T he threat of a delayed or deterred

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1 Pharmaceutical Law & Industry Report Reproduced with permission from Pharmaceutical Law & Industry Report, 10 PLIR 1332, 10/12/2012. Copyright 2012 by The Bureau of National Affairs, Inc. ( ) September Sequester Surprise: FDA User Fees on the Chopping Block BY ELIZABETH M. WROE & PHILIP S. BONFORTE T he threat of a delayed or deterred (re-)authorization of key Food and Drug Administration (FDA) user fee programs (hereinafter referred to as the FDA user fees ) caused significant angst among biomedical product stakeholders over the course of the last year and a half. 1 While enactment of the Food and Drug Administration Safety and Innovation Act of 2012 (FDASIA) 2 alleviated these concerns, a new threat to the availability of FDA user fees in Fiscal Year (FY) 2013 has emerged: sequestration. The Balanced Budget and Emergency Deficit Control Act of 1985 (Gramm-Rudman-Hollings) first established sequester as a tool to force automatic reductions in government spending. 3 Now, the Budget Control Act of 2011 (BCA) has revived sequestration as a budget enforcement mechanism that is set to occur over the course of the next decade. 4 The Sequestration Transparency Act of 2012 was enacted over the summer, requiring the President to provide Congress with a report on how sequestration will 1 For the purposes of this article, user fee programs, the FDA user fees or any iteration thereof, refers to the user fees established by the Prescription Drug User Fee Act (PDUFA), Medical Device User Fee and Modernization Act (MDUFA), Generic Drug User Fee Amendments (GDUFA) and the Biosimilar User Fee Act (BsUFA). User fees for animal drugs and tobacco products are beyond the scope of this discussion. 2 Pub. L. No , 126 Stat. 993 (to be codified in scattered sections of the U.S. Code). 3 Pub. L. No , 99 Stat (codified as amended at 2 U.S.C. 900 et seq.). 4 Pub. L. No , 125 Stat. 240 (to be codified in scattered sections of the U.S. Code). Elizabeth M. Wroe and Philip S. Bonforte are members of the FaegreBD Consulting Health & Biosciences Practice Group. FaegreBD Consulting is a division of Faegre Baker Daniels LLP, a full service law firm with more than 800 lawyers and consultants in 12 locations. Wroe, the former Health Policy Director and Counsel of the U.S. Senate Committee on the Budget, provides strategic counsel to health and life sciences industry clients. Bonforte specializes in FDA policy and regulatory affairs. impact specific federal programs and agency funding in FY This report released by the White House Office of Management and Budget (OMB) on September 14, 2012 provides the Administration s preliminary views on exempt and non-exempt budget accounts, an estimate of the funding reductions that would be required across non-exempt accounts, an explanation of the calculations in the report, and additional information on the potential implementation [of the sequester] In what came as a September sequester surprise to many in FDA-regulated industries, the OMB report classifies all budgetary resources available to FDA, including user fees, as subject to sequestration. Given the important role these fees play in FDA funding, stakeholders are seeking clarity on the practical implications of this development. In an attempt to assist stakeholders as they navigate through the sequester process, the following article is designed to analyze how sequestration and the user fees work, overlap and present challenges for FDA funding in FY A. Sequestration The BCA was signed into law on August 2, 2011, in an effort to prevent the United States from defaulting on its financial obligations. In addition to raising the debt ceiling, the BCA introduced a number of mechanisms to promote deficit reduction. Among these mechanisms, was the establishment of the Congressional Joint Select Committee on Deficit Reduction (Joint Committee), charged with reporting legislation by November 23, 2011 to reduce the deficit by at least $1.5 trillion over the next decade. The Joint Committee failed to reach agreement, triggering automatic spending reductions to be spread evenly from FY 2013 to FY FY 2013 In FY 2013, the automatic spending reductions in discretionary spending and direct spending will be accomplished by sequestration, defined in federal law as the cancellation of budgetary resources provided by discretionary appropriations or direct spending law. 7 5 Pub. L. No , 126 Stat OFFICE OF MGMT. &BUDGET, EXECUTIVE OFFICE OF THE PRESIDENT, OMB REPORT PURSUANT TO THE SEQUESTRATION TRANSPARENCY ACT OF 2012 (Sept. 14, 2012). 7 Gramm-Rudman-Hollings 250(c)(2). COPYRIGHT 2012 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN

2 2 Generally speaking, discretionary spending refers to funding provided through Congressional appropriations, while direct spending, also known as mandatory spending, refers to federal funding authorized by law without going through the appropriations process. Many direct spending programs and activities are statutorily exempt from sequestration, including Social Security, Medicaid, and other entitlement programs. According to the September 14 th OMB report, sequestration in FY 2013 is expected to result in a 9.4% reduction in non-exempt defense discretionary spending and a 8.2% reduction in non-exempt nondefense discretionary spending. Reductions of 2.0% to Medicare, 7.6% to other non-exempt nondefense direct spending programs, and 10.0% to non-exempt defense direct spending programs is also likely to occur. 8 It is important to note that any reductions to discretionary spending due to sequestration will be in addition to reductions that result from discretionary spending caps established in the BCA FY 2014-FY 2021 After the first year of enforcement, the automatic spending reductions will occur using different enforcement mechanisms depending on whether spending is discretionary spending or direct spending. Reductions in direct spending will be carried out through sequester, while reductions in discretionary spending will be accomplished by further lowering discretionary spending caps (known as a discretionary spending cap adjustment ). B. FDA User Fee Programs FDA, industry and patients recognize user fees as an invaluable resource. These fees paid to FDA by the pharmaceutical and device industries help accelerate product approval (without adversely affecting review quality) and support an ever expanding list of agency activities. 10 The importance of user fees is illustrated by FDA s Congressional Justification for the agency s FY 2013 budget request. Under the agency s justification, FDA user fees would increase from $1.33 billion in FY 2012 to $1.97 billion in FY 2013, while non-user fee appropriations would remain largely unchanged at nearly $2.5 billion. 11 If these amounts were realized, it would bring the percentage of FDA s budget that comes from user fees to 44% in FY In the context of sequestration, an assumption can easily be made that, as a fee, FDA user fees are 8 OFFICE OF MGMT. &BUDGET, EXECUTIVE OFFICE OF THE PRESIDENT, OMB REPORT PURSUANT TO THE SEQUESTRATION TRANSPARENCY ACT OF 2012 (Sept. 14, 2012). 9 BCA 101 amends Gramm-Rudman-Hollings to establish 10-year statutory caps on the amount of money that can be spent through the annual appropriations process for the next 10 years. The Congressional Budget Office (CBO) estimates that adherence to these caps will reduce federal spending by $917 billion over the next 10 years. 10 Reauthorization of FDA user fee programs tends to expand user fee funding to regulatory activities beyond the original purpose of product review. For example, the Food and Drug Administration Amendments Act of 2007 expanded prescription drug user fees to encompass funding for post-market safety activities. Pub. L. No , 121 Stat. 823 (codified as amended in scattered sections of the U.S. Code). 11 FOOD AND DRUG ADMINISTRATION, DEPARTMENT OF HEALTH AND HUMAN SERVICES, FY 2013 FDA JUSTIFICATION OF ESTIMATES FOR AP- PROPRIATIONS COMMITTEES 4 (2012). treated solely as revenues into the U.S. government, having no nexus to the annual Congressional appropriations process and the sequester of discretionary spending. This is simply not the case. FDA user fees, beginning with PDUFA, are structured by design to be intertwined with the appropriation of federal dollars. A deeper understanding of how sequestration impacts FDA user fees requires a clearer sense of how these unique programs are structured. 1. Negotiated Agreement FDA user fees are characterized as an exchange of private fees for additional performance. 12 Prior to every user fee act, FDA and industry negotiate an agreement on what fee amounts are to be paid in order for the agency to achieve specified performance goals. While negotiations take place to help establish an equitable return on industry investment, this outcome is not guaranteed. Agreed upon fee amounts are recommended to Congress, then industry obligations to pay such fees are codified in statute. Performance goals, however, are handled differently. Agreed upon performance goals are communicated separately in a side letter to Congress and incorporated only by reference in the findings section of user fee legislation. FDA has no statutory mandate to meet such goals. The applicable findings language provides only that Congress intends the authorized fees be dedicated toward achieving performance goals, not that these goals be achieved. 13 It should be highlighted that FDA has an inherent incentive to meet performance goals; the agency relies heavily on user fees and would be subject to scrutiny from Congress, industry and other stakeholders if they failed to meet their obligations. Despite this fact, industry s power to enforce their negotiated agreement diminishes significantly upon enactment of user fee legislation. 2. Statutory Triggers Once terms are agreed to and legislation is enacted, the ability for the agency to collect user fees is subject to Congressional appropriations. 14 This means user fees are an offsetting collection (or a reimbursement for a set, appropriated sum of money). 15 Ideally, every fiscal year, an appropriations act is signed into law that dictates the total amount of money that is appropriated to operate FDA, as well as the amounts of various fees FDA is required to collect to partially offset this total appropriated amount (referred to as appropriated fee amounts ). 16 Total appropriated amounts (including 12 PDUFA & THE EXPANSION OF FDA USER FEES: LESSONS FROM NEGOTIATORS 77 (Nancy B. Myers & Anne P. McNickle eds., The Food and Drug Law Institute) (2011). 13 See, e.g., FDASIA See, e.g., Federal Food Drug and Cosmetic Act (FDCA), Pub L. No , 736(g)(2)(A)(i), 52 Stat. 1040, (1938) (as amended by FDASIA 101). 15 [Prescription Drug User Fees] are classified in the federal budget as offsetting collections because the authority for FDA to assess and spend such fees is subject to appropriation. CONGRESSIONAL BUDGET OFFICE, CONGRESSIONAL BUDGET COST ESTIMATE FOR S. 1695, BIOLOGICS PRICES COMPETITION AND INNOVATION ACT OF 2007 (June 25, 2008). 16 Offsetting collections are authorized by law to be credited to expenditure accounts (in effect, a negative expenditure) and are not subject to further Congressional appropriation be COPYRIGHT 2012 BY THE BUREAU OF NATIONAL AFFAIRS, INC. PLIR ISSN

3 3 appropriated fee amounts) are then deposited into an account established by the Department of Treasury and FDA draws on this account to meet negotiated performance goals. 17 FDA user fees are also subject to maintenance of effort requirements. These requirements condition FDA s authority to implement the user fee program on whether certain pre-determined levels of non-user fee funding are met on an annual basis. For example, MDUFA user fees are not available unless FDA s allocations for the review of medical device applications (excluding user fees) are greater than or equal to FDA s FY 2009 allocations for such review (excluding user fees). 18 FDA user fee dollars are intended to supplement, not supplant federal funding. Maintenance of effort requirements help preserve this intent. Ultimately, subjecting FDA user fees to both appropriations and maintenance of effort requirements serve as important program triggers. While the user fee program enables FDA to promote more timely patient access to safe and effective medicines, FDA is put in jeopardy of being overly dependent on the very industry it regulates if user fees outpace other agency funding. 1. What is the Impact of FDA User Fees Being Subject to Sequestration? The OMB report gave stakeholders the first official confirmation that FDA user fees would be directly impacted by the FY 2013 sequester. The report broadly describes the sequesterable budget authority of FDA as $3.873 billion, which reflects almost the entire FDA budget. At a practical level, this means that roughly $318 million of FDA s funding from both federal dollars and user fees cannot be utilized in FY The small portion of FDA funding that is not subject to sequestration is voluntary payments to the Governfore an agency may obligate the collections; an annual appropriation act may include limitations on the availability of obligation of these collections. U.S. GOVERNMENT ACCOUNTABILITY OFFICE, USER FEE DESIGN GUIDE (MAY 29, 2008). 17 The Department of Treasury establishes a separate account for each appropriation or fund following enactment of an appropriations act by Congress. See U.S. DEPARTMENT OF THE TREASURY, RESPONSIBILITIES RELATING TO GOVERNMENT INVESTMENT AC- COUNTS AND INVESTMENT IN GOVERNMENT ACCOUNT SERIES (GAS) TREA- SURY SECURITIES (Aug. 7, 2012). 18 FDCA 738(i)(2)(A)(ii) (as amended by FDASIA 203). 19 See FOOD AND DRUG ADMINISTRATION, DEPARTMENT OF HEALTH AND HUMAN SERVICES, PDUFA IV: FIVE-YEAR FINANCIAL PLAN 2009 UPDATE (2009). 3. Adjustments User fee collections do not cease or change during the course of a fiscal year once fee revenues meet appropriated fee amounts. Appropriated fee amounts serve only as a ceiling on what FDA can spend in a given fiscal year. How collected fees are handled depends on the circumstance. User fee collections generally either exceed or fall short of authorized amounts because of how individual user fee rates are calculated and implemented. The total user fee amount that may be collected for each user fee program in a fiscal year is defined in statute, broken down by FDA into individual user fee rates, and then published in the Federal Register on an annual basis. The amounts FDA collects from individual establishment and product user fees is fairly stable from year to year, but application fees are quite variable. 19 For example, if more new drug applications are received than originally estimated, it would result in an excess collection of user fees, (essentially more user fees than originally estimated, authorized, and appropriated). Conversely, fewer new drug applications than expected would result in an under-collection. This, along with other program characteristics, results in collections that do not always align perfectly with appropriated fee amounts. Under PDUFA and MDUFA, a cumulative collection provision exists, where collections that exceed appropriated fee amounts may be kept and used to reduce fees that would otherwise be assessed in a later fiscal year. 20 GDUFA and BsUFA do not appear to share this cumulative collection structure. Based on how FDA implemented the first iteration of PDUFA (which did not have a cumulative collection provision), generic drug and biosimilar biological product user fees collected in excess of appropriated fee amounts will likely be refunded. 21 All user fee programs address under-collection the same way, drawing on user fee collections from a prior fiscal year that were appropriated and collected, but never obligated. These collections are part of a carry over balance. 22 User fee amounts are rarely modified upwards to compensate for under-collection in a prior fiscal year. 23 C. Key Issues Despite the OMB report, three main issues remain for stakeholders: (1) the rationale behind, and expected impact of, classifying FDA user fees as subject to sequestration; (2) whether or not the 8.2% reduction in FDA s appropriated funds will place user fee triggers at risk; and (3) how FDA s ability to achieve performance goal obligations may be affected. 20 If cumulative collections through FY 2015, including an estimate for 2016, exceed the fee revenue amounts specified in the appropriations acts for that period, FDA will reduce the fee rates for FY 2017 by the cumulative amount that fees are estimated to exceed the appropriations during that period. FDCA 736(g)(4) (as amended by FDASIA 103); 738(i)(4) (as amended by FDASIA 203). 21 PDUFA I prohibited FDA from keeping fees in excess of the amount specified in appropriations (collection ceiling) each fiscal year through Amounts collected that exceeded collection ceilings through FY 1997 were required to be refunded. FOOD AND DRUG ADMINISTRATION, DEPARTMENT OF HEALTH AND HUMAN SERVICES, PDUFA 2008 FINANCIAL REPORT (2009). This result occurred because, at the time, PDUFA did not have a cumulative offset provision. See Pub. L. No , 106 Stat (1992) (codified as amended in scattered sections of the U.S. Code). 22 See FDCA 736(g)(1) (as amended by FDASIA 103); 738(i)(1)(as amended by FDASIA 203); 744B(i)(1)( as amended by FDASIA 302); 744H(i)(1)(as amended by FDA- SIA 402). 23 See, e.g., Medical Device User Fee Stabilization Act of 2005, Pub. L. No , 119 Stat. 430 (striking MDUFA s compensating adjustment provision). 24 OFFICE OF MGMT. &BUDGET, EXECUTIVE OFFICE OF THE PRESI- DENT, OMB REPORT PURSUANT TO THE SEQUESTRATION TRANSPARENCY ACT OF 2012 (Sept. 14, 2012). The OMB report correctly assumes that discretionary appropriations will be funded at a level to be provided under a continuing resolution and at the same rate of operations as in FY See id. PHARMACEUTICAL LAW & INDUSTRY REPORT ISSN BNA

4 4 25 Gramm-Rudman-Hollings 255(g)(1)(A). This reflects $67 million of the FDA s budget and arises from offsetting collections from federal sources. See generally OFFICE OF MGMT. & BUDGET, EXECUTIVE OFFICE OF THE PRESIDENT, BUDGET OF THE UNITED STATES GOVERNMENT, FISCAL YEAR (Feb. 13, 2012). 26 For FDA user fees to be subject to sequestration, OMB had to determine that such fees are discretionary appropriations as envisioned by the BCA. See generally BCA 302. Section 250(c)(7) of Gramm-Rudman-Hollings defines discretionary appropriations as budgetary resources (except to fund direct-spending programs) provided in appropriation Acts. Section 250(c)(6) further defines budgetary resources as meaning new budget authority, unobligated balances, direct spending authority, and obligation limitations. See generally Gramm-Rudman-Hollings Gramm-Rudman-Hollings 3 (2). 28 OFFICE OF MGMT. &BUDGET, EXECUTIVE OFFICE OF THE PRESI- DENT, BUDGET OF THE UNITED STATES GOVERNMENT, FISCAL YEAR 2013, SUPPLEMENTAL MATERIALS Table 33-1 (Feb. 13, 2012). 29 H.R. 5973, 112th Cong ment for goods or services to be provided for such payments. This exemption relates to collections from Federal sources and not user fees. 25 Although the confirmation that FDA user fees are indeed subject to sequester was surprising to some, it is not an entirely unexpected outcome given the statutory definitions at play and the common budgetary treatment of such fees. i. Rationale Reaching this outcome required OMB to make the determination that such fees are both budget authority...[and] provided in appropriations acts. 26 To understand how OMB made this determination one can look to both of these elements and the Congressional and Administration practices regarding the budgetary treatment of FDA user fees. First, budget authority is defined as the authority provided by Federal law to incur financial obligations...[including] offsetting receipts and collections as negative budget authority, and the reduction thereof as positive budget authority. 27 This means that budget authority includes not only the authority to spend, but also to collect. The President s FY 2013 budget request also expressly refers to FDA user fees as spending authority from offsetting collections... and categorizes the spending as BA (short for budget authority). 28 As discussed previously, FDA user fees are uniquely intertwined with Congressional appropriations and are initially provided for within the appropriations act, even though the user fees flow into the government to essentially pay it back for providing the funding to FDA up front. For example, the Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act of 2013 refers to FDA user fees in the same way as other budget authorities it provides for: Provided, That of the amount provided under this heading [the Food and Drug Administration], $712,808,000 shall be derived from prescription drug user fees authorized by 21 U.S.C. 379h, and shall be credited to this account and remain available until expended, and shall not include any fees pursuant to 21 U.S.C. 379h(a)(2) and (a)(3) assessed for fiscal year 2014 but collected in fiscal year The OMB report is only the Administration s preliminary thinking on what accounts will be subject to sequestration in FY It is possible (but very unlikely) that OMB could change determinations prior to sequestration (prescribed by the BCA to go into effect on January 2, 2013). However, in the absence of a reversal by OMB or enactment of a new law that somehow changes the operation of this sequester, stakeholders must grapple with the most likely implications of the report. ii. Expected Impact: Cancellation of Authority to Spend in FY 2013, Rollover of User Fees 30 The result of the OMB report is that FDA retains the authority to collect the full amount of expected user fees but cannot spend 8.2% of the funds in FY FDA will be permitted to utilize the 8.2% of sequestered fees in subsequent years when Congress appropriates new user fee amounts. This outcome is supported by the text of the BCA, the underlying Gramm-Rudman- Hollings sequestration procedures and generally makes sense given how the individual fees are collected throughout the year. The BCA provides that any reductions imposed under this section [which lays out sequestration] shall be implemented in accordance with section 256(k) [of Gramm-Rudman-Hollings]. 31 Section 256(k)(6) of Gramm-Rudman-Hollings states that budgetary resources sequestered in revolving, trust, and special fund accounts and offsetting collections sequestered in appropriation accounts shall not be available for obligation during the fiscal year in which the sequestration occurs, but shall be available in subsequent years to the extent otherwise provided in law. 32 FDA user fee legislation expressly permits the agency to maintain carryover balances in subsequent years for fees appropriated and collected, but not obligated by the end of a specific fiscal year. Under PDUFA and MDUFA, if cumulative collections through FY 2015, including an estimate for FY 2016, exceed cumulative fee appropriations for the same period, FDA will reduce fees assessed to industry in FY 2017 by the cumulative amount by which the fees collected exceed fees appropriated over this period. Although not an ideal outcome, these provisions would ensure that the 8.2% of sequestered user fees paid in FY 2013 could be utilized in subsequent years. To be clear, this result is not expected to change the fee amount paid by each user in FY As discussed, fees assessed to individual companies should remain as laid out in Federal Register notices. Alternatively, the agency could stop collecting fees once they hit their sequesterable limit, but that would create an odd free-rider incentive for innovators to wait and file a new drug application, in the case of PDUFA, after their industry colleagues have already filed their applications and exceeded the FDA s ability to collect more fees. 2. Will FDA User Fee Triggers Be Threatened by Sequester of Appropriated Funds? In addition to user fees being subject to sequestration, stakeholders must also consider the impact of the 30 Other outcomes that have been floated publicly include the cancellation of FDA s ability to collect 8.2% of the authorized fee levels and the full collection of fees, with 8.2% going towards deficit reduction. Neither outcome is supported by the text of the BCA and the underlying provisions of Gramm- Rudman-Hollings. 31 BCA Gramm-Rudman-Hollings 256(k)(6) COPYRIGHT 2012 BY THE BUREAU OF NATIONAL AFFAIRS, INC. PLIR ISSN

5 5 8.2% sequester of FDA appropriated funds. Although unlikely, it is possible a sequester will affect the agency s ability to meet previously discussed program triggers. The scenario is best explained by examining user fee triggers at a granular level. All FDA user fee programs have one simple, common appropriations trigger: the amount to be collected and made available in a fiscal year must be provided in advance in appropriations Acts. Two other triggers exist, but vary between programs; these triggers relate to maintenance of effort and can be categorized as appropriations-based and allocation-based. FDA must satisfy program triggers each year in order to collect and spend user fees. 33 i. Appropriated Dollars As stated, every FDA user fee program has an appropriations trigger. 34 Sequester will not impede any program s ability to meet this trigger because the requirement is focused simply on whether appropriated dollars exist, not the level at which they are appropriated. ii. Appropriations Based Maintenance of Effort PDUFA, MDUFA and GDUFA have a maintenance of effort trigger that prohibits FDA from collecting and 33 Triggers may overlap, but they are independent requirements for each program. It is possible for the agency to meet triggers for one user fee program without meeting others. 34 FDCA 736(g)(1) (as amended by FDASIA 103); 738(i)(1)( as amended by FDASIA 203); 744B(i)(1)(as amended by FDASIA 302); 744H(i)(1)(as amended by FDA- SIA 402). spending user fees unless appropriations for FDA salaries and expenses (excluding user fees) meet or exceed pre-defined appropriations levels (excluding user fees and multiplied by an adjustment factor). 35 BsUFA does not have this trigger. Based on FY 2012 enacted levels which are carried forward into FY 2013 through a Continuing Appropriations Resolution, enacted on September 28, an 8.2% across the broad reduction in FDA appropriated funding will not put this user fee trigger at risk. 37 Table 1 depicts how PDUFA, MDUFA and GDUFA will meet their respective triggers. 35 These three user fee programs vary slightly with respect to this trigger: PDUFA requires that FDA s total Salaries and Expenses appropriations (excluding user fees) meet or exceed FDA s FY 1997 Salaries and Expenses appropriations (excluding user fees and multiplied by an adjustment factor); MDUFA requires that FDA s Salaries and Expenses appropriations (excluding user fees) for devices and radiological products must meet or exceed a statutorily defined amount (multiplied by an adjustment factor); and GDUFA require that FDA s total Salaries and Expenses appropriations (excluding user fees) must meet or exceed FDA s FY 2009 Salaries and Expenses Appropriations (excluding user fees and multiplied by an adjustment factor). FDCA 736f(1); FDCA 738(h)(1)(A) (as amended by FDASIA 203); FDCA 744B(h)(1) (as amended by FDASIA 302). Technically, these triggers require fees to be refunded or not be assessed, depending on the applicable user fee legislation. 36 Continuing Appropriations Resolution, H.J. Res th Cong. (2012). 37 See FOOD AND DRUG ADMINISTRATION, DEPARTMENT OF HEALTH AND HUMAN SERVICES, FY 2013 FDA JUSTIFICATION OF ESTIMATES FOR APPROPRIATIONS COMMITTEES 93 (2012). PDUFA MDUFA GDUFA Respective FY 2013 Appropriations Trigger $1,172,827, $280,587, $1,883,539, Relevant FY 2012 Appropriations $2,336,515, $322,672, $2,336,515, Relevant FY 2012 Appropriations Minus 8.2% $2,144,920,770 $296,212,896 $2,144,920,770 Will Trigger Be Met? Yes Yes Yes Table 1. Comparison of appropriations levels and appropriations based maintenance of effort triggers. 38 FDA s total FY 1997 Salaries and Expenses Appropriation (excluding user fees) was $819,971,000. The PDUFA adjustment factor for FY 2013 is Multiplying the FY 1997 amount by the adjustment factor, an adjusted FY 1997 Salaries and Expenses Appropriation (excluding user fees) is $1,172,827, The statutory defined amount is $280,587,000. The adjustment factor for FY 2013 is 1. Multiplying 280,587,000 by the adjustment factor, 1, is 280,587,000. Under 738(h)(1)(A) (as amended by FDASIA 203), this trigger can still be met if appropriations are not more than 1% below the statutory amount. Therefore, the true absolute minimum amount that must be appropriated so Salaries and Expenses for devices and radiological products must meet or exceed $277,781, FDA s total FY 2009 Salaries and Expenses Appropriation (excluding user fees) was $1,883,539,000. The GDUFA adjustment factor for FY 2013 is 1. Multiplying the FY 2009 amount by the adjustment factor, 1, an adjusted FY 2009 Salaries and Expenses Appropriation (excluding user fees) is $1,883,539, See FOOD AND DRUG ADMINISTRATION, DEPARTMENT OF HEALTH AND HUMAN SERVICES, FY 2013 BUDGET REQUEST (2012). This calculation excludes rent to the U.S. General Services Administration, $160,506,000, which was also not included in the FY 1997 appropriation amount. See FOOD AND DRUG ADMINISTRATION, DEPARTMENT OF HEALTH AND HUMAN SERVICES, PDUFA 2010 FINANCIAL REPORT (2011). 42 See FOOD AND DRUG ADMINISTRATION, DEPARTMENT OF HEALTH AND HUMAN SERVICES, FY 2013 BUDGET REQUEST (2012). 43 Id. PHARMACEUTICAL LAW & INDUSTRY REPORT ISSN BNA

6 6 iii. Allocation Based Maintenance of Effort All user fee programs have a maintenance of effort trigger that prohibits FDA from spending user fees unless the agency allocates resources for product review (excluding user fees) in a manner that meets certain pre-defined allocation levels (excluding user fees and multiplied by an adjustment factor). 44 While allocation based triggers can be calculated, as in Table 2, these triggers cannot be measured directly by appropriations. If the agency has to do more with less because of sequestration, it may be forced to readjust spending priorities in a manner that undermines its ability to meet appropriate maintenance of effort levels. This scenario is unlikely as it would require FDA to make a conscious decision to threaten the existence of a user fee program; however, it may be a possibility if the 8.2% reduction spreads the agency too thin. 44 Like the appropriations based maintenance of effort trigger, this trigger varies between user fee programs: PDUFA requires that FDA s resource allocation for the review of human drug applications (excluding user fees) meet or exceed FDA s FY 1997 allocation for the review of human drug applications (excluding user fees and multiplied by an adjustment factor); MDUFA requires that FDA s resource allocation for the review of medical device applications (excluding user fees) meet or exceed FDA s FY 2009 allocation for the review of medical device applications (excluding user fees and multiplied by an adjustment factors); GDUFA requires that FDA s resource allocation for the human generic drug activities (excluding user fees) meet or exceed a statutorily defined amount (multiplied by an adjustment factor); and BsUFA requires that FDA s resource allocation for the review of biosimilar biological products (excluding user fees) meet or exceed a statutorily defined amount (multiplied by an adjustment factor). FDCA 736g(2)(A)(ii) (as amended by FDASIA 103); 738(i)(2)(A)(ii) (as amended by FDASIA 203); 744B(i)(2)(A)(ii) (as amended by FDASIA 302); 744H(e)(2)(B) (as amended by FDASIA 402). Relevant FY 2013 Allocation Based Trigger PDUFA MDUFA GDUFA BsUFA FDA must allocate at FDA must allocate at least $223,545,693 to least $97,000,000 on the review of medical human generic drug device applications activities (excluding (excluding user user fees). 47 fees). 46 FDA must allocate at least $211,630,886 to the review of human drug applications (excluding user fees). 45 FDA must allocate at least $19,907,480 on the review of biosimilar biological product applications (excluding user fees). 48 Table 2. Comparison of allocations necessary in FY 2013 for FDA to meet allocation based maintenance of effort triggers. 45 FDA s FY 1997 Appropriation for the review of human drug applications was $147,959,689. The PDUFA adjustment factor for FY 2013 is Multiplying the FY 1997 amount by the adjustment factor, an adjusted FY 1997 Salaries and Expenses Appropriation (excluding user fees) is $211,630, Under FDCA 736 g(2)(b)(i)-(ii) this trigger can still be met if spending is not more than 5% below the adjusted FY 1997 amount (however, fees assessed will be reduced in the subsequent fiscal year). Therefore, the true absolute minimum amount that must be appropriated to Salaries and Expenses (excluding user fees) is approximately $201,049, FDA allocated $223,545,693 from appropriations in FY 2009 for the review of device applications. The MDUFA adjustment factor for FY 2013 is 1. Multiplying the FY 2009 amount by the adjustment factor, an adjusted FY 2009 spending level (excluding user fees) is $223,545,693. Under FDCA 738(i)(B)(i), this trigger can still be met if spending is not more than 5% below the calculated FY 2009 amount (however, fees assessed may be reduced). Therefore, the true absolute minimum amount that must be appropriated to Salaries and Expenses (excluding user fees) is approximately $212,368, The statutory defined amount is $97,000,000. The adjustment factor for FY 2013 is 1. Multiplying $97,000,000 by the adjustment factor, 1, the adjusted statutory amount is $97,000,000. Under FDCA 744B(i)(2)(B) (as amended by FDASIA 302), this trigger can still be met if appropriations are not more than 10% below the statutory amount. Therefore, the true absolute minimum amount that must be allocated for the review of human generic drug activities is $87,300, The statutory defined amount is $20,000,000. The BsUFA adjustment factor for FY 2013 is Multiplying $20,000,000 by the adjustment factor, , is $19,907, What Is the Practical Impact of the Sequester on FDA s Performance Goals? The agency has two realistic options for addressing performance goals in light of sequestration: underperform or reallocate certain non-user fee funding towards meeting performance goals. How sequestration forces this choice depends on how sequestration is administered by agencies. Nevertheless, if history has any predictive value, the agency will likely choose to underperform. Impacting Performance When the sequester order is issued for FY 2013, the order will identify the sequesterable amount for each budget account. Agencies are then required to administer sequestration at the program, project, and activity (PPA) level. The PPA level for an account is usually listed in the text of an appropriations law, or in the accompanying committee report. The Sequester Transparency Act actually required OMB to identify how agencies would administer sequestration at the PPA level, but OMB did not comply with this requirement and focused solely on sequestration s account-level impact. How the agency decides to implement sequestration at the PPA level will have a significant impact on how agency resources are prioritized and performance goals are met. The main FDA account listed in congressional and budget documents is traditionally FDA, salaries and expenses. For illustrative purposes, one example of a COPYRIGHT 2012 BY THE BUREAU OF NATIONAL AFFAIRS, INC. PLIR ISSN

7 7 PPA level mention in the most recent House appropriations bill is of the total amount appropriated: (1) $883,503,000 shall be for the Center for Food Safety and Applied Nutrition and related field activities in the Office of Regulatory Affairs; (2) $999,966,000 shall be for the Center for Drug Evaluation and Research and related field activities in the Office of Regulatory Affairs, of which no less than $52,499,000 shall be available for the Office of Generic Drugs. 49 This gives some sense of the programmatic level at which FDA will be making decisions about reallocation of resource in order to administer sequestration. When compared to reallocating resources, underperformance is arguably a lesser of two evils for FDA. If the agency was to reallocate non-user fee funding to support performance goals, FDA would be consciously shifting the burden of sequestration to another program, issue or stakeholder. This concept of picking winners and losers is a dangerous proposition for an agency that is highly sensitive to public scrutiny and congressional oversight. i. History Repeating In FY 2008, after the Food and Drug Administration Amendments Act of 2007 (FDAAA) codified the fourth iteration of PDUFA, FDA faced unprecedented demands on...reviewer workloads. 50 FDAAA placed new drug safety obligations on an already understaffed agency, which resulted in an unintended and unexpected impact on performance goals. 51 Rather than reallocate resources in order to avert issues with staffing, training, etc., FDA allowed staff to miss PDUFA goals in order to bring their unit s workload into better balance with their existing resources. 52 It was not until a year later that FDA instructed staff to begin moving back to the prior posture of meeting PDUFA goals whenever possible. 53 While the current circumstance differs, the issue with FDAAA is telling. It demonstrates the agency s willingness to forgo performance goals when faced with an adverse circumstance. It also demonstrates a willingness of industry to accept this outcome. FDA recently validated the likelihood of underperformance on staffing. According to Mary Beth Clarke, a Senior Advisor and Acting Director of Executive Programs at FDA s drug center, [sequestration] is, of course, going to affect our hiring ability if we don t have as much of the user fee money. But it will proceed. It will just proceed at a slower pace H.R. 5973, 112th Cong FOOD AND DRUG ADMINISTRATION, DEPARTMENT OF HEALTH AND HUMAN SERVICES, PDUFA 2008 FINANCIAL REPORT (2009). 51 Id. 52 Michelle Hoffman, The FDA Itself Issues a Cry for Help. Is Anyone Listening?, Pharmaceutical Technology (Apr. 2, 2008), 27s+Comment/Message-in-a-Bottle/ArticleStandard/Article/ detail/ John Jenkins, Director of Office of New Drugs, Food and Drug Administration, New Drug Review: 2009 Update (Dec. 3, 2009), CentersOffices/OfficeofMedicalProductsandTobacco/CDER/ UCM pdf. 54 Stephanie Beasley, GDUFA Fix Bill Expedited Through Congress As FDA Prepares New Program, FDA Week (Sept. 9, ii. Remedy? The reality of the situation is FDA will underperform. One potential option would be for industry to engage in a post-hoc negotiation process to reconfigure performance goals based on revised agency funding levels. However, this option would be impractical given the fact that user fee legislation codifying the negotiated agreement has no mechanism for re-negotiation, the existing user fee program is already being implemented, and such a process would present political and legislative challenges. CONCLUSION The purpose of sequestration as a deficit reduction tool is to force automatic reductions in spending should Congress fail to meet certain deficit reduction targets. According to Former Senator Gramm (R-TX), it was never the objective of Gramm-Rudman-Hollings that sequester occur; he articulates that the objective was to force action, to force compromise. 55 Interestingly, in the case of FDA user fees, this latest lack of compromise and action has also created a substantial amount of confusion for stakeholders and the agency itself. The impending FY 2013 sequester creates challenges for FDA, an agency already strapped by increasing responsibilities in a time of fiscal restraint. It also creates challenges for biomedical innovators who are already struggling to bring new products to market in this economic climate. Most important, Americans deserve a functioning FDA that has the ability to allow safe and effective products to get to market, and in the hands of patients, as soon as possible. One thing is clear: this process is far from over and has the potential for further sequester surprises as it unfolds. When Members of Congress return to the Capitol in November for a lame-duck session there will undoubtedly be efforts to delay or avoid a sequester. If a large-scale deal proves unreachable, smaller changes or clarifications to the sequestration authorities may be attempted as add-ons to year-end mustpass legislative vehicles. Stakeholders could use this opportunity to exempt FDA user fees from sequestration altogether or gain statutory remedies to enforce FDA s performance goal obligations. The Administration also has several tools at its disposal. OMB could choose to revisit their classification of FDA user fees in the final sequester order. FDA will have some discretion at the programmatic level as it seeks to preserve and protect the FDA s public health mission. Finally, industry, advocates, and patients will all have a role to play as the government learns to provide essential services in the post-bca environment; an environment in which spending limitations and enforcement mechanisms will force the agency to prioritize functions to a new degree and one which is unlikely to go away any time soon as our nation stares down yet another fiscal cliff. 2012), available at (requires subscriber login or purchase). 55 Budget Enforcement Mechanisms: Hearing Before the S. Comm. on Finance, 112th Cong. 7 (2011) (statement of the Honorable Phil Gramm). PHARMACEUTICAL LAW & INDUSTRY REPORT ISSN BNA