raised by the plaintiffs as the Court was able to resolve this case without addressing these questions. The complex issues remain open for another day, another case, and potentially another court.

* Mr. Hall serves as a Professor of Practice at the University of Minnesota Law School. He is also a Principal with Leavitt Partners, a health care strategy and consulting firm, and is CEO of MR 3 Medical, LLC, a small startup medical device company.

[1]    Merck et al. v. U.S. Dep’t of Health & Human Servs., 962 F.3d 531 (D.C. Cir. 2020).

[2]    Rescission of Guidances and Other Informal Issuances Concerning Premarket Review of Laboratory Developed Tests, U.S. Dep’t Health & Human Servs. (Sept. 1, 2020), https://www.hhs.gov/coronavirus/testing/recission-guidances-informal-issuances-premarket-review-lab-tests/index.html.

[3]    We leave to others the debate as to whether drug prices are “too high,” whether drug pricing is morally suspect, and the best policies to address drug pricing.

[4]    See generally 21 U.S.C. §355(j).

[5]    FTC v. Actavis, Inc., 570 U.S. 136 (2013).

[6]    U.S. Dep’t Health & Human Servs., Importation of Prescription Drugs (2020), https://www.hhs.gov/sites/default/files/importation-final-rule.pdf?utm_medium=email&utm_source=govdelivery.

[7]    Regulation to Require Drug Pricing Transparency, 84 Fed. Reg. 20,732 (May 10, 2019) (to be codified at 42 C.F.R. pt. 403). The proposed rule was published on October 18, 2018 at 83 Fed. Reg. 52,789. For our purposes, the rule was finalized in essentially the same form as the proposed rule.

[8]    The Court did not directly address whether the mandated disclosures would result in lower drug costs but did focus on the differences between the WAC or list price and what consumers actually paid for drugs.

[9]    While there are, of course, definitional differences between drugs and biologics, for simplicity purposes, this paper will refer to both simply as drugs.

[10]  The final rule includes some exceptions to this disclosure requirement, a standard length of treatment for price purposes, some definitions, and the precise language that was to be used for the disclosure. While interesting, these details are not relevant to the legal issues being discussed herein.

[11]  Regulation to Require Drug Pricing Transparency, 84 Fed. Reg. at 20735.

[12]  See Merck & Co., et al. v. U.S. Dep’t Health & Human Servs., 385 F. Supp. 3d 81 (D.D.C. 2019).

[13]  The “Forced Speech” doctrine includes foundational cases such as Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio, 471 U.S. 626 (1985).

[14]  Of course, had the district court or appellate court determined that HHS had the statutory authority to issue the rule, the courts may have had to address the constitutional issues.

[15]  Louisiana Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 374 (1986).

[16]  42 U.S.C. §1302(a).

[17]  42 U.S.C. §1395hh.

[18]  Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 468 U.S. 837 (1984).

[19]  Merck et al. v. U.S. Dep’t of Health & Human Servs., 962 F.3d 531, 538 (D.C. Cir. 2020).

[20]  Id. at 539.

[21]  See, e.g., FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000).

[22]  134 S. Ct. 2427, 2444 (2014).

[23]  Merck, 962 F.3d at 537.

[24]  HHS Statement on Regulatory Process, U.S. Dep’t Health & Human Servs., (Sept. 20, 2020), https://www.hhs.gov/about/news/2020/09/20/hhs-statement-on-regulatory-process.html.