Elimination of the Deductibility of Prescription Drug Advertising
Emerges as a Possible Funding Mechanism for Health Care Reform 

With the Congressional debate on health care in full swing, and deliberations on how to  pay for expansion of insurance coverage a central issue, eliminating the deductibility of direct-to-consumer (DTC) pharmaceutical advertising has emerged as a potential option for providing some of the revenue necessary to pay for legislation that is likely to cost a trillion dollars or more.  Given the importance of prescription drug advertising for magazine publishers, MPA – who earlier this year established a board level task force to deal with legislative and regulatory issues affecting DTC – has quickly mobilized to fight to retain the deductibility of this usual and customary business expense.

Reflecting the significant interest in health care reform, five Congressional Committees are currently working on versions of health care legislation.  In the House, the Ways & Means Committee, the Energy & Commerce Committee, and the Committee on Education & Labor have worked jointly to create a “draft” health care bill.  While the bill does not currently include any financing mechanisms, there has been extensive discussion by the Ways and Means Committee of potential sources of funding, including explicit mention of DTC advertising deductibility.  In recent public comments, the chairman of the powerful Committee, Congressman Charlie Rangel (D-NY), stated his interest in the deductibility of DTC advertising and claimed that “you can pick up $37 billion” by eliminating the deduction – a number that significantly inflates the actual value of the deduction.

With the House set to take up the debate on health care reform toward the middle of July, in the Senate, both the Health, Education, Labor, and Pensions Committee (HELP) and the Finance Committee are also working on legislation.  Despite the absence of Senator Ted Kennedy (D-MA), the HELP committee has continued to work on its proposed version.  At this juncture, the legislation being drafted by the Finance Committee, which is chaired by Senator Max Baucus (D-MT), appears to be the most likely to move forward with bipartisan support, despite recently missing two self imposed completion deadlines shortly before the Fourth of July recess.

As in the House, the elimination of DTC advertising deductibility has been discussed, albeit less publicly.  While a recent agreement between PhRMA (the pharmaceutical industry association), the White House, and the Finance Committee, in which PhRMA committed to “contribute” $80 billion dollars to the cost of health care reform by reducing Medicare prescription drug costs for seniors, has quieted the call for additional contributions from the pharmaceutical industry, the situation remains highly fluid.

To prevent inclusion of an elimination of DTC deductibility in the final version of any legislation, MPA has been lobbying both the Senate Finance Committee and the House Ways and Means Committee and has urged members to make grassroots contacts as well, providing members with contact information and background material.  In conjunction with other media and advertising associations participating in a coalition called The Advertising Coalition (TAC), MPA has sent letters to all the members of both Committees, explaining both the economic fallout that would result from an elimination of DTC deductibility as well as the First Amendment implications of singling out one type of advertising for discriminatory treatment in this manner.  MPA has also had direct exchanges with Committee members to reinforce the value of DTC advertising in educating consumers and heightening their health awareness and has engaged our counterparts within the pharmaceutical companies to reinforce the importance of print DTC advertising.  

As the debate continues on into the summer and beyond, MPA will continue to aggressively protect DTC advertising.  As appropriate, we will engage MPA members in grassroots efforts to bring home town voices into Congress’ deliberations.

Postal Service Financial Situation Continues to Deteriorate;
Congress Takes First Steps to Provide Financial Relief

The Postal Service’s losses continue to mount, with May bringing the worst volume results yet this year.  In May, the most recent month for which published financial results are available, volume declined by 20% from the same period last year and the Postal Service lost $677 million.  Year-to-date through May, the Postal Service has now lost $3.35 billion, compared to a loss of $166 million during the same period last year.  While the Postal Service’s recently approved “summer sale” on standard mail pieces may help increase volumes for the rest of the fiscal year – both the sale and the fiscal year end on September 30 – summer is traditionally the least profitable time of year for the Postal Service.  In its most recent financial report for the quarter ending March 31, the Postal Service projected a net loss for the entire fiscal year of over $6 billion, more than double the Postal Service’s 2008 net loss.  There is concern in the mailing community that if volumes continue to decline, the actual loss for 2009 could be even larger than $6 billion.

Another storm cloud being watched anxiously by mailers is the decline in the CPI index that determines how much the Postal Service can raise rates for market dominant products.  It is now becoming increasingly clear that inflation and thus the change in the CPI will be low or even negative this year.  This means that the Postal Service will have little or no authority to increase rates under the price cap next May.  With no ability to raise rates under the cap and with another staggering loss being projected for next year, mailers are increasingly concerned about the possibility that the Postal Service might seek an exigent rate increase by May 2010 to try to raise additional revenues.

As reported previously, MPA and other mailing industry associations have been seeking legislative relief for the Postal Service to help it through this challenging period.  On June 24th, Congress took the first step toward providing financial relief for the Postal Service from its Health Benefit Fund obligations.  Following several hearings earlier this year, the House Committee on Oversight and Government Reform’s subcommittee on the Federal Workforce, Postal Service, and the District of Columbia, passed an amended version of H.R. 22, legislation that would allow the Postal Service to pay health premiums for current retirees – a cost of about $2 billion this year – out of funds already paid into the Health Benefit Fund established in the 2006 postal reform law.  Rather than the eight years originally proposed in the bill, the amended legislation offered by Subcommittee Chairman Stephen Lynch (D-MA) provides three years of relief, starting in 2009. 

Following unanimous approval of the amended bill on a voice vote, the bill will now go to the full Committee, chaired by Congressman Edolphus Towns (D-NY), for approval.  Similar legislation has not yet been introduced in the Senate, although Senators Tom Carper (D-DE) and Susan Collins (R-ME), who were so instrumental in passage of the 2006 postal reform law, are in active discussions about a Senate version.

In the meantime, the Postal Service continues to pursue innovative pricing strategies designed to encourage volume growth.  In addition to a recently approved decrease in the rate for high-density standard mail pieces, the Postal Service is considering reducing the rate for “ride-along” pieces included in magazines.  MPA has been encouraging the Postal Service to reevaluate the pricing for lightweight ride-alongs, such as small samples included in an advertisement, as well as allowing multiple ride-alongs in an issue.  The Postal Service is considering several options, with a decision expected shortly.

Congressional Interest in Behavioral Advertising Remains High;
Advertising Associations Issue Self-Regulatory Principles

Concern about user’s online privacy in general, and the privacy implications of the use of behavioral advertising in particular, continues to run high in the House of Representatives, with a joint subcommittee hearing held in June and the possibility of legislation being introduced later this year.  At the same time, industry wide self regulation efforts continue to move forward.

On June 18th, the House Energy and Commerce subcommittee on Communications, Technology and the Internet and the Subcommittee on Commerce, Trade, and Consumer Protection held a joint hearing titled, “Behavioral Advertising:  Industry Practices and Consumers’ Expectations” to examine the potential privacy implications of behavioral advertising.

Called to testify at the hearing were executives from internet companies, including Google, Yahoo, and Facebook, as well as privacy advocates from think tanks and universities.  While few lawmakers questioned the company executives as a result of a six hour delay due to voting on the House floor, several central themes emerged. 

A number of legislators, including subcommittee Chairman Rick Boucher (D-VA) and Ranking Member Joe Barton (R-TX), support the creation of, as Congressman Boucher said “some baseline protections in the online space.” As became clearer at the hearing, proposals would likely include at a minimum “notice and choice” for the collection and use of online data, with a distinction likely between first- and third-party use of the data. 

In contrast, several Republicans, including Congressman Cliff Stearns (R-FL) raised concerns about imposing new regulations that could impede business, and suggested self regulation was a better route.  There was a similar range of views expressed by the witnesses, with support from the internet companies for self regulation and calls for a federal opt-in privacy law from the privacy advocates.

As a lead up to the hearing, the combined staffs of the respective committees held a small number of informational meetings with interested parties.  MPA was asked to participate in such a meeting, during which we expressed support for greater transparency and effective notice and choice with respect to behavioral advertising.  We also conveyed the important distinction between first party and third party activities, and contextual and behavioral advertising. 

It is expected that in July the subcommittees will hear from the Federal Trade Commission, which has been examining the issue of behavioral advertising since 2007 and which has called for enhanced industry self-regulation.  Responding to Self-Regulatory Guidelines issued by the FTC in February, on July 2nd, a group of advertising trade associations released a set of self regulatory principles, incorporating seven principles: education, transparency, consumer control, data security, material changes, sensitive data, and accountability.  Accountability programs to promote widespread adoption of the principles is expected to be developed by the Council of Better Business Bureaus and the DMA, with implementation planned for the beginning of 2010.

In response to behavioral advertising, and online privacy more broadly, moving to the forefront in Washington, MPA has convened a board designated task force to discuss legislative and regulatory developments and self-regulatory initiatives, and to fine-tune MPA’s strategy as the situation evolves.  Members of the task force may also travel to Washington to join MPA staff for Hill visits to provide on-the-ground business perspectives.  

House Passes Energy and Climate Change Legislation

By a very narrow margin, on June 26th the House passed the American Clean Energy & Security Act (H.R. 2454) by a vote of 219 to 212. The new legislation, which seeks to reduce global warming, would create a nationwide cap and trade system to limit greenhouse gas emissions. A cap and trade system sets limits on the total amount of emissions an economy can produce (the cap), and allows emitters to buy or trade permits for the right to produce emissions (the trade).  The bill’s goal is to cut greenhouse gas emissions by 17 percent by 2020 and 80 percent by 2050.

The legislation received a mixed review from the paper industry.  Several last minute changes to the legislation were favorable to the forest products industry, including an expansion of the definition of biomass to include residues or byproducts from wood, pulp or paper products facilities, thereby recognizing the paper industry’s renewable energy in the Renewable Electricity Standard, the Renewable Fuel Standard, and the cap-and-trade program.  Similarly, the offsets program was expanded to include managed forests and forest products. 

On the other hand, the paper industry was not pleased with the allowance allocation and its rate of decline, with only 15% of the allowances set aside for energy-intensive, trade exposed industries like paper.  There was also some concern about a lack of clarity in the bill with regard to recycling, a topic of interest to both the paper industry and MPA.  The printing industry also took a strong position against the bill, with the Printing Industries of America arguing that the cap and trade provisions of H.R. 2454 would reduce printing industry payrolls by 6000-7000 jobs per year and increase industry utility costs by about $1.25 billion per year.

MPA has been working with other paper-using industries in the Paper Industry Association Council to articulate a common set of principles with regard to climate change legislation.  As the Senate begins to work on its version of legislation, MPA will continue to advocate for provisions to support and increase recycling, to recognize the benefits of sustainable forestry, and to ensure the long term viability of the paper industry.

FTC to Conduct Periodic Review of Negative Option Rule

Having last conducted a periodic review of the Negative Option Rule in 1997 – at which time the Rule was renamed to “Use of Prenotification Negative Option Plans” – in May, the Federal Trade Commission announced its intention to review the Rule once again and requested public comments on the Rule’s costs, benefits, necessity, and regulatory and economic impact.  Prenotification negative option plans regulated by the Rule are plans where consumers receive periodic announcements of upcoming merchandise in which they have a set period to contact the seller and decline the item.  The Rule requires sellers to clearly and conspicuously disclose seven material terms to buyers before they subscribe to the plan, and to follow certain procedures in operating the plans. 

In the 1998 ruling that followed the 1997 review, the Commission concluded that the Rule “continued to be of value to consumers and firms, and [was] functioning well in the marketplace at minimal cost.”  The current Request for Comments poses 20 questions, many of which are similar to what was asked in 1997, including whether or not there is a continuing need for the Rule as currently promulgated, how the benefits the Rule provides to purchasers relate to the costs to the sellers, and what modifications if any should be made to the Rule to account for changes in technology. 

Of interest to magazine publishers, the FTC Notice discusses what it describes as “several other types of commonly used negative option offers”, including trial conversions and automatic renewals.  The FTC asks for comments on whether there is a basis to expand the Rule to cover these additional offers, and, if so, what requirements the Rule should include.  The FTC also mentions several alternative approaches to protect consumers from deceptive or unfair practices, including consumer education campaigns, industry guidance, and continued law enforcement actions. MPA is preparing comments on the Rule review, with particular focus on the Commission’s questions with regard to trial offers and automatic renewals.

Automatic Renewal Legislation Advances in California

Automatic renewal marketing has been an active issue on the state level as well this year, with proposals in several states, including California, North Carolina, Washington, Oregon, and Texas.  The only proposal advancing at this point is SB 340 in California, which is now before the California Assembly after passing the Senate in late April.

While an initial version of the bill introduced in February contained provisions closely modeled on an automatic renewal multi-state agreement reached several years ago, the legislation has been significantly redrafted since then.  Modifications to the bill in April eliminated the requirement for a toll-free telephone number for cancellations and a requirement that full offer terms be on the front of the offer materials.  Following the postponement of a proposed hearing in the Assembly Judiciary committee to allow the bill’s sponsor to work with interested parties to further modify the proposed bill, new legislation was introduced.  The most recent set of changes further improves the bill, by among other things, eliminating a highly prescriptive set of auto renewal disclosure requirements and expanding the ways in which businesses can allow consumers to cancel. On June 30th, the Judiciary Committee voted to approve the new measure and refer it to the Committee on Business and Professions.  Action by the full Assembly is possible following that. 

Consumer Product Safety Commission Continues Deliberations
on Books and Other Printed Materials

On June 9th, CPSC staff, including General Counsel Cheryl Falvey and Assistant Executive Director Gib Mullen, held another meeting with representatives and members of the Association of American Publishers and the Printing Industries of America to discuss the Agency’s ongoing efforts to render a determination that ordinary books and other printed materials (which would include magazines) would not be subject to the lead testing and certification requirements under section 101 of the Consumer Product Safety Improvement Act.  It appears that despite extensive submissions of data by industry over the last several months on the extremely low lead levels contained in books and printed material, and several lengthy meetings, CPSC will not be issuing a determination any time in the near future.  As was evident at the meeting, CPSC officials still have questions and concerns about certain aspects of the publishing process, including inks and binding styles such as saddle stitching.

The potential for a protracted delay in issuing a determination means that it is likely that the tracking label requirements contained in section 103 of CPSIA – which are designed to allow a consumer to find the manufacturer of a product potentially containing lead and the manufacturer to ascertain the location and date of production of the product – will go into effect on August 14th before any resolution is reached.  CPSC has stated its intention to release a guidance document on the tracking label requirements, but has not yet done so.  To comply with the tracking label requirements, publishers of books and other printed material for children twelve and younger will need to determine the “manufacturer” – a term undefined in CPSIA.  With regard to the question of whether the publisher or their printer is the manufacturer, at the June 9th  meeting, the CPSC conducted a “straw poll” vote of the attendees on that question.  With both publishers and printers in the room, the general consensus was that publishers are the manufacturer.

MPA has been providing periodic updates on the CPSC deliberations as well as disseminating CPSC produced materials on CPSIA to MPA members with children’s magazines.  We continue to monitor developments with regard to both the tracking label requirements and testing and certification requirements, and will notify members if, and when, CPSC reaches a determination.

Expiration Date Notification Legislation Passes New York Assembly

As previously reported, a bill that would extend subscription expiration date notice requirements currently imposed on magazines to newspapers and change the requirements for how expiration dates must be disclosed on subscription renewal materials for both magazines and newspapers, has passed out of the New York State Assembly after additional modifications were made in response to continued objections by MPA and others.

After initially being introduced in January, a proposed February hearing in the New York State Assembly’s Consumer Affairs and Protection Committee was postponed at the urging of MPA and the newspaper association to provide time for the involved parties, MPA principal among them, to provide input.  An amended version produced after consultation with Committee Chairwoman and bill sponsor Audrey Pheffer continued to contain a number of provisions that MPA found troubling.  In response, in April, MPA once again communicated our ongoing concerns to Chairwoman Pheffer. 

The resulting redrafted bill (A. 2642 B) addresses all of the issues MPA voiced objection to, which included font size requirements on the mailing label or in renewal pieces, the absence of an exemption for gift subscriptions, and the lack of a safe harbor for renewals violating the proposed law in error.  With our concerns addressed, MPA withdrew objection to the bill, which was subsequently passed by the Assembly on June 16, and sent to the Senate.  It now faces an uncertain future in the Senate where ongoing political divisions have put the chamber into a legislative stalemate.

Libel Tourism Bill Passes out of House Committee

Legislation aiming to mitigate the consequences of “libel tourism” passed the House Judiciary Committee on June 11th.  The bill (H.R. 2765), introduced by Representative Steve Cohen (D-TN) prohibits American courts from recognizing the verdicts of foreign libel cases brought against American defendants abroad.

The bill is one of three versions introduced in Congress this year.  Two alternative versions (H.R 1304 and S. 449), sponsored by Representative Peter King (R-NY) and Senator Arlen Specter (D-PA) respectively, have not yet seen Committee action.  Cohen’s bill differs from the other two in that it does not include a clause that would allow American defendants to counter-sue their prosecutors.

This issue is one of ongoing concern for publishers as it threatens one of the most basic American rights of Freedom of Speech. The goal for this legislation is to protect that right for publishers, writers, and members of the media abroad who at present are vulnerable to foreign legal systems with far weaker protection of speech.

Libel tourism is being addressed at the state level as well. This year, Florida passed a bill protecting state residents against defamation charges, joining New York and Illinois, who passed bills in 2008. Meanwhile, California, New Jersey, and Hawaii currently have legislation pending. 

FDA Issues Draft Guidance on Presenting Risk Information in DTC Advertising

In late May, the FDA issued a new draft guidance document on how risk information should be presented in advertising for prescription drugs and medical devices   The document – which contains “nonbinding recommendations” – covers general considerations (consistent use of language, use of signals, framing risk information, hierarchy of risk information), considerations of content (quantity and materiality and comprehensiveness), and considerations of format – which cover print and “non-print” (videos, broadcast ads, and similar audio and visual pieces).  

The section on print-specific format considerations contains recommendations for the location of risk information, font size and style, contrast, and white space.  In terms of location, the FDA says that risk information should be included in the main part of an advertisement and in the same part as the benefits and goes on to say explicitly that an ad should not present risks only on a brief summary page.  With regard to font size and style, the FDA says it might object to “substantial” differences in font size for risk information or the presentation of risk information in a difficult-to-read font size or style.  The recommendation with regard to contrast specifies that contrast between text and background should not highlight benefits more than risks.  In a similar vein with respect to use of white space, FDA says that similar spacing, headings, bullets, etc. should be used for risks and benefits.

Comments on the draft guidance are due by August 25th.  MPA will be working on its comments in consultation with the Board-level DTC advertising task force formed earlier this year to deal with legislative and regulatory issues affecting direct-to-consumer pharmaceutical advertising.

In another sign of the FDA’s increasing regulatory activity with regard to DTC prescription drug advertising, on June 22nd, the FDA put out a notice on a proposed study it is planning to evaluate various ways of communicating “quantitative efficacy” in DTC ads.  An example of a “quantitative efficacy” format the FDA will look at is a “drug facts” box, similar to the nutrition fact box found on foods.  Some research has suggested that providing quantitative information, such as the percentage of people in a clinical trial with beneficial effects or experiencing a particular side effect, enables consumers to make better choices about potential therapy.  Legislation (S. 1142) that would direct the FDA to review the effectiveness of quantitative notices, and implement them if found effective, has also been introduced by Senators Reed (D-RI) and Mikulski (D-MD).

FTC Plans Workshop on News Media In the Internet Age This Fall

Following on similarly themed Congressional hearings held in April and May by Congressman John Conyers (D-MI) and Senator John Kerry (D-MA) in House Judiciary and Senate Commerce subcommittees, The Federal Trade Commission (FTC) is planning to hold a multi-day workshop titled “Can News Media Survive the Internet Age? Competition, Consumer Protection, and First Amendment Perspectives.” Originally scheduled for September 15th,  FTC staff working on topics, speakers, and agenda for the workshop are now expecting the workshop to be held later in the year. The workshop is being held in response to changing media trends and will address both editorial content and advertising issues, including copyright protection, varying business models for print and online, and behavioral advertising, among other related issues.  The FTC has been meeting with representatives of the various industries falling under the news media umbrella, including MPA, and will be using the background information provided by us and others to set parameters for the scope of the workshop and topics to be covered.

Also of Note… 

In California, Governor Schwarzenegger has vetoed a budget package that included an “Amazon” style tax.  Similar to legislation passed in New York last year, the bill would have extended the sales tax nexus, requiring out-of-state sellers that pay California firms or residents for advertising or sales referrals (often through a website link) to collect sales tax on sales to California residents.