PHARMACEUTICALS: HEALTH MINISTER TELLS AMBASSADOR

UNCLAS SEOUL 001477

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/K AND EB/TPP
COMMERCE FOR 4431/MAC/OPB/EAP/DUTTON
PASS USTR FOR CUTLER, AUGEROT AND KI

E.O. 12958: N/A
TAGS: ETRD EIND KS
SUBJECT: PHARMACEUTICALS: HEALTH MINISTER TELLS AMBASSADOR
HE WILL STICK TO PLANS TO ANNOUNCE SHIFT TO "POSITIVE LIST"

REF: A. PORTMAN-KIM LETTER OF 5/1/06


B. MEMCON ON TONG-LEE MEETING OF 4/28/06

C. STATE 66875

SUMMARY
--------------


1. (SBU) The Ambassador met on May 2 with Minister of Health
and Welfare (MHW) Rhyu Si-min and expressed serious concerns
with Rhyu's plan to officially announce on May 3 a proposal
to shift to a "positive list" system for reimbursing
pharmaceuticals. The Ambassador urged Rhyu to postpone such
an announcement until after sufficient intergovernmental
discussions of the issue had taken place, or to reconsider
the proposal entirely. He noted that the sudden
announcement of such a far-reaching decision could have a
negative impact on the atmosphere surrounding the upcoming
U.S.-Korea Free Trade Agreement (FTA) negotiations and
significantly complicate the negotiations over
pharmaceuticals.


2. (SBU) Rhyu told the Ambassador that MHW would go ahead
with plans to announce on May 3 its intent to begin the
process of shifting Korea's system for reimbursing
pharmaceuticals under the National Health Insurance (NHI)
system from the current negative list to a positive list
system. He noted that the announcement would present
"tentative" plans, not a full-fledged, final proposal. Rhyu
outlined three principles for carrying out the shift,
offering assurances that the shift would not disadvantage
foreign pharmaceutical companies and promising that the plan
would not create any new non-tariff barriers to
pharmaceuticals trade. Rhyu noted that a two-month comment
period starting May 3 would be used to seek comments from
foreign manufacturers and governments. Rhyu also commented
that once FTA negotiations begin, if there is any evidence
that implementation of his plan is creating significant
difficulties for the FTA negotiations, he would be open to
continued consultations on the matter.


3. (SBU) In response, the Ambassador re-emphasized the need
for substantive government-to-government talks on this
matter, and stated that merely calling for a 60-day comment
period was an insufficient level of transparency --
particularly given the context of FTA talks -- since
negotiators would be presented with the problem of trying to
negotiate around the substance of a moving target.


4. (SBU) According to the Ministry of Foreign Affairs and
Trade (MOFAT),Trade Minister Kim Hyun-chong met with Rhyu
and a Blue House representative before Rhyu met the
Ambassador in order to try to talk Rhyu out of going forward
with these plans, but this effort was unsuccessful. Embassy
representatives will attend the May 3 MHW briefing on its
decision to move forward with the positive list strategy.
End summary.

AMBASSADOR LODGES STRONG PROTEST
--------------


5. (SBU) Ambassador Vershbow told MHW Minister Rhyu that the
United States has serious concerns with Rhyu's plans to
announce on May 3 a shift to a positive list system for
reimbursing pharmaceuticals. He reminded Rhyu that Korean
representatives had assured us in the last Quarterly Trade
Meeting that there would be full consultations with affected
stakeholders including foreign pharmaceutical companies.
The Ambassador also outlined substantive concerns with the
proposal, highlighting the potential of a positive list
system to limit innovation, restrict Korean citizens' access
to new and innovative drugs and disadvantage the research-
based pharmaceutical industry.


6. (SBU) The Ambassador also emphasized our concern that a
positive list system would unfairly strengthen MHW's hand,
enabling it to effectively force pharmaceutical companies to
lower their prices to levels that do not recoup their
research and development costs in exchange for being listed
by the National Health Insurance. He noted that this
announcement has the potential to sour the atmosphere
surrounding the upcoming FTA negotiations and make
negotiations over pharmaceuticals much more complicated by
creating a "moving target." He urged Rhyu to either
postpone this announcement until such time as interested
stakeholders had had ample opportunity to comment and
discuss its ramifications, or to reconsider his decision
entirely.


RHYU: INTEND TO ANNOUNCE TENTATIVE PLAN
--------------


7. (SBU) Rhyu responded to the Ambassador by noting that he
has an obligation to work for the health of the Korean
people, and that he is fully aware of the concerns expressed
by the Ambassador. He said that Koreans use too many
pharmaceuticals, which drives "excessive" health care
expenditure. In addressing this problem through
introduction of a positive list reimbursement system, Rhyu
said MHW would abide by three principles:

-- First, MHW would ensure that a shift to a positive list
system creates a system of fair competition, with "no
discrimination in the market between domestic and foreign
firms." Rhyu also noted in this context the widespread
prevalence, especially among local pharmaceutical
manufacturers of corrupt, illegal marketing practices that
also served to drive up expenditures, saying that a positive
list system would help put a stop to such practices.

-- Second, the shift to a positive list system would take
place without introducing any new non-tariff barriers to
pharmaceuticals trade. Rhyu offered assurances that the
principle of fair-market competition would be applied
equally to all firms, regardless of where their headquarters
are located.

-- Third, Rhyu promised that there would be full
transparency in the decision-making process surrounding
adoption and implementation of a positive list system. He
emphasized that the May 3 announcement would not be of a
final, full-fledged proposal, but rather of a tentative
plan. Rhyu said that a shift to a positive list system
would not necessitate an amendment to law, but only to
subordinate regulations. He said he foresees taking a full
two months to collect comments and opinions from
stakeholders before finalizing the proposal. Rhyu also told
the Ambassador that, as part of MHW plans to enhance
decision-making transparency, MHW would also set up an
independent review system.


8. (SBU) Summing up, Rhyu said that it is true that the
change to a positive list system would proceed concurrently
with FTA negotiations, although he averred that this fact
was nothing more than a coincidence. He assured the
Ambassador that if problems are created, or allegations of
new non-tariff barriers created by the positive list system
arise, then MHW is "ready to discuss" any such issues. Rhyu
concluded by commenting that MHW's pursuit of a positive
list system is "inevitable," but that the system would be
established in a way so as not to create any new non-tariff
barriers.

AMBASSADOR: MUST NOT INTERFERE WITH TRADE TALKS
-------------- --


9. (SBU) The Ambassador thanked Rhyu for his assurances that
he did not want to interfere in efforts to expand trade.
But given the suddenness of this development, even 60 days
would not be enough time to consult on the issue
appropriately. He added that it would have been
preferential to have had extensive government-to-government
consultations on this issue before it ever developed to this
stage.


10. (SBU) Rhyu replied by noting this idea should not be
considered a surprise, since he had raised the possibility
of seeking a switch to a positive list system in his
February 8 hearing before the National Assembly, and again
the week thereafter during the National Assembly's
"inspection" of MHW. He also noted that he had discussed
MHW's basic principles on March 27 with representatives of
the Korea Research-based Pharmaceutical Industry Association
(KRPIA) and the American Chamber of Commerce. (Note: MHW
Director Bae Kyung-taek later clarified that the positive
list issue had only been raised tangentially in that
meeting.)


11. (SBU) The Ambassador concluded the discussion by
emphasizing again that it is difficult to negotiate over a
moving target, and that it is highly regrettable that this
process is moving forward at the same time as FTA
negotiations. He expressed the hope that if MHW received
enough negative reaction during the comment period, it would
be willing to reconsider its plans.


MOFAT TRIES, FAILS TO AVERT ANNOUNCEMENT
--------------


12. (SBU) According to MOFAT Director General for Bilateral
Affairs Lee Gun-tae, Trade Minister Kim met with Rhyu and an
unnamed high-level Blue House advisor just prior to the
Ambassador's meeting with Rhyu in an effort to persuade Rhyu
to reconsider his plans to move forward with the positive
list proposal. Kim's efforts did not succeed, but may have
sensitized Rhyu to the FTA ramifications of this proposal.

MHW'S "UNOFFICIAL" MAY 3 PRE-BRIEFING
--------------


13. (SBU) MHW will hold what it is calling an "unofficial
pre-briefing" for stakeholders on May 3 to explain its
intentions regarding the positive list. Despite MHW claims
of transparency, only two representatives each from KRPIA,
the Korea Pharmaceutical Manufacturers Association (KPMA),
the Embassy, and the Mission of the European Union have been
invited to attend. Members of chambers of commerce or
individual companies will not be allowed to attend.
However, as currently planned, the event will be open to the
press.

VERSHBOW