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Nevada state seal. (David Calvert/The Nevada Independent)

Update 5-31-18 at 11:17 a.m.: Division of Public and Behavioral Health Administrator Julie Kotchevar adopted the regulation Thursday morning after a brief, 4-minute hearing. Because the Legislative Commission approved the regulation in an unusual early review two weeks ago, the regulation immediately takes effect.

Kotchevar said that the Department of Health and Human Services believes the regulations are “sufficient as written” in order to meet the July 1 deadline for manufacturers of essential diabetes drugs and pharmacy benefit managers to report certain pricing data to the state. She said that public comments submitted will be considered for future revision or clarification of the regulations.

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Neither supporters nor opponents of Nevada’s first-in-the-nation insulin pricing transparency law are happy with a regulation slated for possible adoption Thursday morning. It would create a mechanism for pharmaceutical companies to shield trade secret-protected information from the public’s eyes while still turning it over to the state in compliance with the new law.

The Culinary Health Fund, which provides health care to members of the politically powerful union and its families and championed the bill during the legislative session, is arguing that the proposed trade secret-protection mechanism in the regulation subverts the entire purpose of the law, while the pharmaceutical industry believes it shouldn’t need to provide an explanation to the state for why certain information shouldn’t be disclosed as required by the regulation. Comments from both the health fund and the drug lobby were submitted to the state earlier this month in advance of the hearing on the regulation, which will take place at 11 a.m. in Carson City.

The hearing represents the next step in a protracted debate over the implementation of Nevada’s insulin pricing transparency law, which was passed by the Legislature in 2017. The original drug pricing transparency proposal was sponsored by Democratic state Sen. Yvanna Cancela but was signed into law by Gov. Brian Sandoval as a hybrid of her bill and a second proposal from Republican state Senate Leader Michael Roberson.

The law requires both manufacturers and the third-party entities known as pharmacy benefit managers that act as the go-betweens for drug companies and insurers to disclose pricing information and profits related to the sale of essential diabetes drugs. The Department of Health and Human Services is then required to take all of that information and aggregate it into an annual report explaining why the costs of diabetes drugs increased each year.

But the pharmaceutical industry has not taken kindly to the adoption of the new law, arguing in a lawsuit filed in the U.S. District Court in September that provisions of the law are preempted by federal law and also violate the U.S. Constitution. That lawsuit largely stalled over the last few months as the regulatory process ran its course while the parties waited to see if the regulation would mollify the industry’s fears about the potential disclosure of their trade secrets, though there has been renewed activity on the case in recent days as the hearing date inched closer.

At their core, the pharmaceutical industry’s concerns expressed both in the lawsuit and its comments on the proposed regulation come down to whether the state is able to adequately protect their trade secrets — broadly, formulas, practices, processes or other information not known to others that gives a business an economic advantage — from public disclosure. On the other side, the Culinary Health Fund, which has expressed serious concerns about the rising costs of diabetes drugs for its members and is the entity likely most interested in obtaining the drug companies’ pricing data through a public records request, is worried that the regulation goes too far in protecting the information from public consumption.

The regulation spells out a process for drug manufacturers and pharmacy benefit managers to request that certain information they are required to report to the state — things like the cost of producing a drug, profits made off of it or rebates provided for the sale of the drug — be kept confidential if they believe its disclosure would constitute a misappropriation of a trade secret and also detail the explanation behind their request. Then, if the department receives a request to release that information through a public records request, department officials would make an initial determination about whether the information constitutes a trade secret and, if they determine it doesn’t, notify the manufacturer of the request and allow them 30-days to take action in court to halt the release of the information if they disagree.

In a letter to the state earlier this month, health fund attorneys argued that the proposed regulation exceeds the Department of Health and Human Services’ authority, is based on a misinterpretation of federal trade secret law and unlawfully amends Nevada’s Public Records Act — all with the ultimate effect of keeping diabetes drug pricing data from the public.

“Making this information transparent is SB 539’s entire purpose,” the lawyers wrote. “SB 539 achieves this transparency by exempting the information from trade-secret protection under Nevada law. The Legislature included this exemption in order to ensure that the information made available to the public under SB 539’s reporting requirements would be meaningful.”

Both Cancela’s original bill and the final version signed into law amended the state’s trade secret law to specifically prevent trade secret protections from applying to the drug pricing information required to be reported to the state, a provision that the pharmaceutical industry objected to at the time. During the session, Cancela also broadened some of the language in the bill to allow companies to protect proprietary information while still requiring them to provide transparency on how they set drug prices.

“The language is now broader to capture the core pieces we wanted to capture but not necessarily a ton of other details, with the intent being to protect what could be proprietary information and make sure that it is flexible enough to allow manufacturers to disclose but not put them in a position where they would black line everything and call it all proprietary information,” Cancela told The Nevada Independent in April.

The pharmaceutical industry, however, has argued both in its comments on the proposed regulation and in court filings that the federal Defend Trade Secrets Act (DTSA), signed into law by President Barack Obama in 2016, preempts the state’s trade secret law, despite the fact that the federal law contains an anti-preemption provision. (Because the federal law is still so new, it is unclear how the court will choose to handle so-called “DTSA only” trade secrets — those that are protected under federal law but not state law.)

But the health fund argued in its letter that the DTSA does not prohibit the department from “disclosing information provided to it when that course of action is lawful under — and indeed mandated by — SB539” and that Congress “made it clear that it did not intend to preempt state law when it enacted the DTSA.” 

“Because the regulations contradict SB 539’s clear mandate on the trade-secret treatment of information submitted by drug manufacturers and pharmacy benefit managers, and because such deviation from the enabling statute has no basis in federal law, the proposed regulations are beyond [the department’s] authority,” the lawyers wrote.

The health fund also opposes the fact that the regulation requires the department to look to the federal Freedom of Information Act (FOIA) to decide what constitutes a trade secret and therefore might violate the DTSA, when FOIA and DTSA use different definitions for what counts as a trade secret. Lawyers also argued that the mechanism spelled out in the regulation violates the state’s public records act by allowing the department to deny a requester information that the department has deemed not confidential.

The pharmaceutical industry, represented by the Pharmaceutical Researchers and Manufacturers of America (PhRMA), in its letter to the state praised the department and the Legislative Counsel Bureau for “crafting regulations that acknowledge the need to ensure the confidentiality of manufacturers’ trade secrets.” However, PhRMA argues that it should not have to explain why the disclosure of certain information would constitute a misappropriation of trade secrets when trade secrets are already generally declared confidential under federal law.

“The relevant question under the Nevada Public Records Act is technically not whether disclosure would constitute misappropriation, but rather simply whether the requested information constitutes a trade secret under federal law,” PhRMA’s assistant general counsel wrote in the letter.

PhRMA also argues that the explanation for why the disclosure of the information would constitute a misappropriation of a trade secret will “likely itself implicate trade secrets” and therefore that explanation should not be automatically disclosed to requestors, as is currently the case under the proposed regulation. The drug lobby has also asked that no reporting be due until April 1, 2019, instead of the upcoming July 1 deadline, saying it has not had enough time to prepare reports and expressed concern that the regulation doesn’t offer specifics about what information companies must disclose.

The state also received a third letter from the trade association representing pharmacy benefit managers, the Pharmaceutical Care Management Association, with several technical concerns about the regulation.

Typically, regulations are adopted by whatever rulemaking authority outlined in the legislation, in this case the Department of Health and Human Services, and then sent over to the Legislative Commission, a panel of lawmakers that meets in between legislative sessions, for final approval. However, because the Legislative Commission already approved the regulation during an early review earlier this month, the regulation will immediately take effect if it is approved by the department at the Thursday hearing with no changes.

If there are any changes to the regulation, it will have to go back before the Legislative Commission at its June 26 meeting for final approval.

With the July 1 reporting deadline looming, PhRMA filed a motion with the U.S. District Court last week asking the court to issue a preliminary injunction barring the department from “publishing, disseminating, or otherwise disclosing” any of the information submitted to the department that manufacturers designate as a trade secret. PhRMA also asked the court to delay any consideration of the motions for summary judgment filed by both PhRMA and the state until the final regulations are adopted.

“Manufacturers of essential diabetes drugs cannot relinquish their trade secrets to the Department and then hope that the Department may adopt regulations that prevent them from being published online or otherwise disclosed,” lawyers for PhRMA wrote in the motion. “The irreparable harm to manufacturers outweighs any potential harm to Defendants from a short delay in enforcement of the Act to allow the Department to adopt and implement final regulations protecting trade secrets.”

Attorneys for the Legislature noted in a filing to the court on Monday that even if the regulations were not adopted by the July 1 deadline, the Department for Health and Human Services will still not be able to disclose trade secrets under the federal DTSA.

“The proposed regulations will not establish any new substantive or legislative rules regarding trade secrets because [the department] does not possess any regulation-making authority that would allow it to adopt substantive or legislative rules relating to existing federal law or policy regarding trade secrets,” legislative lawyers wrote.

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