HIGHER DRUG PRICES
In a number of statements, government ministers have claimed that the US-Australia Free
Trade Agreement will not have the effect of increasing drug prices and will not contribute
to the long-term financial sustainability pressures on the Pharmaceutical Benefits Scheme.
A close look at the FTA indicates that this is not the most likely outcome. The text of
the Agreement is unbalanced and most of the measures increase the pricing power of US drug
companies operating in Australia. It is inconceivable, based on past practice, that they
will not make use of that new pricing power.
How much will this cost? American consumers, insurers and health programs pay two to
three times as much for many important drugs as their Australian counterparts. Because
most of the measures in the FTA apply to new drugs rather than existing ones, and because
legislation will need to be enacted, regulations changed and new procedures put in place,
there will be a substantial time-lag between the signing of the FTA and its full effect on
prices. The full effect of the FTA on the pharmaceutical market is therefore unlikely to
be felt for about five years.
By that time, however, it is plausible that the gap between US and Australian drug
prices could be cut in half. We estimate, very conservatively, that Australia’s PBS
will have to pay at least one third more for its drugs with the FTA than without it. If
the likely FTA effects are applied to 2003 figures, the extra cost to of the PBS to the
government last year would have been around $1.5 billion for the same drugs at the same
levels of use and with no increase in the health benefit to Australian patients. Similar
pressures would be felt by other buyers of prescription pharmaceuticals, particularly
hospitals.
INTELLECTUAL PROPERTY MEASURES
Under the FTA, Australia is required to go much further in extending intellectual
property rights than is required by our obligations under the existing rules of
international trade. In a substantial number of measures, the previously accepted
boundaries of the World Trade Organisation’s Trade Related Aspects of Intellectual
Property treaty have been pushed forward, greatly strengthening the power of the seller in
the pharmaceutical marketplace.
The FTA concedes to the US standards on intellectual property rights (IPRs) that it
would not have been able to obtain in the WTO or would have had to make considerable
concessions to obtain.
The FTA throws away IPRs as a bargaining tool in the WTO with respect to other
countries, most notably Europe and Japan. In other words, Japanese and European IPR owners
also benefit from the IPR chapter.
This agreement aids the US strategy of using FTAs to divide and conquer countries that
are interested in agricultural trade liberalisation. Both Cairns Group members and G-20
members are agreeing to FTAs (in the latter case the price of the FTA is departure from
the group) thereby undermining their effectiveness as collective entities in multilateral
bargaining over agriculture.
A number of other countries have rejected US trade pressure to redefine intellectual
property laws as they affect the American pharmaceutical industry. They have, instead,
sought to protect competition and their own export industries. Canada, for instance, has
legislation before its Parliament to offer generic drug companies export potential for
medicines used in HIV/AIDS. By complying with US-developed standards rather than the
accepted norms of global trade, Australia is throwing away substantial export
opportunities.
EFFECTS ON GENERIC COMPETITORS
The major trans-national originator drug makers do not compete on price. Even where
several interchangeable drugs exist in a therapeutic field, prices stay the same or rise
when alternative patented products are marketed. The only real price competition in the
pharmaceutical market comes from generics manufacturers – those companies, usually
much smaller, that make their own version of a medicine once it comes out of patent. When
generic versions of a drug become available, prices usually fall dramatically.
Measures extending the large originator companies’ rights in data protection will,
in many cases, force generics makers to repeat clinical studies that have already been
conducted. It is unlikely that ethics committees would approve such studies: to put
patients at risk to provide data that are already well known would contravene basic
international standards of human research ethics.
Other measures will also have the effect of delaying the development and approval of
generic versions of drugs. The major companies will, therefore, have a longer period free
of competition, during which they can enjoy much higher prices than they could achieve in
a competitive environment.
A recent study by the Australia Institute found these measures were likely to delay the
development of generic drugs in Australia by around three years. It estimated the cost of
this to the PBS for the five drugs examined by the study was more than $1.1 billion for
the period 2006-2009.
THE PBAC APPEALS PROCEDURE
Under the FTA, Australia has undertaken to "make available an independent review
process" by which a manufacturer can challenge PBS listing decisions made by the key
committee, the Pharmaceutical Benefits Pricing Authority.
The government has repeatedly promised that this would not be able to set aside or
overturn PBAC decisions. However, the realities of the FTA are that Australia is likely to
face very large sanctions under the dispute resolution and enforcement sections of the FTA
if it does not provide an appeals process that the US and its drug makers find acceptable.
Any process that does not have the power to reverse decisions, and which merely returns a
submission to the committee for further consideration, will not represent any advance for
the American side or the US companies. According to several statements from the industry
and the American side, an appeals process without power is not what they think they have
secured.
Such a process will seriously compromise the negotiating position of the PBAC. At
present, the committee commissions sophisticated economic evaluations of each new drug and
decides whether the price requested by the company represents fair value in terms of the
health benefits the drug is likely to provide. If the answer is no, companies must reduce
their price or find new data to justify the price they want. Often, the price comes down.
If, rather than re-submitting to the PBAC, sponsor companies could go to an alternative
forum to have the PBAC’s decision overturned or changed, the committee would find it
far more difficult to enforce price discipline on major drug makers.
DISPUTE RESOLUTION AND ENFORCEMENT
Often, when trade negotiators cannot finalise contentious points of detail, they
produce a text that is deliberately unclear on these matters and that can be sorted out
later. These "constructive ambiguities" abound in those elements of the FTA that
affect the pharmaceutical market and the PBS. These ambiguous clauses allow each side to
claim a "win" and to secure endorsement from each nation’s legislatures.
But further consultation and dispute resolution processes will be put in place to sort
these matters out later, outside of public and parliamentary scrutiny.
Two such processes are included in this FTA: a consultative Medicines Working Group,
and the overall disputes resolution processes.
The Medicines Working Group will comprise federal officials from each country.
Decisions will effectively be binding on Australia unless the draconian provisions of the
FTA’s enforcement processes are to be risked. The Australian parliament is being
asked to endorse an agreement that does not specify what will happen to key elements of
one of its central national health programs, the PBS; and that gives immense power to a
non-Australian group meeting behind closed doors, with no published agenda and no
accountability to the Australian people, parliament or press.
Matters likely to be discussed by the Medicines Working Group include the PBAC appeals
procedure, crucial technical aspects of PBAC economic evaluations, involvement of
companies in PBAC decision-making, whether the Australian government will still be able to
remove drugs from the PBS and demands about speed of listing. Most of these matters would
potentially diminish the negotiating position of the PBS in dealing with overseas drug
companies and would lead to higher drug prices.
If Australia does not comply with US demands, or does not change its laws, regulations
and processes to put into effect the FTA and the judgements of the Medicines Working
Group, the disputes resolution and enforcement processes will come into force.
These involve the establishment of committees and working groups that "seek the
advice of non-governmental persons or groups" – a measure that brings the
industry and its lobbyists directly into the processes of administering and enforcing the
FTA.
If Australia is found to be in breach, a fine can be set of up to 50 percent of the
value of the benefit Australia is calculated to have gained by its breach. As some single
drugs cost the PBS more than $100 million a year, these fines are likely to be very large
indeed. Ongoing penalties of up to $US15 million may also be imposed for each instance of
each breach.
And "benefits under the agreement" may be suspended. This means the US could
deny Australia any or all of the access achieved under the FTA to its market for any
Australian product, including primary products such as beef and lamb.
PRESSURES ON THE PBAC
As discussed above, the PBS listing process is a combination of valuation followed by
negotiation, built on objective economic and clinical evaluation of their products. The
PBS does not attempt to gain the lowest possible price: rather, it attempts to pay what it
believes, based on the evidence of clinical safety and efficacy, is fair and consistent
with what is paid for other medicines. It is a sophisticated and very successful program
that has been copied by other countries. The PBS has provided Australia with very
competitive drug prices. Local branch offices of global drug companies are under immense
power from their overseas head offices to achieve prices closer to those ruling in the US;
therefore, anything that weakens the power of the PBAC to reject unsatisfactory prices,
and to hold out for better value, will inevitably cause costs to rise and add to the
long-term problems of financial sustainability facing the PBS.
Australia’s ban on direct-to-consumer advertising of prescription medicines will
become easier for companies to circumvent. This will add to the pressure on the PBAC to
make new drugs available whatever the cost. It will also increase total cost as patients
are induced to switch to new, expensive drugs from older, cheaper ones or from no drug at
all.
Company representatives will become involved in the actual meetings of the PBAC and its
technical sub-committees, and will be able to make personal sales pitches to the meetings
deciding on the value of their products. The FTA will reinforce companies’ ability to
seek higher prices for already-listed drugs, but there will be no capacity for the PBS to
review prices downwards if (as often happens) drugs perform less well in the "real
world" of actual clinical use than they did in the original clinical trials.
The combined pressures of all these measures on the PBAC and its members will be
enormous and extraordinarily difficult to resist. The committee will effectively be under
siege: the number of interests attacking any negative decision will have multiplied both
in number and in strength. Despite its present powers under the National Health Act,
it is difficult to see how the committee will be able to continue serving the
public’s interest properly under such conditions.
