In his State of the Union Address last week, President Trump renewed his commitment to “lower[ing] the cost of health care and prescription drugs” and “requir[ing] drug companies, insurance companies, and hospitals to disclose real prices to foster competition and bring costs way down.” His administration’s plan to lower pharmaceutical prices by tying them to foreign countries’ price controls has attracted significant criticism. But Trump’s plan to foster price competition by forcing drug makers to advertise the prices they charge pharmacies isn’t much better.
A federal court already struck down the administration’s initial attempt to mandate pharmaceutical price disclosure through regulation. So, in his speech, Trump challenged Congress to enact legislation that “delivers fairness and price transparency for American patients.” That revived interest in a proposal by Sens. Richard Durbin (D-IL) and Charles Grassley (R-IA) to require prescription drug ads to include “an appropriate disclosure of truthful and non-misleading pricing information.” Unfortunately, while more transparency in health care pricing would be beneficial, the price disclosure mandate Trump wants to foist on America would do nothing to help consumers and would have no effect on price competition. It’s also unconstitutional.
What’s all the fuss about?
Last spring, the Department of Health and Human Services (HHS)—through its Center for Medicare and Medicaid Services (CMS)—published a rule that would force television advertisements for prescription medicines covered under Medicare or Medicaid to disclose the products’ “wholesale acquisition cost” for a 30-day supply of the medicines or for a typical course of treatment. The ostensible justification is to increase the amount of information patients have about drug prices, arming them to be smarter, more cost-conscious shoppers, thereby forcing drug companies to compete more aggressively on price.
To be sure, one of the most frustrating flaws of the American health care marketplace is its lack of meaningful price transparency. So, efforts to increase transparency should, at least in theory, be applauded. But there’s a significant disconnect between the administration’s approach and the problem it’s trying to solve.
A full 84 percent of Americans get health insurance as an employment benefit or through Medicare and Medicaid, so they don’t see directly what health care services cost them. Even among the 6 percent of Americans who pay for their own insurance, their plans’ cost-sharing arrangements insulate most of them from the full effects of their purchasing decisions. In short, very few Americans would have an incentive to choose low-cost health care services and products, including medicines, even if pricing information were more broadly available.
Worse still, the CMS proposal doesn’t even require disclosure of the prices consumers are charged for prescription drugs. How could it? Drug makers don’t set those prices; pharmacies do. And prices consumers pay vary significantly from pharmacy to pharmacy and from one health plan to another, influenced by co-pays, deductibles, and dozens of other variables from patient to patient.
What the rule does instead is require manufacturers to disclose the price at which they sell drugs to pharmacies, hospitals, and other providers. But that isn’t information patients can act upon, so it can’t be expected to have any meaningful impact on comparative shopping behavior. On the other hand, locking drug makers into a single price for all purchasers would preclude their ability to negotiate price discounts for bulk orders or long-term contracts with insurance companies and pharmacies.
On the other hand, the mandate would raise the cost of advertising and provide a cudgel that opponents of the pharmaceutical industry could use to attack drug makers over wholesale prices perceived as being too high. HHS Secretary Alex Azar admitted as much when he defended the proposal by telling drug makers, if you’re “ashamed of your drug prices, change your drug prices. It’s that simple.” But neither of those things is a legitimate function of government. And CMS doesn’t even try to pretend they are, claiming in administrative documents and court filings that the rule is needed because “empowering consumers to make better-informed decisions will ‘increase price competition and slow the growth of federal spending on prescription drugs’.”
As soon as the final rule was published in May 2019, a group of pharmaceutical manufacturers challenged it in court, arguing that the Department of Health and Human Services had no legal authority to require drug ad price disclosures and that, even if it did, such a requirement would violate the Constitution’s free speech protections.
In July 2019, the U.S. District Court for the District of Columbia agreed that the rule exceeded the Department’s statutory authority and struck it down. (Having dispensed with the issue on statutory grounds, the judge did not address the First Amendment claims.) HHS appealed the decision, and the case is pending, but it is unlikely the D.C. Circuit Court of Appeals will reverse the lower court.
Knowing that, the president turned to Congress and asked for legislation like the Durbin-Grassley bill to give CMS authority to promulgate the rule. Doing so would be pointless, though, as decades of court precedent makes clear that neither private citizens nor businesses can be compelled to say or print things unless there is a substantial governmental interest in doing so. It’s unlikely courts will agree that shaming the pharmaceutical industry counts.
Commercial speech is afforded less constitutional protection than pure political or scientific speech. But courts agree that, for a commercial speech restriction or mandate to pass constitutional muster, the government must have a substantial interest in correcting some problem, the regulation must directly advance that governmental interest, and the regulation may be no more extensive than necessary to do so. In recent years, the U.S. Supreme Court has further indicated that strict scrutiny applies to at least some compelled commercial speech cases, making the government’s burden even greater.
In justifying the proposed rule, CMS argued it has a “substantial interest in the efficient administration of both Medicare and Medicaid programs” and needs to empower consumers to make more cost-conscious choices. Yet, even if such an interest were indeed substantial enough to justify compelling price disclosures—which is far from certain—the rule would still fail the remaining elements of the constitutional test. Because CMS wants to require drug makers to disclose wholesale prices that bear little relation to the retail prices consumers pay, the rule does not directly advance the government’s interest and is decidedly not narrowly tailored to achieve it.
In short, the wholesale price disclosure rule is bad policy because it does nothing to help consumers comparison shop, so it won’t promote price competition. It is also clearly unconstitutional. So, rather than waste its time on this bill, Congress and the president would be well advised to pursue other policies that would promote meaningful health care price transparency as well as reforms that would put more purchasing power in the hands of individual health care consumers.