In South Korea, although most doctor’s offices and hospitals are privately owned, a publicly funded National Health Insurance system guarantees universal healthcare access for all citizens. Private health insurance exists to supplement what the National Health Insurance does not cover. The National Health Insurance Corporation, a government-owned corporation that administers the insurance, determines the pricing of all medical procedures and prescription medicine covered by the National Health Insurance.
According to the South Korean government, the Korea-US Free Trade Agreement (KORUS FTA), which went into force in 2012, exempts health and medical service from liberalization and will not affect South Korea’s healthcare system. But a closer review of the agreement’s text reveals it can lead to fundamental changes in the healthcare system by facilitating privatization and limiting government ability to make healthcare policy.
The following is based on “Changes and Implications for the Health and Medical Sector Since KORUS-FTA Implementation,” a presentation (in Korean) given by Unified Progressive Party Representative Kim Mi-hee at a forum on the FTA in Seoul in March 2014.
1. The KORUS FTA enables the establishment of private hospitals in special economic zones.
Immediately after passage of the KORUS FTA, South Korea’s Health and Welfare Ministry decided to allow hospitals with more than 50% foreign investment in special economic zones to operate as private for-profit hospitals.
According to the KORUS FTA, South Korea reserves the right to create its own laws and policies regarding health and medical service. However, this reservation clause specifically does not apply to medical institutions and pharmacies on Jeju Island or in South Korea’s six special economic zones. This means hospitals and pharmacies in special economic zones are subject to all trade and service liberalization rules of the FTA, including the ratchet clause, which states that once regulatory measures are eased, they can never be reversed. Since special economic zones are located all around the country, this means the permanent establishment of private for-profit hospitals nationwide.
The first in line to establish a for-private hospital in the Incheon Free Economic Zone is a consortium of Samsung, KT&G, and Japanese investor Daiwa Securities. The KORUS FTA in effect became the catalyst for Korea’s first for-profit hospital – and a Samsung hospital at that.
It’s widely known that relative to public hospitals, private for-profit hospitals charge higher medical fees, have higher patient-to-staff ratios, employ more irregular workers, and have a tendency to provide selective, high-cost medical services over essential services such as emergency care. And as South Korea’s national health insurance system does not apply to private hospitals, the private hospitals are free to charge as much as they want for their services. It’s projected that for-profit hospitals in special economic zones will charge four times as much as public hospitals.
The creation of private hospitals in special economic zones can have a spill-over effect and increase medical costs overall even outside special economic zones. And the introduction of luxury hospitals can eventually open the door for the creation of a separate private health insurance system and lead to a two-tiered health care system.
2. The KORUS FTA will limit government ability to regulate private health insurance.
Although all South Koreans are covered by universal healthcare, many opt to enroll in private health insurance for supplemental coverage of deductibles and the more expensive medical treatments not covered by the National Health Insurance, such as advanced cancer treatments.
In recent years, the South Korean government has been encouraging the growth of private health insurance and changing the healthcare system from one where all healthcare is publicly provided for to a system where for-profit private health insurance gradually takes on a greater role.
Already, 30-40% of the nation’s healthcare is covered by private health insurance. 53.2% of adults over the age of 20 say they have private health insurance and the average monthly household payment for private health insurance is equivalent to more than $200.
However, since the emergence of private health insurance is still relatively new, it’s a largely unregulated sector. For example, there is no regulation regarding the cost of premiums, insurance plans and product offerings are not standardized, and consumers routinely complain about being rejected by insurance companies for pre-existing conditions or for unspecified reasons.
And the KORUS FTA limits government ability to strengthen regulation of the largely unregulated private health insurance sector. As the health and medical service provision of the FTA does not apply to private health insurance, the reservation clause that enables the South Korean government to make its own policies regarding health and medical service does not include private health insurance. Rather, private health insurance is considered a financial product. And the KORUS FTA forbids regulation of new financial products as it is considered “indirect expropriation” (government action that reduces the value of a foreign investment). The FTA, therefore, will pose a serious challenge to government measures to strengthen regulation of private health insurance.
3. The KORUS FTA weakens government ability to strengthen the public health insurance system.
All South Korean political parties across the political spectrum tout strengthening and expanding National Health Insurance coverage as the core of their social welfare policies. The KORUS FTA, however, can undermine government ability to implement such policies.
Although the KORUS FTA technically exempts health and social welfare services from liberalization, it also specifies that if government-provided services compete with those of financial institutions, they are subject to FTA rules. Should the government wish to expand National Health Insurance coverage to include treatment for cancer and other critical conditions, for example, it can be deemed in competition with private health insurance and be subject to FTA rules. And FTA rules require the South Korean government to guarantee a “minimum standard of treatment” for foreign investors in accordance with international norms and compensate investors for losses due to expropriation. Strengthening National Health Insurance can be deemed “indirect expropriation” if it encroaches on the private health insurance market, and the investor-state dispute provision of the FTA enables foreign investors to challenge the policy in an international tribunal.
The arbiter in that case will be not be the South Korean government but an international panel like the World Bank’s International Center for Settlement of Investment Disputes and will likely include U.S. investors with stakes in South Korean insurance companies.
80% of investor-state dispute claims under similar FTAs have been filed by corporations accusing governments of violating their obligation to provide foreign investors a “minimum standard of treatment” in accordance with international norms. For example, in 2009, Centurion Health, a for-profit U.S. hospital corporation, challenged Canada’s national healthcare system. According to Centurion Health, which sought to build a large, private surgical center in British Columbia, Canada’s policy of universal healthcare access and free health insurance for its citizens undermines its due profits and is a breach of Canada’s obligations under NAFTA. The arbitration panel eventually dismissed the case, but only because Centurion failed to make the required deposit of costs of the arbitration proceedings.
South Korea’s compulsory National Health Insurance is similar to the Canadian system in that the government determines the pricing of medical services and prevents medical institutions from charging more. This means South Korea’s health insurance system, too, can be challenged in an investor-state dispute, and compulsory, universal health insurance coverage, the core of South Korea’s healthcare system, can be undermined due to the FTA.
4. KORUS FTA will increase the cost of medicine and make life-saving medicine inaccessible for working people.
The KORUS FTA introduces the patent-drug approval linkage system in Korea. Under this system, drug regulatory authorities are required to delay approval for generic versions of medicine until patents of the original product expire. And the mere claim of patent infringement automatically puts the brakes on market entry for the generic drug in question. Such rules do not exist for any other commercial product. For example, the numerous mutual patent infringement claims between Apple and Samsung Electronics have had no impact on the continued sale of their products while their claims are adjudicated.
Not only does this system delay access to low-cost alternatives, it also incentivizes patent abuse. The practice of “evergreening” – the myriad ways in which drug monopolies abuse the law to extend their intellectual property rights over profitable drugs – has become a widespread problem driving up the cost of medicine. And abuse of the patent-approval linkage system is a convenient way for pharmaceutical multinationals to extend their patent terms. Patent applications and patent infringement claims have markedly increased in places that have adopted the patent-approval linkage system. Pharmaceutical patent owners eventually lose in most patent lawsuits – 73% in the United States and 77% in South Korea – but the financial benefits of deterring generic market entry by filing a bogus claim outweigh their risks or penalties.
For countries with a public health insurance system that covers all or most of the cost of medicine, the delay of generic drug market entry is not simply a dispute between patent-owning pharmaceutical corporations and producers of generic medicine, but a matter of crucial public interest. Those who profit from this system are multinational corporations but the damage will be borne by patients in need of life-saving medicine and the general public that has to pay for the increased financial burden on National Health Insurance.
Furthermore, the KORUS FTA’s chapter on “Pharmaceuticals and Medical Devices” requires the South Korean government to set the cost of reimbursement for pharmaceuticals and medical devices based on a “competitive market-derived price,” which means the standard market price in advanced countries. This gives the United States the basis to pressure South Korea to adopt the standard market price of medicine in advanced countries, which is twice as expensive in the EU and three times more expensive in the United States.
5. The KORUS FTA undermines government ability to set policy on the pricing and reimbursement of medicine and medical devices.
In the name of “transparency,” the KORUS FTA’s chapter on “Pharmaceuticals and Medical Devices” enables the involvement of pharmaceutical corporations in the process of determining the pricing and reimbursement of pharmaceutical products and medical devices.
An addendum to the chapter also requires the establishment of an independent review body “independent of the healthcare authorities at the central level of government” to review determinations regarding pricing and reimbursement. This independent review process, which became operative in South Korea in December 2011, excludes and undermines the Health and Welfare Ministry, the Health Insurance Corporation, and the Health Insurance Review Agency, which have traditionally performed this function.
Although, for the time being, the so-called independent review process excludes the participation of pharmaceutical and medical device corporations, it is nonetheless composed of medical organizations under their influence. And the United States insists on the direct participation of pharmaceutical and medical device corporations in the review process. In this way, the KORUS FTA undermines the government’s ability to make healthcare policy and privatizes the process of determining pricing and reimbursement for pharmaceuticals and medical devices.