This is the third post in a three-part series on how the Trans-Pacific Partnership (TPP) could increase medicine prices in the United States. Click here for the first post's introduction to the problem, and here for the second post's outline of new rights that the TPP would give to Big Pharma.

A leaked draft TPP annex with the Orwellian title “Transparency and Procedural Fairness for Healthcare Technologies” would set broad limits on governments’ prerogatives to negotiate or mandate lower drug prices, including for taxpayer-funded programs such as Medicare, Medicaid and veterans’ and military health programs. Pushed by U.S. negotiators, these proposed TPP rules would conflict with existing and proposed policies to reduce healthcare costs for seniors, military families and the poor.

Rolling back medicine cost savings for U.S. veterans:

The U.S. government uses automatic price reductions to secure lower drug costs for U.S. veterans who benefit from health programs administered by VA. U.S. law allows VA to access drug prices at 24 percent below average market prices, and requires drug companies to offer these reduced prices for VA-administered programs as a condition for their medicines being included in other government health programs.

However, this cost-saving mechanism could run afoul of the proposed TPP annex, which requires government drug reimbursements to be based on “competitive, market-derived prices,” or on a system that “appropriately recognizes[] the value” of the drugs. The government-mandated price-setting system for VA programs would be subject to challenge as not being “competitive” and “market-derived.” VA-secured prices that fall significantly below the prices of patented drugs also could be challenged under the TPP as not “appropriately recognizing” drugs’ value. These TPP provisions, if enacted, could expose the U.S. government to challenges before international tribunals for not rolling back policies that cut healthcare costs for veterans and taxpayers.

Threatening policies that make medicines more affordable for the poor:

U.S. federal and state governments currently use several methods to tamp down the prices of drugs provided to low-income families through Medicaid. For example, the U.S. federal government requires drug corporations, as a condition for having their drugs covered by Medicaid, to sign discount agreements that oblige the firms to provide the state and federal governments with rebates to lower the cost of the drugs. These rebates have resulted in a 45 percent reduction in Medicaid spending for brand-name drugs.

State governments can further cut costs by, for example, negotiating lower prices with drug companies in return for placing their medicines on a Preferred Drug List (PDL) – a list of medicines that the state’s Medicaid program will cover without requiring prior authorization from a doctor. States have calculated substantial cost savings from usage of PDLs: New York saved an estimated $381 million in one recent year, while Texas saved an estimated $115 million and Utah saved an estimated $434 million.

Such Medicaid cost containment measures could be challenged under the TPP. Leveraging the government’s buying power to set prices could be attacked as not being “market-derived” or as “appropriately recognizing” the value of patented drugs. Some argue that the TPP provisions would primarily target federal policies, while Medicaid is administered by state governments. But even if limited to federal policies, the pact’s proposed terms directly contradict Medicaid’s federal cost control efforts, such as requiring drug firms to sign discount agreements. And state-level tools like PDLs could still be challenged under the TPP as part of a program created and controlled by the federal government.

Challenging Obamacare cost reductions for seniors:

Before implementation of the landmark Patient Protection and Affordable Care Act of 2010, seniors faced a gap in Medicare drug coverage. After passing a given threshold of drug costs, Medicare beneficiaries went from having to pay 25 percent of a drug’s cost to having to pay 100 percent out of pocket, until reaching a second threshold at which Medicare again covered most costs. Closing this “doughnut hole” was a key objective of the Affordable Care Act, which required drug manufacturers to offer a 50 percent drug price discount to Medicare beneficiaries within the coverage gap if they wanted their drugs to continue being covered under Medicare. As a result of this discount and a gradual increase in Medicare coverage, Medicare beneficiaries within the coverage gap were only responsible for 47.5 percent of brand-name drug costs in 2013 and will be responsible for only 25 percent by 2020.

But under the TPP, the requirement for drug companies to halve the price of their drugs within the coverage gap could be challenged for neither reflecting “competitive market-derived” prices nor “appropriately recognizing[] the value” of patented drugs. The Obama administration’s TPP healthcare annex thus threatens the cost savings that the administration’s own signature health law has provided to seniors.

Chilling future reforms that could further reduce healthcare costs for retirees:

Governments in countries ranging from New Zealand to Japan have kept healthcare costs in check by leveraging the government’s large purchasing power for taxpayer-funded public health programs to negotiate lower drug prices with pharmaceutical corporations. In contrast, for Medicare, which covers more than 50 million Americans, the U.S. government is barred by law from directly negotiating drug prices with pharmaceutical corporations.

Many policymakers, healthcare professionals and even President Obama have called for changes to this law so that the government could ask drug companies to provide lower prices in exchange for getting subsidized access to millions of Medicare recipients. Other reform proposals, including legislation now pending, would have the federal government set maximum prices for drugs covered by Medicare (as it does for health programs provided to veterans) or require that drug companies provide drug rebates (similar to the rebates required under Medicaid). Indeed, the White House itself has proposed requiring drug companies to pay Medicaid-like rebates to providers for treating low-income Medicare beneficiaries. The administration estimates this would deliver $117 billion in savings over 10 years.

However, the TPP presents an obstacle to these proposals to control soaring Medicare costs. All of the above-mentioned policies involve direct government intervention in price setting, conflicting with the TPP requirement for market-derived prices, and inviting challenges for failing to “appropriately recognize” the value of patented drugs.

Undermining drug discounts for underserved communities:

Under a program known as 340B, the U.S. federal government enables nongovernmental health centers – including migrant health centers, homeless health centers, children’s hospitals and family planning centers – to offer their diverse constituencies more affordable drugs. The federal government requires pharmaceutical firms to offer discounted drug prices to 340B-covered health centers via rebates, as a condition for having their drugs covered by Medicaid.

As a federally-run program that mandates below-market prices, the program could be challenged as a violation of the proposed TPP rules requiring drug prices to be market-derived or to reflect the value of patented drugs. In addition, the leaked TPP annex would require the U.S. government to allow pharmaceutical corporations to appeal drug pricing decisions such as the rebate amounts set under the 340B program, though they have very limited appeal rights for such decisions under U.S. domestic law. The TPP would thus give pharmaceutical corporations a new means of challenging 340B policies that reduce drug prices for underserved populations.