How the US trade deal undermined Australia’s PBS

Central to the processes of the PBS is the idea that drugs with identical or similar clinical outcomes should have similar prices. Thinglass/Shutterstock

Ten years on from the Australia-US Free Trade Agreement, Australia is entering another round of negotiations towards the new and controversial Trans-Pacific Partnership. In this Free Trade Scorecard series, we review Australian trade policy over the years and where we stand today on the brink of a number of significant new trade deals.


Australia’s Pharmaceutical Benefits Scheme (PBS) is one of the few pieces of national public health policy with unquestioned democratic legitimacy. It was established by the vote of a majority of citizens in a majority of states in a referendum in the late 1940s. Since then, it has lowered the cost of pharmaceuticals to citizens through expert assessment of their cost-effectiveness.

The PBS uses public funds to reimburse pharmaceutical companies for the “health innovation” value of listed medications, as determined after review of scientific evidence by the Pharmaceutical Benefits Advisory Committee. The government negotiates the price with drug companies and wants a good deal for taxpayers, who ultimately foot the bill.

Central to the processes of the PBS is the idea that drugs with identical or similar clinical outcomes should have similar prices, known as reference pricing. Unfortunately, the PBS process of reference pricing was considerably disrupted by the Australia-US Free Trade Agreement (AUSFTA) – though this is not something the Australian government wishes to admit.

Australian medicines impacted by trade negotiations

In the early 2000s, in preparing for the first bilateral trade deal between the United States and Australia, the US representatives were required by legislation to negotiate an agreement that eliminated government price control measures such as reference pricing, which “deny full market access for United States products”.

The same legislation also required the US Department of Commerce to investigate the possible future dismantling of reference pricing in other OECD countries. In December 2005, the US sought to implement this agenda through the OECD Pharmaceutical Pricing Policy project.

The Australian government initially denied the PBS would be in the AUSFTA at all. The AUSFTA ended up, however, specifically addressing Australia’s PBS in an annex. This meant this part of the AUSFTA would apply to Australia without having specific reciprocal obligations for the US. This also was handy for US pharmaceutical companies, as many policymakers in the US actually wanted to copy Australia’s PBS system because of excessively high US drug prices.

Annex 2C of the AUSFTA specified the parties agreed on the importance of pharmaceutical innovation and on pricing systems for pharmaceuticals being governed by both the “operation of competitive markets” (the US position) and “objectively demonstrated therapeutic significance” (the Australian position).

However, it also created a lobbying niche by requiring the PBS system to respond to undefined “innovation”.

In 2004, Australian AUSFTA negotiators reassured the Australian parliament about Annex 2C via a Senate Committee. They said:

… we went into these negotiations with an absolutely clear mandate to protect and preserve the fundamentals of the PBS. That is what this agreement does … there is nothing in the commitments that we have entered into in Annex 2C or the exchange of letters on the PBS that requires legislative change.

However, when the AUSFTA Medicines Working Group (MWG), which was established under Annex 2C, met for the first time in Washington in January 2006, Australia’s then-trade minister Mark Vaile, said that:

… the core principle that we both agree on in this area … is recognising the value of innovation.

Unfortunately Vaile did not clarify which approach to pharmaceutical “innovation” he was referring to. Documents obtained under a Freedom of Information application (organised by Pat Ranald of the Australian Fair Trade and Investment Network in 2007) were so redacted that they revealed almost nothing of what was said at the first AUSFTA MWG meeting, raising separate issues about the democratic legitimacy of the AUSFTA.

One disclosed document, presumably discussed in the MWG, was an opinion editorial by a conservative Australian politician in The Australian, which argued that:

Truly innovative cures should be referenced against innovation in other classes, rather than against generics.

This approach seems to reflect the US “competitive markets” method of valuing innovation.

Shortly after the AUSFTA MWG met, the Australian parliament (with Liberal majorities in both houses) rapidly passed the National Health Amendment (Pharmaceutical Benefits Scheme) Act 2007. This new act amended the National Health Act 1953 and from August 2007 divided the PBS into two separate formularies: F1, which mostly contains single-brand medicines, and F2, which mostly contains multiple brand, mainly generic, medicines.

Private sector consultants appear to have been heavily involved in drafting this legislation.

The separation of PBS-listed drugs into two groups (F1 and F2), weakened the role and fiscal benefits of referencing pricing in the PBS. Although there will be reference pricing within F1, an effect of the changes was to insulate high-priced single brand (patented) F1 drugs from price cuts and from the reference pricing that applied under previous PBS processes.

From 2007, once a new drug is listed on the PBS as F1, its price will not be linked to the price of any similar drug in F2. F1 drugs are not interchangeable at the individual patient level with drugs that have multiple brands, so the manufacturers may be able to retain their original PBS price until the listing of a bio-equivalent brand satisfies the new standards for a shift to F2.

Reductions in F2 drug prices will not affect F1 prices, even where the therapeutic effect of an F2 medicine is similar though not necessarily meeting the unscientific and subjective standard of “interchangeable at the individual patient level”.

US continues to flex its trade muscle for pharma

In its subsequent free trade negotiations with the US, the South Korean government demanded a process similar to Australia’s current system of evidence-based cost-effectiveness and reference pricing.

After recognising each nation’s differing approach to medicines policy, the Republic of Korea–United States Free Trade Agreement indicates that if South Korea establishes a reimbursement system for pharmaceuticals or medical devices where the amount paid is not based on “competitive market-derived prices”, then it has to “appropriately recognise the value of patented pharmaceutical products”.

The agreement respectively mentions PBS-type “sound economic incentives” as a method of facilitating access to patented medicines and Australian-style “transparent and accountable” procedures as a means of promoting health innovation. However, it creates a Medicines and Medical Devices Committee, similar to the AUSFTA MWG.

This is another example of the US technique to alter the domestic regulatory systems of other nations to achieve greater profits for US companies. And a recent US-India working group on pharmaceutical patents looks like it could be headed the same way.

An evidence-based approach to pharmaceutical innovation

The United Kingdom’s 2009 Kennedy Report on Valuing Innovation is directly relevant to debates about how to value pharmaceutical innovation. It strongly promotes the evidence-based approach Australia takes to assessing and valuing innovation through expert assessment of objectively demonstrated therapeutic significance.

The Kennedy Report recommends disinvestment or compensation to the government if an allegedly innovative product fails to offer value or meet expectations made when being evaluated for public funding. It also recommends a working definition of pharmaceutical innovation, emphasising scrutiny of whether the relevant product significantly and substantially improves the way that a current need (including supportive care) is met.

Allowing the US to alter the basic processes of Australia’s PBS represented an inexcusable surrender of Australia’s democratic sovereignty. It represents just how compromised the state has become as a representative of citizens’ interest in the face of corporate power.

It also provides salutary lessons as Australian citizens attempt to prevent their government surrendering democratic sovereignty on an even greater scale by agreeing to investor-state dispute settlement in the US-led Trans-Pacific Partnership Agreement.


This article draws on research prepared for the 2014 Workshop “Ten Years since the Australia-US Free Trade Agreement: Where to for Australia’s Trade Policy?”, sponsored by the Academy of the Social Sciences in Australia and Faculty of Arts and Social Sciences, UNSW Australia.