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The Doctors Reform Society of Australia, Box 992 Gosford 2250

Phone 02 9264-9084 Fax 02 9267-4393.

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Doctors Reform Society

 

PO Box 992

Gosford NSW 2250

Tel 02 9264 9084

Fax 02 9267 4393

drs@drs.org.au

www.drs.org.au

 

 

 

 

 

 

 

Submission to the

 

Senate Committee

on

 

The Australia-United States Free Trade Agreement

(AUSFTA)

 

 

 

May 2004

 

 

 

 

 

 

 

INTRODUCTION

 

The Doctors Reform Society (DRS) is an organisation of doctors formed in 1973 to support the introduction in Australia of universal health insurance, initially Medibank, now Medicare. The DRS continues to advocate for equitable universal access to quality health care for all members of Australian society according to need and not the ability to pay. The DRS welcomes this opportunity to contribute our views to this inquiry.

 

The DRS has previously addressed health implications of economic globalisation, the General Agreement on Trade in Services (GATS) of the World Trade Organisation (WTO) and the bilateral free trade agreement (FTA) between Australia and the United States (US) in submissions (2001-2003) to the Department of Foreign Affairs and Trade (DFAT) and to the Senate Inquiry on the General Agreement on Trade in Services and the proposed Australia-US Free Trade Agreement.

 

The fundamental purpose of international trade agreements is to reduce barriers to trade. Barriers to trade in services are largely domestic regulations. The DRS strongly believes health-related services should not be negotiated in trade agreements. The DRS believes the market ideology of trade agreements threatens universal health insurance schemes like Medicare, the Pharmaceutical Benefits Scheme and public health principles. In this submission, the DRS will address specific concerns in relation to health care issues and the Australia-United States Free Trade Agreement (AUSFTA).

 

The Doctors Reform Society is concerned that public health policy has been embodied within the AUSFTA. Australian health care policy, including that for pharmaceuticals, will be linked by the AUSFTA to the nation with arguably the most inefficient and inequitable health and pharmaceutical system of developed nations.1-14 Public health principles, equity and universality will not be priorities.

 

The DRS believes benefits for Australia from the AUSFTA are doubtful and the potential cost to the community great. The predicted economic gains from an AUSFTA determined in the original study by the Centre for International Economics commissioned by the government were extremely modest, only 0.3 percent of GDP per year after 10 years and this was if all trade barriers were removed.15 Other economic studies by ACIL consultants and the Productivity Commission predicted losses.16,17 The gains in agriculture have been much less than predicted. There are doubts from several quarters on the projected gains predicted in the recent Centre for International Economics (CIE) analysis18 of the AUSFTA including trade economists, intellectual property law experts and reports from DFAT.19

 

The United States has shifted to pursuing bilateral and regional rather than multi-lateral trade agreements as the provisions go far beyond what has been possible to negotiate in the WTO. For example, US bilateral and regional agreements have provided far stronger protection to US patent holders and investors than offered through the WTO.20 

 

Professor John Quiggin, School of Economics and School of Political Science and International Studies at the University of Queensland, has stated that the terms of such ‘integration’ rather than ‘free trade’ agreements pursued by the US are those set by the more powerful party. An integration agreement involves the adoption of common economic policies on a wide range of issues, including intellectual property, public ownership of infrastructure and competition policy. This results in smaller less powerful nations integrating or adopting the economic and social institutions of the larger more powerful nation. An agreement with the US will inevitably result in Australia adopting American institutions and not vice versa.21,22

 

Three objectives of the US in the AUSFTA negotiations that are particularly relevant to pharmaceuticals and health care are to - 'address issues of anti-competitive business conduct, state monopolies, and state enterprises'; 'reduce or eliminate artificial or trade-distorting barriers to US investment in Australia'; and to 'have Australia apply levels of (patent) protection (for undisclosed test data and other information)…in line with US law'.23

 

SUMMARY

 

The main concerns of the DRS in relation to health care are:

 

·         Public services are not protected from the market thrust of the agreement;

·         Health care is not unambiguously excluded and is thus open to market forces and US style corporatisation;

·         Health professional qualifications, licensing and standards within health facilities are not to be 'unnecessary barriers to trade' and are to be 'not more burdensome than necessary';

·         The US government and pharmaceutical companies will have greater influence over the functioning of the PBS thus compromising public health principles and the price control capacity of the Pharmaceutical Benefits Advisory Committee (PBAC);

·         The introduction of an 'independent review process' of negative PBAC decisions will lead to greater pressure on the PBAC to approve more expensive drugs even when they may not give any significant advantage over drugs that are already available;

·         The creation of a 'Medicines Working Group' (MWG) with the US government will be another mechanism for the US pharmaceutical industry through their government to continue to pressure the Australian government to make further changes to pharmaceutical policy that would lead to greater profits for the US industry;

·         Increased patent rights for pharmaceutical companies will delay the entry of new generic drugs onto the market by the generic industry maintaining higher prices for longer and thus higher costs for the PBS and ultimately the Australian people;

·         The beginning of direct-to-consumer advertising (DTCA) of pharmaceutical drugs by inclusion of a clause on internet DTCA. This opens up DTCA for further 'discussion' and negotiation under trade priorities rather than public health merits. There will be opportunity for further pressure from pharmaceutical companies.

·         What is considered necessary to protect human life or health; whether a particular health service is a social service for a public purpose; public health measures such as tobacco and alcohol control; and pharmaceutical policy – will all be open to interpretation by trade dispute panels whose priority is reducing trade barriers not public health.

 

Sections in the text of the Australia-US Free Trade Agreement (AUSFTA) that are relevant to health care include:

           

·         Chapter 10 Cross-Border Trade in Services;

·         Chapter 13 Financial services (includes health insurance);

·         Annex II (includes exclusions for Social services);

·         side letter regarding gambling, alcohol, firearms and tobacco;

·         Chapter 2: Market Access, Annex 2.C Pharmaceuticals;

·         Chapter 17 Intellectual Property Rights;

·         side letter on the Pharmaceutical Benefits Scheme (PBS).

THE DETAILS

 

Exclusions and Impacts on Health Care:

 

Chapter 10 deals with trade in services. As the AUSFTA is a 'top down' agreement using a negative list approach, any service not explicitly excluded automatically comes under the terms of the agreement. This is in contrast to a 'bottom-up' agreement with a positive list of what is included. The issue of clearly defining exclusions is thus crucial.  

 

Chapter 10 Cross-Border Trade in Services, Article 10.1 Scope and Definition, replicates the contentious language used in the World Trade Organisation (WTO) General Agreement on Trade in Services (GATS) Article 1.3 for exclusion of 'services supplied in the exercise of governmental authority':

 

ARTICLE 10.1 : SCOPE AND COVERAGE

4. This Chapter does not apply to:

(e) services supplied in the exercise of governmental authority within the territory of each respective Party.

A service supplied in the exercise of governmental authority means any service which is supplied neither on a commercial basis, nor in competition with one or more service suppliers. (italics added)

 

This gives little assurance for public services including health care. The recent report of the Senate Inquiry into the General Agreement on Trade in Services and the Proposed Australia-United States Free Trade Agreement highlighted concerns with interpretation of this article.24 The WTO has previously stated:

 

39. The hospital sector in many countries, however, is made up of government- and privately- owned entities which both operate on a commercial basis, charging the patient or his insurance for the treatment provided. Supplementary subsidies may be granted for social, regional and similar policy purposes. It seems unrealistic in such cases to argue for continued application of Article 1:3 and/or maintain that no competitive relationship exists between the two groups of suppliers or services.  In scheduled sectors, this suggests that subsidies and any similar economic benefits conferred on one group would be subject to the national treatment obligation under Article XVII.  [italics and bold added] 25

 

General exceptions for services (Chapter 22 General Provisions and Exceptions, Article 22.1 General Exceptions subparagraph 2.) are the same as in GATS Article XIV which includes measures that are:

 

a) necessary to protect public morals or to maintain public order;

b) necessary to protect human, animal or plant life or health;

c) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement including those relating to:

i) the prevention of deceptive and fraudulent practices or to deal with the effects of a default on services contracts;

ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts;

iii) safety; (italics added)

 

With the important proviso:

 

… that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail; or a disguised restriction on trade in services

 

In the side letter regarding gambling, alcohol, firearms and tobacco, it is stated that regulation of retail trade services for tobacco products, alcoholic beverages, or firearms will typically fall within the exceptions provided under subparagraphs (a), (b), and (c) (iii) of GATS Article XIV.

 

Any dispute that may arise may be subject to scrutiny by a trade dispute panel. The WTO has previously used a very narrow interpretation of what is deemed 'necessary', typically as essential, and interpreted that the measure must be the least trade restrictive possible to achieve its objective.26 This standard gives priority to free trade and restricts national measures to protect public health. In over 50 years of the General Agreement on Tariffs and Trade (GATT) with an identically worded exception clause (Article XXb), there has only been one recent case where a dispute panel has upheld an inconsistent measure on the basis of this exception.27

 

Annex II contains exclusions for social services including health care and states:

 

Australia reserves the right to adopt or maintain any measure with respect to the provision of law enforcement and correctional services, and the following services to the extent that they are social services established or maintained for a public purpose: income security or insurance, social security or insurance, social welfare, public education, public training, health and child care. (italics added)

 

A crucial question is how will health care be defined. As the agreement uses a negative list approach, it is essential for clarity.

 

Although health care is not specifically stated as 'public', whether public or private it would have to be deemed a 'social service established or maintained  for a public purpose' to be excluded. A US definition of this can differ markedly from other interpretations. Market ideology which dominates the US health system interprets many areas of health care not as social services for a public purpose. Rather, individual responsibility and the relationship between the provider and consumer (patient) are paramount.

 

There have been differences between Canadian and US interpretations in relation to health care exclusions in the similarly worded North American Free Trade Agreement (NAFTA). The US Trade Representative has indicated a narrow interpretation that the Annex II exclusion only applies where services are both entirely government financed and publicly delivered.28,29 The more the system is privatised, the less likely is the claim that all services are provided for a public purpose. The complex web of public-private relationships in Australia's health sector could expose many areas of health care to AUSFTA trade obligations. Self-definition has not applied in trade dispute procedures. 

 

The classification system for services that will be used is not stated. WTO classification places medical, dental, nursing, midwifery, physiotherapy and paramedical services not occurring in a hospital under professional services in Business Services and not in Health Related and Social Services as in the UN Central Product Classification. Health insurance is classified under non-life insurance in Financial Services which includes insurance, banking and other financial services. There is no mention of an exclusion of health insurance in Chapter 13 Financial services or Annexes III and IV (which lists exempt non-conforming measures in relation to Chapter 13). It appears that this places the health insurance sector under the full obligations of the agreement.

 

The Australian negotiators have not clarified these issues.  

This all seems to lead to murky definitions open to interpretation by trade officials whose priority is reducing trade barriers not public health.

 

The market and deregulation thrust of the agreement applies to services that are not excluded seen in the following articles in Chapter 10 Cross-Border Trade in Services.

 

10.2 National Treatment:

Each Party shall accord to service suppliers of the other Party treatment no less favourable

than that it accords, in like circumstances, to its own service suppliers.

 

10.3 Most-Favoured-Nation:

Each Party shall accord to service suppliers of the other Party treatment no less favourable than that it accords, in like circumstances, to service suppliers of a non-Party.

 

10.4 Market Access:

A Party shall not adopt or maintain, either on the basis of a regional subdivision or on the basis of its entire territory, measures that:

(a) impose limitations on:

(i) the number of service suppliers whether in the form of numerical quotas, monopolies, exclusive service suppliers, or the requirement of an economic needs test;

(ii) the total value of service transactions or assets in the form of numerical quotas or the requirement of an economic needs test;

(iii) the total number of service operations or the total quantity of services output expressed in terms of designated numerical units in the form of quotas or the requirement of an economic needs test;1 or

(iv) the total number of natural persons that may be employed in a particular service sector or that a service supplier may employ and who are necessary for, and directly related to, the supply of a specific service in the form of numerical quotas or the requirement of an economic needs test; or

(b) restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service.

and

 

10.5 Local Presence:

A Party shall not require a service supplier of the other Party to establish or maintain a representative office or any form of enterprise, or to be resident, in its territory as a condition for the cross-border supply of a service.

 

Similarly, the following articles in Chapter 13 Financial Services apply to financial services that are not excluded. 

 

13.2 National Treatment:

1. Each Party shall accord to investors of the other Party treatment no less favourable than that it accords to its own investors, in like circumstances, with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of financial institutions and investments in financial institutions in its territory.

2. Each Party shall accord to financial institutions of the other Party and to investments of investors of the other Party in financial institutions treatment no less favourable than that it accords to its own financial institutions, and to investments of its own investors in financial institutions, in like circumstances, with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of financial institutions and investments.

 

13.3 Most-Favoured-Nation:

Each Party shall accord to investors of the other Party, financial institutions of the other Party, investments of investors in financial institutions, and cross-border financial service suppliers of the other Party treatment no less favourable than that it accords to the investors, financial institutions, investments of investors in financial institutions, and cross-border financial service suppliers of a non-Party, in like circumstances.

 

13.4 Market Access for Financial Institutions:

A Party shall not adopt or maintain, with respect to investors of the other Party, either on the basis of a regional subdivision or on the basis of its entire territory, measures that:

(a) impose limitations on

(i) the number of financial institutions whether in the form of numerical quotas, monopolies, exclusive service suppliers, or the requirement of an economic needs test;

(ii) the total value of financial service transactions or assets in the form of numerical quotas or the requirement of an economic needs test;

(iii) the total number of financial service operations or on the total quantity of financial services output expressed in terms of designated numerical units in the form of quotas or the requirement of an economic needs test;13-1 or

(iv) the total number of natural persons that may be employed in a particular financial service sector or that a financial institution may employ and who are necessary for, and directly related to, the supply of a specific financial service in the form of a numerical quota or the requirement of an economic needs test; or

(b) restrict or require specific types of legal entity or joint venture through which a financial institution may supply a service.

and

 

13.5 Cross-Border Trade:

1. Each Party shall permit, under terms and conditions that accord national treatment, crossborder financial service suppliers of the other Party to supply the services specified in Annex 13-A. National treatment requires that a Party shall accord to cross-border financial service suppliers of the other Party treatment no less favourable than that which it accords to its own financial service suppliers, in like circumstances, with respect to the supply of the relevant service.

2. Each Party shall permit persons located in its territory, and its nationals wherever located, to purchase financial services from cross-border financial service suppliers of the other Party located in the territory of the other Party. This obligation does not require a Party to permit such suppliers to do business or solicit in its territory. Each Party may define “doing business” and “solicitation” for purposes of this obligation, as long as such definitions are not inconsistent with paragraph 1.

3. Without prejudice to other means of prudential regulation of cross-border trade in financial services, a Party may require the registration of cross-border financial service suppliers of the other Party and of financial instruments.

 

Professional Qualifications and Standards:

 

Article 10.7: Domestic regulation 2. (a), (b) and (c) that apply to qualifications and standards in the health field is the same as GATS Article VI Domestic Regulation 4. (a), (b) and (c):

 

4. With a view to ensuring that measures relating to qualification requirements and procedures,       technical standards, and licensing requirements do not constitute unnecessary barriers to trade in services, each Party shall endeavour to ensure, as appropriate for individual sectors, that such measures are:

a) based on objective and transparent criteria, such as competence and the ability to supply the service;

b) not more burdensome than necessary to ensure the quality of the service; and

c) in the case of licensing procedures, not in themselves a restriction on the supply of the  service. (italics and bold added)

 

This covers professional qualifications and licensing, and licensing and accreditation of facilities, financing and funding of services and overall administration. Of concern, this applies to non-discriminatory measures.

 

The Pharmaceutical Benefits Scheme:

 

The Pharmaceutical Benefits Scheme (PBS) is dealt with specifically in Chapter 2: Market Access, Annex 2.C Pharmaceuticals and the side letter on the PBS.

 

·        Principles

The Agreed Principles of Annex 2.C uses the language of the pharmaceutical industry and concentrates on the importance of 'innovation' and 'research and development' and ominously 'the need to recognize the value of innovative pharmaceuticals through the operation of competitive markets or by adopting or maintaining procedures that appropriately value the objectively demonstrated therapeutic significance of a pharmaceutical'. There is no mention of equity or universal access to affordable medicines. This is in complete contrast to the objectives of the PBS - comprehensiveness, universality and responsible community cost.

 

The term ‘innovation’ is value laden. In Australia, the issue has been whether the innovation is of value in terms of an additional benefit for the patient. It is not innovation per se that is wanted - it is better care for patients. A US report from the National Institute for Health Care Management found that relatively few of the new drugs approved during the period examined in the study, 1989 to 2000, were highly innovative, and that modified versions of older medications (the so-called ‘me-too’ drugs) had become increasingly dominant over time.30

 

The pharmaceutical industry has consistently used rewarding innovation and research and development (R&D) to defend high US prices. This is despite the pharmaceutical industry having been the most profitable industry in the US for each of the past 10 years, the most generous campaign contributor in the world, spending twice as much on marketing as on R&D and the fact that most new drugs on the market are replacements for cheaper generic versions.30-37

 

An OECD report found about three-quarters of the final pharmaceutical expenditures are publicly reimbursed in the vast majority of OECD countries.35 A US study showed that taxpayer-funded scientists and foreign universities conducted 85% of the published research studies, tests and trials leading to the discovery and development of five innovative drugs.38 The pharmaceutical industry in the US is described as lightly taxed and heavily subsidised. In addition to receiving research subsidies, the pharmaceutical industry in the US has low tax levels due to tax credits making their effective tax rate about 40% less than the average for all other industries.39

 

The US pharmaceutical industry is the largest lobby group in the US.40 In the 1999-2000 US election cycle, pharmaceutical corporations spent over US$177 million on lobbying. President Bush received US$14 million from the US pharmaceutical industry during his 2000 campaign. Budget papers for 2003-2004 of the Pharmaceutical Research and Manufacturers of America (PhRMA), the powerful trade association representing US pharmaceutical manufacturers, reportedly included US$17.5 million to fight price controls and protect patent rights in foreign countries and trade negotiations of which US$1 million was ‘to change the Canadian health care system’. US Democrat Senator Richard J Durbin has said in the Senate “PhRMA, this lobby, has a death grip on Congress”. Democrat Senator Charles E Schumer said drug industry made wonderful products but was becoming ‘despised and hated’ because of aggressive efforts to keep prices and profits high.41

 

·        Pharmaceutical industry input and review process

Both Annex 2.C and the side letter on the PBS incorporate Pharmaceutical industry input into the Pharmaceutical Benefits Advisory Committee (PBAC) approval process both before and after a decision has been made. The side letter states that before approval companies are provided with:

 

1. (a) an opportunity to consult relevant officials prior to submission of an application for listing, including on the selection of a comparator pharmaceutical;

(b) an opportunity to respond fully to reports or evaluations relating to the applications that are prepared for the technical subcommittees of the Pharmaceutical Benefits Advisory Committee (PBAC);

(c) an opportunity for a hearing before PBAC while it is considering reports or advice from the technical subcommittees to the PBAC regarding applications; and

(d) sufficient information on the reasons for its determination on an application, on an expeditious basis, to facilitate any application to the Pharmaceutical Benefits Pricing Authority.

 

If not happy with a negative decision, pharmaceutical companies are given a further review process:

 

2. Australia shall provide an opportunity for independent review of PBAC determinations, where an application has not resulted in a PBAC recommendation to list. (side letter on the PBS)

 

2. (f) make available an independent review process that may be invoked at the request of an applicant directly affected by a recommendation or determination. (Chapter 2: Market Access, Annex 2.C Pharmaceuticals)

 

The structure of the 'independent' review has not yet been determined. The Australian negotiators insist the independent review is not an appeals process and will not be able to overturn PBAC decisions. This is a play on semantics. Although not having direct power, decisions will be influenced, otherwise what is the purpose of the process? Introducing a review process must imply that decisions will be ‘reviewed’ and thus there is the possibility that some will, as a result, be modified. As this applies only to negative decisions there will be an upward shift to costs. There will be greater pressure to approve more expensive drugs that may not give any significant advantage over drugs that are already available. A further appeals process had previously been rejected in the Tambling Review of the PBS.42

 

Once listed, further opportunity for drug prices to keep rising is assured due to the statement in the side letter on the PBS:

 

4. Australia shall provide opportunities to apply for an adjustment to a reimbursement amount.

                

Although the Australian negotiators say this provision already exists and will not change things, it is now embodied in the trade agreement and thus under the obligations and possible dispute procedures of the AUSFTA. Significantly there are no provisions to review prices downwards.

 

·        Medicines Working Group

In Chapter 2: Market Access, Annex 2.C Pharmaceuticals  there is a proviso to establish a Medicines Working Group (MWG) to promote discussion 'including the importance of pharmaceutical research and development to continued improvement of healthcare outcomes'. It is to 'comprise officials from federal government agencies responsible for federal healthcare programs and other appropriate federal government officials'.

 

The Medicines Working Group will provide for continued dialogue between the United States and Australia on emerging health care policy issues. Again the emphasis is on the pharmaceutical industry with no mention of universal access to affordable medicines. This is unbalanced and based on commercial principles. This 'discussion group' is with a country where 40 per cent of its citizens cannot afford access to necessary drugs and many go to Canada and Mexico to buy them. There is no accountability to the Australian people or parliament.

 

What has Australia to gain from US government pharmaceutical policy? Australia’s excellent pharmaceutical system that other nations attempt to emulate is recognised worldwide. In this agreement, however, it will be Australia integrating the US system and not vice versa.

 

In a testimony to the US Senate Finance Committee on Pharmaceuticals, Gerard Anderson of Johns Hopkins University has said that it is not surprising that the US pays considerably more for pharmaceuticals, as the US has no national strategy for determining appropriate utilisation, comparing prices to what other countries pay, setting a reasonable research and development level or reasonable profit level. As the US has done little, he believes it unfair to ask other countries to dismantle their programs which are effectively controlling pharmaceutical prices and promoting appropriate utilisation.13

 

The Bush administration's strategy in relation to pharmaceutical policy has been to undermine drug price controls in other developed countries. President Bush's recently passed Medicare bill includes provisions to scrutinise ‘protectionist’ programs in foreign countries and if necessary eliminate them through free trade negotiations. The bill specifically forbids the government to use its influence to negotiate lower drug prices in its own country.4043,44 That provision was a key goal in the lobbying of the pharmaceutical industry.

 

There is the conviction that ‘pricing constraints’ in other countries shift ‘the burden for R&D’ to the consumers in the US. US Republican Senator Kyl, who was part of the US negotiating team, told a US Senate finance committee after the AUSFTA was released that a way to address this “is to get the other countries of the world to help bear part of the burden of the R&D”.45

 

The evidence does not support this or that raising prices in other countries would lead to lower prices in the US.