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Prescription Drugs and the US-Australia FTA

While the industry has been unsuccessful in attacking PDLs in the courts, it has quietly lobbied for trade policies which attack them abroad, with possible implications for programs in the U.S.  Free Trade Agreements are "international executive agreements with Congressional approval" and as such they have the legal status of binding federal law, which have preemptive effect over state law.    International trade law includes precedents that municipal laws can be interpreted as evidence of compliance or non-compliance with international obligations.  

In addition, the Trade Promotion Authority Act of 2002 formally instructed the US Trade Representative to "achieve the elimination of government measures such as price controls and reference pricing."    Two particular trade agreements included clear attempts to interfere with systems of reference pricing abroad, endangering similar programs in the US - the bilateral Free Trade Agreements with Australia and Korea.

Annex 2(c) of the Australia-US FTA

The bilateral FTA negotiated between the US and Australia was the first one to include a section directly addressing the reference pricing of pharmaceuticals.  It introduced a series of rules concerning the procedures involved in administering the systems of reference pricing.  The US-Australia FTA requires that health authorities 1) ensure decisions within a specified period of time, 2) disclose procedural rules and guidelines used to assess a proposed listing, 3) afford opportunities to companies to provide comments, 4) provide written reasons for listing decisions, and 5) "make available an independent review process" for the  decisions.

State governments were alarmed by these provisions, which could place administrative burdens on their already cash-strapped Medicaid programs.  There was, however, a question of whether or not Annex 2(c) would apply to state Medicaid programs.  The terms of Annex 2(c) of the US-Australia FTA applied specifically to federal healthcare authorities, but Medicaid is a joint federal-state program run by state governments according federal guidelines.  Perhaps most significantly, it is jointly funded by the federal and state governments.  Between 1995 and 2005, 57% of Medicaid funding came from the federal government and the remaining 43% came from states.   Therefore, state lobbying on the rules in Annex 2(c) sought to have the federal government guarantee the exemption of Medicaid and other state programs.  

State leaders sought assurance from USTR that Annex 2(c) would not endanger their preferred drug lists.  The Vermont state senate issued a resolution urging USTR to "pursue an exchange of Interpretive notes" with Australia to formally ensure sate Medicaid programs would not be covered by Annex 2(c).  California state senators wrote USTR in February 2005, followed by the governor of Washington state in March.  The National Legislative Assembly on Prescription Drugs, a nonprofit organization founded by state legislators seeking to reduce drug prices and expand access to prescription medicines, wrote in USTR in May 2005, warning about the dangers of the free trade agreement and asked for a binding interpretation.  States and their advocates continued to write USTR, and met with USTR staff on this topic.  To date, however, there has been no binding clarification.

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