Joint Hearing of the International Trade Subcommittee and the Health Care Subcommittee of the Senate Finance Committee

Federal News Service

HEADLINE: JOINT HEARING OF THE INTERNATIONAL TRADE SUBCOMMITTEE AND THE HEALTH CARE SUBCOMMITTEE OF THE SENATE FINANCE COMMITTEE

SUBJECT: INTERNATIONAL TRADE AND PHARMACEUTICALS CHAIRED BY: SENATOR JON KYL (R-AZ) AND SENATOR CRAIG THOMAS (R-WY)

WITNESSES PANEL I: GRANT D. ALDONAS, UNDER SECRETARY FOR INTERNATIONAL TRADE, DEPARTMENT OF COMMERCE; JOSETTE SHEERAN SHINER, DEPUTY UNITED STATES TRADE REPRESENTATIVE; WILLIAM K. HUBBARD, ASSOCIATE COMMISSIONER FOR POLICY AND PLANNING, FOOD AND DRUG ADMINISTRATION;

PANEL II:

JOHN E. CALFEE, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE; GERARD ANDERSON, PROFESSOR, JOHN HOPKINS SCHOOL OF HYGIENE AND PUBLIC HEALTH

LOCATION: 215 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.

BODY:
SEN. JOHN BREAUX (D-LA): Thank you very much, Mr. Co- Chairman, and I don't know if I'm giving the position of the Democratic side on this issue or not. I would suspect that there'd be a little bit of a disagreement in my thoughts on this issue. But very briefly, it is very clear that we pay a lot more for brand name drugs in the United States than they do in most parts of the world. The reason for that is because most parts of the world have artificially controlled prices. They fix prices, something that this country does not allow in any area that we do commercial business in. We believe in a free market.

So it's ironic, I think, that some would say the solution to the problem of the fact that drugs cost too much in the United States is to import another country's system of fixing prices arbitrarily by government fiat. Something that we would never do in this country because it would be contrary to our beliefs in a free market system and free competition. It is clear that U.S. consumers are getting stuck with the bill for research and development by the rest of the world. Our companies have to charge higher prices in this country because they are arbitrarily by government fiat forced to abide by a government edict on what they can sell their products for in other countries.

When other countries do that in other areas we file charges against them. I don't think anyone in this country would say, for instance, in the area of pork, for instance, from Canada. While we currently have an industry filing a petition against Canada pork producers because they get illegal subsidies on pork, our position has meant we're not going to let them import pork into this country freely because the Canadian government gives them illegal subsidies. The same thing is true with wheat from Canada. The Canadian Wheat Board arbitrarily gives more generous assistance to wheat monopolistic practices in Canada, so our members of Congress say, well, don't bring wheat in from Canada because they have an unfair government practices over there that arbitrarily allows for a cheaper price.

How about timber from Canada? There are cases against Canadian timber producers because the Canadian government gives their producers of timber special deals on property that grow timber in their country, so our people in this country say don't just open the door for Canadian timber because of artificial practices in that country which make the price arbitrarily lower than it should be. But when it comes to drugs, some of our same folks are saying oh, it's all right to import their price fixing practices.

This is not so much a fight against domestic producers as it is against governments that arbitrarily fix prices. And the answer to this, and I'm glad we're having this hearing, is to look at it from a trade perspective to find out exactly what practices in foreign governments have created this situation while our consumers are being forced to pay for the research and development for the entire rest of the world. Solve that problem, then we can get a fair price overseas which would lower the prices in this country to our consumers, and I thank you for having these hearings.

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SEN. BREAUX: Thank you very much to the panel. Let me-if I just state as I said, my opening comments, there's no question that the rest of the world is sticking it to the U.S. consumers of pharmaceuticals because of the arbitrary fixing of prices in these other countries requiring manufacturers here to charge more for their product in our market than they are able to get back from other parts of the world that they sell. Some people will argue that while the solution to the problem for U.S. consumers is to import their system into our country, and that we are going to have their price-fixing system apply to our consumers.

I think that is so totally contrary to everything else we do in trade and I wanted to ask you, Grant, about the concept.

There are members who would point out that we shouldn't allow the unrestricted export of pork product from Canada to the United States because of illegal subsidies in their country, that we shouldn't allow the unrestricted import of wheat products from Canada because the Canadian wheat board grants monopolies to their producers and allowed them to have a law of price, or for soft wood lumber that we shouldn't, for instance, allow unrestricted imports of their products from Canada into this country because of the fact that in Canada they give industry very favorable terms on leasing Federal property, keeping the price down.

So, so many examples of why we say there's an answer to this problem, it is to go after these unfair practices and fixing of prices in these countries in order to create a level playing field. But isn't the examples I gave you analogous to what we're talking about here? I mean here's a government that arbitrarily fixes prices, they say they do, they set prices, here's the price fixing, and I mean-what's the difference in the products that I pointed out, I mean as opposed to what we're talking about here?

MR. ALDONAS: Well, you raise a good point, Senator Breaux, in a sense that you've got an endemic problem in Canada where they set the price on a whole host of things, they opt for a particular economic model that has an impact on wheat, certainly, in terms of lumber, the fact that the province has set the price of timber below the market value has a dramatic impact.

From my perspective, since you know, the Commerce Department is supposed to be the voice of manufacturing, I do have real concerns about importing, the impact of price fixing abroad, because in effect what you're doing --

SEN. BREAUX: There's no question it would be good for our consumers, because we would be getting cheaper lumber, we'd be getting cheaper wheat, we'd be getting cheaper pork products.

MR. ALDONAS: True.

SEN. BREAUX: If we did that, wasn't that true?

MR. ALDONAS: Yes, and --

SEN. BREAUX: So what's wrong with that?

MR. ALDONAS: Well, the problem at the end of the day is about where you want the investment to take place, and whether you really are concerned about American industry. And if what you want is a research based industry in the United States which in fact is a model for what we want in U.S. manufacturing, we've got a heavy investment innovation, the protection of their brands, safety and quality assurances to the world market, that gives them an advantage in the marketplace.

The sort of thing that you want to do is ensure that you've protected those values. And we have the trade laws in these other areas for precisely that reason as a practical matter.

SEN. BREAUX: Here's the problem, though, I mean, this is going to-I look at it as a trade problem. The rest of the world is sticking it to us in their trade policies in the pharmaceutical industry. But I mean transparency is one thing, y'all did a great job with Australia, saying let's see what you're really doing. Okay, we find out what they're doing, they're fixing prices. Then you're going to say, all right, don't do that. Now, which member of parliament in Canada or which member of parliament in Australia is going to be the first one to introduce a bill to increase prices of pharmaceuticals in their country? Who's going to do that. Unless there's some huge hammer that somebody has to put over their heads, they're not going to do it. We can have all the transparency in the world and they're not going to move one inch unless there's a reason to do it that we can give them. Now, what reasons can we give them to raise prices of drugs in their country?

MR. ALDONAS: Well, I think what you can do is say the ultimate goal is lowering the cost to the consumer, and there's a better way to get there. The fact of the matter is --

SEN. BREAUX: I don't know what better way if it works pretty good when the U.S. arbitrarily fixed the prices.

MR. ALDONAS: Well, I mean, how to put it. Having a hammer always helps, to make sure you have it in your back pocket. On the other hand, I think, Senator Baucus may have seen in the case of British Columbia, they recognize they've got a system that is so poor in its performance in terms of selling timber, they're finally moving on the political front to eliminate the system and move towards auctions. And the reason is they had to see their own economic interest in it. So I think part of it is the persuasion that these countries that are the principal problems here, Japan and Europe in particular, really do have a vested interest in making sure they move in the direction of the market at this stage.

MS. SHINER: Can I also add to that?

SEN. BREAUX: Sure.

MS. SHINER: I think we can also effectively make the case that we're not looking at more spending but maybe smarter spending. And if you look at the patterns around the world, for example, Americans use a far greater percentage of generic drugs. Also, generics are much lower priced here in the United States. We reward innovation and then when it goes off patent, the price drops and there's, you know, less reward in the generic zone. In other countries you see often the opposite happening, that generics get a far greater share of the healthcare budget, and also that, for example, in Europe, only 16 to 18 percent of the market is generic. In the United States, over 50 percent.

SEN. BREAUX: Pardon, ma'am. They fix the prices of brand name and they increase the price of generics because most of-a lot of the generics are being produced in their countries.

MS. SHINER: Right.

SEN. BREAUX: I mean, this is not a surprise.

MS. SHINER: In part, we're not necessarily arguing for something that would change the budget, just for smarter spending that would reward innovation.

SEN. BREAUX: Thank you.

BREAK IN TRANSCRIPT

SEN. BREAUX: I just had one other follow-up question, and I thank the chairman. Perhaps, Grant, you may be able to address it. If I were a pharmaceutical company and I filed that I was exporting 70,000 pills to Canada and the Canadian market only required 50,000 pills, I make a decision, well, I'm going to see what the market needs in Canada to Canada, but I'm not going to sell them more than they need. Is there any rules or regulations that require a producer of any product to sell more to a country than they can market and sell in that country?

MR. ALDONAS: No.

SEN. BREAUX: I'm sorry?

MR. ALDONAS: No.

SEN. BREAUX: Okay. Thank you.

BREAK IN TRANSCRIPT

SEN. BREAUX: Thank you very much. I thank the panel members as well. It's really interesting, the one experience that we've had in this country in fixing pharmaceutical prices is in part B in the Medicare where we fixed the price of the reimbursement rate to oncologists for cancer drugs. We were overpaying them by a couple of hundred million dollars every year. So the last Medicare bill had to say look, we've tried to fix prices for cancer drugs and we screwed it up so bad, we're going to have eliminate it-and because we were overpaying them, not underpaying them, we were overpaying, it was just a great example of how a price fixing mechanism at the government level does not work.

It is interesting, I think, Mr. Calfee I was looking at your-of course, even without price fixing and lower income countries, the price of our product manufactured here is going to sell for less in that country than it does in this country. We sell cars that are made in the United States cheaper in Canada than we sell them in the United States. Why? Not because of price controls, but because the per capita income in Canada is, I don't know, substantially less than it is in the United States. Open heart surgery in Mexico is probably a lot cheaper than it is in Houston, or in, you know, New Orleans or anywhere else in this country, because that's what the market's going to be. The problem becomes when it is also an additional fixed price because of government price controls that I think that I am very concerned about.

Can you give me any concept as to why generics are so much more expensive in Europe, for instance, than they are in this country?

MR. CALFEE: Well, most of those countries have not passed anything like the Hatch-Waxman Act here. The Hatch-Waxman Act gives a pretty smooth open path for developing-I mean, in creating a generic drug and getting it on the market, manufacturing. And you can have several different manufacturers. In some of the European countries it isn't that way. We don't have a law that says, this is what you're allowed to do, these are the procedures you can follow, this is how you get a generic on the market.

And the result is that in some cases it's hard getting in the market, it is intentionally made hard to enter the market by some of these countries because they want to preserve either a very small number of domestic generic firms, or some of their domestic firms can still have branded drugs on the market where they don't want to get generic competition. So if those countries were to enact something like we have in the Hatch-Waxman Act and removed price controls, they would get cheap drugs very rapidly. And one or two countries have moved in that direction, such as Canada and Britain, and they're getting a good generic market.

SEN. BREAUX: Mr. Anderson, one of your recommendations, the last one, the fifth one, is that the United States should use prices in other countries as a benchmark price for the price we charge our consumers in this country. Do you limit that to pharmaceuticals? I mean, should-or is it-would you say that the benchmark price of what we charge products in this country should be based on another country's price, even though that country may have a per capita income of 50 or 100 percent less than the United States, so we could find some lesser developed countries that the price of the product is really very, very low. Should that become the benchmark price of what we sell that product for in this country.

MR. ANDERSON: Well, I think you have to look at it market-by- market. So if you're talking about hospitals or you're talking about physician service, most of the expenditures are for labor. So when a country that has very low labor costs-I wouldn't expect the U.S. to have similar prices to those countries. However, if we're talking a product like pharmaceuticals, which has-which is a product that you can buy or computers or something like that, I would expect that the United States would, in fact, pay similar prices --

SEN. BREAUX: Why would we set our benchmark price on a country that has a 50 percent lower per capita income. Why can't we say that because their per capita is so much lower than the United States, that the price of that product in that country should be the benchmark for the price in the United States when their per capita income is half of what our country's is?

MR. ANDERSON: I think we could set it up so that it's similar to countries like Canada, like the U.K., like Germany, like Luxembourg, which have similar levels of income. And if we want to pay 20 percent more to subsidize pharmaceutical research, that's fine with me. The question is, why should we be paying 100 percent more. Our incomes aren't 100 percent higher than those other countries.

SEN. BREAUX: Well, why not try to get them to allow a market price to occur within their boundaries, based on what their market would charge, as opposed to what their government says it should charge.

MR. ANDERSON: Well, I think when you don't have a monopoly-I mean, we've essentially given these companies the monopoly when we've given them a patent to sell drugs for a period of time. There is no alternative. If you have a problem with low blood levels, red blood cells, the only choice you've got is EPO. It's a single monopoly and there's one company that sells it, and that's Genentech. And so they have a monopoly to sell that product, and they, and any economist would tell you, should sell it at the highest price they could possibly get it in a free market. And so the only way to negotiate with that is to have an equally powerful purchaser.

SEN. BREAUX: Okay. My time's up.