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Sources knowledgeable about the U.S. negotiating position in the TPP confirm that the U.S. has now drafted a pharmaceutical chapter for the TPP negotiations. The chapter is modeled on the Korea-US (KORUS) FTA’s pharmaceutical chapter, as expected, but goes beyond it in various ways.

Objectives. The objectives of the section include a statement recognizing the ability of governments to apply appropriate standards to monitor the quality, safety and efficacy of medicines. But this language does not include recognition of governments’ need to promote the affordability of medicines.

Restrictions on reimbursement programs. The key provisions restricting the efficacy of pharmaceutical pricing programs is in a “procedural fairness” section. The section includes requirements to:

• Disclose all “methods” used to determine the amount of reimbursement;

• Give companies opportunities to comment on drug listing and reimbursement price decisions;

-Many Medicaid programs establish their preferred drug lists in open meetings, but not all of them do and not all use notice and comment rule making for the making of their lists.

• Set the amount of reimbursements based on “market derived prices” in the party’s territory.

-The KORUS agreement includes a similar requirement on market prices, but the language mandating that the market price be in the party’s territory is new.

-The territorial restriction appears to make illegal the common practice of reference pricing – the consideration of prices offered in other territories as benchmarks for local price comparisons;

• If reimbursements are not based on market derived prices within the territory, then the reimbursement price must “appropriately recognize the value of patented or generic products” in the reimbursement amount (subject to an appeal, as described below);

-This formulation appears in the KORUS agreement as well. What it means in practice is very unclear and will likely be defined in litigation with pharmaceutical companies in countries that adopt these standards through legislation.

• Give manufacturers the opportunity, before or after the reimbursement decision, to apply for an increase based on evidence of superior efficacy, safety or quality of their product;

• Give manufacturers the opportunity to receive reimbursement for “additional indications” based on information that the manufacturer provides.

-This section could be interpreted to mandate public reimbursement for off-label prescribing – that is, the prescribing of products for purposes not approved by the country’s drug registration body. In the U.S., some Medicaid programs refuse reimbursement for certain off label uses of approved products.

• Provide information to manufacturers on the basis for all listing and reimbursement decisions;

-Assumedly to set up an appeal or other litigation;

• Provide an independent appeal or review of all decisions

-e.g. on whether the reimbursement price adequately recognizes the value of a patent.

Direct Marketing. A new section not included in previous trade agreements would require countries to permit direct-to-consumer marketing over the internet. The section requires countries to allow companies to disseminate information to prescribers and the public through internet websites. This would appear to make illegal a proposal by Representative Waxman that companies not be allowed to engage in certain kinds of promotion in the first three years of a drug’s time on the market.

U.S. Carve-Outs. As has been widely reported, programs for the purchasing and reimbursement of medicines in the U.S. do not comply with most of these standards. Medicaid programs, for example, do not provide substantive appeals for decisions to list a drug on a preferred drug list. The U.S. proposal attempts to protect most U.S. programs from being effected by the proposal through a series of technical carve outs.

As in the Australia and Korea FTAs, the scope of the section applies to all programs where the listing or reimbursement price for medicines is set by the “central” level of government. The restriction of the section’s coverage to “reimbursement” decisions, rather than purchasing decisions, makes the section applicable to most foreign government programs (which generally operate like insurance through reimbursements), but exempts most U.S. federal level drug pricing programs which operate through direct purchasing (e.g. VA hospitals, GSA, DoD). The restriction of the mandates to “central” level government programs also exempts many employee reimbursement schemes and other drug programs operated by states.

The section appears facially applicable to several large and important reimbursement programs in the U.S., namely the 340b program (where prices for pharmaceuticals are set through a federal statutory formula), Medicare part B (covering reimbursements in hospitals), and Medicaid (where federal law defines coverage criteria and where prices are set in large part through a federal formula). But a footnote in the Korea FTA, which is carried forward into TPP, exempts Medicaid as being regional rather than central, even though important reimbursement decisions are made by the federal Department of Health and Human Services. The footnote in TPP has been expanded to propose exempting Medicaid and “related” programs. The definition of “related” remains to be defined. It may be an attempt to ensure that the 340b program is exempted, but it does not clearly do so.

Medicare Part B appears to be regulated by the text with no carve out. If Medicare Part D were changed to create a single federal government managed formulary, which has been proposed by some law makers and would likely result in significant cost savings, then it too would be covered by the section.

Developing Countries. The pharmaceutical chapter in TPP is very different than past chapters (Korea, Australia) in that it regulates medicine affordability programs in developing countries. The current draft does not contain special and differential treatment for developing countries. TPP would be the first trade agreement since TRIPS and the Doha Agreement on TRIPS and Public Health to impose substantive restrictions on the ability of developing countries to regulate the prices of IP-protected medicines or other goods.

Big picture. The ultimate goal of the TPP chapter, and the Korea and Australia agreements before it, appears to be to turn the negotiation of drug reimbursement rates with pharmaceutical companies into formal rule making, complete with appeals and potential litigation at the back end. The procedural hurdles would decrease the negotiating power of governments to exact price reductions through the kind of market means used by larger insurers. If widely followed in the U.S., one would predict that government programs would begin to pay higher prices than private insurers not bound by the same restrictions, rather than the lower prices that public programs are often able to receive (given their larger economies of scale).

An overriding question for those concerned about the protection of U.S. programs is how long U.S. negotiators can continue to succeed in an agenda to impose substantive restrictions on drug pricing programs by other countries, but not limit its own programs that have similar operation and effects. As Governor Shumlin noted in a recent letter to President Obama:

“[T]here is no guarantee that a TPP Pharmaceuticals chapter would contain the same carve-out (as the KORUS FTA). Even if a chapter was proposed that did include a Medicaid carve-out, state leaders believe it is inappropriate for U.S. trade policy to advance restrictions on pharmaceutical pricing programs that U.S. programs do not meet but for technical carve outs.”

The TPP chapter may be best seen as a significant step toward the pharmaceutical industry’s ultimate goal, which is a binding international agreement on drug pricing that would restrain the ability of governments to use collective purchasing power to demand prices below “market” levels.