The free trade agreement between Australia and the United States

BMJ 2004; 328 doi: https://doi.org/10.1136/bmj.328.7451.1271 (Published 27 May 2004) Cite this as: BMJ 2004;328:1271

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

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

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: No competing interests

23 June 2004
Kevin Outterson
Associate professor of law
West Virginia University, Morgantown, WV 26506