Identifier
Created
Classification
Origin
06AITTAIPEI3275
2006-09-22 02:05:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
American Institute Taiwan, Taipei
Cable title:  

TAIWAN TIFA FOLLOW UP - PHARMACEUTICALS IN FLUX

Tags:  ECON ETRD EIND TW 
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VZCZCXYZ0000
RR RUEHWEB

DE RUEHIN #3275/01 2650205
ZNR UUUUU ZZH
R 220205Z SEP 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 2254
INFO RUEHBJ/AMEMBASSY BEIJING 5685
RUEHUL/AMEMBASSY SEOUL 8115
RUEHKO/AMEMBASSY TOKYO 8053
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHGV/USMISSION GENEVA 1766
UNCLAS AIT TAIPEI 003275 

SIPDIS

SENSITIVE
SIPDIS





STATE PASS USTR
STATE FOR EAP/TC,
USTR FOR BOLLYKY AND ALTBACH,
USDOC FOR 4431/ITA/MAC/AP/OPB/TAIWAN/JDUTTON

E.O. 12958: N/A
TAGS: ECON ETRD EIND TW
SUBJECT: TAIWAN TIFA FOLLOW UP - PHARMACEUTICALS IN FLUX

REF: A. TAIPEI 2947


B. TAIPEI 2570

Summary
-----------
UNCLAS AIT TAIPEI 003275

SIPDIS

SENSITIVE
SIPDIS





STATE PASS USTR
STATE FOR EAP/TC,
USTR FOR BOLLYKY AND ALTBACH,
USDOC FOR 4431/ITA/MAC/AP/OPB/TAIWAN/JDUTTON

E.O. 12958: N/A
TAGS: ECON ETRD EIND TW
SUBJECT: TAIWAN TIFA FOLLOW UP - PHARMACEUTICALS IN FLUX

REF: A. TAIPEI 2947


B. TAIPEI 2570

Summary
--------------

1. (U) Please see action request in paragraph 14. Over the
past five months the U.S. and Taiwan have held three
sets of consultations in an effort to resolve differences
over pharmaceutical pricing policies. In May, Taiwan
agreed to a three-month delay in announcing
mandatory price cuts and made several changes to the
Fifth Price Volume Survey, which determines the price
cuts. Following a Digital Video Conference on
September 13, the price cuts have once again been
delayed. During the DVC, Taiwan agreed to the U.S.
proposal to establish working groups to resolve long
term issues like actual transaction pricing, but was
unwilling to adopt the Merck 1982 Index for setting
patent term for pricing purposes, and pleaded for
more time to implement standard contracts. Taiwan
confirmed it will not/not use therapeutic groupings for
this round of price cuts but may be considering it for
the future. U.S. firms continue to argue strongly
against generic groupings. Taiwan has requested
further training and exchanges and stressed its goal of
"creating a fair trading environment" as well as its
desire to attract foreign investment in its
pharmaceutical and biotech sectors. End Summary.

Pharmaceutical DVC
--------------

2. (U) As a follow-up to TIFA Talks in May and August,
officials from the Department of Health (DOH) and
the Bureau of National Health Insurance (BNHI) and
USTR and Washington agencies, met via digital
video conference on September 13, Taiwan time.
The DVC previewed the upcoming announcement of
the Fifth Price Volume Survey results scheduled for
September 15, now delayed, and reviewed progress
on other long-term issues. Taipei officials were led
by Vice Minister of Health Mr. Chen Shih-chung and
President of the Bureau of National Health Insurance
Dr. Liu Chien-hsiang. They were joined by staff,
officials from the Ministry of Economic Affairs, and
AIT Econ and Commercial officers. From
Washington, the DVC was led by Deputy Assistant

U.S. Trade Representative Eric Altbach. He was
joined by Tom Bollyky, USTR Asia Pacific and
Pharmaceutical Policy, Jeff Dutton, Director for
Korea and Taiwan, Department of Commerce, Sue
Bremner, EAP/TC, and Rick Ruzicka, AIT/W. The
meeting lasted for about 2 hours and covered issues
relating to: standard contracts for drug transactions,
C survey and data accuracy, use of Merck Index 1982
vs. 1983, therapeutic groupings, and the Price
Volume Survey (PVS) implementation date. In
addition, DAUSTR proposed that working groups be
established to make progress on issues of long-term
concern. The following paragraphs highlight the key
issues raised in the DVC as well as follow-up
conversations over the last several days AIT has had
with BNHI/DOH and industry.

Standard Contracts
--------------

3. (U) DAUSTR Altbach pressed for the introduction of a
standard contract for transactions between hospitals
and drug distributors before price cuts from the new
PVS take affect. Altbach stated that there was a
strong case that the immediate implementation of a
standard contract would improve accuracy and
transparency of data reporting for future price volume
surveys and would reduce the black hole. BNHI
President Liu stated that he is already working with
Taiwan's Fair Trade Commission on this project, but
because it is an interagency process and because
hospitals and drug firms need to be consulted, it
would not be possible to implement so quickly. Vice
Premier Chen also noted that DOH was working on
other measures as well to improve the trading
environment. (Note: After the DVC DOH provided
AIT with a copy of new guidelines for doctors when
accepting gifts and conference invitations from drug

companies. While a step in the right direction, it does
not appear to go to the heart of the problem, primarily
bulk hospital purchases. End note.)

C Survey and Data Accuracy
--------------

4. (U) DAUSTR asked for an update on the C Survey, in
which BNHI has requested detailed information on
252 transactions where major discrepancies were
found between data reported by drug vendors and
hospital buyers. Dr. Liu reported BNHI expected to
take an additional month to review the data. If BNHI
judged that the discrepancy was made in error, then
the relevant drug price would be adjusted and no
further action would be taken. If BNHI suspected
fraud, however, the case would be referred to the
Ministry of Justice for appropriate action. USTR's
Bollyky reiterated USG points that were raised in
August - namely that we would like additional
information on whether companies or their employees
possibly would be subjected to administrative or
judicial penalties and what these penalties might be.
BNHI is in the process of providing this information.

Merck Index 1982 vs. 1983 vs. 1984
--------------

5. (U) As he argued during his August visit, DAUSTR
Altbach again stated that for the Fifth PVS it would
be most appropriate to use Merck Index 1982 to
establish patent term for pricing purposes. BNHI
pushed back and stated that contrary to their original
plan to use Merck Index 1984, they had already
compromised on Merck Index 1983. Based on
information provided by BNHI after the DVC, here is
an explanation of how the Merck Index has been used
in prior surveys:

--The last full PVS (meaning survey of all drugs
available in Taiwan's market as opposed to a selected
subset of available drugs) was the third PVS,
conducted from May 2002 to January 2003. It used
transaction data from second and third quarter 2001,
and price cuts were implemented March 2003. Merck
Index 1980 was used to establish patent term for
pricing purposes for the third PVS.

--The Fourth PVS was conducted from January 2004
to July 2005. It used transaction data from second
and third quarter 2003 and price cuts were
implemented in September 2005. BNHI does not
consider this a full PVS, but simply an update or
mini-survey of 841 items (about 40% of the market,
by value) which appeared to have been improperly
priced in the Third PVS. Based on this review, 564
drug prices were adjusted. Because it was an update,
no new Merck Index was used.

--The current Fifth PVS was conducted from
December 2005 to May 2006. It used transaction data
from third and fourth quarter 2004. Price cuts were to
have been implemented July 1, initially delayed to
October 1, now delayed further. Originally BNHI
planned to use Merck Index 1984, but stated during
the DVC that they planned to use Merck Index 1983.


6. (U) BNHI argues that Merck Index 1983 is the most
appropriate for the current PVS because the last
complete PVS was conducted three years ago and
based patent term on Merck Index 1980. Therefore,
now three years after the most recent full survey, it is
appropriate to shift the index by three years. In a
meeting with Econoff after the DVC, DOH advised
that they wanted to move toward a 20-year TRIPS
patent protection period. Even if BNHI uses Merck
Index 1983, the period would be well in excess of the
20-year TRIPS requirement. Industry has argued,
however, that since Merck Index 1980 was also used
in the Fourth PVS that a two-year shift to Merck
Index 1982 is appropriate.

Therapeutic Groupings
--------------

7. (U) As a result of information supplied by a PhRMA
member company, DAUSTR asked if BNHI was
holding to its earlier commitment to eschew
therapeutic groupings for pricing purposes. BNHI
staff stated that the case in question was a new drug
pricing case that had nothing to do with the PVS, and
was being appealed by the drug company. It was the
case of a newly-patented combination drug, where the
expert panel charged with setting a new drug price
suggested pricing the drug in comparison with one of
the drug's active ingredients already on the Taiwan
market. Altbach pointed out that this seemed in effect
to be therapeutic grouping and asked for details on the
appeal and the outcome of the case. BNHI agreed to
provide additional information. BNHI confirmed that
therapeutic grouping would not be used in the current
PVS, but pointedly would make no commitments
about the future, noting that Australia and Italy are
using therapeutic grouping in setting drug prices.


8. (U) BNHI later provided AIT with additional
information about this and another similar case. In
both cases the pricing panel, an independent group of
experts, suggested that the pricing of these new drugs
be based in part on other drugs already in the market.
The new drugs would also face any future PVS price
cut for drugs in the reference group. Although this is
the first time the panel has introduced this concept,
BNHI stressed that they were individual cases, and
that they do not signal any policy shift. Nonetheless,
if these individual cases became the norm, new drug
prices would be set in part by therapeutic grouping.
Both companies are appealing these decisions. AIT
has expressed interest in these cases and will monitor
the cases and their appeals.

Working Groups for Long Term Issues
-------------- -

9. (U) DAUSTR mentioned that during the May TIFA
Talks, BNHI suggested establishing working groups
to push progress on long-term issues. Altbach
suggested that this would be a good structure to
continue dialogue on these items, specifically
suggesting working groups for:

--Separating prescribing and dispensing (SPD),

--Developing a standard contract and transparent,
accurate data gathering, and a fair trading
environment, and

--Actual transaction pricing (ATP).

Dr. Liu endorsed this idea. Altbach stated that he
would provide suggestions on how to structure these
working groups to move forward.

Taiwan's Intended Deliverables
--------------

10. (U) At the DVC and in follow-up conversations with
AIT, Dr. Liu and BNHI staff enumerated a list of
concrete decisions that BNHI has taken as a result of
the TIFA consultations with AIT, USTR and industry.
They are listed below along with BNHI's estimate of
how much each action saves the pharmaceutical
industry. These numbers are estimates only and
reflect savings that accrue to all drug firms, not just
American firms.

--The effective date for the new reimbursement
schedule (i.e. price cuts) was postponed from July 1
to October 1 (now further delayed). BNHI stated that
this change will reduce the impact of price cuts on
pharmaceutical firms by NT$2-3 billion
(approximately US$61-92 million).

--The R-zone was expanded to 15% from 2%, which
was adopted with reference to the Japan system, to
encourage new drugs to enter the Taiwan market.
This reduces the impact of price cuts by NT$2 billion
(approximately US$61 million).

--Angio-tension receptor blocker (ARB) drugs will
not be subject to groupings, but will be reclassified as
patented drugs for related adjustments - a change that
will benefit 15 innovative drugs of six companies,
reducing the impact by NT$390 (approximately
US$12 million)

--Nineteen categories of drugs, including EPO and
insulin, on which the original R&D companies
maintain competitiveness, will not be subject to price
adjustments. This will influence the prices of 188
drugs of 16 companies, reducing the cost impact of
the price cuts by NT$790 million (approximately
US$24 million).

--The patent year is changed to 1983 from the
previously announced 1984. With one more year of
patent protection, this affects 33 drugs of 11
companies, reducing the impact by NT$400 million
(approximately US$12 million)

No Talk of Generic Grouping
--------------

11. (U) U.S. and other foreign firms here in Taiwan have
expressed their concern that generic grouping has not
been raised as part of our bilateral discussions. They
have argued strongly to BNHI that generic groupings
inflate the price of generic drugs, many of which have
not been tested for biological equivalence and are not
manufactured under quality control regimes that
match those for brand name drugs. In turn, generic
grouping reduces the reimbursement price of brand-
name off-patent drugs. Industry has pushed for no
groupings at all, arguing that it would reduce drug
costs for BNHI. Eliminating generic groupings,
however, could also harm the bottom line of member
hospitals, since they use the larger discounts given by
generics to subsidize their overall operations. AIT
has advised industry that we will pass on their
concerns to USTR and that they should also raise
their concerns directly with USTR via their corporate
offices or PhRMA.

What Are We Waiting For?
--------------

12. (SBU) All eyes are now on the Bureau of National
Health Insurance which has again postponed
announcing the final PVS results and delayed the
October 1 implementation date. Although BNHI and
the DOH claim all of the decisions have been made,
industry tells AIT that BNHI and DOH are bickering
over some of the details, possibly over the generic
grouping issue. They seem paralyzed by the concern

that the USG has not formally signed off on their
changes as part of the consultation process. They fear
that the USG might make formal objections to the
PVS results similar to objections raised earlier this
summer. After consulting with USTR, AIT declined
to provide any blanket guarantees, and we advised
DOH/BNHI that they are fully aware of USG views
on the current PVS and hope that they consider them.
We also noted that the USG appreciated the open
dialogue that occurred with AIT and industry over the
past few months and looked forward to working
closely together on long-term issues.

Training and Exchange Requests
--------------

13. (U) BNHI and DOH have made several general
training requests ranging from studying the Orange
Book and patent linkage drug pricing for Medicare,
learning about independent community pharmacies,
and, a new request, auditing hospital administrative
costs. AIT is working with BNHI and DOH to clarify
these requests and is also working with USTR's Tom
Bollyky coordinating these requests with relevant
USG agencies.

Next Steps
--------------

14. (U) Action requests for USTR: 1) We look forward
to receiving additional information from USTR on
possible training opportunities for DOH/BNHI staff.
2) BNHI is awaiting suggestions from USTR on how
the proposed working groups should be constituted
and the scope of their work. Please provide AIT
guidance on this issue. On our part, AIT is gathering
additional information from DOH/BNHI on the C
Survey as well as on the individual drug pricing cases
raised during the DVC.


15. (SBU) Comment: As the Fifth PVS comes to a
belabored, dramatic close, it is probably time to
declare victory and move forward on the longer term
issues. Long term reforms to the health care system
discussed under the TIFA process are supported by
the government and the health care bureaucracy.
Vice Minister Chen noted, in his closing remarks
during the DVC, he hoped reforms would help create
an environment that would attract foreign biotech and
pharmaceutical firms. Nonetheless, the political
realities of taking on powerful domestic health care
interests, and curbing the excesses in a popular,
inexpensive health care system will require our
persistent, full, and active engagement.
YOUNG