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The Pink Sheet – How Do You Solve A Problem Like Sequestration?

The Pink Sheet – How Do You Solve A Problem Like Sequestration?


If a deficit reduction plan is not reached, the resulting sequestration could have the ability to dramatically affect FDA service delivery, even if user fee collections are protected.

FDA, as with many federal agencies, has been directed by the White House to plan for the sequester in the event it goes into effect Jan. 2. The agency could face an estimated 7.8% budget cut if no agreement is reached to avert it.

Congressional leaders announced in August that they had made a deal to fund the government for six months when the fiscal year ends Sept. 30 and it seems unlikely a deal would not be crafted in the final days that would avert the cuts.

Still, the issue has created a stir among FDA advocates and others as they attempt to determine how the agency would be affected in a worst-case scenario.

In a May report on the sequester’s potential effects on health research, the advocacy group Research!America estimated FDA would lose $191.1 million, though the estimated cuts to the National Institutes of Health ($2.4 billion) and Centers for Disease Control & Prevention ($444.6 million) were greater.

FDA could be forced to cut employees or delay hiring under sequestration because about 80% of its costs are personnel-related.

Former FDA Commissioner Andrew von Eschenbach said in an interview he did not think the cuts could be made without laying off employees.

“Can you get past a short period of time? Sure you can. That’s what good management does,” he said. “But if you do that, and this is an agency that unfortunately has been … forced to do that for too long a period of time – to get by with less, it’s not feasible. It’s not rational. It’s not justified and it’s not good public policy.”

Von Eschenbach, now a senior fellow at the Milken Institute, said the agency could use its appropriations, user fee revenue, as well as the funds that could be generated through the Reagan-Udall Foundation to keep programs running.

He warned, however, that FDA cannot sustain existing service levels under the scheduled cuts.

“I think this can be managed temporarily, but long-term it is not possible for this agency to suffer a reduction and be expected to meet increasing demand,” von Eschenbach said. “It just won’t work.”

A Complicated Explanation For FDA

Part of the reason stakeholders are worried may be that there has been no definitive interpretation of how the sequester would be implemented.

Steven Grossman, deputy executive director of the Alliance for a Stronger FDA, said it is unclear at the moment how FDA should describe the potential effects.

He said FDA could say its approval decisions would slow and new initiatives would be delayed, but cannot give a more concrete description of the effects like some other agencies.

“I don’t know how it will be done and it’s not as simple as other agencies,” Grossman said in an interview. “There is no real way to interpret the impact on FDA.”

The Office of Management and Budget should provide some clarity soon. It must submit a congressionally-mandated report by Sept. 6 that estimates the required cuts.

Hiring Freeze, Travel Reductions Would Be Considered

When the expected reduction is about 5%, the agency could absorb it with a hiring freeze, said John Dyer, a health consultant and former FDA chief operating officer.

Dyer said in an interview when the reduction is more than 5%, travel or overtime cuts also would be considered.

And with the agency in the midst of growing its presence internationally, those cuts could be problematic. Travel budgets are used to get inspectors to foreign facilities, he said.

“That kind of [cut] will be very disruptive,” Dyer said of the sequester. “The impact will be serious.”

The potential threat to travel comes as FDA is implementing globalization plans amid criticism it is not conducting enough foreign manufacturer inspections. The agency acknowledged it can no longer inspect all facilities worldwide and wants to use information from trusted foreign regulators to better target its resources (“FDA’s Globalization Strategy Needs To Be More Aggressive, Sen. Brown Suggests” — “The Pink Sheet” DAILY, Apr. 19, 2012).

Patrick Ronan, president of Greenleaf Health and a former FDA chief of staff, said in an interview there are no cuts available that would not dramatically disrupt operations. He said the smaller reductions, such as travel limits or hiring freezes, likely would slow regulation and guidance writing and slow facility inspections.

Ronan said that ultimately would affect the drug review process.

“When you start talking about FDA’s budget, it’s delicate and any reduction in the budget … even a couple million dollars, probably has a greater effect at FDA than it does at other agencies,” he said.

What Would Happen To User Fees?

A cut that would affect user fee triggers likely would be more damaging, because if the trigger amounts were not reached, the agency would be prevented from collecting any submission-related fees.

It seems unlikely the agency would allow that to happen, because fee revenue supports personnel across many review divisions and many other activities.

Scott Gottlieb, a former FDA deputy commissioner for medical and scientific affairs and now a resident fellow at the American Enterprise Institute, said the actual sequestration cut is not as concerning as the potential for losing user fee collections because of the way it is implemented.

“[Not meeting the triggers] could be far more damaging and disruptive, even if the sequestration was eventually reversed in a budget compromise because it could cause, theoretically, some temporary work stoppages,” Gottlieb said.

Ronan said generally user fee programs cannot be touched by the sequester cuts because of the danger of missing a trigger.

“Any center at FDA that has a user fee program which is protected by a trigger, it’s not really an option to look at,” he said.

FDA has increased its dependence on user fees in recent years. Obama’s FY 2013 budget request assumed 44% of FDA’s budget, about $2 billion, would come from user fees. That was an increase from FY 2012, when 35%, about $1.33 billion, came from fees (“FDA’s Projected $20 Mil. In 2013 Biosimilar User Fees Translates Into 68 More Staffers” — “The Pink Sheet” DAILY, Feb. 13, 2012).

Fee revenue is meant to supplement, not supplant, tax payer dollars. Each program requires a certain amount to be appropriated from the treasury each year to allow the agency to collect fees.

The prescription drug user fee program does not have a defined annual amount in the law, but states that the total fee revenue each fiscal year cannot exceed the total costs for the resources allocated for human drug review.

The generic drug user fee program requires FDA to allocate at least $97 million to the program in FY 2013 to collect fees. FDA also must direct at least $20 million for the biosimilar program in FY 2013 in order to have the ability to collect its fees.

Trimming appropriations for those programs, while still meeting the trigger, likely would not create much savings, Ronan said.

“The generics program is effective, but does not have a big number to start with,” he said. “Any cuts you could make to the program would dramatically affect its efficiency and at the end of the day the total budget savings would be minimal.”

Both user fee programs were created July 9 when Obama signed the FDA Safety and Innovation Act into law. The legislation also reauthorized PDUFA (“FDASIA Is Signed, Not That White House Wanted Anyone To Notice” — “The Pink Sheet,” Jul. 16, 2012).

If the trigger amounts are not met, in FY 2013 FDA would lose the ability to collect $299 million in GDUFA fees and $693.1 million in PDUFA fees. It is unclear how much revenue BsUFA will generate, but individual fee amounts mirror PDUFA, meaning millions could be lost.

Without the new fee revenue, FDA likely would be unable to hire the additional application reviewers and facility inspectors needed to meet the GDUFA and BsUFA review goals (“Generic User Fee Agreement Includes FDA Pledge To Determine Best Use Of Foreign Regulator Inspections” — “The Pink Sheet” DAILY, Dec. 7, 2011 and “Biosimilar User Fee Agreement Reached, But Will Require Appropriations Boost” — “The Pink Sheet” DAILY, Sep. 22, 2011).

The agency also could be forced to move funds between its various accounts to meet the trigger amounts. Von Eschenbach said in the short-term it may come at the expense of other programs, but would not be a permanent fix.

“There’s some things that they may have to shut down and delay in terms of implementation,” he said. “There’s some things that they may have to shift resources from one place to another place temporarily at least in order to cover … That’s the kind of thinking that has to go on.”

A Time To Research Agency Effectiveness

Von Eschenbach said the review forced by the sequester is an opportunity to better understand whether FDA is positioned properly for the evolving industries it regulates.

An independent commission should look at the agency to determine whether it is ideally structured to meet future challenges, he said. Otherwise, FDA may never know if its resources are optimally allocated.

“We need to step back and look at this and ask the question: Is it designed properly? Is it organized properly?” von Eschenbach said. “I’m not talking about [science] … I’m talking about a Simpson-Bowles kind of commission that looks at operational capacity and capability from an organizational perspective.”

The idea of a broader reconsideration of agency operations is also a component of broader policy debates outside of the sequestration question. Republicans promised FDA reform in their national platform to better ensure resources are not wasted because of red tape and uncertainty (“Republican National Platform Embraces Medicare Transformation, FDA Reform” — “The Pink Sheet” DAILY, Aug. 29, 2012).

FDA also was required in user fee legislation to develop a strategic integrated management plan for the drug, biologic and device centers to help improve their efficiency.

Sen. Richard Burr, R-N.C., called for additional efficiency and performance studies during the user fee debate (“FDASIA Study Mandates Focus On Performance, But Could Slow Reviews” — “The Pink Sheet,” Aug. 20, 2012).