KORUS FTA: AMBASSADOR'S MEETING WITH DEPUTY PRIME

1. (SBU) Deputy Prime Minister and Minister of Finance and
Economy (MOFE) Han Duck-soo told the Ambassador on June 2
that the results of the May 31 local elections were probably
unrelated to the economy, which is doing well. He attributed
the poor showing of Uri Party candidates to personality
politics and unfair treatment of the Roh Administration and
the Uri Party by the local press. The Ambassador raised USG
concerns about excessively harsh regulatory and investigatory
treatment of certain politically unpopular foreign firms.
Han countered with familiar assurances about a "level playing
field," and noted that the Korean government cannot intervene
in judicial investigations.



2. (SBU) On issues related to the U.S.-Korea Free Trade
Agreement (KORUS FTA), Han affirmed the plan announced by the
Ministry of Health and Welfare (MHW) to reform the National
Health Insurance system, including introducing a "positive
list" for reimbursing pharmaceuticals. Han said the plan had
been under discussion by the Korean government for some time,
and is necessitated by the fiscal constraints faced by the
government. The Ambassador strongly reiterated our criticism
of the plan and noted that it could complicate the KORUS FTA
negotiations. Han stressed that he and other cabinet
officials would continue to vocally support the KORUS FTA and
that President Roh remains firmly committed to the agreement.
End Summary.

ELECTION RESULTS


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3. (SBU) Han told the Ambassador that the results of the May
31 local elections (Ref A) would not have any affect on
Korean economic policy, or on the KORUS FTA. He asked
rhetorically, "What economic policy could we possibly
change?" Han commented that, contrary to press reports, he
does not think that economic issues played any significant
role in the election outcome, particularly since the economy
is performing well. Instead, Han suggested that Korean
voters are more swayed by the relative strengths of the
candidates' personalities. He laid the most blame for the
Uri Party's poor performance, however, on the media's unfair
and relentless criticisms of the Roh Administration and the
Uri Party. He declined the opportunity to speculate on his
own future in the Administration.

PHARMACEUTICALS


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4. (SBU) DPM Han stressed to the Ambassador that MHW's
envisioned reforms to the pharmaceutical pricing and
reimbursement system, including the introduction of a
positive list system and eliminating A7 pricing, had been
under consideration by the ROKG for some time, including
mention in the Health Minister's confirmation hearings, and
could not have come as a surprise to the U.S. Government. He
said that the reform of the system along the lines proposed
by MHW is essential due to the fiscal constraints the
government is facing. In current budgetary circumstances,
reducing costs is "critical." Han also noted that even
though the current system is a "negative list," MHW has been
running it as a de facto positive list for some time (Note:
thereby confirming one of U.S. industry's chief complaints),
meaning that the reform would not mean a great deal of change
for U.S. industry.



5. (SBU) Han denied the Ambassador's criticism that the
reform plan was launched by Health Minister Rhyu Si-min
without full consensus be other ROKG elements, saying that
the reform plan had been fully coordinated and approved in
advance. He tried to allay U.S. concerns by commenting that
the reform would not imply dramatic changes for treatment of
U.S. industry, though he admitted that the positive list
would try to exclude some of the "more expensive" drugs.
Responding to the Ambassador's point that the health system's
financial difficulties are more attributable to the
relatively high price of the local generics (which account
for 72 percent of drug expenditures), Han said that the
government would also seek to cut those costs by eliminating


insurance fraud and other corrupt practices. He disagreed
with the Ambassador's premise, however, saying that the high
costs of new drugs are the primary cost driver.



6. (SBU) DPM Han noted that the Korean government also plans
to introduce supplementary private health insurance designed
to cover costs not covered by the national plan. This
optional coverage could include costs for drugs not included
on the positive list.



7. (SBU) The Ambassador reiterated our serious disappointment
and disagreement with the MHW reform plan, and expressed
regret that Han was not willing to reconsider the proposal.
He emphasised that the United States views the plan as a
breach of faith that will complicate the upcoming KORUS FTA
negotiations. He also noted that the MHW proposal would do a
disservice to Korean patients by restricting their access to
new and innovative drugs. Han responded that such an
argument may have merit, but needs to be carried out by
Koreans amongst themselves. He added that Korea cannot wait
until all its FTAs are completed before making necessary
reforms. He opined that it was in fact better to get the
reform over with, and negotiate based on the new situation,
rather that negotiate on something that had to change
eventually in any case.

BROADER FTA ISSUES


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8. (SBU) Han assured the Ambassador that he and other cabinet
officials would continue to speak out in favor of KORUS FTA.
He emphasized that President Roh remains "firmly committed"
to pursuing the FTA, and is convinced that the pact is
necessary to raise Korea's competitiveness. The Ambassador
asked about Han's view of the U.S. FTA texts and whether Han
saw any particular issues with our drafts. Han replied that
our demand related to the elimination of certain taxes on
automobiles is "far too ambitious," and would cut Korean
government revenue too much. He asked if taxes are really
the reason why U.S. autos do not sell well in the Korean
market, pointing out that, overall, imports are doing quite
well in recent years as measured by sales value (rather than
number of units).

VERSHBOW