Today, the White House Office of Management and Budget (OMB) released a report that appears to classify the user fees collected from medical device and pharmaceutical companies as subject to sequestration as of Jan. 2, 2013. While this step was unexpected as recently as two weeks ago, its impact on these companies and others is likely dramatic. It is possible that litigation or agency action to address this issue will be considered: many companies will not want to be put in the unusual position of paying user fees for additional Food and Drug Administration (FDA) review services but ultimately having those fees diverted instead to help reduce the general federal deficit.

This legal update briefly considers how the OMB September Sequestration Report released today treats the Food and Drug Administration (FDA) User Fees[1] for the purpose of calculating fiscal year (FY) 2013 levels of sequestered spending, and the possible rationale.

Key Questions of Concern:

  • Will the FDA User Fees be Subject to Sequester?

    The OMB report (Appendix A) describes the "sequesterable" budget authority (BA) for FDA as $3.873 billion. According to OMB, 8.2 percent of this amount ($318 million) will be sequestered in FY 2013. By a basic reading of Appendix A, OMB appears to be including the FDA user fees in the category of sequesterable FDA funding.

    Appendix B of the OMB report also provides a preliminary classification of budgetary resources as sequesterable or exempt and provides the legal basis for each exempt classification. Certain accounts are classified as both sequesterable and exempt if they fund multiple activities, some of which are exempt. Two FDA accounts that include the spending from non-federal sources and offsetting governmental collections (such as FDA user fees) include both sequesterable and exempt activities. The exempt portions of these accounts are classified as coming from "voluntary payments to the Government for goods or services to be provided for such payments."[2] Unfortunately, the OMB report does not go into further detail about which activities would be considered exempt. However, based solely on the total of FDA sequesterable BA (roughly $3.8 billion), it would appear that much of the user fees "live" within the sequesterable classification.

    If in fact OMB has determined that the FDA user fees are sequesterable, the impact to regulated industry required to pay such fees is unclear. The most rational policy outcome would seem to be for OMB to determine that 8.2% of the FDA's budget authority to both collect and spend the user fees is sequestered and therefore cancelled for the purposes of FY 2013. This would presumably result in a reduction of user fees paid into the agency to insure that the FDA does not collect or spend industry contributions beyond its budget authority. If industry pays less in fees, then a question would arise as to whether or not FDA's performance obligations under the user fee agreements would be similarly reduced. In the alternative, OMB could find that the Treasury itself has the authority to "keep" the money collected above FDA's budget authority, thereby utilizing the 8.2% of sequestered industry fees for deficit reduction. This result would be in line with the BCA's overall deficit reduction purpose, but would violate the negotiated agreement that FDA and industry made as part of the most recent user fee reauthorizations by using user fees beyond their stated purpose.

  • Will the FDA Have Enough Appropriated Dollars to Collect User Fees?

The OMB report assumes that discretionary appropriations will be funded at a level to be provided under a continuing resolution (CR) and at the same rate of operations as in FY 2012. Based on FY 2012 enacted levels, an 8.2% across the board reduction in FDA's appropriated funds is unlikely to put appropriation-specific triggers for the Prescription Drug User Fees Act (PDUFA) and the Medical Device User Fee Act (MDUFA) at risk.[3] However, the Generic Drug User Fee Act (GDUFA) and the Biosimilar User Fee Act (BsUFA) are likely to be in jeopardy of starting as planned on October 1, 2012, since these new user fee programs are not included in the FY 2012 appropriations act.

The triggers that cannot be measured directly by appropriations numbers are those tied to FDA's allocation of resources. If the agency has to do more with less, because of sequestration, they may be forced to readjust their spending priorities in a manner that undermines their ability to meet allocation triggers. This scenario would require FDA to make a conscious decision to impede user fee programs, but it may be a possibility if the 8.2% reduction spreads the agency too thin. 

Background

The OMB Sequester Report: The Sequestration Transparency Act of 2012[4] was enacted on July 26, 2012 to require the president to provide a detailed report on sequestration implementation by September 6, 2012. The report, released this afternoon, 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 sequestration."[5]

The FY 2013 Sequester: The Budget Control Act of 2011 (BCA)[6] 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 a Congressional Joint Select Committee on Deficit Reduction (the Joint Committee), charged with reporting legislation to reduce the deficit by at least $1.5 trillion by November 23, 2011. The inability of the Joint Committee to reach agreement has triggered automatic spending reductions to be spread evenly from FY 2013 to FY 2021.

In FY 2013, the first year of enforcement, the automatic reductions in direct spending and discretionary spending will be accomplished by a sequester, essentially "money that would otherwise be spent under current law is held back and is used instead for deficit reduction."[7] Many direct spending programs and activities are exempted from the sequester by statute, including Social Security and other retirement programs, Medicaid, and certain other programs benefiting low-income people. Under the OMB report, the sequestration would result in a 9.4 percent reduction in non-exempt defense discretionary funding and an 8.2 percent reduction in non-exempt nondefense discretionary funding. The sequestration would also impose cuts of 2.0 percent to Medicare, 7.6 percent to other non-exempt nondefense mandatory programs, and 10.0 percent to non-exempt defense mandatory programs.[8] Any cuts to discretionary spending through the automatic reduction would be in addition to those cuts resulting from the discretionary spending caps provided in the BCA.

After the first year of enforcement (FY2014-FY 2021), the automatic spending reduction will be carried out not through a sequester of both direct and discretionary spending, but rather a sequestration of just direct spending and  lowering  the caps on discretionary spending established under the BCA for the relevant years following FY 2013.

The purpose of sequestration as a deficit reduction tool is to force automatic reductions in spending. Interestingly, in the case of the FDA user fees, it is possible that the FY 2013 sequester may actually prohibit or limit the FDA from collecting fees from an outside source … which, one could argue, flies in the face of deficit reduction.

The FDA User Fees: FDA user fees are widely recognized as an invaluable resource for the agency, industry and patients who benefit from access to safe, often life-saving biomedical products. The revenues from these fees helps accelerate product approval (without adversely affecting review quality) and provides a mechanism for holding the agency accountable for agreed-upon performance measures. These revenues also serve as an investment in the growth of the agency; reauthorizations of FDA user fee programs tend to result in the expansion of user fee funding to regulatory activities beyond the original purpose of product review.[9]

To measure the potential impact of the new sequestration process on the FDA user fees, it is important to have a clear sense of how these unique and often tortured fee structures operate. Many will make an assumption that as a "fee," the FDA user fees are treated as revenues into the U.S. government and have no relationship to the annual Congressional appropriations process and therefore have no nexus to the impending FY 2013 reductions in spending. That is simply not the case. The FDA user fees, beginning with PDUFA are structured by design to be intertwined with the appropriation of federal dollars to the FDA and have therefore been the subject of much speculation as to how they would be treated for the purposes of the FY 2013 sequester.