[Ip-health] Annex 2C Plus provisions in KoreaUS FTA Phrma Chapter

[Sean Flynn]

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More information on the Korea FTA and the pdf version of this article
can be found at
http://www.wcl.american.edu/pijip/us_korea_negotiations.cfm





"Annex 2C-plus" provisions in the Korea-US FTA Pharmaceuticals Chapter



Sean Flynn[1]

Associate Director, Program on Information Justice and Intellectual
Property

American University, Washington College of Law

sflynn@wcl.american.edu, 202-274-4157



April 6, 2007



Although the final text of the Korea-US Free Trade Agreement has not
been released, it is evident from a careful reading of USTR's summary
that many of its provisions will go far beyond the controversial
restrictions on Australia's Pharmaceutical Benefit Scheme (PBS) included
in Annex 2C of the Australia-US Free Trade Agreement.  Following the
practice of terming provisions that go beyond the minimum requirement of
TRIPS as "TRIPS-plus," this paper coins a new phrase - "Annex 2C plus" -
for provisions in the Korea agreement that go beyond Annex 2C.



This is a first draft note including preliminary analysis.  I invite
comments to sflynn@wcl.american.edu  Subsequent drafts will be posted to
www.pijip.org <http://www.pijip.org/>  as new information is released.



Annex 2C and Drug Formularies



Annex 2C was the first section of an FTA with the U.S. to attempt to
restrict the operation of public pharmaceutical reimbursement schemes
based on a drug formulary (referred to by the Republic of Korea as a
"positive list" and by U.S. states as "preferred drug lists.")  The
principle of a formulary is simple.  In order to ensure value for money
and negotiate reasonable prices with drug companies, the payer must be
able to say "no" to some extent to the drug company's offered terms of
sale.  This is normally accomplished by requiring that higher priced
drugs with equivalent therapeutic value compared to alternatives be
subject to some form of prior authorization, subject to restrictions on
subsidized use, or excluded from reimbursement entirely if the
incremental therapeutic value is not considered sufficient to justify
the price premium.



The desire of companies to have their products reimbursed in the easiest
possible manner provides an incentive for them to negotiate lower prices
to the purchaser.  Formularies can also be used to steer patients toward
generic equivalents of or therapeutic substitutes for brand name
products.  Because of their effectiveness at promoting negotiation of
lower prices, some version of a formulary for drug purchases is used by
every substantial purchaser of drugs, including private insurance
companies and corporations, U.S. and foreign governments, and nearly
every state government Medicaid program.  But the pharmaceutical
industry is becoming increasingly successful at achieving limitations on
this important and effective tool by public entities through the
operation of binding trade rules.



Annex 2C of the Australia-U.S. FTA was the result of intense
pharmaceutical industry lobbying against one of the most effective drug
formularies in the world.[2]  The Australian PBS scheme works by
requiring drugs seeking listing on the formulary to be assessed based on
evidence of the comparative effectiveness, including comparative cost
effectiveness, against the therapy most likely to be replaced in
practice.  Combined with a reference pricing system, the PBS will only
list a medicine at higher price than the comparator where it is able to
demonstrate an incremental benefit.  Where a new drug is deemed to offer
equivalent benefits to patients, the system will not list the drug at a
higher price irrespective of its patent status.



Annex 2C did not mandate that Australia provide equally simple access to
every drug without price restraint, as the pharmaceutical industry
wished.  It did, however, implement a number of procedures and normative
principles that some argue could enable them to challenge listing
decisions.  The Annex included three main sections:

(1) "Agreed Principles," expressing commitments to recognize the value
of "innovative pharmaceuticals";

(2) Transparency provision, mandating certain procedures, including
written reasons and "independent review process" for listing
recommendations; and

(3) participation in a "Medicines Working Group" to "promote discussion
and mutual understanding" of the issues raised in the Annex.



USTR's Fact Sheet on the Korea-US agreement follows the same general
pattern of Annex 2C, and therefore one can surmise what much of the
language in the final text will be.  Importantly, the Fact Sheet
includes several key changes in wording and additions to Annex 2C, i.e.
Annex 2C-plus provisions, that may further decrease the ability of Korea
to use its public drug formulary to negotiate lower prices.  These
provisions are discussed in more detail below.



Title: Pharmaceuticals and Medical Devices



Korea Fact Sheet language:     Pharmaceuticals and Medical Devices: A
Shared Commitment on Access to Innovative Medicines



Analysis:  The first notable Annex 2C-plus provision in the Korea-US is
included in the title of the section.  Where Annex 2C was titled
"Pharmaceuticals," the Korea fact sheet labels the section
"Pharmaceuticals and Medical Devices."  The inclusion of "medical
devices" is new.  Annex 2C only covered reimbursement programs for
medicines, not medical devices.  The scope of the Korea-US FTA is thus
likely to be much broader than Annex 2-C.





Agreed principles



Korea Fact Sheet language:     Agreement on common principles on
facilitating high-quality health care and continued improvements in
public health for nationals.



This provision appears similar to the principles included in the
Australia-US agreement.  It does not clearly include Annex 2C-plus
provisions.



Annex 2C included a set of "agreed principles" favorable to the branded
drug industry, including commitments to "the important role played by
innovative pharmaceutical products," the need to promote "access to
innovative pharmaceuticals through transparent, expeditious and
accountable procedures," and "the need to recognize the value of
innovative pharmaceuticals."  Similar principles, focused on branded
drugs, can be expected in the Korea FTA principles.



Much may lie in the definition of "innovative pharmaceuticals" if that
term is used in the Korea agreement.  The Australians consider an
"innovative" drug as one conferring a clinically important improvement
in patient outcome. [3] The pharmaceutical industry tends to equate
innovative with patented.  Patented drugs do not necessarily have any
additional clinical benefit - they are required by the patent system to
be novel, not clinically important.[4] Annex 2C did not define
"innovative pharmaceuticals."  It will be important to analyze the Korea
language for further detail in this area.



access to innovative products



Korea Fact Sheet language:     Commitment to increase access to
innovative products, including through insurance the fair, reasonable,
and non-discriminatory treatment for pharmaceutical products and medical
devices.



This entire provision appears to be Annex 2C-plus.  Nothing in Annex 2C
recorded a commitment to increase the use of "innovative" products.
And, as mentioned earlier, nothing in Annex 2C applied to "devices."



It is not clear what the final text language will do to "increase access
to innovative products."  The pharmaceutical industry has argued that
public systems should reimburse every product for every registered
indication.  Such a principle would obliterate the effectiveness of a
drug formulary since there would be no potential to refuse
reimbursement.  The degree to which the Korea-US FTA will damage Korea's
negotiating power through its formulary is unknown at this point.







transparency



Korea Fact Sheet language:     Commitments on transparency in the
pricing and reimbursement process for pharmaceutical products and
medical devices.



Annex 2C included a provision on " Transparency" applicable only where
"federal healthcare authorities operate or maintain procedures for
listing new pharmaceuticals or indications for reimbursement purposes."
For such programs, Annex 2C required that the system ensure decisions
within a specified period of time, disclose "procedural" rules and
guidelines used to assess a proposed listing, afford opportunities to
companies to provide comments, provide written reasons for listing
decisions, and "make available an independent review process" for the
decisions.



The restriction of the application to "federal" level reimbursement
programs is noticeably absent from the summary description of the Korea
FTA.  If this absence is carried forward in the actual agreement text,
it may be the most important Annex 2C-plus provision from the point of
view of U.S. States.



At least 40 U.S. states operate preferred drug price lists for Medicaid
and other programs.  Under FTA implementing legislation, the U.S.
government maintains the authority to sue states to preempt programs and
laws that do not comply with the FTA.[5]  U.S. states have raised
concerns with the indeterminacy of Annex 2C as applied to Medicaid
programs.[6][7]  Under Medicaid, states play a large part in paying for
and administering the drug benefit, but ultimately it is federal law
that determines which drugs are covered for reimbursement and thus could
be considered a "federal" program for Annex 2C purposes.  If the Korea
agreement is not expressly limited to federal/national level programs,
it would more directly threaten the most effective tool that states now
have in restraining medicine prices.



Improper Inducements



Korea Fact Sheet language:     Agreement to adopt and maintain measures
to prohibit improper inducements by pharmaceutical products and medical
device manufacturers and to enforce such measures.



It is not clear what this provision is indicating.  There is no similar
provision in Annex 2C, nor was one negotiated during the FTA process.
It is Annex 2C-plus, although to what effect it is difficult to
ascertain.





Medicines and Medical Devices Working Group



Korea Fact Sheet language:     Agreement to establish a Medicines and
Medical Devices Working Group that will provide for continued dialogue
between the United States and Korea on emerging health care policy
issues.



Annex 2C provided for a "Medicines Working Group" to "promote discussion
and mutual understanding of issues relating to this Annex . . . ,
including the importance of pharmaceutical research and development to
continued health outcomes."  The extension of this mandate to "Medical
Devices" is new, and therefore Annex 2C-plus.



Independent Review Body



Korea Fact Sheet language:     Agreement by Korea to establish and
maintain an independent body that reviews recommendations or
determinations regarding the pricing and reimbursement of pharmaceutical
products and medical devices.



Annex 2C provided for "an independent review process," not a "body."
The distinction could be important.  Australia has complied with Annex
2C by establishing a review process within the health system with no
authority to overturn the decision of the expert body in the PBS.  It
can only report findings on matters in dispute back to the expert body
which may then decide to reconsider a recommendation (but is not obliged
to).



The Korea language mandating creation of an "independent body" may imply
an obligation set up an additional panel of experts with authority to
overturn the decision of the initial panel of experts that decides
listing decisions.  This provision would be wasteful and may provide
opportunities for the pharmaceutical industry to engage in complex and
well-funded efforts to capture the attention and interests of the review
"body" through repetitive proceedings.



Interestingly, the language in the fact sheet only applies to Korea.
Annex 2C binds both countries.  It will therefore be interesting to
watch for whether the agreement is in fact one-sided when the language
is finally released.






________________________________

[1] Special thanks are owed to Ruth Lopert, MD, Harkness Fellow in
Public Health Care Policy at George Washington University School of
Public Health who reviewed and commented on an earlier version of this
note and whose insights are reflected herein and to Mike Palmedo for
invaluable research assistance.  All errors are my own.

[2] Dr K. Lokuge and Richard Denniss. Trading Away Our Health System?
The impact of the Australia-US Free Trade Agreement on the
Pharmaceutical Benefits Scheme.  The Australia Institute. Discussion
Paper Number 55.  May 2003.  Additionally, the US pharmaceutical
industry's grievances with the Australian Pharmaceutical Benefits Scheme
are offered in writing each year to the US Trade Representative in
annual submissions for the USTR 301 report.



[3] This note was written with considerable advice and assistance of
Ruth Lopert, MD, Harkness Fellow, George Washington University, former
Health Care Advisor to the Australian Trade Negotiation Team.

[4]  National Institute of Healthcare Management. Changing Patterns of
Pharmaceutical Innovation. May, 2002. This report examined drug
approvals in the 1990s and found that only 35% received a priority
approval from the FDA, indicating "significant therapeutic gain" over
existing treatments.

[5]  Global Trade Watch. States' Rights and International Trade. Public
Citizen. February, 2007.

[6]  Vermont General Assembly. J.R.50. Joint resolution relating to
international trade agreements and pharmaceutical drug programs.
January, 2006.

[7]  California State Senator Liz Figueroa. Letter to the US Trade
Representative. February 2005. Available online at
www.forumdemocracy.net <http://www.forumdemocracy.net/> .