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The Australia-U.S. Free Trade Agreement Did NOT Blow-up Australia's Pharmaceutical Benefits Program

Right now, literally as I type this, Australian trade negotiators are reportedly resisting U.S. demands for increased protection of pharmaceutical and biotech innovation in the Trans-Pacific Partnership (TPP) agreement. They are no doubt motivated by the warnings of Australian academics and researchers that Australia’s Pharmaceutical Benefits Scheme (PBS), which the Australian government uses to control drug prices, will be weakened or undone altogether by extending the period of data protection for biologics, among other provisions.

The sky-is-falling warning from these academic critics of the pharmaceutical industry is that protecting the products of innovation will necessarily result in dramatic price increases, which Australia (and Australians) will no longer be able to afford.

Interestingly, Australian academics made this exact same argument in 2003, warning Australia about the treaty that was then being negotiated, the Australia-U.S. Free Trade Agreement (FTA).  

I have before me a copy of a paper published by The Australia Institute, entitled “A Backdoor to Higher Medicine Prices? Intellectual Property and the Australia-US Free Trade Agreement,” by Dr. Buddhima Lokuge, Dr. Thomas Alured Faunce, and Richard Denniss.

The paper predicted that the Australia-U.S. FTA would result in dramatic increases in the cost of prescription drugs in Australia.

“This paper examines five leading medicines near the end of their patent lives in Australia. Based on PBS expenditures for these drugs in 2003, we estimated the potential cost of likely changes to IP provisions under the FTA to the PBS and Australian taxpayers. The costs accrue over a four-year period from 2006 to 2009. . . . The ‘central case’ estimate is that the additional cost of these five drugs alone, as a result of IP provisions in the FTA, will be more than $1.12 billion with a lower estimate of $850 million and an upper estimate of $1.56 billion.”

But they were wrong then, and they’re likely wrong now.

According to Australia government data, the Pharmaceutical Benefits Scheme did not experience significant increases in spending in the years since the passage of the Australia-U.S. FTA.  From the implementation of the Australia-U.S. FTA in 2005, PBS spending remained stable at an average growth of 5.48 percent per year, which was below the 6.9 percent growth rate in overall healthcare spending.

Moreover, Australia spends around 1.25 percent of its GDP on medicines, compared with an average OECD rate of 1.5 percent.

And in May of 2010, Australia’s Federal Treasury reported in its budget that “real growth over the forward estimates period for the pharmaceutical services and benefits subfunction is lower than that forecast in the 2009-2010 budget.” Further, the Treasury predicted that PBS spending would grow in the future at only a 2.1 percent annual rate.

What this means is that the terms Australia agreed to in the Australia-U.S. FTA did not in any way result in dramatically higher spending pressures on Australia’s PBS, despite the hyperbolic warnings of academic critics of the pharmaceutical industry.

Importantly, Australia’s positive overall experience with the Australia-U.S. FTA led Australia to eagerly embrace participation in the TPP. The government of Australia recognizes the benefits of liberalized trade with the other members of the TPP, so it’s important that Australia’s participation in the TPP not be negatively impacted by the warnings of academics whose predictions have proven false.


P.S. – A piece in today’s Dominion Post (New Zealand) finds exactly the same thing, and looks at other countries as well:

“We can't assume medicine costs will increase if some patents or Intellectual Property protections are extended. Speculation about rising medicine prices under the TPPA mirror concerns Australians voiced over the U.S-Australia FTA. However, since signing the FTA in 2005, Australia's spend on pharmaceuticals has remained stable and the rate of expenditure has decreased. In 2006 Canada's pharmaceutical spend decreased after implementing an eight year data protection period. Similarly, after Japan increased data protection in 2007 to eight years, pharmaceutical spend decreased and health care spend increased by the year 2010.”

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