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US-Korea text and the carve-out for state Medicaid programs


Chapter 5 of the Korea-US Free Trade Agreement


In 2006, the US and Korea began negotiations for a bilateral Free Trade Agreement (Korus FTA), and reference pricing of pharmaceuticals quickly became a major problem in the negotiations.As negotiations began, the American team heard that Korea was in the process of reforming its National Health Insurance to embrace reference pricing in a system similar to that used by US state governments.American opposition to the Korean reforms was extremely strong, and the second formal round of FTA negotiations fell apart when the US negotiators left the table in protest of these reforms, labeling them “inconsistent with both the mandate of the pharmaceuticals working group and the market opening spirit of the Korus FTA,” and accusing the Koreans of discriminating against foreign pharmaceutical products.[1]The US team initially tried to get the Koreans to drop their reforms, though they eventually agreed to drop their objections in return for the inclusion in the FTA of a Chapter regulating the price negotiations, based on Annex 2(c) of the trade deal with Australia.

Chapter 5 of the “Korus FTA” contained the rules on reference pricing that were actually more burdensome for government negotiators.Under the text being discussed, health care authorities would need to provide pharmaceutical companies "meaningful and detailed written information” explaining all of their listing decisions.Changes in procedures for determining formulary listings could be made only if the government formally solicited comments and replied to them in writing – giving the industry ample opportunities to slow the process.While the trade agreement with Australia required that systems of reference pricing include a process for appeals, this trade agreement went further, requiring the creation of an “independent review body” composed of medical professionals outside the Health Ministry.It is not clear from the text whether or not such a body will have the authority to overturn the original formulary listing decisions, but this was clearly the pharmaceutical industry’s wish.While the Korus FTA was under negotiation, PhRMA testified to the House Ways and Means Committee that, “Ideally, this independent appeals process would include a panel of experts that would review reimbursement and listing decisions to determine if the decision is in line with the regulations and guidelines for the system.“[2]

Perhaps the most alarming provision to state governments in the Korus FTA was the obligation for price negotiators to "appropriately recognize the value of patented pharmaceutical products and medical devices in the amount of reimbursement it provides."This provision would require drug price negotiators to provide greater reimbursements to expensive brand name drugs than lower-priced generics, substantially undermining efforts to save money through generic substitution.

Alarmed state officials once again sought to persuade the federal government to exclude Medicaid and other state programs from the reach of the agreement.In March, legislators from Arizona and Connecticut wrote the leadership of the Congressional Ways and Means Committee, stating that they were “extremely troubled by, and strongly oppose, USTR’s efforts to alter public reimbursement formularies in the Korea FTA.”[3]Also that month, the National Legislative Assembly for Prescription Drug Prices offered testimony to the House Ways and Means Committee.The Forum on Democracy and Trade visited Congressional offices on Capitol Hill throughout the spring, and alerted the Association of State Medicaid Directors to the potential conflict.

The Korus FTA negotiations were carried out as the new Democratic majority came into Congress, and many of the incoming freshmen were more skeptical of FTAs in general than the incumbents they replaced.Much more attention was paid to potential problems with this and other FTAs, especially in the areas of labor, the environment and healthcare.

This time, American trade officials included a “carve out” for state programs in general, and for Medicaid in particular, as part of the agreement.Chapter five of the Korus FTA refers constantly to healthcare programs operated by each Party’s Central level of government, which Article 5.8 defines as “a health care program in which the health care authorities of a Party's central level of government make the decisions regarding matters to which this Chapter applies.”Furthermore, a footnote to Article 5.8 states that

For greater certainty, Medicaid is a regional level of government health care program in the United States, not a central level of government program.



[1] Statement of Assistant USTR Wendy Culter on the Conclusion of the Second Round of Negotiations of the KORUS FTA. July 14, 2007.

[2] Geralyn S. Ritter, Vice President of International Affairs, Pharmaceutical Researchers and Manufacturers of America. Testimony Before the Subcommittee on Trade of the House Committee on Ways and Means. (March 20, 2007)

[3] Letter from AZ State Senator Meg Burton Cahill and CT State Representative Kevin Ryan to Members of the House Ways and Means Committee Subcommittee on Trade. March 18, 2007.

General Content
The Korea-US Free Trade Agreement Threatens Federal "340B" Discounts for Medicines for Low Income Americans
Describes how the Korea-US FTA's provision carving Medicaid out of the agreement does not apply to the 340B program, which provides discounted medicine prices for people through a variety of local hospitals, pharmacies and clinics.
NLARx Comments to U.S. Trade Representative on the Korea-U.S. Free Trade Agreement
September 15th, 2009
Comments from ME Representative Sharon Treat on the pending free trade agreement with Korea, focusing on provisions on pharmaceuticals and medical devices.

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