19 March 2004

Pharmaceutical benefits and free trade: Trouble ahead for subsidised medicines in Australia?

Ken Harvey, La Trobe University

After concluding the Free Trade Agreement (FTA) with the United States, Trade Minister Mark Vaile said, ‘critical elements of Australian public policy have not been compromised. The Pharmaceutical Benefits Scheme (PBS), in particular the price and listing arrangements that ensure Australians access to quality, affordable medicines, remains intact’ (Vaile 2004).

Some consumer, medical, and media analysts weren’t so sanguine. The Australian Consumers Association warned that ‘The vague terms of the agreement mean that it is possible that the FTA could have a very detrimental effect on the PBS’ (Ballenden 2004). The Doctors Reform Society warned that the proposed changes to the PBS would almost certainly cause PBS costs to rise (Marr 2004). Writing in The Australian Financial Review Mark Davis asked, ‘Has the federal government pulled the wool over the eyes of the US pharmaceutical industry or the Australian public?’ (2004). And most recently, John Garnaut of The Sydney Morning Herald reported that the chief US trade negotiator told a US Senate committee that the FTA was the first step in a campaign to raise global pharmaceutical prices and that it would change the ‘distribution of prices in Australia and the relative prices of generic and patented drugs’ (Garnaut 2004).

Drug prices in the US are 160% higher than in Australia.

So why did the way Australia subsidises vital medicines become part of our free trade negotiations with the United States, and what provisions of the FTA should we be worried about?

THE PBS AND BIG PHARMA

Australia’s 55 year old Pharmaceutical Benefits Scheme is world renowned for subsidising around 600 drugs for Australian consumers. Under the scheme, low drug prices are negotiated by the combination of stringent cost-benefit (or ‘pharmacoeconomic’) analyses and the market power of a centralised buying system (see Harvey 2001; Wright 2003). The Australian system works. Drug prices in the United States are around 160 per cent higher than in Australia; drugs in Canada and Sweden cost about 50 per cent more (Productivity Commission 2001).

However, the success of the PBS does not please everyone, particularly the American pharmaceutical companies. The Pharmaceutical Research and Manufacturers of America (PhRMA) makes no secret of its dislike of Australia’s scheme, which it argues erodes intellectual property, devalues innovation, and discourages investments in new medical discoveries (PhRMA 2003). But PhRMA’s claims are not easily supported. For example, the Australian Productivity Commission (2001) has found that, comparatively, the largest price differences in Australia applied to new drugs offering few benefits over existing ones (so-called ‘me-too’ drugs). This means that genuinely innovative pharmaceuticals are priced like they are in other countries—and hardly pose a disincentive. When it comes to investment, the Department of Industry, Tourism & Resources (2004) administers a Pharmaceutical Industry Investment Program (PIIP) that rewards pharmaceutical manufacturers for undertaking research and development in Australia.

This year PhRMA will spend more than US$ 150m to influence government.

Even so, PhRMA often vigorously opposes government policies they think hurt the balance sheets of their members. In the current fiscal year July 2003–June 2004, PhRMA will apparently spend more than US $150 million to influence government—a 23 percent increase over the previous year (see Table 1).

Given this political activity, it isn’t surprising to discover that, in January 2003, PhRMA lobbied US trade negotiators to seek an Australian government commitment to ‘refrain from trade distorting, abusive, or discriminatory price controls’ which would include PBS pharmacoeconomic analysis, reference pricing, and restricted listings. Nor is it surprising that President Bush, who benefited to the tune of $14 million from the US pharmaceutical industry during his 2000 campaign, singled out changes to the PBS that would help US companies when he visited Australia last October (Colebatch 2003).

Table 1: Spending money to change policy: PhRMA’s budget initiatives (July 2003–2004)
PhRMA Initiatives	Budget (US$m)
Pharmaceutical lobbying at the federal level, (there are 625 pharmaceutical lobbyists on Capitol Hill; more than the number of Congressmen)	72.7
Lobbying at state level	48.7
Fighting price controls and protecting patent rights in foreign countries and in trade negotiations	17.5
Fighting ‘a union-driven initiative in Ohio’ which would lower drug prices for people who have no insurance to cover such costs	15.8
Lobbying the US Food and Drug Administration	4.9
Payments to research and policy organisations, ‘to build intellectual capital and generate a higher volume of messages from credible sources’ sympathetic to the industry	2.0
Funding a standing network of economists to speak against US drug price controls	1.0
Changing the Canadian health care system	1.0
TOTAL	163.6

Source: Pear (2003).

DOES THE FREE TRADE AGREEMENT THREATEN THE PBS?

We have reason to worry about the FTA. The principles of the agreement (Department of Foreign Affairs and Trade) are unbalanced because they focus entirely on the rights of manufacturers of innovative pharmaceutical products, neglecting the rights of consumers to gain access to affordable drugs. The agreement leaves out the key principle of the Doha Declaration on the Trade Related Intellectual Property Rights Agreement in Public Health: that trade agreements should be interpreted and implemented to protect public health and promote universal access to medicines (Correa 2002). And the crucial role of generic manufacturers in protecting public health (by moderating prices when patents have expired or in health emergencies) is not mentioned in the FTA.

The Free Trade Agreement allows US pharmaceutical manufacturers to ask for an independent review if the Pharmaceutical Benefits Advisory Committee (PBAC) decides not to list their drug. In briefings on the FTA, the Department of Health and Aging (DoHA) has drawn a distinction between the review mechanism proposed in the FTA and a comprehensive appeals process; DoHA argues that the proposed review process will not be able to overturn a PBAC decision. This interpretation is unsupportable. If reviews cannot result in PBAC decisions being overturned then what is the point of them? It seems inevitable that reviews of negative PBAC decisions will allow the numerous lawyers, large budgets, and formidable public relations machines of US pharmaceutical companies to wear the PBAC down. The end result will be drugs listed at higher prices than the PBAC originally thought justified by the pharmacoeconomic evidence. Ironically, while the pharmaceutical industry—and the FTA—profess the need for greater transparency in PBAC decision-making, to date the major impediment to transparency has been ‘commercial-in-confidence’ claims by the industry. The industry will still be able to make such claims under the FTA.

Australia will allow drug manufacturers to apply for PBS price adjustments.

The agreement also sets up a medicines working group ‘to further promote the agreement’s public health principles through an ongoing dialogue between the United States and Australia’ (Office of the United States Trade Representative 2004, p. 4). The group involves health officials from the United States, a country which many argue has the world’s worst (most inequitable, highest priced) pharmaceutical system. Yet neither the agreement nor this working group will consider the public health goal of equitable access. The Department of Health and Ageing argues that the working group is similar to others set up for other industries affected by the FTA. Thus, the group isn’t a policy-making body and only serves as a discussion forum. Once again, US officials appear to have a different view of the likely impact of working group than do Australian officials. It seems they believe ‘ongoing dialogue’ will lead to drug price hikes as ‘other countries in the world [read: Australia] help bear the burden of R&D’ (US Senator John Kyl cited in Garnaut 2004).

The letters exchanged between Trade Minister Vaile and US Ambassador Zoellick note that Australia will allow pharmaceutical manufacturers to apply for PBS price adjustments. The Department of Health and Ageing argues that the Pharmaceutical Benefits Pricing Tribunal (PBPT) has long provided for price adjustments and that this clause adds nothing new. If that is the case, it is unclear why this clause was specifically included in the FTA. Given that the United States is adamant that the FTA will provide higher prices abroad, why wouldn’t the United States expect this clause to instruct the PBPT to better recognise the value of innovative pharmaceuticals—by adjusting prices upwards? Ironically, there was no mention in the FTA of the need for downwards price adjustments when massive promotion result in PBS drugs being used well outside the conditions for which the PBAC judged the drug was cost-effective; a well documented tactic in recent years (Dowden 2003; Wright 2003).

The FTA also contains a provision about disseminating pharmaceutical information online. Once again, the Department of Health and Ageing is adamant that this provision contains nothing new, and only reiterates laws in both countries. However, others worry that this clause will allow ‘direct to consumer’ advertising in Australia. This advertising is legal in the United States but illegal here, and stands accused of substantially increasing the use of advertised products. These activities encourage overuse and higher health care costs (Mintzes et al. 2002). Once again, many questions about this provision remain unanswered.

Consumers and doctors are worried about the future of the PBS under a free trade regime.

Finally, although not part of the Agreement’s Annex 2-C on Pharmaceuticals, Article 17 of the FTA (Intellectual Property) proposes changes to Australian patent laws which could delay the introduction of cost-effective generic drugs. This could lead both to increased PBS costs and higher consumer prices for over-the-counter medicines. In briefings on the FTA, Phillip Davies, DoHA Deputy Secretary, said, ‘we believe that … we can implement the changes to ensure that the likelihood of the delaying the entry of generic medicines to the market is very small’. Given the potential threats outlined above, his opinion hardly encourages.

CONCLUSION

The FTA appears to mean something different to the Australian government than what it means to the Americans and their negotiators. Given this, it’s not surprising that consumer and medical groups are apprehensive about the future for pharmaceutical benefits under a free trade regime. It has been suggested that if the Australian government view is correct; namely that the FTA-PBS provisions are purely cosmetic, then the Senate should insist that these provisions be eliminated by amendment. That would reassure those worried and presumably not cause a problem with the United States, given that they also could be convinced that the FTA-PBS provisions were purely cosmetic!

Meanwhile, the Parliamentary Joint Standing Committee on Treaties has announced a public inquiry into the FTA. Written submissions close on Tuesday, 13 April with public hearings to be held at various locations around Australia from 19 April to 14 May 2004. The Committee is required to report back to Parliament by 23 June, 2004 (Southcott 2004).

REFERENCES

Ballenden, N. 2004, ACA demands Govt assurance on impact of FTA on Pharmaceutical Benefits Scheme, Australian Consumers Association Media Release, 4 March [Online], Available: http://www.choice.com.au/viewPressRelease.aspx?id=104197&catId=100202&tid=100010&p=1 [2004, March 15].

Colebatch, T. 2003, ‘Bush wants end to medicine subsidies’, 24 October, The Age, p. 3.

Correa, C. 2002, Implications of the Doha Declaration on the TRIPS Agreement and Public Health, Health Economics and Drugs EDM Series No. 12. World Health Organisation, Geneva [Online], Available: http://www.who.int/medicines/library/par/who-edm-par-2002-3/doha-implications.doc [2004, March 15].

Davis, M. 2004, ‘PBS appeals, cosmetic or not?’, The Australian Financial Review, 5 March, p. 6.

Department of Foreign Affairs and Trade 2004, ‘Australia-United States Free Trade Agreement, Annex 2-C Pharmaceuticals’, Australian Department of Foreign Affairs and Trade [Online], Available: http://www.dfat.gov.au/trade/negotiations/us_fta/text/index.html [2004, March 15].

Department of Industry, Tourism & Resources 2004, Pharmaceutical Industry Investment Program, Department of Industry, Tourism & Resources, Canberra [Online]: Available: http://www.industry.gov.au/content/sitemap.cfm?objectid=48A506B0-20E0-68D8 [2004, March 15].

Dowden, J. 2003, ‘Coax, COX and cola’ [Editorial], Medical Journal of Australia, vol. 179, pp. 397–398 [Online], Available: http://www.mja.com.au/public/issues/179_08_201003/dow10457_fm-2.html [2004, March 15].

Garnaut, J. 2004, ‘Australian drug costs will rise with FTA deal: US official’, The Sydney Morning Herald, 11 March [Online], Available: http://www.smh.com.au/text/articles/2004/03/10/1078594434762.html [2004, March 15].

Harvey, K. 2001, ‘The Pharmaceutical Benefits Scheme: history, current status and post election prognosis’, The Drawing Board: An Australian Review of Public Affairs, 2 Nov [Online], Available: http://www.econ.usyd.edu.au/drawingboard/digest/0111/harvey.html [2004, March 17].

Marr, R. 2004, Doctors warn FTA could cause PBS cost increase, Media Release, 10 March, Doctors Reform Society [Online], Available: http://www.drs.org.au/media/2004/media100304.htm [2004, March 15].

Mintzes, B., Barer, M. Kazanjian, A., Bassett, K., Evans, R. & Morgan, S. 2002, An assessment of the health system impacts of direct-to-consumer advertising of prescription medicines (DTCA): Volume 1, Executive Summary, Centre for Health Services and Policy Research, The University of British Columbia. [Online], Available: http://www.chspr.ubc.ca/hpru/pdf/dtca-v1-execsum.pdf.

Office of the United States Trade Representative 2004, Australia and U.S. complete Free Trade Agreement, Press Release 04-08, 8 February [Online], Available: http://www.ustr.gov/releases/2004/02/04-08.pdf [2004, March 17].

Pear, R. 2003, ‘Drug companies increase spending on efforts to lobby Congress and governments’, June 1, The New York Times, 1 June, p. 33.

Pharmaceutical Research and Manufacturers of America 2003, ‘PhRMA “Special 301” submission to the Office of the United States Trade Representative: Australia’, Pharmaceutical Research and Manufacturers of America [Online], Available: http://www.cptech.org/ip/health/c/australia/phrma-au-2003.html [2004, March 15].

Productivity Commission. 2001, International Pharmaceutical Price Differences: Research Report, Productivity Commission, Melbourne 2001 [Online], Available: http://www.pc.gov.au/study/pbsprices/finalreport/pbsprices.pdf [2004, March 15].

Southcott, A. 2004, Public Inquiry into the Australia-US Free Trade Agreement, Media alert 11 March, Joint Standing Committee on Treaties, Parliament House, Canberra [Online], Available: http://www.aph.gov.au/house/committee/jsct/ [2004, March 15].

Vaile, M. 2004, Free Trade Agreement with the United States, Media Release, 8 February, MVT08/2004 [Online], Available: http://www.trademinister.gov.au/releases/2004/mvt008_04.html [2004, March 15].

Wright, D. 2003, ‘Profitability and leakage under the PBS’, The Drawing Board: An Australian Review of Public Affairs, 8 Dec [Online], Available: http://www.econ.usyd.edu.au/drawingboard/digest/0312/wright.html [2004, March 17].

Ken Harvey is a Senior Lecturer in the School of Public Health at La Trobe University, a Board Member of Therapeutic Guidelines Limited and a Councillor of the Australian Consumer’s Association.

View other articles by Ken Harvey:

Securing the Future of the PBS? (Digest, 3 Jun 2002)
The Pharmaceutical Benefits Scheme (Digest, 2 Nov 2001)