By Geoff Lawrence

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, though, government officials don’t always fully appreciate the complexity of their requirements nor the fragmented nature of competitive markets wherein some firms are large and bureaucratic while others are small and 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 would have gone further by imposing direct price controls on diabetes medications that prohibited those prices from rising faster than inflation. That bill was vetoed by former Gov. Brian Sandoval, but many provisions were later grafted into a subsequent bill that he signed into law. Among them are requirements for drugmakers to 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 the 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 finally 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 all parties was to shame drugmakers, PBMs and pharmacies into reducing their profit margins as a method of 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 of Nevada 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 “…continue[s] 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 speaks primarily for its largest, deep-pocketed members. What has gotten lost in the shuffle are those small drug manufacturers that do not have legal and accounting departments large enough to 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 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. After all, there is no forecasted reduction in demand for these products, while new compliance costs will restrain supply. To the contrary, 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.

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.

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 will be consolidated to a handful of large manufacturers totally insulated from competition and innovation.

Geoffrey Lawrence is director of drug policy at the Reason Foundation.