Testimony to the US House Ways & Means Committee on the Australian-US FTA

23 June 2004

The U.S.-Australia Free Trade Agreement’s Unfortunate Attack on Good Healthcare Policy

Kevin Outterson

1. The Australian Pharmaceutical Benefits Scheme

Americans are increasingly looking to “pay for value” in health care. The Australian experience with the economic evaluation of drugs in the Pharmaceutical Benefits Scheme (PBS) is the gold standard of such programs worldwide. The PBS is not government price controls, but allows pharmaceutical companies to request higher reimbursement levels if data establishes the greater cost-effectiveness of the drug. It does not appear that Australia is ‘free riding’ on American-funded innovation, since companies are given ample opportunity to seek higher reimbursement for truly innovative drugs.

The PBS has generated unwelcome attention from PhRMA and its Australian counterpart, Medicines Australia. This is unsurprising, since the PBS economic evaluations have resulted in some of the lowest patented drug prices in the OECD, much lower than even Canadian prices. After years of unsuccessful domestic attempts to derail PBAC in Australia, PhRMA and Medicines Australia turned to international trade law, namely the Australian-US Free Trade Agreement (FTA). The primary talking point on this issue is to increase transparency in the PBS (see section 5 below), but the actual goal is to increase Australian drug prices.

2. The FTA is Likely To Raise Australian Drug Prices

A debate is underway in Australia as to whether the FTA will force significant changes in PBS. While scaled back from early proposals, the FTA nonetheless requires subtle modifications to the PBS which will lead to higher prices in Australia, as detailed by the recent editorial in the British Medical Journal and recent testimony in the Australian Parliament.

Against this evidence, the Australian government claims that the FTA provisions won’t raise drug prices at all in Australia. If that is so, then why did PhRMA and Medicines Australia fight for the provision? If there is truly no impact on drug prices, then it should be removed immediately by a side letter.

A similar non-sequitur arose under the ‘non-interference’ provision PhRMA added to the Medicare Modernization Act of 2003. This law commits the US federal government to purchase US$ 600 billion in pharmaceuticals over the next decade, but prohibits the government from using its purchasing power to negotiate better prices. The Bush Administration insists that this provision won’t affect the price at all.

The US negotiated the FTA under the assumption that drug prices in Australia are too low and must be increased. Other observers might reach the opposite conclusion: that Australian prices are economically efficient and the appropriate targets of reform are excessive US prices.

3. This FTA Will Be Used As A Model To Increase Drug Prices Worldwide

Ralph Ives was the chief US negotiator of the FTA. After his success in Australia, he was promoted in April 2004 to the newly-created post of Assistant United States Trade Representative for Pharmaceutical Policy. In his new post, he will attempt to raise patented drug prices throughout the OECD through trade agreements, even though it is not clear that higher prices are necessary to pharmaceutical innovation.

4. US Consumers Will Not Benefit From Higher Australian Drug Prices and Blocked Drug Exports

There is no guarantee that US consumers will benefit from higher drug prices in Australia. Drug companies are under no obligation to lower US prices as Australian prices increase.

Press reports indicate that under the FTA, Australian negotiators ‘gave assurances’ that low-cost drug exports to the US would be blocked, despite legislation in Congress to specifically permit importation from Australia. The FTA is being used to block Congressional attempts to give Americans access to low-cost drugs.

5. Transparency

We are told that the FTA is needed to promote ‘transparency’ in the PBS process.

If transparency is the goal, let me suggest the first place to start: publicly release all of the submissions to the relevant PBS committee, the PBAC. Policymakers worldwide would benefit from seeing all of the data previously collected. If drug companies think they’ve been unfairly treated, then the debate can proceed publicly. Today, PBAC data is secret (‘commercial in-confidence’) because the drug companies demand secrecy. Release the data publicly and allow the world to see the economic evaluations. Let the world see all of the clinical data on which drugs are truly innovative, and which ones offer modest or no improvements.

Second, transparency should require drug companies to disclose all financial relationships with researchers and policymakers. The US National Institutes of Health is currently embroiled in a major controversy as we are just beginning to understand how profoundly PhRMA influences research. We need to see if the researchers touting drugs are truly independent. All of this is absent from the FTA.

Third, if transparency is needed, they why were health care NGOs excluded from the Advisory Committees to the FTA? The key committee on this issue, ISAC-3, included representatives of the pharmaceutical industry, but not groups critical of extending TRIPS Plus rules to drugs. On this issue, Australian and American representatives of drug companies negotiated with themselves, while NGOs were shut out.

Fourth, will transparency apply to the new Medicines Working Group under the FTA? Who will be appointed? Will those meetings be open to the public? Will NGOs be permitted to participate? Will past and present conflicts of interest be disclosed?

Fifth, the very concept of ‘transparency’ is laughable in a Free Trade Agreement exceeding a thousand pages in length. This is a frightfully complex agreement, with minutely negotiated provisions that are very difficult for even trade lawyers to understand.

For example, when the US stood against the world to attack unlicensed generic anti-retroviral drugs for AIDS, it was the ‘public health’ language of the WTO TRIPS agreement which rallied the world against the US and eventually led to the concessions at Doha and Cancun. In the FTA, the ‘public health’ language is missing, replaced by other language supporting ‘pharmaceutical innovation.’ In the future, when the US invokes the FTA dispute resolution mechanism, a panel of highly specialized trade experts will decide whether Australia’s efforts to reform the PBS satisfy the FTA. To these experts (several of whom may have participated in the negotiations), the absence of the TRIPS public health language and the additional provision on pharmaceutical innovation will be viewed as very significant. Australia could well lose a panel decision on such a basis, allowing a Government to plead years from now that its hands are tied by the FTA. I suspect that the FTA includes many other subtleties. It will take some time to find them all.

Finally, a call for transparency should be received with a little skepticism from an industry with incredibly complex and opaque pricing and business practices, including the practice of blocking publication of clinical studies which demonstrate problems with their products.

* * * * * *

In my home state of West Virginia, we are exploring a drug reimbursement system which includes economic evaluation. We will ask the drug companies for copies of the work already completed for the PBAC. Other states are exploring similar programs. If Australia can maintain the PBS for a few more years, it will be hailed as a model in the United States. This is both my hope and PhRMA’s fear. Undermining Australia’s PBS is an inappropriate topic for a free trade agreement.

Competing interests: None declared

Competing interests: None declared

Kevin Outterson, Associate professor of law

West Virginia University, Morgantown, WV 26506

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