Michael C. Dorf

Was the Deal Capping Drug Cost Savings Inappropriate?

By MICHAEL C. DORF


Wednesday, September 9, 2009

As this column goes to press, President Obama is putting the finishing touches on his speech to a joint session of Congress outlining his case for health care reform. The Presidential address follows a summer of criticisms ranging from the understandable—for example, that current reform proposals would not do enough to contain costs—to the delusional—such as the fear of government "death panels." Anyone interested in rational debate should be relieved that the President has now focused on specific reforms. Indeed, pro-reform critics have been complaining for some time that the President had been acting too passively.

Yet the speech to Congress is not the President's first high-profile involvement in the health-care reform process. Last month, the White House made headlines when it struck a deal to enlist the pharmaceutical industry in support of its reform efforts. The Pharmaceutical Research and Manufacturers of America (PhRMA) agreed that it would give $80 billion worth of discounts to patients over ten years. It further agreed to spend $150 million for advertising in support of the President's plan. In exchange, the White House agreed that savings from drug discounts would be capped at the $80 billion; the government would not use its purchasing power to negotiate deeper price cuts.

Since the outlines of the deal have been made public, doubts have been raised about its details and whether it binds Congress. Lawmakers did not sign on the dotted line, after all. Should an otherwise-acceptable plan emerge from Congress that violates the terms described above, would President Obama veto it? At this point, much remains to be seen.

Still, quite apart from the complexities of the underlying draft legislation, the PhRMA deal itself raises important issues about the role of interest groups in government. For purposes of this column, I shall assume that the elements of the deal are as described above, and explore the question whether there is anything wrong with such a deal. Many Democrats criticized the Bush Administration for its coziness with corporate lobbyists. Is the Obama/PhRMA deal different from the Bush modus operandi? Is it worse?

A Misplaced Objection: Regulated Businesses Should Not Be Involved in Lawmaking

On its face, there is something unseemly about permitting business interests that stand to gain from weak, rather than strong, regulation to participate in the process of creating that regulation. In fact, however, this happens quite commonly. Ethics laws restrict the ability of lawmakers to accept gifts and favors from lobbyists, but lobbying itself—the process by which business and other interest groups try to persuade lawmakers to their point of view—is protected First Amendment activity.

Business and other interest groups receive similar protection with respect to the executive branch. Thus, the federal Administrative Procedure Act (APA) guarantees "interested persons," including corporations, "an opportunity to participate" in the process by which binding rules are made.

Giving industry representatives a chance to make their case on the merits may be a matter of basic fairness. But the Obama/PhRMA deal went further. President Obama was not simply persuaded by PhRMA that capping drug cost savings at $80 billion is a good idea. Instead, PhRMA and the Administration apparently negotiated over just how much the industry would need to pay. That sort of bargaining is more than simply an opportunity to be heard on the merits.

Yet such bargaining is also routine. Legislation, we frequently hear, is the art of compromise. Such compromises do not simply trade off the policy preferences of various legislators: They involve the interests of the underlying groups with which various legislators are in sympathy.

Indeed, turning again to the APA, we find that Congress has established procedures for "negotiated rulemaking," in which government agency officials convene interested parties (again, including corporations) to negotiate over the rules and standards that will govern their future conduct.

Negotiations with powerful industry players are often necessary if regulation is to occur at all: Government lacks the resources or the expertise to regulate complex industries such as health care (or sub-industries such as pharmaceuticals), without some level of cooperation from the regulated industries. When industry leaders play a role in the design and implementation of the regulations governing them, we can generally expect that such "buy-in" will lead responsible industry players to cooperate with, rather than attempt to undermine, the resulting regulatory scheme.

Yet buy-in does not eliminate the need for government watchdog agencies, nor does it assure that profit-driven corporations will happily accept any regulations proposed. That is why, before striking a deal with industry, government should engage in tough, arm's-length negotiations. And perhaps the Obama deal with PhRMA was not tough enough. But then we are arguing over the particular deal that was struck, not about whether the government ought even to be able to negotiate the governing law with the targets of regulation. It ought to be, and it does, routinely.

Free Speech Implications of the PhRMA Deal

Nonetheless, one particular aspect of the PhRMA deal is troubling along a wholly different dimension: PhRMA's agreement to fund advertisements in favor of health care reform raises issues under the spirit, if not the letter, of the First Amendment.

According to published accounts, PhRMA agreed to pay $150 million for advertising to promote the Administration's reform proposal. Although that represents only a tiny fraction of the amount of money at stake in the underlying regulation, it is nevertheless a huge sum for a political advertising campaign. By comparison, in 2008, a Presidential candidate who accepted public funding would have only been permitted to spend just over $126 million for the primary and general election campaigns combined.

If PhRMA were spending the $150 million in advertising on its own, then that would be a sign that the $80 billion cap on drug discounts was to its liking—a good deal for the industry and, conversely, a not-so-good deal for taxpayers: After all, you don't voluntarily roll out a huge advertising campaign for a program you hope will fail.

But it appears that the advertising was itself part of the deal. Is that a First Amendment problem? Perhaps. According to the "unconstitutional conditions" doctrine, the government can run afoul of the Constitution by conditioning a benefit on the relinquishment of a right. For example, the government could not insist that recipients of food stamps forfeit the right to vote, even though the government could cancel the food stamps program entirely.

Likewise here, it might be said that the Obama Administration has conditioned a benefit—the $80-billion cap on drug-cost savings—on the pharmaceutical industry's giving up its right not to speak in favor of the health care reform proposal. The objection would be less clear than in my food stamps example, partly because corporations do not have exactly the same right to political speech as natural persons. That could change, however. As I discussed in an earlier column, the Supreme Court hears argument today in a case in which it specifically asked the parties to address the question whether to overturn a precedent permitting limits on corporate-funded political speech.

Still, even if the Court expands the free speech rights of corporations, it would not follow that the pharmaceutical industry could complain that its deal with the Administration imposes an unconstitutional condition. The unconstitutional conditions doctrine is notoriously difficult to apply and, in any event, the industry appears to be happy with the deal, and thus unlikely to challenge it.

Why the PhRMA Deal Does Not Involve Ordinary Government Speech

Thus, the real speech issue raised by the PhRMA deal may have less to do with the industry's right to speak, than with the public's interest in a health-care debate that is not corrupted by government propaganda.

Of course, not all government speech is "propaganda," as I am using that term. Government legitimately aims to accomplish many of its policy objectives through speech: After all, it is largely through speech that public schools educate the young. Moreover, the government also speaks through public campaigns urging Americans to eat a healthy diet, exercise, conserve water and other scarce resources, avoid alcohol when pregnant, and take any number of other measures for their own and the social good. These are all reasonable means of pursuing laudable aims. And the Supreme Court's recent case law—including the decision earlier this year in Pleasant Grove City v. Summum—make clear that government speech is even permissible when the government appears to take sides on hotly-contested questions.

Nonetheless, the Obama/PhRMA deal does not exactly fit the government-speech paradigm. Here, the government is speaking through a third party in a way that could cause public confusion. Therefore, the deal might be compared to the Bush Administration's secret payments to journalists like Armstrong Williams for touting the No Child Left Behind law.

The PhRMA deal is a bit different from the payments to journalists, however. It is not secret, and it does not appear aimed at borrowing the credibility of seemingly independent speakers: Even before the $2.3-billion fine levied on Pfizer for unethical marketing practices, the pharmaceutical industry was viewed by many as a malefactor in the health cost crisis. Thus, the Obama Administration almost certainly did not make a judgment that PhRMA was the perfect spokesperson for its message on health care.

Rather, the PhRMA deal was a way to funnel $150 million of previously private, and now public, funds into urging the public to support the President's health care initiative. Rather than extract $80.15 billion in savings from the pharmaceutical industry, the President agreed to take only $80 billion, essentially receiving a kickback of $150 million in the form of PhRMA-paid advertising. That was not illegal because the money was to be used to advance the President's policy agenda, rather than to supplement the personal fortune or campaign treasury of any candidate. Still, it was highly problematic.

To see why, imagine that the President had instead simply gone to Congress and asked for $150 million to fund an advertising campaign aimed at persuading the public to urge Congress to enact the President's health care reform proposal. Surely, the very members of Congress who currently oppose the proposal would have opposed the funding, as well.

Moreover, even if Congress had been willing to authorize the funding, the appropriation for the advertising campaign still would have been troubling. The PhRMA-funded advertisements are not public service announcements. They are not, in other words, instances of the government's pursuing its own established policy aims through speech. Rather, they are advertisements designed to influence the public debate over what policy aims should be adopted in the future. They are in that sense, propaganda aimed at achieving political outcomes, rather than speech aimed at implementing or supporting outcomes that were themselves the result of a prior political process.

Such propaganda violates a maxim of Thomas Jefferson: "to compel a man to furnish contributions of money for the propagation of opinions which he disbelieves, is sinful and tyrannical." Jefferson's view may seem odd in light of the fact that government can, for instance, use the tax revenues from pacifists to support a war, and the revenues from watchman-state libertarians to support social programs. What makes government expenditures for the propagation of certain kinds of opinions different, I would suggest, is that they use what are supposed to be the outputs of government decision-making to influence their inputs.

I admit that the line I am propounding—between traditional government speech as policy, and government-funded speech to affect policy choices—will not always be easy to discern. Government speech that results from one policy choice may affect another: For example, public education campaigns urging people not to smoke may also lead people to favor laws banning smoking in public places.

Accordingly, the distinction between permissible government speech and impermissible government propaganda may not be suitable for judicial enforcement. But if not, that is all the more reason for the President to take extra care not to cross the line.


Michael C. Dorf, a FindLaw columnist is the Robert S. Stevens Professor of Law at Cornell University. He is the author of No Litmus Test: Law Versus Politics in the Twenty-First Century and he blogs at michaeldorf.org.

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