The U.S. has recently begun to include in free trade agreements provisions regarding government health care programs which reimburse entities for prescription drugs.  The U.S.-Australia free trade agreement was the first to include such provisions, followed by the U.S.-Korea Free Trade Agreement (Korea FTA).  Similar language is likely to be included in the Trans-Pacific Partnership Free Trade Agreement (TPP FTA), which includes Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam.[i]

Because the language of the TPP agreement has not yet been made public, this paper applies the language in the Korea FTA—which is a likely template for the TPP FTA—to the Medicare Part B program.  Medicare is a federal health care insurance program for individuals over age 65 and those with certain disabilities.  Without amendment to the language used in the Korea FTA, Part B of the Medicare program may violate Korea FTA, as well as the TPP FTA.

The Medicare Part B program is managed by the central level of government

Medicare was created by Congress and is operated by the federal government through the Centers for Medicare and Medicaid Services (CMS).  It meets the Korea FTA definition of a program for which the central level of government makes decisions regarding coverage and reimbursement because CMS “manages procedures for listing pharmaceutical products,” ” indications for reimbursement,” and “set[s] the amount of reimbursement for pharmaceutical products” for the program, because all reimbursement decisions, calculations and coding are conducted by CMS.

Part B of the program covers physicians’ services, outpatient care, and home health services, and covers a limited number of outpatient drugs.[ii] Most drugs administered in the hospital or in the doctor’s office are generally paid for in a bundle with the payment for the services provided, however Part B separately covers certain medications, such as pneumonia, hepatitis B and flu vaccines, immune globulin and nutrition IVs and oral anti-cancer and anti-emetic drugs.

Medicare uses the Healthcare Common Procedure Coding System (HCPCS) to reimburse for products, supplies and services used in treating a patient.[iii] Level II of the HCPCS codifies all of the products, equipment and supplies physicians use to treat patients.  CMS establishes and maintains the Level II codes.[iv] For pharmaceuticals, the appropriate HCPCS code describes the drug by the ingredients and unit size, but does not identify a specific manufacturer.  As such, brand name drugs without generic alternatives typically have their own HCPCS codes, and drugs with multiple generic alternatives share HCPCS codes.  CMS generally reimburses providers for prescription drugs at a rate of 106% of Average Selling Price (ASP).  Drug manufacturers calculate quarterly ASP for each of its individual drugs, which are identified by a National Drug Code (NDC).  This calculation includes all of the manufacturer’s sales of that product during the applicable quarter, with sales to many government programs or entities exempted.[v]

However, as discussed above, Medicare does not reimburse providers at the NDC level–it uses HCPCS codes.  In the case of a HCPCS code which encompasses drugs from multiple manufacturers or multiple NDCs, CMS uses a weighted ASP calculation which includes the ASP for all NDCs within the HCPCS, averaged based on utilization of each NDC.

The Part B program does not comply with all of the Korea FTA requirements

Article 5 of the Korea FTA contains several mandates with which the Medicare Part B program does not currently comply:

  • The Part B program does not allow independent review—Article 5.3(e) of the Korea FTA requires an “independent review process that may be invoked at the request” of an affected manufacturer. Medicare does have a Provider Reimbursement Review Board, which is an independent panel to which Medicare service providers may appeal if dissatisfied with a final reimbursement determination.  This Board is however, only available to service providers, and does not include drug manufacturers.  There is no formal means for a manufacturer to appeal a CMS decision regarding the reimbursement amount for a particular NDC.  As such, the Part B program may violate the Korea FTA.

  • The Part B program does not use market-based reimbursements—Article 5.2(b) requires reimbursement amounts be based on “competitive market-derived” prices.  Under the Medicare Part B program, drug manufacturers are required to submit ASP calculations for all of their drugs to CMS within thirty days of the end of each calendar quarter.[vi] CMS then uses those ASPs to calculate the weighted ASPs for each HCPCS code, which becomes the reimbursement amount for the following quarter.


As such, the pricing lags behind by two quarters.[vii] This lag can lead to reimbursement amounts which do not truly reflect the current market price for a particular drug.  Specifically, when a lower-priced generic alternative is introduced into the market, its price will not be a factor in the reimbursement calculation until six months later. As a result, during those six months, providers are purchasing the drugs at a lower cost, but are being reimbursed by Medicare at a higher level.  It could therefore be argued that this difference between the current market price and the Medicare Part B reimbursement amount results in reimbursements amounts which are not truly “competitive market-derived,” as required by the Korea FTA.

Further, while the existing ASP calculation may “recognize the value of the patented” drugs, the calculation does not meet the two other alternative to market-derived reimbursement requirements:  allowing manufacturers to apply for increased reimbursement and to appeal reimbursement decisions.   The Part B program offers an appeals process for providers and patients, but not drug manufacturers.  A manufacturer is responsible for calculating its own ASP, but if CMS finds that a manufacturer has provided “false” information in reporting its APS calculations, the company can be fined up to $100,000.[viii]

  • The Part B program does not provide opportunity to appeal for reimbursement for additional indications—As previously discussed, Medicare providers can appeal final reimbursement decisions, but this avenue of appeal is not available to drug manufacturers, as required by Article 5.2(c) of the Korea FTA.  In addition, existing federal drug oversight regulations prohibit drug manufacturers from marketing a drug for an indication which has not been approved by the FDA.  Although the Medicare Part B program may allow health care providers to prescribe medication for a patient for an indication which the FDA has not approved, the program does not provide a means for manufacturers to specifically request that a medication be covered for a non-approved indication.  If a company were to do so, it would likely be in violation of federal drug marketing laws.[ix]

[i] The language to be included in the TPP has not been made public by the U.S. Trade Representative, but sources indicate that the language will be very close to that included in the Korea agreement.  See Sean Flynn, Shape of U.S. TPP Pharmaceuticals Chapter Emerges, International IP and Public Interest, June 15, 2011,

[ii] The Medicare Part D program provides outpatient prescription drug coverage for beneficiaries and is generally managed by individual health plans, operating within parameters set by CMS.

[iii] See CMS HCPCS Coding Questions

[iv] 45 CFR 162.10002; 42 CFR Sec. 414.40 (a).

[v] 42 U.S.C. § 1395w-3a(c).  Also exempt are sales which are “nominal” in amount, as defined in the Medicaid statute.

[vi] 42 U.S.C. § 1396r-8(b)(3)(A)(iii).

[vii] See U.S. Dept. of Health and Human Servs., Office of Inspector General, Medicare Payments for Newly Available Generic Drugs, i (2011).

[viii] Supra note 4 at (b)(3)(C).

[ix] See 21 U.S.C. § 360aaa for FDA statute regarding dissemination of information regarding unapproved indications by manufacturers.