Healthy Skepticism Library item: 460

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Publication type: news

Testimony to the Ways and Means Committee, U.S. House of Representatives US-Australia Free Trade Agreement: Implications for Prescription Drug Prices in the US and Australia
2004 Jun 22

Full text:

EXECUTIVE SUMMARY
Provisions of the US-Australia Free Trade Agreement (FTA) could result in higher prescription drug prices for U.S. and Australian consumers.

The Agreement could block legislation authorizing reimportation of less expensive drugs into the U.S. New requirements for independent review of federal agency decisions about listing and pricing for drugs could lead to higher drug prices for the Medicaid program and for Veterans Administration health services, and necessitate changes to US law and current practices. The vagueness of key provisions places these important programs at risk. These concerns should be addressed, and Congress should ensure that U.S. consumers, including veterans and Medicaid beneficiaries, are adequately protected, in these areas:

1. The Agreement could block reimportation of less expensive drugs from other countries, including future legislation that would authorize such “parallel importation,” preempting Congressional debate.

2. Vulnerable populations served by Medicaid and Medicare could face higher drug prices. These programs would have to establish an undefined “independent review process” for any recommendations or determinations regarding “listing new pharmaceuticals or indications for reimbursement purposes, or for setting the amount of reimbursement for pharmaceuticals.” This could delay or alter decisions about providing drugs and establishing affordable prices. It could require changes to current U.S. law. It is unclear how this requirement would apply to private companies that administer the new Medicare Part D.

3. Veterans could face higher drug prices. Federal programs such as the Veterans Administration, and possibly state programs, would also have to provide new review processes for drug listing and pricing decisions.
Technical standards that guide drug purchasing decisions could not be “unnecessary obstacles to trade,” but these terms are not defined. These provisions are different from current practice. They can delay procurement decisions, and allow companies to pressure agencies for higher prices.

4. The many vague provisions of the Agreement will be interpreted and enforced by international dispute panels, which are not guided by or
subject to U.S. law. Government agencies that appeal the many unclear
provisions of the Agreement after it is enacted have no guarantee of prevailing. Trade panels can impose financial sanctions to achieve compliance.

5. Many Australian health professional associations oppose the FTA, and have stated that it will raise drug prices in Australia, which are currently closely controlled. The U.S. pharmaceutical industry claims that it is necessary to raise drug prices in Australia and other developed countries, to fund innovation in research, and eventually lower drug prices in the U.S. Public funding for research and development in the U.S. reflects concern for innovation, and patent laws that protect products from competition for 20 years permit drug companies to recoup their investments.

But the 15% of revenues the industry spends on research increasingly focuses on copycat drugs that present little if any additional therapeutic value, while treatments for important health conditions are not explored. Prices are unaffordable for many. Companies are obliged to respond to shareholder expectations for the highest possible profits, and the industry’s return on revenue is already among the highest in the U.S. It is unclear how higher profit levels could lead the industry to offer more affordable prices. The crisis in the industry’s complex business model will not be successfully resolved by undermining price controls abroad.

US-AUSTRALIA FREE TRADE AGREEMENT: IMPLICATIONS FOR PRESCRIPTION DRUG PRICES IN THE US AND AUSTRALIA

Provisions Related To Setting Prices For Drugs

Paragraph 17.9.4 of the Agreement could block reimportation of less expensive medicines from other countries, termed “parallel importation.”
Additional rules that extend the terms of patents are included in Chapter 17 on Intellectual Property. The Agreement grants additional rights to drug patent holders that are likely to delay the entry into market of competitive generic drugs, and delay the resulting reduction in drug prices. These include “data exclusivity,” the right not to release drug trial data to generic companies.

Annex 2-C, Pharmaceuticals, establishes rules for transparency and for independent review of decisions for government agencies that create lists of drugs and set prices for drugs, but do not directly procure them, such as Medicaid and Medicare.

Agencies that procure drugs directly, including the Veterans Administration, the Department of Defense, and the Indian Health Service, are covered by Chapter 15, Government Procurement.

1. The Agreement would block reimportation of less expensive drugs from other countries.

Chapter 17.9.4 on parallel importation could be used to block reimportation of lower priced drugs into the U.S from any country.
Reportedly other language in the Agreement prohibiting reimportation was removed earlier. However, this provision in the current the version of the Agreement posted on the U.S. Trade Representative website would have the same effect:

Each Party shall provide that the exclusive right of the patent owner to prevent importation of a patented product, or a product that results from a patented process, without the consent of the patent owner shall not be limited by the sale or distribution of that product outside its territory, at least where the patentee has placed restrictions on importation by contract or other means.

Many members of Congress and the public have expressed interest in reimportation; this Agreement would preempt a debate on the subject.
There is no provision that allows future laws passed by the U.S.
Congress to supersede this Agreement. Under particular sections and annexes, each country is allowed to identify current laws that do not conform with the Agreement and will remain exempt, and also areas where future domestic legislation can differ from the Agreement. There is no reference any chapter or its related schedules and annexes to excluding parallel importation of drugs, or to pharmaceuticals.

2. Transparency and independent review requirements for Medicare, Medicaid, and perhaps others.

Annex 2-C, Pharmaceuticals, applies transparency requirements to “federal healthcare authorities [that] operate or maintain procedures for listing new pharmaceuticals or indications for reimbursement purposes, or for setting the amount of reimbursement for pharmaceuticals, under its federal healthcare programs.” In the case of the U.S. this would apply to Medicare and Medicaid, which are both federal programs. (A claim that Medicaid is not a federal program because it is administered by states would likely be referred to an international trade dispute panel if challenged.) It would also apply to Australia’s Pharmaceutical Benefits Scheme, which determines the list of available drugs and negotiates prices.

The independent review process is not defined. It suggests a decision-making process “independent” of government authorities, that will allow the industry (referred to as “applicants”) to go beyond current adequate negotiation processes, and appeal for higher prices for more products.

The requirements are stated in Paragraph 2(a) – (f), Transparency, listed below.

(a) ensure that consideration of all formal proposals for listing are completed within a specified time;
(b) disclose procedural rules, methodologies, principles, and guidelines used to assess a proposal;
© afford applicants timely opportunities to provide comments at relevant points in the process;
(d) provide applicants with detailed written information regarding the basis for recommendations or determinations regarding the listing of new pharmaceuticals or for setting the amount of reimbursement by federal healthcare authorities;
(e) provide written information to the public regarding its recommendations or determinations, while protecting information considered to be confidential under the Party’s law; and
(f) make available an independent review process that may be invoked at the request of an applicant directly affected by a recommendation or determination.

Questions:

2a. Since international trade law and trade panels govern this Agreement, and since the independent review process is not clearly defined, how can agencies assure that they will retain the final authority to assure appropriate lists and affordable prices for their vulnerable populations?

2b. For U.S. federal health care authorities that do not currently comply with paragraphs (a) – (f) above, what legislative or regulatory change would be required for compliance?

2c. Since international trade law and trade panels govern this Agreement, how can agencies be certain regarding whether they are covered by this provision?

3. Technical specifications and independent review requirements for federal and state health care agencies that establish formularies and engage in procurement of pharmaceuticals: VA, DoD, IHS

Government programs that directly procure drugs, including the Veterans Administration and Department of Defense, are covered by requirements to establish technical standards and independent review for drug purchases in Chapter 15 on Government Procurement. Specifically, Article 15.6 states that technical specifications cannot have the “purpose or effect of creating unnecessary obstacles to trade.” (See relevant provisions in Attachment #1.)

Article 15.11 describes the two levels of independent review that government procurement bodies must make available in the case of challenges to their decisions. This goes beyond the requirements of the World Trade Organization’s Government Procurement Agreement, to which the U.S. is a party. The differences are detailed in Attachment #2 below.

A footnote in Annex 2-C states: “Pharmaceutical formulary development and management shall be considered to be an aspect of government procurement of pharmaceutical products for federal healthcare agencies that engage in government procurement. Government procurement of pharmaceutical products shall be governed by Chapter 15 (Government
Procurement) and not the provisions of this Annex.”

The second sentence of the footnote refers broadly to “Government procurement of pharmaceutical products,” and does not limit the application merely to federal agency activity. This suggests that state drug formulary programs could be subject to the Agreement.

Question 3a. Since international trade law and trade panels govern this Agreement, how can the VA and other agencies be assured that technical standards for setting formularies and prices will be considered acceptable, and do not constitute unnecessary obstacles to trade?

Question 3b. How can the VA and other agencies assure that they will retain the final authority to determine lists and prices of drugs, in the interest of assuring appropriate lists and affordable prices, and that “independent” review panels will not assume this authority?

Question 3c. What is the complete list of federal and state health care agencies in the U.S. that engage in pharmaceutical formulary development and management?

Question 3d. Of these government health care agencies, to what degree do current procurement methods differ from the provisions of Chapter 15 of the US-Australia FTA? (See Attachment #1.) What legislative and/or regulatory change(s) would be required to ensure compliance with the provisions of Chapter 15?

4. Trade agreements are interpreted by international panels which are not guided by or subject to U.S. law. Several provisions of the Agreement are ambiguous, including the definitions of the kinds of agencies covered, technical specifications, and independent review. The Government Procurement section (see above), for example, requires countries to prove that technical specifications on which they base their decisions do not have the “purpose or effect of creating unnecessary obstacles to trade.” Countries involved in trade disputes have frequently been surprised at the types of technical standards that trade dispute panels find acceptable. Government agencies that appeal these provisions in the event of a challenge, including by asserting that they are exempt, have no guarantee of prevailing.

5. The FTA is intended to lead to higher drug prices in Australia. It is not clear that this will be likely to lower drug prices in the US.

The Agreement applies the same requirements for transparency and independent review, described above, to Australia’s Pharmaceutical Benefits Scheme, including consulting with applicants (which would include pharmaceutical companies), and providing independent avenues for appealing decisions about listing and pricing drugs. It also establishes a Medicines Working Group, intended to “promote discussion and mutual understanding of issues relating to this Annex (except those issues covered in paragraph 4, including the importance of pharmaceutical research and development to continued improvement of healthcare outcomes,)” consisting of “officials of federal government agencies responsible for federal healthcare programs and other appropriate federal government officials.”

Several U.S. policymakers have stated that it is the explicit intention for this Agreement to raise drug prices in Australia. A recent submission to the Australian Senate Select Committee on the US-Australia Free Trade Agreement presented concerns that these provisions will indeed raise drug prices there. Relevant sections of this report are reproduced below in Attachment #3.

Assuring the development of beneficial new drugs, and making them available at an affordable price, are essential concerns. In the U.S., these concerns have led to substantial public contributions, in funding and other resources, for research and development, and to patent laws that protect products from competition for 20 years to allow drug companies to recoup their investments. Nevertheless, innovation increasingly focuses on copycat drugs of uncertain therapeutic value, while treatments for important health conditions are not explored.
Prices are unaffordable for many. It is among the most profitable industries in the U.S., earning a 19% return on revenue, or $72.6 billion in profits in 2002. It is unclear how higher profit levels could lead the industry to offer more affordable prices in the U.S. The industry has no track record of voluntarily reducing prices, without competition following expiration of patents, and is obliged to respond to shareholder expectations for the highest possible profits. The current complex business model for the U.S. pharmaceutical industry appears to be at a crossroads, one that will not likely be successfully navigated or credibly addressed by undermining price control systems abroad.

SUMMARY

The U.S.-Australia Free Trade Agreement contains a number of provisions related to pharmaceutical products that are likely to interfere with current efforts to achieve or maintain affordable prescription drug prices in the U.S. and in Australia. The Agreement preempts important rights of governments. Resolving international concerns about drug prices and availability will involve careful consideration of complex issues by a range of stakeholders. To the extent that these issues can be usefully addressed in trade agreements, multilateral settings are likely to be more productive than bilateral agreements. The provisions noted should be reconsidered, and should not serve as a precedent for future agreements.