Nevada’s Pharmaceutical Disclosure Law Could Cause Drug Prices to Climb Even Higher
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Nevada’s Pharmaceutical Disclosure Law Could Cause Drug Prices to Climb Even Higher

Nevada could be driving out smaller companies and reducing competition, which could lead to higher prices.

Living with diabetes can be a challenging experience. Sufferers must constantly monitor their blood sugar and insulin levels and in some cases may need to administer painful injections of insulin supplements on a routine basis. In times when insulin is unavailable or cannot be stored properly, because of power outages or other confounding factors, the disease can quickly spiral out of control. So, it’s only natural that sympathetic policymakers would want to do something to make life better for diabetics.

As with many interventions into the marketplace, however, government legislation comes with unintended consequences. The government doesn’t always account for the complexity of meeting legislative requirements nor for the diverse, fragmented nature of competitive markets wherein some firms are large and bureaucratic while others are small and far less endowed with capital.

In 2017, Nevada lawmakers delved into the regulation of diabetes medications by passing a law ostensibly intended to make transparent the costs of producing these medications relative to their selling prices. The legislation was the first of its kind in the nation and became one of the most heavily lobbied bills in Nevada history as lobbyists from large national patients’ groups, pharmaceutical manufacturers, and others arrived in Carson City to weigh in.

An original version of the bill called for imposing direct price controls on diabetes medications and would have prohibited those prices from rising faster than inflation. That bill was vetoed by then-Gov. Brian Sandoval, but many provisions were later grafted into the subsequent bill that he signed into law.

Among the requirements in the bill — drugmakers must file reports with the state detailing their production and marketing costs along with the rebates and promotions they offer. Interestingly, Sandoval indicated in his veto message that he believed parts of the original bill did not go far enough because it did not include pharmacy benefit managers (PBMs) in these reporting requirements.

PBMs are essentially middlemen who negotiate prices between drugmakers and insurance companies. Sandoval wished to include these actors in the reporting requirements, saying, “Complete transparency would shed light on every stage in the prescription drug supply process, and require all participants to share the same disclosure responsibility.”

Former Senate Majority Leader Michael Roberson, primary sponsor of the bill that was signed into law, went further, saying, “We are focused all along the supply chain from the pharmaceutical manufacturer on down to the retail pharmacist in making a serious effort to address the skyrocketing costs of diabetes drugs to patients here in Nevada.”

It seems the intent of the legislation was to shame drugmakers, PBMs and pharmacies into reducing their profit margins and reducing prescription drug prices by making their cost information public.

Prescription drugmakers countered that some of the information the law would require them to disclose included trade secrets that were protected under federal law. Therefore, disclosure of this information would constitute state-mandated forfeiture of intellectual property that would erode private property and compromise the viability of their businesses. The industry’s primary trade group filed suit against the state in federal court, challenging the constitutionality of Nevada’s law.

Then, in June 2018, the group agreed to drop the lawsuit after the state agreed, in its implementation of the new law, to prevent public disclosure of sensitive information included in the reports. However, the trade group noted that it continued “to believe that [the law] is facially unconstitutional” and that it may recommence litigation in the future if proprietary information is made public.

But, like many trade groups, the Pharmaceutical Researchers and Manufacturers of America primarily serves its largest, most deep-pocketed members. What has gotten lost in the shuffle are smaller drug manufacturers that do not have legal and accounting departments large enough to cost-effectively comply with Nevada’s complicated new disclosure laws.

Last month, Nevada assessed $17.4 million in fines on 21 manufacturers of prescription diabetes drugs for failure to timely comply with the reporting requirements. Department of Health and Human Services Director Richard Whitley said, “If you do business in our state, there are laws. You don’t get to comply with only those that you’re interested in or those that are profitable.”

But several of the companies against which fines were assessed said they didn’t even know the requirement existed, while others may not have the administrative capacity to comply.

As with many regulations that impose onerous compliance costs, the ultimate result of Nevada’s law may be to give an increased competitive advantage to large, established firms that can afford the additional costs of compliance while forcing smaller operators out of the market.

To the extent this is true, the reduction in competition could ironically lead to higher overall drug prices. The Centers for Disease Control reports that the number of Americans with diabetes has ballooned from about a half-million in 1958 to more than 23 million by 2015. So there is no forecasted reduction in demand for these products but the state’s new compliance costs could reduce supply.

It’s important that policymakers understand how heavy compliance costs can suppress dynamism and competition within an industry. The Nevada law, if not eventually overturned in federal court, could easily have the opposite effect from what was intended. Rather than leading to more transparency and lower prices, Nevada could be driving out smaller companies and reducing competition, which could lead to higher prices.

Unfortunately, in the recently concluded 2019 legislative session, Nevada lawmakers doubled down on this approach by imposing similar requirements on producers of prescription asthma medications.

If this trend does not stop or expands to other states, it’s easy to see how the pharmaceutical industry could be further consolidated to a handful of large manufacturers totally insulated from competition and innovation.

A version of this column originally appeared on The Nevada Independent.

Geoffrey Lawrence is a senior policy fellow at Reason Foundation.