The United States and South Korea are finalizing a free trade agreement this week, which unbeknownst to Congress or the public, could jeopardize state programs that provide medicines for America's poor and elderly.
Since negotiations began in June 2006, the U.S. trade representative (USTR) has been doggedly attacking South Korea's public drug reimbursement formulary as a potential barrier to trade. In December, the Korean universal health insurance program began requiring drug companies to negotiate with the government to be placed on a "positive list" of preferred drugs for reimbursement. The list prefers generic and lower priced medicines, raising the ire of the brand-name pharmaceutical industry in the United States.
Wendy Cutler, the chief U.S. negotiator of US-Korea trade talks said at the time: "We don't believe this proposed change in the Korean system toward a 'positive list' will achieve the objective that Korea has stated for itself. We believe the proposed system would end up discriminating against and limiting the access of Korean patients and doctors to the most innovative drugs in the world." In response, the USTR suspended negotiations with Korea and threatened to end talks unless Korea adopted substantive and procedural changes to its reimbursement program.
This is not the first time that U.S. trade negotiators have sought concessions from Korea to raise its drug prices. In 1999, Korea was pressured into an agreement under which "new innovative drugs" were subject to "A-7 pricing," i.e., the average price of the same drug in United States, United Kingdom, Germany, France, Italy, Switzerland and Japan. Korea, however, has an average income per person of only about $16,000 per year -- less than half of the other A-7 countries. In effect, Korea pays far more for brand name drugs as a percentage of per capita income than any of the other A-7 countries. Indeed, many brand name drugs in Korea are priced higher even than the U.S. government pays for the same drugs. The life-saving leukemia drug Gleevic, for example, costs over $52,000 a year in Korea, but only $28,000 to the U.S. Veterans Administration.
The rub is that the USTR's latest demands won't just raise prices in Korea -- it may raise prices in American states. This is because Korea's drug formulary is substantially similar to the "preferred drug lists" used by at least 40 American states for Medicaid purchases. Adjusted for inflation, Medicaid spending on pharmaceuticals by state governments declined in 2005, while overall national drug spending increased at double the rate of inflation the same year, and by over five times since 1994. But the federal government can sue states to preempt laws and programs that conflict with FTAs. Thus, whatever is required of Korea in the FTA may apply to states as well.
According to documents obtained by the nonprofit Consumer Project on Technology, several officials within the State Department have been raising similar concerns. In a 2003 memo, one official wrote "FDA and HSS have been involved in analyzing the PhRMA proposals [to restrict Korea's formulary] and have found a number of their suggestions to be problematic from the standpoint of U.S. domestic practice." Another official wrote that American states "are taking the same approach the [Republic of Korea government] is taking: containing the costs by scrutinizing prescription drugs, particularly brand name drugs."
Unfortunately, no member of Congress at the March 20 Ways and Means hearing on the US-Korea FTA demanded that the USTR refrain from negotiating away American state programs that control the spiraling costs of medicines. As a result, the pharmaceutical industry may achieve in stealthy trade negotiations what it has failed to do through millions of dollars spent opposing and challenging the country's most effective drug spending control measures.