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 
----------- 
¶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