Earlier this month, the D.C. Circuit struck down a controversial rule promulgated by the U.S. Department of Health and Human Services that required drug manufacturers to disclose in their television commercials the wholesale cost of many prescription drugs for which payment is available under Medicare or Medicaid. 

In affirming the decision of the district court, the D.C. Circuit held that HHS "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." 

Federal law authorizes HHS to promulgate regulations that are "necessary" to the administration of the Medicare and Medicaid programs.  Pursuant to that authority, HHS issued a rule requiring that television commercials promoting covered pharmaceuticals include a textual statement disclosing the wholesale price for a typical 30-day regimen of the product or for a typical course of treatment. 

The HHS defended its authority to issue the rule, arguing that it "will improve the efficient administration of the Medicare and Medicaid programs by improving drug price transparency and informing consumer decision-making, both of which can increase price competition and slow the growth of federal spending on prescription drugs." 

Various drug companies, as well as the Association of National Advertisers, challenged the rule on the basis that the HHS did not have authority to issue the rule, that the rule was arbitrary and capricious, and that it violated the First Amendment.  The district court sided with the advertisers, holding that the HHS exceeded its authority in issuing the rule, and the D.C. Circuit affirmed. 

The D.C. Circuit said that, for a regulation to be "necessary" to the "administration" of the Medicare and Medicaid programs, the HHS must demonstrate "an actual and discernible nexus between the rule and the conduct or management" of the programs.  The court then concluded that HHS failed to do so, for four reasons. 

First, requiring disclosure of a drug's wholesale price "bears little meaningful relationship" to the price that the government or consumers pay for the drug. 

Second, informing consumers of a price that they are unlikely to pay for a drug "unlashes the disclosure from its claimed administrative mooring."  The court said that generating consumer confusion about drug pricing is not a plausible means for administering the Medicare and Medicaid programs. 

Third, the HHS rule doesn't just target advertising to Medicare and Medicaid recipients, but instead is directed at the general public. 

Fourth, the sweeping nature and scope of the authority claimed by HHS emphasizes the unreasonableness of its claim that it is just engaged in general administration of the Medicare and Medicaid programs.  The court wrote, "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." 

The court noted that it is not holding that that HHS is necessarily prohibited from regulating drug advertising, but just that the regulation promulgated here exceeded its authority.  The court wrote, "Although the Secretary's regulatory authority is broad, it does not allow him to move the goalposts to wherever he kicks the ball."