Can Agencies Do That? Limits to Executive Action Regarding Drug Pricing

In this Ropes & Gray podcast, health care partners Margaux Hall and Stephanie Webster and counsel David Ault explore drug pricing reforms and limits on agency action. In the months leading up to the midterm elections, we saw a flurry of activity around drug pricing, and now, in the wake of midterms, we see heightened bipartisan interest in the topic. Listen in to hear about some of the key recent events and a discussion on the fundamental question of how far agencies can go in regulating drug pricing.

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Transcript:

Margaux Hall: Hello, everyone, and welcome to this podcast. Today, we will be discussing drug pricing reforms and limits on agency action. In the months leading up to the midterm elections, we saw a flurry of activity around drug pricing. And now, in the wake of midterms, we know that there remains increasing bipartisan interest in the topic. We also have seen high levels of agency action around drug pricing in recent months. Our panel today is going to talk about some of the key recent events, and the fundamental question of how far agencies can go in regulating drug pricing.

My name is Margaux Hall—I’m a partner in the Ropes & Gray health care group based in Washington, D.C., and I focus my practice on drug pricing and issues of market access around pharmaceuticals. I’m thrilled to be joined today by my two colleagues, also in the D.C. office, David Ault and Stephanie Webster. David brings to bear a real insider’s perspective on how agencies think about questions. He’s spent almost a decade at the Department of Health and Human Services, including serving as director of the division of financial risk within the Center for Medicare & Medicaid Innovation, also known as CMMI. Stephanie Webster is an administrative litigator who works on litigation and non-litigation matters that involve the central question of limits of agency action. Among other accomplishments, Stephanie led her team to victory before the Supreme Court in the landmark case, Allina, involving Medicare notice-and-comment rulemaking requirements. Stephanie also, earlier in her career, served within government in the office of general counsel at HHS.

I’m going to start today by briefly describing three key recent events that relate to drug pricing, and then we’re going to collectively discuss what these mean as we think about agency action in this space. First, I’ll talk about the Inflation Reduction Act and its Drug Price Negotiation Program. Second, I’ll discuss accumulators, and recent litigation challenging the lawfulness of agency policy that permits these programs. And third, I’ll discuss the recent Executive Order from President Biden, directing CMMI to test new models to lower drug pricing.

First, the Inflation Reduction Act has received significant attention in recent months, particularly its Drug Price Negotiation Program. For the first time, Medicare will have the authority to directly negotiate prices with drug manufacturers for certain high-spend Medicare drugs. Although it’s a scaled-back version of some of the earlier proposed negotiation models, this new program is aimed to drive significantly lower prices for Medicare. It will go into effect starting in 2026 for Part D covered products, and in 2028 for Part B covered products. And each year, the Centers for Medicare & Medicaid Services will select a new cohort of drugs that will become subject to a negotiated price, or what the IRA refers to as the “maximum fair price.” Although it’s referred to as a “negotiation,” this maximum fair price effectively operates as a price control—it is set at a statutory ceiling price, and it’s negotiated from there. And, in order to drive manufacturers to the negotiating table, the IRA imposes substantial excise taxes in addition to new civil monetary penalties. So if, for instance, a manufacturer refuses to negotiate, or refuses to agree to this maximum fair price, the manufacturer must pay an excise tax equal to up to 1,900% of the selected drug price for every unit sold during the non-compliant period, or it has to terminate its Medicare Part D and Medicaid direct rebate program agreement, thereby losing all the benefits of participation in those programs for its full portfolio. The contours of the IRA are to be developed through rulemaking. We already see indications that CMS is staffing up in order to work on implementation of the statute. And the statute itself has a seemingly fairly-broadly-worded provision regarding preclusion of judicial and administrative review around topics such as the determination of a unit, the selection of drugs subject to negotiation, and the determination of the maximum fair price.

The second development of note that pertains to agency action is around accumulators. The HIV+Hepatitis Policy Institute, and other patient advocacy organizations filed suit in late August in the D.C. District Court. They challenged the 2021 notice of benefit and payment parameters rule that permitted Affordable Care Act-regulated commercial plans to adopt accumulator programs. Under accumulator programs, insurers can exclude manufacturer copay assistance from patients’ deductibles and out-of-pocket maximums. In the 2021 final rule, the agency authorized insurers to determine themselves whether they would count that copay assistance towards the deductible and out-of-pocket maximum. The plaintiffs in the litigation have challenged this agency action on three grounds. First, they said it conflicts with the plain language of the Affordable Care Act, which defines cost sharing by reference to “expenditures that are required of” plan members, not by reference to who pays those amounts. Second, they argue it’s inconsistent with the agency’s own regulations that define cost sharing as “any expenditure required by or on behalf of an enrollee” for an essential health benefit. And therefore, they argue, there’s an internal inconsistency that’s unresolved within the agency’s own regulations. And third, they argue that the agency’s 2021 rulemaking was arbitrary and capricious, in violation of the Administrative Procedure Act, for various reasons. Among other reasons, they said allowing insurers to determine the definition of this text is by definition arbitrary, the same text cannot mean opposite things, the agency didn’t explain its reason for deviating from prior rules, and patients themselves have had legitimate reliance interest under the prior rule and those concerns have been unaddressed by the agency. The requested relief is to set aside the rule, and they’ve asked for a declaratory and injunctive relief.

The third development in this space relates to CMMI. On October 14, President Biden issued an Executive Order directing HHS to test new models to lower drug prices. The Executive Order language compels three steps by the secretary of HHS. First, the secretary is required to consider whether to test through the Innovation Center new health care payment and delivery models for Medicare and Medicaid that would lower drug costs and promote access to innovative therapies, including ways to lower cost-sharing, and/or support value-based payments. Second, the secretary is required to, not later than 90 days from the order (so by mid-January), submit a report to the assistant to the president for domestic policy, listing the selected models, and also specifying a plan and a timeline for testing. So, we can expect that report to be issued by mid-January, based on the terms of the Executive Order. And third, following the submission of that report, the secretary is required to take appropriate actions to test any health care payment and delivery models discussed in the report.

These are three pretty sweeping developments when it comes to drug pricing, certainly things we’re keeping close watch on here. But, Dave, I wanted to bring you in at this point and hear your perspective on how do you think about this Executive Order and how it changes the calculus for drug pricing.

David Ault: Yes—thanks, Margaux. I think the Executive Order is, more than anything, just a stamp of approval from this administration supporting the activities that are already coming out of the IRA, and really to continue to support the work the Innovation Center wants to do on drug pricing. So, historically, there have been some limited attempts in both Part B and Part D at the Innovation Center to test new ways of paying for drugs, and they haven’t been very successful. So, I think the Executive Order is really meant to be a statement to all of the stakeholders involved that this is something that this administration is going to continue to make a priority for the last two years of the administration. And so, what I mean by that, is, I think, as you said, the 90-day report that’ll be coming out, I think that there are already models in the works that are going to be announced along with that report—that would be my guess. The development of a model at the Innovation Center generally isn’t something that can happen overnight—there is a close to two-year process from the inception of an idea to implementation of a model. And so, what I’m thinking the EO is doing is, again, signaling that they’re probably far enough along in that process with some new ideas that we could expect an announcement to come that will be for programs that will start either mid-2023 or beginning of January 2024.

Margaux Hall: So, that’s a pretty close timeline actually, suggesting that would be some more changes afoot in the relatively near future. I know, Dave, we saw earlier versions of this Most Favored Nation proposal in contemplated demonstration programs. Those earlier versions looked at international reference prices as benchmarks, rather than what we ended up seeing in the Inflation Reduction Act, which looked instead at domestic and VA pricing. Now that we have the IRA, which institutes direct negotiation of drug pricing and institutes price benchmarks, does that temper the risk, in your view, of having a bolder demonstration program?

David Ault: In some ways, yes, for sure. Under the authority of the IRA, CMS, including the Innovation Center, have statutory authority to implement some of these price negotiation changes. I think that that gives some amount of cover that didn’t exist before with Most Favored Nation. And, I think that if that is also paired with the broad authority that the Innovation Center has in terms of the limits on administrative and judicial review of design and implementation of models, I think the cover is just quite broad and that the agency will probably use this as an opportunity to maybe test some things, getting out in front of certain aspects of the IRA. So, as you mentioned before, the Part B drug price or the drug negotiation components don’t go into effect until 2028, so perhaps the Innovation Center is going to want to get ahead of that and do some work in the Part B space to inform what the implementation of the IRA in Part B could look like as we get closer to 2028.

Margaux Hall: I see. The other thing that you mentioned that’s really interesting is the seemingly quite broad preclusion of administrative and judicial review provision in the CMMI authorizing statute. I know that there have been many questions circulating in recent months since the enactment of the IRA around what does it mean to preclude administrative and judicial review of certain decisions? Are there still limits, even when there is a more broadly worded statutory provision in that regard? Are there examples of demonstration programs that have been subject to legal challenge for being too broad or contravening the statute in some fundamental way?

David Ault: There have. Historically, the majority of models that have been shut down or killed before or during implementation are not based on judicial review, but based on political or pressure out in the media sphere. We had that with the prior Part B drug program during the Obama Administration that never went live because of blowback from industry and from certain various stakeholders. Most recently we do have Most Favored Nation, the first real legal challenge to the Innovation Center’s authority. I think that that was a wake-up call to the Innovation Center, that there actually may start to be some organizations that are going to challenge the actions of the Innovation Center if they think they are too broad. And, what I expect that to lead to, is the Innovation Center, and CMS more broadly, to really focus on implementing a lot of these new models or programs through rulemaking. So, the Innovation Center has some models which they have rolled out through rulemaking, and some which they just do through direct contracts with the participants in the models. I think that in this space, we’re almost certain to see rulemaking to give them additional cover on that front, particularly because I think that to successfully implement models in this space, they will need to be mandatory. And as history has shown, mandatory models are not going to get off the ground without rulemaking—notice-and-comment rulemaking.

Margaux Hall: So, that leads to key questions for you, Stephanie. You tend to enter the scene when things go wrong or when individuals are working to better understand the contours of agency action and what is permissible. One of the most pivotal cases illuminating the bounds on agency action in the Medicare context is your case, the Allina case. Can you share your thoughts about Allina, how it’s relevant to this, and how we might think about rulemaking in the drug-pricing context?

Stephanie Webster: Happy to discuss that, Margaux. Allina has, in my view, gotten the agency’s attention, and the agency has focused on implementation of Allina and the need for notice and comment under certain circumstances. In December 2020, then HHS general counsel, Robert Charrow, actually issued an advisory opinion on the implementation of Allina. That opinion concluded that a substantive legal standard, which is what was at issue in Allina, announces new binding parameters governing any legal right or obligation relating to Medicare benefits, payments, or eligibility, and sets forth a requirement not otherwise mandated by statute or regulation. According to this memo, any effort to regulate drug pricing would need to go through notice-and-comment rulemaking. This memo is still on the books and hasn’t been rescinded by the Biden Administration, although we don’t know exactly what the Biden Administration might be doing with respect to this memo and whether we can expect some change going forward.

Margaux Hall: That leads to a question about what are the contours around notice-and-comment rulemaking? I know, oftentimes, when rules are issued, the trade associations will issue their comments, and, at times, companies might wonder, “Do I really need to engage in notice-and-comment during the rulemaking?” Can you, and then Dave as well after based on your perspective being inside the agency recently, share insights on: What is the importance of actually submitting comments when there is that notice-and-comment opportunity? How does the agency review and consider those comments? And how do those comments factor into the whole landscape of ratifying and ensuring appropriate limits around agency action?

Stephanie Webster: Sure. Under the Administrative Procedure Act, or “APA” as it’s commonly called, the agency is required to consider the comments on a proposed rule and to incorporate into the rules adopted what’s called a “concise general statement” of their basis and purpose. That statutory requirement in the APA, it doesn’t read as being that significant. But there is a lot of case law on what is required by an agency under which an agency rule or decision could be found arbitrary and capricious and therefore invalid if the agency hasn’t adequately explained its result, and responded to relevant and significant public comments. There’s also case law making very clear that an agency has to consider important factors and has to consider the connection between the facts found and the action taken, so comments on rules are very important. Of course, as you’ve mentioned, there is a provision that precludes administrative and judicial review over certain facets of decision making that’s coming out of CMMI, for example. But, nonetheless, it’s important for folks to be commenting on anything that’s of importance to them. First, because they should be heard by the policymakers, but also, to the extent that there is any prospect of a legal challenge down the road, there is a need to lay that groundwork.

Margaux Hall: And, Dave, what’s your experience in terms of how agencies actually review and make sense of the comments and respond to them?

David Ault: Yes, sure. Echoing everything that Stephanie said, in reviewing them, they really do consider every single comment. And I think it’s important to note that there are major commenters, such as the larger associations, that get flagged and really noticed and paid attention to by the agency, but also individual organizations. So, just the sheer volume of responses on a particular topic or a particular point within a regulation is noticed and actually does weigh into the rulemaking process. And beyond that, especially when we get into a situation where we don’t have as many options for administrative or judicial challenges, it’s really important to think about it in terms of how it builds a relationship with the agency. If an organization wants to go in and meet with the administrator, or a deputy administrator, or whomever on some issue, but hasn’t commented as an organization on that issue in the past, they’re not going to have as much standing with the leadership of the agency compared to if they had already done that. I think that’s really important from that standpoint as well, just to get on the record.

Margaux Hall: That’s a really helpful dimension to think about the relationship-building as well, and being a constructive part of potential refinements to rulemaking or clarifying potential limits on what agencies can do consistent with the statute. I wanted to touch on a topic that I think we each have alluded to, or picked up as a thread, but look at it in a more focused way, which is the language in the Inflation Reduction Act around the preclusion of administrative and judicial review with various determinations related to the government’s Drug Price Negotiation Program. Initially, Stephanie, can you break down the difference between preclusion of judicial and administrative review? What’s the relevant distinction there between those two?

Stephanie Webster: Of course. The preclusion of administrative review means that a party cannot challenge a determination or a decision before the agency itself, and, typically, such a challenge would be through an administrative appeals process. But, CMS has also taken the position in certain contexts that that preclusion of administrative review even prevents voluntary action by the agency to correct errors. On the other hand, the preclusion of judicial review strips the courts of their usual authority or jurisdiction to hear challenges to federal agencies’ decisions.

Margaux Hall: And so then, when you look at this language that seems somewhat broad in its scope, where does this leave parties if they’re aggrieved by an agency decision that, let’s just assume, falls within the bounds of that language, or at least, there’s a question regarding whether it falls within the bounds of that particular language—how do you look at that language? Where have courts held that preclusion is not, in fact, complete, and there are still other arguments that might be leveraged?

Stephanie Webster: Unfortunately, preclusion-of-review provisions, like the one that exists in the statute authorizing CMMI, do leave regulated parties with more limited options to challenge agency action and decisions depending on the nature of decisions. And, it’s really important to look carefully at what is covered and what’s not covered by the preclusion-of-review provision and the administrative process used to make the determination in assessing your options, for example.

Margaux Hall: In your view, does this change the prospect of agency rulemaking? I’ve heard some speculation that maybe agencies feel empowered to not go through notice-and-comment rulemaking when a statute has a preclusion provision, like the one we’ve seen in the Inflation Reduction Act. Do we think that agencies might be less inclined to undertake notice-and-comment rulemaking if they feel like they have a statutory preclusion provision that they can point to?

Stephanie Webster: My view is that it could alter the nature of the notice-and-comment rulemaking and also could have an effect on the responses by the agency to the comments. For example, the MFN rule that was issued at the tail end of the Trump Administration was adopted as an interim final, which perhaps would not have occurred otherwise. That rule was also challenged, and the parties challenging the rule were able to overcome the preclusion-in-review provision mostly because the action taken by the agency there just so clearly exceeded the agency’s statutory authority, in my view. So, there is an example of where the agency might have pushed the envelope a bit but, in doing so, got some major pushback and ultimately did not prevail as the result of the procedural irregularities.

Margaux Hall: And, Dave, any perspective from you? Do you think we’re going to see notice-and-comment rulemaking around the Inflation Reduction Act, notwithstanding the fact that there is a statutory provision that addresses preclusion?

David Ault: Yes, I do. Again, it’s just because it does give more cover from any challenges. And also, just particularly in this space, there are so many stakeholders involved between obviously the Medicare program, the Medicare trust fund, the patients, the providers, the manufacturers, PBMs—there’s so many interested parties that they want to make sure that they are covered in receiving responses. And frankly, in a situation like this, they want those comments—they’re interested in those comments, meaning when they haven’t done notice-and-comment rulemaking in this space, they’ve still put out an RFI to try to solicit input. And so, if they were going to go through that process anyway, it would benefit them to just do rulemaking instead, so that’s absolutely what I expect here.

Margaux Hall: So, it seems that we have more to come in terms of agency action in the months to come, especially as folks are thinking about implementation of the IRA. We have the Executive Order and, I think, can also anticipate the CMMI report on prospective drug pricing demonstrations by mid-January. Just to end on maybe a more optimistic note, Dave, can we think about demonstration programs in a more constructive manner? Can we think of them as friend rather than foe—and if so, what’s the best way to think about that? How can folks who want to come up with better solutions to challenges regarding affordability and access, but don’t necessarily want to always be on the receiving-end and want to propose something affirmative, how might they think about engaging with CMMI constructively?

David Ault: I’m completely biased, having come out of the Innovation Center, but I think it should be viewed as a friend as well as the programs that come out of it. What is key is not being responsive, but actually being at the front edge of their developing of policy. And the way you do that, is by going in and talking with them—coming up with ideas. I go in all the time to meet with them and present ideas on behalf of clients, because that’s what the people at the Innovation Center want to hear—that’s what they want to know—because they don’t know what’s happening on the ground. We sit at desks at the Innovation Center, coming up with policy and hoping that we are accomplishing what we intend to do, so that feedback is important and will actually influence the shape of a model. And, to get ahead of it and be proactive, means that your organization’s needs, or any speed bumps or hurdles that an organization faces, can and likely may very well be addressed in a model.

Stephanie Webster: It could be important as well for stakeholders to comment even on guidance that gets issued by the agency, because what we know from the Allina litigation (and the Court emphasized) is that the label that the agency gives a particular document or publication does not determine whether it’s a rule that needs to go through notice-and-comment or not. So, I would encourage stakeholders to comment on anything the agency does, including in the ways that Dave described.

Margaux Hall: Another really important takeaway. I think a lot of us really look for the clear solicitations for comment, and, even when we recognize that there might be some regulatory guidance that seems truly substantive and alters obligations wouldn’t always intuitively think, “I should be formally commenting on this as well.”

That’s all the time we have for today’s episode. And we want to thank all of our listeners for tuning in. For more information about our practice or other topics of interest, please visit our health care and life sciences practice pages at www.ropesgray.com. You can listen to our podcast or other RopesTalk podcasts in our podcast newsroom that’s available on our website. Or, you can subscribe wherever you listen to your podcasts, including on Apple or Spotify. If you have any questions about topics that we discussed today, I think I speak on behalf of Stephanie and Dave as well when I say, please feel free to reach out to any of us. Thanks again for listening.