P&T Journal ... April 2011
FDA Plans New National Standards, Pharmacies Tread With Trepidation
Stephen Barlas
As if the integration of electronic health records (EHRs) into
pharmacy operations hasn’t been difficult enough, hospitals
will soon face a secondHerculean technology task imposed by
the federal government—a challenge that most medical facilities
and pharmacies don’t even know is coming. A national
requirement to “track and trace” prescription drug packages—
in order to preventing counterfeit products from getting into
pharmacies—is coming down the pike, thanks to California.
That state already has its own deadline in place for January 1,
2015; however, the FDA will almost certainly be replacing the
requirement with a national standard in order to prevent the
drug-supply chain from getting tangled up in 50 different
state laws.
The California 2015 deadline formanufacturers to
apply an electronic pedigree (e-Pedigree) to each
item-level package has been delayed twice before
because of anguished cries from manufacturers,
wholesalers, and pharmacies that were not ready to
comply. The new final deadline is July 1, 2017, for all
California pharmacies to authenticate the e-Pedigrees
of all packages that arrive at their back door.
“The delays in California gave us a little breathing
room,” acknowledges Robert J. Bepko, Jr., RPh,MHA, Director
of Professional Services at Norwalk Hospital in Connecticut.
As a result of those delays, the National Council for PrescriptionDrug
Programs (NCPDP),which develops standards
for the pharmacy industry, set up its Work Group 17.
This group has been tracking the potential impact of a California
e-Pedigree requirement on pharmacies. In December 2010,
Work Group 17 issued a white paper on the topic.Mr. Bepko,
a member of the Work Group, says that even after California’s
deadline for implementation was delayed,Work Group 17 was
made aware of efforts by New York andMassachusetts to develop
their own e-Pedigree laws.
“We are hoping for a national law,” Mr. Bepko asserts.
FDA’s Role and Timetable Are Unclear
It is not clear when the FDA will establish a national requirement
that would brush away the California program or
whether the agency needs authorization fromCongress to do
that. At a suburban Maryland FDA workshop that took place
on February 14 and 15, 2011, Grant Hodgkins, Manager of
Strategy, Standards, and Processes at Alcon’s supply chain,
asked that very question of Ilisa Bernstein, Acting Deputy
Director of the Office of Compliance at the FDA’s Centers for
Drug Evaluation and Research (CDER).
“I will defer answering that,” she replied.
The FDA does have the authority to set national standards
drug packages, as permitted by the 2007 FDA Amendments
Act (FDAAA). The February workshop had been scheduled
to obtain industry input on standards for interoperability,
authentication, and data management that the FDA plans to
write. Many in the audience equated the writing of standards
with the imposition of a national requirement to track pharmaceutical
packages (forward) and trace them (backwards
from the pharmacy). There was also confusion about the
difference between California’s e-Pedigree requirements and
the prospective requirements of a track-and-trace system (to
be imposed by the FDA at a future date).
The confusion is understandable. There are three
major permutations of an item-level drug-tagging
system meant to make it impossible for counterfeiters
to divert products. All three steps start with a
Standardized Numerical Identifier (SNI), as follows:
(1) The SNI is established and printed on item-level;
(2) the SNI is incorporated into an e-Pedigree, which
is passed forward only; and (3) the e-Pedigree becomes
part of a track-and-trace system, with each
person along the distribution channel adding
information and being able to be queried “backwards” to obtain
information or to communicate (e.g., the pharmacy with
the wholesaler or manufacturer).
The SNI is printed in a two-dimensional (2D) datamatrix bar
code—or, alternatively, on a radiofrequency identification
(RFID) tag—on the immediate package as it goes down the
packaging line.
In March 2010, in response to a requirement in the 2007
FDAAA, the agency issued guidelines onwhat to include in the
SNI: a serializedNationalDrug Code (NDC), consisting of the
manufacturer’s NDC, plus a unique serial number generated
by the manufacturer or repackager for each individual package.
Serial numbers should be numeric or alphanumeric. The
SNI conforms to the structure of the serialized Global Trade
Item Number (GTIN), GS1’s standard for trade item identification.
GS1 is a nonprofit organization (formerly called EAN
International) with headquarters in Belgium.
Overseas Requirements Are Simpler Than
California e-Pedigree or Track and Trace
Turkey and France already have requirements for drug
packages to be printed with 2D data matrix codes when they
leave a manufacturer’s plant. In this first iteration of an anticounterfeiting
(“point-of-dispensing”) system, however, the
codes are simply uploaded to a data repository and then sent
down the distribution line to the pharmacy, where that SNI is
authenticated via a 2D data matrix bar-code reader.
The e-Pedigree system endorsed by California goes a couple
of steps further by requiring the creation of an e-Pedigree
manufacturer
to a third-party logistics carrier, through a warehouse,
and to the pharmacy. First, the package is placed at the end of
a packaging line inside a case with similar packages; the case
is also given an SNI. The package and case SNIs are matched
up, forming a “parent/child” relationship.
The information, in the form
of a digital shipping document
tied to a specific customer order, is passed along the distribution
channel and is added to the package every time it changes
ownership. These pedigrees would be formatted based on a
GS1 standard called the Drug Pedigree Messaging Standard,
which was developed in 2007. However, many consider that
standard to be antiquated. GS1 is working, ever so slowly, on
an updated standard.
A track-and-trace system is similar, allowing for communications
to go backward; however, an e-Pedigree can be forwarded
only. In track-and-trace systems, when the product
changes hands, the new data that were entered into the pedigree
are sent back to the repository, which maintains the product’s
travel history. For example, a pharmacy can query a
wholesaler or manufacturer or can send an acknowledgment
that a shipment was received. All participants in a manufacturer’s
supply chain would have some access to that data repository,
although access might be controlled by the drug’s manufacturer
or by a third party, often a government agency.
In both e-Pedigree and track-and-trace systems, theoretically
at least, cases must be opened in a warehouse, and the 2D bar
codes on the packages must be read to ensure that the packages
inside are the ones sent by the manufacturer. This is a
huge problem for manufacturers and distributors, especially
in terms of the time it is expected to take and the associated
costs. California allows inference, whereby wholesalers and
others would not have to pull the cases apart to check SNIs or
affirmthe parent/child relationship between each package and
the case.
Dirk Rodgers of RxTrace.com explains that California’s
Board of Pharmacymust draw up rules so that companies will
know how they can make use of inference. He says:
“It is possible that the Board could create rules that define
the concept so narrowly that it will be a far cry from what the
industry means when they use the term. We’ll have to see
where they take it.”
Costs Rise as Requirements Expand
There are also broader implications formanufacturers stemming
from requirements for repositories, inference, and the
like. Steve Drucker, Director of Global Pharmaceutical Commercialization
in Packaging Technologies and Compliance at
Merck, explains:
In a full track-and-trace system, you have to make changes to your
manufacturingmanagement systems, warehousemanagement systems,
and order-to-cash systems to track item-level SNIs andmaintain
the parent/child data instead of simply tracking lot numbers,
which is what we do now. It is a huge endeavor, and the complexity
is far beyond anything we have tried before, as are the costs.
He says that the estimated costs for full track-and-trace compliance
are as high as $100 million.
The challenges and costs for pharmacies mount as one
moves up from a point-of-dispensing system (the main requirement
is to verify the SNI), to e-Pedigree (pharmacists
must decommission the pedigree), to track and trace (pharmacists
must communicate with physicians as well as manufacturers).
These possibilities raise all sorts of questions for hospital
pharmacists such as Robert Bepko, Jr. He already has a
pharmaceutical inventory system that he purchased from
McKesson, his wholesaler. In addition, his hospital is in the
process of installing an electronic health record (EHR) system
from Cerner in order to qualify for Medicare incentive payments
for capital costs—and to avoidMedicare penalties for not
implementing an EHR system. He says:
If we knew what was going to be expected of us, we would work toward
that end. If the Joint Commission, the Drug Enforcement
Agency, or the FDA comes in to a pharmacy and asks a pharmacist
to showthempedigrees for themonth ofMarch, the pharmacist can
pull up that list from McKesson. But what if they want to see the
pedigrees for patientMr. Jones?Does that default to the Cerner system?
So you can see the difficulty we have here—preparing for what
we don’t know.
Each additional responsibility adds pharmacy costs, and a
full track-and-trace requirement is likely to be very costly to all
pharmacies. ChrissyKopple, Vice President ofMedia Relations
at theNational Association of ChainDrug Stores, says that proposals
that would mandate the tracking and tracing of prescription
drugs are faced with complexities, technical and
feasibility issues, and substantial costs for all drug supply
chain stakeholders. She says that these systems have not been
developed or fully tested yet and have not been evaluated in
pilot programs; they also lack uniform national standards and
patient privacy safeguards.
So far, wholesalers such as McKesson haven’t focused on
helping their pharmacy customers get ready for e-Pedigrees,
much less track and trace. Ron Bone, Senior Vice President of
Distribution Support at McKesson, explains:
Once we have established a process to quickly on-board manufacturers,
we will then be able to use this as a basis for on-boarding our
pharmacy provider community.With the California pedigree deadline
for the provider community at July 2017, we have not engaged
with this segment as yet.
Pharmacies Are Particularly Vulnerable
Pharmacies, to a large extent, have been at themercy of the
drug manufacturers, which have been driving the drug package
identification process through their involvement withGS1,
the global standards group. The FDA’s designation of an SNI
in March 2010—based on a GS1 standard—illustrates why
pharmacies in particular are worried about the FDA’s next
steps—establishing standards for interoperability, authentication,
and data management.
The FDA’s SNI guidance prescribed an identifier that contains
the National Drug Code and a second 20-digit alphanumeric
code that a company would choose and that would be
unique to a particular drug package. (There is no require-
Track-and-Trace Drug Verification
2 P&T® • April 2011 • Vol. 36 No. 4
continued on page 208
ment that the SNI guidance must be followed, but it is, in
essence, a de jure standard.) Pharmacy data systems, however,
use a field that allows for only 19 characters. That field is set
by a standard fromthe NCPDP, and pharmacies use it to send
data to health insurers when a patient comes in to fill a prescription.
“We would have to make changes to our data systems to
accommodate the FDA’s SNI,” says John Klimek, RPh, Senior
Vice President of Industry Information Technology at the
NCPDP.
Part of the concern within the pharmacy community is that
the FDA relied too heavily onGS1 in writing the SNI guidance,
and the agencymight do so again when it writes the new standards.
Phillip D. Scott, Senior Vice President of Business and
Development at the NCPDP, explains that GS1, which is
dominated by large drug manufacturers, has “owned” the
e-Pedigree space, but its initiatives essentially stop when the
package gets to the pharmacy back door.
“We have felt for some time that we need to make sure that
any transaction could translate once it got inside the pharmacy,
to the physical transaction of filling the prescription,” he
says.
The NCPDP set upWork Group 17 partly as a watch group
to provide information to the FDA, which would counterGS1’s
Big Pharma slant.
The formation of the NCPDP Work Group, as well as the
issuance of its December 2010 white paper, is just one indication
of the pharmacy industry’s interest in what the FDA is
doing. Companies represented at the FDA workshop on February
14 and 15 included Walgreens, Osborn Drugs, CVS
Caremark,Wal-Mart, Rite-Aid, and several pharmacy associations,
such as the American Society of Health-System Pharmacists.
Swedish Pharmacy Pilot Program Provides Hints
So far, almost nowork has been performed in theU.S. on the
potential impact of pharmacy authentication of drug package
pedigrees. The only pilot program ever instituted was in
Sweden under the auspices of the European Federation of
Pharmaceutical Industries and Associations. In this point-ofdispensing
pilot program, which took place in September 2009,
25 of Sweden’s Apoteket AB retail pharmacies verified 2D
datamatrix bar codes on 95,000 drug packages supplied by 14
drug manufacturers. All par ticipating pharmacies were
equipped with new scanners that could read these codes to
verify the products. Existing point-of-sale software was also
amended to include the necessary extra functionality. Product
verification and dispensing operations were fully integrated
into the ordinary pharmacy workflow.
Although each pharmacy in the pilot program received the
new camera-based scanning equipment, the pilot report does
not indicate that cost or the cost of software upgrades. The
pharmacies were basically able to integrate package verification
via the new bar-code readers into the everyday workflow
with little difficulty; however, this was possible only because
of the high rate of e-prescriptions already coming through the
pharmacies, the quality of the Apoteket point-of-sale systems,
and the standardization of systems within the Apoteket pharmacy
network.
Turkey already imposes a point-of-dispensing requirement
on all incoming drug products; thus, Americanmanufacturers
packaging products for Turkey are now serializing drug packages
for that country. These companies includeGEHealthcare,
which packages contrast media products used in conjunction
with x-ray and magnetic resonance imaging (MRI) devices at
its manufacturing facility in Cork, Ireland. Those products go
to Turkey, theU.S., and elsewhere.GEHealthcare hiredOptel
Vision of Canada to serialize that packaging line; as products
move down the line, each one is given a differentGlobal Trade
Item Number.
When the Cork packaging line becomes fully operational,
perhaps by the end of 2011, GE Healthcare will serialize 12
other lines in Norway, Ireland, and Shanghai, says Gordon
Glass, Director of Manufacturing Project management. He is
now deciding between two vendors for an Electronic Product
Code Information System (EPCIS) for data management.
EPCIS is a GS1 standard that allows “event” data on the packaging
line to be uploaded to a data repository and to be shared
with other company data systems as well as systems outside
the company.
Turkey uses GS1 standards (mainly the Global Item Trade
Number unique numbering scheme), as does France; other European
countries that are working on their own requirements
will probably also use it. That puts the pressure on the FDA to
also pay close attention to standards of interoperability, authentication,
and data management that GS1 is developing.
The FDA, however,will have to consider the needs of all players,
not just Big Pharma. That probably will force the agency
to make some tough choices. For example, according to Bill
Fletcher, Managing Partner of Pharma Logic Solutions, the
larger pharmaceutical companies favor a distributed database,
which each company controls, instead of a central data clearinghouse,
which is run by a third-party chosen by the FDA.
“Small pharmacies at the end of the supply chain will likely
not be able to support costly distributed systems and will likely
require faster authentication response times than largerwholesalers,”
he said.
How Heavily Will the FDA Lean on GS1?
Mr. Fletcher and others have argued that GS1 functions as
a “Big Pharma boys club.”Multinational companies can pay upwards
of five figures formembership in GS1, and they, for the
most part, “pay the bills,” sinceGS1 is a nonprofit organization.
Jon Mellor, a spokesman for GS1 Healthcare U.S., explains,
though, that more than 80% of GS1 members are small to
mediumbusinesses spending in the three or four figures. Bill
Fletcher is a member, but he has mixed feelings about GS1.
He says:
They are open to new ideas, but it would be easier to develop standards
for Pharma if we didn’t have to contend with their bureaucracy.
The weekly participants in the work groups are fromvery Big
Pharma, wholesalers, and a handful of solution providers. In fact,
my joining, because I aman unbiased subjectmatter expert and consultant,
required special approval.
Apart from questions about how representative the organization
is, GS1 has had some issues with the standards it has
already developed. Right now, even the e-Pedigreemessaging
standard that GS1 adopted in 2007 is under fire; it was rushed
into final formtomeet the needs of a Florida law that was going
into effect at the time.
Ruby Raley, Director of Health Care Solutions at Axway,
explains that the document pedigree-management system
standard adopted by GS1 focuses on collecting data on a package’s
chain of custody. The system does not provide information
about the physical location of the package at a particular
moment in time, based on an SNI.
Bob Celeste,Director ofGS1HealthcareUS, admits that the
current data-messaging standard is ill-suited to an e-Pedigree
system. He explains that it was developed in 2006 to meet the
requirements of a Florida law that required the passing of
master data, which every participant in the distribution chain
adds to, resulting in considerable redundancy of information.
However, he admits that there is not much going on with that
standard.
GS1 is now in the process of developing new standards that
could be used by the FDA as the basis for a robust track-andtrace
system, in which data would flow forward from the
manufacturer; the pharmacy could also query back to the
wholesaler andmanufacturer. For example, a pharmacy could
send a receipt back to a trading partner to acknowledge that
the pharmacy received a shipment or even a particular package.
To accommodate the needs of pharmacies for this type of
reverse data transmission, GS1 is developing a discovery
service standard.
Whether or not the FDA leans on GS1 as heavily as it did in
coming up with SNI guidance, the agency will be under pressure—
in an antiregulatory environment—not to go overboard
in terms of the complexity of the standards it writes. At its
February workshop, the FDA presented some preliminary
thoughts on its forthcoming standards.McKesson’s Ron Bone
says:
Authentication, as the FDA defined it at themeeting, is slightly different
than how the industry has been looking at it. Now that we
have insight into what the FDA is proposing, the industry can discuss
the ramifications and effectively address it in our responses to
the docket due on April 16.
The FDA is likely to be inundated with various entreaties.
Wholesalers such as McKesson and the large, multinational
drugmanufacturers will dominate the chorus. The question is
whether the pharmacy industry’s voice will be drowned out.
Congress Considers Regulatory Changes
Financial Executive ... April 2011
During the first few months of this new Congress, newly-empowered House Republicans and their increased numbers in the Senate have been sniffing after overactive federal regulators like bloodhounds on steroids. House committee chairmen have chased administrators and chairmen of regulatory agencies up to Capitol Hill oversight hearings amidst rhetorical baying over excesses of the Dodd-Frank and health care reform rulemakings, plus agency administration actions in the area of greenhouse gas emissions and internet access rules of the road.
"I have tasked our Committee Members to track down burdensome regulations that choke investment and destroy jobs," says Rep. Fred Upton (R-MI), chairman of House Energy & Commerce, which along with the Financial Services Committee focused its first hearings on business complaints about an over-ambitious Obama administration agenda. "We will identify these regulations, shine a light on them, and then seek repeal."
Complaints about regulatory overreaching, expressed repeatedly and strongly by business groups of all stripes, have apparently prompted signs of sympathy from President Obama, who issued an Executive Order in January requiring federal agencies to examine rules now on the books, whose costs may exceed their benefits. But that Executive Order won't affect the major rules going into effect in 2011 which business groups are most concerned with. "The President’s executive order ...will not affect regulations being written to implement health care reform or financial reform, arguably the two largest sources of regulatory uncertainty in the current economy," says Rep. Spencer Bachus (R-Ala.), chairman of the Financial Services Committee. "So it is hard not to conclude that this latest initiative is more about politics than real regulatory reform."
For corporate financial executives, regulations growing out of the Dodd-Frank Wall Street Reform and Consumer Protection Act pose the biggest threat. The law firm Davis Polk & Wardwell estimates Dodd-Frank requires no fewer than 243 new rules by 11 agencies over 12 years. Compare that to Sarbanes-Oxley, passed in the wake of the Enron meltdown, which led to 16 rule-makings, most from the Securities and Exchange Commission (SEC).
Many of the Dodd-Frank (DF) rulemakings affect only financial institutions, be they commercial banks, investment banks, credit unions and the like. A few of the rules affect narrow industries, such as the requirement that resource extraction issuers disclose payments made to U.S. or foreign governments for the commercial development of oil, natural gas or minerals.
Then there is the one key rulemaking which directly affects the ability of financial executives in every industry to hedge risk and use swaps for commercial, not trading, purposes. DF requires companies who use swaps and derivatives for financial trading purposes to clear those derivatives through clearinghouses, which will be new, non-profit organizations. Industrial and manufacturing companies argued that they were not abusers of derivatives, so they should not have to clear their risk-hedging trades, given the added costs that clearing will impose. Congress agreed, and provided an end-user exemption from clearing for companies who use derivatives for the purpose of hedging or mitigating commercial risk. The SEC and Commodity Futures Trading Commission (CFTC) put out proposed rules on December 23, 2010 providing their thinking on the exemption.
However, a number of critics have raised concern about the wording of the proposed regulation. For example, would utilizing an interest rate swap to convert a fixed rate financing to LIBOR to take advantage of the current low interest rate environment, which currently is a common strategy for some companies, qualify as hedging or mitigating commercial risk. It is not clear it would qualify for the exemption, according to Bruce C. Bennett, a partner at Covington & Burling.
Another unclear issue involves margin costs. Commercial end-users of swaps who take advantage of the exemption will not have to pay margin costs themselves. That much is clear.
However, a company buys a swap from a swap dealer. That would be an investment bank such as JP Morgan, just to take one example. That swap dealer may well have to pay margin costs on an "uncleared" swap. The question, still unanswered, according to Allison Lurton, another Covington & Burling attorney, and a recent CFTC expatriate, is whether the swap dealer can pass along margin costs to the end user.
Business groups already lost one regulatory battle with the SEC over one of the few Dodd-Frank provisions which affects corporate reporting. Corporate types such as Brenda C. Karickhoff, senior vice president & deputy general counsel at Time Warner, had argued that the SEC's intention to require companies to disclose in their Compensation Discussion & Analysis ("CD&A") whether advisory votes resulted in corporate compensation decisions went beyond what Dodd-Frank required. She says companies should have to disclose those actions only if they are material. When the SEC published its final rule on January 25, 2011, it stuck with its wording from its proposed rule, which Karickhoff and others objected to. "The requirement to include, as a mandatory topic in the CD&A, whether and how a company considered the results of previous shareholder say on pay votes in determining compensation policies and decisions has been included in the final rule," says Scott Olsen, PricewaterhouseCoopers. "The final rule is mandatory and not based on any materiality threshold."
A case can be made that business has been losing even more battles at the Environmental Protection Agency. The EPA, using a federal court ruling as justification, issued a final rule, which went into effect on January 2, 2011, which affects all big industrial and manufacturing plants which are newly built going forward and existing plants which make significant modifications. If that modification results in total air emissions exceeding a threshold because of the addition of greenhouse gas (GHG) emissions the plant must obtain a permit from the state which must be approved by the EPA. The permit will require the company to install "Best Available Control Technology (BACT)." The EPA has established some guidance to help states, which have flexibility, determine what constitutes BACT for different plants in different industries. Really persnickety states could require carbon capture, control and storage technology, a very expensive solution. "This is creating a business uncertainty that business abhors," states Howard Feldman, director of regulatory and scientific affairs for the American Petroleum Institute (API).
Going beyond GHG regulation, the agency was scheduled to issue in February a new air emissions rule affecting companies who use industrial boilers and process heaters. That rule will require "major sources''--large emitters in the auto, chemical, metalworking and many other industries--to install maximum achievable control technology (MACT), which is the equivalent of controls used by the top 12 percent performing plants. "Compliance costs associated with these harsh inflexible proposed rules will cost Virginia manufacturing jobs and hurt our global competitiveness," explains Joseph Croce, senior vice president of the Virginia Manufacturers Association. "
And it is not just the boiler MACT that has brought business tempers to a boil. Six months before it issued the proposed boiler MACT rule in the summer of 2010, the agency issued a proposed rule tightening national ambient air quality standards for ground-level ozone. Ground-level ozone is a primary component of smog. The agency wants to lower the George W. Bush administration standard of 75 parts per billion to between 60-70 ppb. A lower standard would affect virtually the entire country, even a place such as Yellowstone National Park, whose ground level ozone has reached 67 ppb, forcing Wyoming to take control measures there. "EPA is trying to do too much now," states Feldman.
Business compliance costs also explain why corporations want a rollback of some of the provisions in some of the interim final regulations issued under the Affordable Care Act (ACA), the health care reform bill Congress passed in 2010. Here the questions have to do with a company's ability to control costs in existing group health plans. Two examples are the ACA's definition of "grandfathered" health plans and of preventive services which must be provided, cost-sharing free, to employees in non-grandfathered companies. Companies whose employee health insurance plans were in effect on March 23, 2010 are "grandfathered"--meaning they do not have to provide some of the ACA's minimum services--unless they change the contours of that grandfathered plan. One of those minimum requirements starting in 2011 is that a non-grandfathered plan must provide preventive services without imposing cost-sharing on the employee.
The three agencies involved in ACA implementation--the Departments of Health and Human Services (HHS), Labor and the Internal Revenue Service--proposed interim final rules (IFRs) last summer on grandfathered plans and preventive services. Final rules have not been issued in either case, yet, and business groups have been lobbying for changes in the interim language. Joe Trauger, vice president, human resources policy, National Association of Manufacturers, says the interim final rule on grandfathered plans means that if employers "make even modest changes" in group plans in order to stem cost and premium increases they would lose their grandfathered status. He adds, "Controlling costs is essential to manufacturers and implementation of the rule as written will force employers to chose between increased costs as they lose grandfathered status and comply with additional reforms or increased costs as they absorb more of the burden of skyrocketing medical inflation."
If the interpretation of what constitutes a grandfathered plan, laid out in the IFR, becomes permanent, many corporate health plans will lose grandfathered status. So they will have to provide no-cost-sharing preventive services. There, group health plans must provide preventive care benefits, without cost-sharing, for evidence-based items or services that have in effect a rating of A or B in the current recommendations of the United States Preventive Services Task Force. Gretchen Young, senior vice president, health policy, of the ERISA Industry Committee, says, "In a number of cases, it is not clear which specific diagnostic and imaging tests are preventive and which would fall under the category of treatment."
Where interim health care reform regulations are still hanging fire, the final Federal Communications Commission (FCC) Order on net neutrality is creating waves. It was issued on December 21, 2010. The rules prevent Internet service providers from discriminating against content and applications, subject to reasonable network management.
Here is another case where Republicans in Congress may try to bring a wayward Obama agency to heel. After Verizon announced a lawsuit against the FCC in January, Rep. Upton praised the legal assault on the FCC net neutrality rule. "At stake is not just innovation and economic growth, although those concerns are vital," says Upton. "Equally important is putting a check on an FCC that is acting beyond the authority granted to it by Congress."
Some federal agencies such as the Occupational Safety and Health Administration have already backpedaled in the face of Republican and business snarling, using the Obama executive order as a rational. But the President has underlined that he is willing to retreat only so far. So it remains for Republicans in Congress to prove what is worse: their bark or their bite.
New Horizons for Growth at GE
February 11, 2011, Hispanic Business Magazine
Stephen Barlas, Contributing Writer
Leaning forward on the edge of a couch in a suite at one of Washington's premier hotels, Luis Manuel Ramirez, CEO of GE's Industrial Solutions division, emits energy like one of GE's new WATT electric vehicle chargers. His hands are in perpetual motion, now orchestrating through the air, now reaching out to gently touch the wrist of an interviewer for emphasis. The 44-year-old CEO has a lot to be excited about. Since he took over the $3 billion-a-year division in January 2010, sales of the once-stagnant unit's electrical components have jumped to double-digit growth rates in many of the 100 countries it operates in.
In his first year at the helm, Mr. Ramirez increased research and development spending 15 percent and added 200 engineers, sales and other personnel to a geriatric-appearing division that was created soon after Thomas Edison established the company in the late 1800s. "We went out and rebuilt the global structure by hiring leaders in key growth markets and approving new technology investments and adding resources we needed to grow," Mr. Ramirez explains.
He had plenty of prior international business experience during his 10-year career at GE, including cementing a $1 billion deal with Algeria in November 2008 to manage gas turbines at 13 power plants when he was general manager of GE's contractual services business. However, this is his first CEO position; he is in charge of 15,000 employees and 60 manufacturing facilities around the world.
Nothing about him says he is the top U.S.-based Hispanic executive at GE. He looks like any other member of the corporate elite, dressed in a light blue, pin-striped suit set off against the one-two punch of a bold purple tie against a subtle lilac shirt. Three aides buzz around the suite. But he pays them no mind. He is direct, engaged, plugged into the interviewer. Built compactly as a nine-volt battery, his words flow like electrons from a power source, smoothly, one precisely after another.
Becoming CEO
It was Mr. Ramirez's multicultural background and executive track recor--not his GQ fashion sense or his silky sentences--that made him a good choice for CEO of Industrial Solutions. The company sells electrical components for traditional markets such as electric- and gas-power producers, transportation and manufacturing plants, and increasingly for "green" markets such as electric vehicles. Sixty percent of its revenue is generated outside North America in countries like India and China.
One would have thought GE would have been attacking the Indian market for many years, given that country's economic growth. Not so. Industrial Solutions had been in India for 30 years; its product line was essentially 30 years old. Mr. Ramirez hired new leaders, revamped manufacturing teams, and expanded the products the division is localizing and introducing in the marketplace. "Our order rate in India has grown 50 percent this year, more than any other division within the GE Energy business segment," he says.
Industrial Solutions is poised for growth in China, too. In December, it broke ground on a Chinese manufacturing facility that is a joint venture with Shanghai Tianling Switchgear Co. The newly engineered, more energy-efficient voltage components produced there give Industrial Solutions a strong entry in the "green" power market, both inside China and outside.
Global Sensibility
Mr. Ramirez's global sensibility comes naturally. He has traveled widely since he was a teenager, starting to work at age 14 so he could pay for airfare to visit a friend who moved first to the Dominican Republic, then Costa Rica and finally Hawaii. "I went to college thinking I would join the Foreign Service," Mr. Ramirez laughs.
At home, he got heavy doses of Hispanic culture from his father, a Cuban emigre who first fought with Castro and then fled from his dictatorship, and his mother, who was born in Colombia. He has always been proud of his Hispanic heritage. But in the early years of his career it was never what he thought about. Yet, people around and above him saw him as a universal player, someone who could adapt to multiple, global environments.
"I didn't make the connection myself, at first," he admits. He does now.
"When they see my face in the Middle East, they think I am Middle Eastern. In India, they think I am Indian. In Europe, maybe I was born in southern Spain," he explains. "People see that I am not the typical Anglo-American, and they ask me where I am from, it is like an icebreaker."
Connecting With Employees
When he arrived at GE, the company had a Hispanic forum, which had been established in the mid-1990s. It was one of a number of "affinity groups" the company sponsored but was somewhat dormant. Mr. Ramirez started working on some forum committees, stepped up eventually to become co-chair and today is an executive sponsor. "It is a great way for me to get connected with a part of our employee base I wouldn't have been connected with," he acknowledges. "My experience with diversity inside the company is that whenever we have embraced it we get more creativity, and as a result, get more success."
His own latest personal success came 10 years after joining GE from Siemens, the German company which, diplomatically put, moved into new businesses very deliberatively. In GE, Mr. Ramirez saw a company which, once it decided to pursue a new market, moved with lightning speed. He started at GE Energy in 2000 as business development and integration leader for the Energy Management Services division. Then he jumped over to Contractual Services rising to vice president in 2008. In late 2009, Dan Heintzelman, the senior vice president at the energy business segment, offered Mr. Ramirez the CEO's position at Industrial Solutions. He didn't know a lot of the details, except that Industrial Solutions was a stand-alone business, global in reach, a turnaround situation, and a growth business GE wanted to invest in again. "It was right in my sweet spot," he explains. "Part of my brand inside GE is turning around limping businesses, globalizing them and giving them solid footing. I wanted to put my thumb print on it and there are not too many opportunities you get in the corporate world to do that."
Changing the Culture
His mission, he says, is to change the culture at Industrial Solutions from one of a sustainable business to one of a growth business. An important part of that strategy is to promote green business products that are part of GE's new, emerging EcoMagination portfolio, such as the WattStation--which decreases electric-vehicle charging time from 12-18 hours to as little as four to eight hours compared to standard charging. "When economy meets ecology, it is a good thing," he says.
Mr. Ramirez also has worked to improve the local ecology--living conditions as much as the flora and fauna--in Plainville, Conn., where Industrial Solutions is headquartered and where he and his wife, Delia Garced, live. Mr. Ramirez has challenged employees to devote energy to local charities such as the Plainville Community Food Pantry and the Petit Family Foundation. "It is a great way to shape the corporate culture when you have people working together like that," he says.
As he has helped shape employees at Industrial Solutions, so, too, has Hispanic culture helped shape him. But he wouldn't be where he is today without an even broader multicultural sensibility, taking French in high school, learning a little Italian during a college stint in Italy. He speaks fluent Spanish, too, of course. Odds are he is learning some Chinese, too, at this very moment. But in whatever language the Industrial Solutions' CEO speaks on any given day, one thing is certain: 15,000 employees listen.
The Future, The Deficit and the Federal Budget
Financial Executive...September 2010
When Rep. Bart Gordon (D-TN) introduced his America COMPETES reauthorization bill (H.R. 5116) on April 22, 2010, he had high hopes for the bill's trouble- free passage through the House. The bill jacked up spending on research programs at three federal agencies and departments, and was designated a "key vote" by at least three business groups, including the Chamber of Commerce, who hoped it would eventually add up to new jobs and new products for American companies.
Gordon thought his bill threaded the political needle; business support meant Republicans would fall into line, increased federal spending meant Democratic support.
Instead of threading that needle, however, Gordon jabbed himself with it.
Republicans and even some Democrats took immediate issue with the cost of the brimming $96 billion bill at a time when the federal deficit was projected to hit $1.3 trillion. Gordon's reauthorization bill pumped up budgets for programs at the Departments of Energy, Commerce and the National Science Foundation at a rate of 8-10 percent a year over a five-year period. He topped that off with dollops of new spending on new programs, some of them seemingly duplicative of existing programs in each place. The annual cost for Gordon's bill was $17.2 billion a year, compared to $8 billion a year for the original bill passed in 2007 in response to a 2005 National Academy of Sciences (NAS) committee report called Rising Above the Gathering Storm, which said the U.S. industrial/exporting/high-paying job sector "appears to be on a losing path."
Three years later, not much had changed. "There is disturbing evidence that our overall innovation lead has not only been lost, but that we are continuing to rapidly lose ground," says Robert D. Atkinson, president, ITIF. Information Technology and Innovation Foundation (ITIF).
But here was Gordon, back with the same basic bill, only fatter. The big budget increases for existing programs during fiscal 2011-2015 seemed particularly irresponsible since Congress had not appropriated funds at the authorization levels for those programs during fiscal 2008-2010. So why even suggest higher authorizations? It was as if Gordon, who is retiring at the end of this session, was sending a message that the deficit be damned. The new programs Gordon insisted on authorizing such as Energy Innovation Hubs and Energy Frontier Research Centers seemed especially excessive given that the marquee new energy program authorized in the 2007 bill-- an Advanced Research Projects Agency-Energy, meant to reproduce the kind of results that the Defense version, called DARPA--had barely gotten off the ground because of Congress's refusal to appropriate funds for it.
The deficit headwinds forced Gordon a month after introduction of the bill to cut its $96 billion, five -year price tag by 10.2 percent. But when that $86 billion bill went to the House floor on May 19, Republicans offered what is called a "motion to recommit" which lopped $40 billion off the bill's price tag by cutting some new programs and freezing spending. It passed by a vote of 292 to 126, the margin in part reflecting inclusion of an amendment--which would have been hard to vote against-- authorizing firing of federal employees who look at pornography on taxpayers' time. The Democratic House leadership then pulled the bill off the floor, found a parliamentary way around the pornography amendment, and brought the $86 billion bill back to the House floor on May 28 when it passed by a vote of 262-150 with some GOP support.
Sen. Jay Rockefeller (D-W. Va.), chairman of the Senate Commerce Committee, and sponsor of the Senate version of America COMPETES, has made it clear that the House bill is unaffordable.
The debate in the House and now the Senate over the America COMPETES reauthorization illustrates how concern over the federal budget deficit is strewing rocks in front of all sorts of key business-favored legislation which would have had a smooth ride through Congress just a few years before. But business groups are responsible for some of the bumps. On the one hand, groups like the Chamber and National Association of Manufacturers (NAM) press legislators such as Gordon to authorize new programs like the Energy Innovation Hubs, Energy Frontier Research Centers and loan guarantees for small- and medium-sized manufacturers included in the America COMPETES reauthorization while at the same time calling for federal spending discipline to reduce the $1.3 trillion deficit.
Asked to reconcile higher federal spending and deficit reduction, Jeff Ostermayer, senior media strategist for the NAM, says, "We have always held the position that the federal government has a role to play to help spur investment and foster economic growth. With our economy still recovering we have supported policies that will help stimulate economic growth and create jobs."
But how to reconcile spending with deficit reduction, that is the question.
President Obama and other world leaders took up that question a month after the House passed the expensive America COMPETES reauthorization during the Group of 20 meeting in Toronto. The agenda there focused on how the world's biggest economies could coordinate to defeat both the global economic slowdown and the looming worldwide deficit debacle. The final G20 communiqué pledged the signatories to a goal of cutting government deficits in half by 2013 and stabilizing the ratio of public debt to gross domestic product by 2016. Although Obama insisted emphatically that there was “violent agreement” on the need to reduce debt over time, the final communiqué included a delicately worded call for deficit reduction “tailored to national circumstances.”
The U.S. national debt stands at $12.88 trillion and the Congressional Budget Office (CBO) expects the nation to add another $1 trillion a year for another decade. Obama, though, hopes to put the debt on a diet; the White House has forecast the projected 2010 deficit of $1.3 trillion will be reduced to $700 billion by 2013.The CBO has given credence to that Obama prediction, prophesying that the deficit will shrink from 10 percent of the economy today to about 4.5 percent in 2013 under Obama's long-range budget blueprint. But reaching that short-term goal depends on Obama's projected budget cuts and tax increases coming to fruition. Moreover, the CBO's June 2010 report The Long Term Budget Outlook calls the long-term budget outlook "daunting."
Obama's big push is toward 2015 when he wants to have a balanced budget excluding interest on the national debt. He has set up a bipartisan National Commission on Fiscal Responsibility and Reform to make recommendations on how that balanced budget can be achieved. Fourteen of the 18 members would have to agree on a package of domestic spending cuts and tax increases for Obama to then submit the recommendations to Congress for approval. Matt Miller, senior director for government affairs at FEI, expects the commission to engage in some good, open-ended dialogue focused on entitlement programs and revenue and tax policy. "A lot of times in these kinds of exercises you will see tight parameters for discussion," he explains. "This is a good inquiry. But it will be extremely difficult for the commission to put forth numerous serious recommendations."
Marty Sullivan, a contributing editor at Tax Analysts, a non-profit publisher of tax information and publications, explains just how extremely difficult it will be for the Commission to prescribe a palatable deficit Rx. "The changes needed to get to a balanced budget in 2015 excluding interest on the debt are earth shaking," Sullivan avers. What might be possible, he says, is to reduce the ratio of U.S. debt to gross domestic product (GDP) from today's level of 65-70 percent. To do that would mean reducing the deficit from its current 10 percent of GDP last year to three percent in 2015. Sullivan estimates that reduction would mean the U.S. would have to cut the federal budget by about $500 billion by 2015. Sullivan posits seven options for performing that gastric surgery:
1) raising all personal income taxes by 30 percent
2) raising all taxes, personal and corporate income taxes, estate taxes, Social Security taxes, etc. by 15 percent
3) cutting Medicare, Medicaid and Social Security spending by 25 percent
4) cutting all discretionary spending by 40 per, including defense, (but not "entitlement" spending such as Medicare, Medicaid and Social Security)
5) cutting all spending, entitlement and discretionary by 13 percent
6) cutting all taxes by 8 percent and all spending by 7 percent
7) imposing a new value added tax at 8 percent
" The current deficit is unsustainable and unprecedented." states Sullivan. "Congress is just taking baby steps. It needs to think outside the box just to get to a minimum level of sustainability."
Of course, the dimensions of the expanding federal deficit and needed solutions were pretty clear before the creation of the National Commission on Fiscal Responsibility and Reform. The long term outlook as viewed by the non-partisan CBO resembles nothing more than the blackening skies in the Wizard of Oz before the tornado swept Dorothy to Oz. And it is going to take more than some short guy with a booming voice behind a curtain to significantly reduce the deficit. The June 2010 CBO report looked at spending trends for Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and insurance subsidies that will be provided through the exchanges created by the recently enacted health care legislation. Under both of CBO’s scenarios, total outlays for those health programs would roughly double as a share of GDP over the next 25 years, from 5.5 percent in 2010 to about 10 percent or 11 percent in 2035. Spending on Social Security would rise much more slowly, from almost 5 percent of GDP in 2009 to about 6 percent in the 2030s and beyond.
Some of the ways of cutting spending on those programs are obvious. J.D. Foster, Norman B. Ture Senior Fellow in the Economics of Fiscal Policy, The Heritage Foundation, says there is agreement "right to left" on the need for Medicare reform. "On the benefit side, every beneficiary is getting a federal subsidy of $6000," he states. " It makes sense to subsidize the health care of low- or middle-income seniors but does it make sense to subsidize Medicare for rich seniors?"
Maya MacGuineas, president, Committee for a Responsible Federal Budget and director, fiscal program policy, New America Foundation, suggests even more radical solutions. "Over time, it would be advisable to fundamentally restructure Medicare to provide a voucher program, which would introduce more cost consciousness and cost controls. Given the progress in creating exchanges in the recent health reforms, this is now more of a possibility. Broad spending controls will have to be introduced to federal health care spending, including a cap on spending growth and triggers to ensure that projected health care savings are realized."
The CBO estimates that these kinds of spending reductions would stabilize the debt-to-GDP ratio at 67 percent for the next decade only if the Bush tax cuts approved in 2001 and 2003 are allowed to expire, if provisions designed to limit the reach of the alternative minimum tax (AMT) are allowed to expire and if annual appropriations drop below the pace of growth of GDP. If some or all of those things don't happen, the public debt would reach almost 90 percent of GDP in 2020. Experts like MacGuineas say the debt ratio should be at 40 percent.
A failure to tame the federal deficit would have myriad unappetizing implications. Most obviously, bills such as America COMPETES will not pass Congress and even if they do appropriators won't approve annual budgets up to the authorization levels. It is interesting to note that when Sen. Jay Rockefeller (D-W. Va.) introduced his version of the America COMPETES reauthorization in mid-July, the bill had a three-year authorization--not five years as in the House--as a way of cutting the bill's cost.
On the tax side, an out-of-control deficit means Congress won't even consider a reduction in the corporate income tax, which even many Democrats support. Nearly everyone with an eye on the global competitive situation understands that American companies are at a severe disadvantage when the U.S. corporate rate is at 39 percent, where it has remained for two decades, compared to the average rate of 26 percent for countries in the Organization for Economic Cooperation and Development (OECD). The only OECD country with a higher rate than the U.S., Japan at 40 percent, recently announced a planned, phased reduction in its corporate income tax as one way of jolting Japan out of its long-term economic malaise, although those plans are somewhat indistinct. But at least the recognition is there.
Not only does a yawning deficit mitigate against corporate tax cuts and an ensuing expansion of capital spending and investment, it also insures expanded borrowing by the U.S. Treasury. That leads to lower national saving which also leads to lower domestic investment. Then there is the whole suite of unappetizing "Greece-like" scenarios revolving around investor confidence and interest rates.
Some Democrats and Republicans in Congress have paid lip service to the need to cut federal spending and, to a much lesser extent, to raise taxes. It didn't go unnoticed in June when House majority Leader Rep. Steny Hoyer (D-MD) raised the possibility of raising the retirement age for Social Security as well as breaking President Obama's presidential campaign promise not to raise taxes on those earning less than $250,000. But even there Hoyer was tentative, saying President Bush's "middle class" tax cuts, which expire at the end of 2010, should be extended but only for one year, which was a way of saying that this Congress didn't have the courage to make that move, but maybe the next Congress would. Then, a week later, Rep. John Boehner (R-Ohio), the House Republican leader, said he favored raising the Social Security retirement age, too, and tying cost-of-living increases to the consumer price index rather than wage inflation and trimming benefits for retirees with substantial non-Social Security income.
But talk has clearly not translated into action, as House passage of the arguably bloated America COMPETES reauthorization proved. Neither the House nor the Senate has considered Obama's "Reduce Unnecessary Spending Act of 2010." The bill would give the president, whomever he or she is, the authority to delete spending from a recently-passed appropriations bill and send that bill back to Congress. The legislation would require the Congress to vote up or down on the presidential cuts. However, a president's spending cuts would be limited to discretionary programs, meaning excluding Social Security, Medicare, Medicaid; tax cut bills would also be off limits. The Obama-proposed authority is far weaker than the line-item veto power a GOP-dominated Congress gave President Clinton in 1996. Under that bill, before it was struck down by the Supreme Court in 1998, Clinton's line-item vetoes automatically went into effect unless overturned by a two-thirds vote of both the House and Senate. It is highly unlikely Congress will pass even Obama's diluted proposal which, as of the end of July, had not moved forward one inch.
Congress's refusal to entertain the Obama bill is just one example of its inability to confront the deficit issue. There are starker examples. In July, it became clear the House would not, for the first time since 1974, introduce, much last pass, a budget resolution. These are annual bills laying out five-year spending and tax plans which serve as a guideline for the Appropriations Committees in both houses. They indicate the size of the federal deficit over that period. The failure of the House to produce a budget resolution was a result of a split within the Democratic caucus. Conservative Blue Dog Democrats wanted a budget resolution which produced, again symbolically, cuts in some federal programs between fiscal 2011 and 2015, showing significant progress toward Obama's goal of a balanced budget minus interest on the federal debt.
Progressive Democrats wanted the resolution to reflect even greater deficits in the short term as a way of jolting the economy out of its continuing doldrums and producing more jobs. House Democrats produced instead what is called a "deeming" resolution which sets targets for only the next fiscal year.
Of course it is not just the Democrats who are hiding from the deficit problem. Republicans resolutely oppose any tax increases. Sullivan argues that the Republicans would be more willing to countenance a tax increase if business groups supported the idea. He notes that the Business Roundtable has at least opened the door to consideration of a value-added tax (VAT) in the U.S. Almost all European countries have one in the area of 15-20 percent. Imposition of a VAT, says Sullivan, would allow Corporate America to demand in return a reduction in the corporate income tax. "Obviously, there have to be spending cuts first," Sullivan notes. "But the second phase has to be broad-based tax increases." He explains that without those tax increases, President Obama and congressional Democrats will continue to look to business for new tax income each year. "It is death by a million cuts," he states. Other countries have recognized the link between lower corporate income taxes and a higher VAT. The new Japanese prime minister has just proposed a cut in that country's 40 percent corporate income tax as part of an increase from 5 to 10 percent in the Japanese VAT.
The new Great Britain government of Prime Minister David Cameron has taken a similar step to address that country's deficit problem. Cameron's plan, agreed to by his coalition of Conservatives and Liberal Democrats, cuts the budgets of most government departments by 25 percent over the next five years. The steps outlined to the House of Commons by George Osborne, the chancellor of the Exchequer, would cut the annual government deficit by nearly $180 billion over the next five years. Great Britain will increase its VAT to 20 percent from 17.5 percent and raise its capital gains tax to a new high of 28 percent. In exchange, the corporate income tax rate will be reduced over a five-year period to 24 percent from 28 percent.
MacGuineas says Great Britain has the formula for austerity about right mixing four pounds in spending cuts for every pound in tax increases. "That is the right model for the U.S." she says. "Although some of the spending cuts have not be specified, what the British government has done is quite remarkable. They are off to a credible start."
She pauses, then adds, " It would be nice if the U.S. were off to any start. It is sort of shameful to watch other countries get their act together while we squabble over petty partisan problems."
When Rep. Bart Gordon (D-TN) introduced his America COMPETES reauthorization bill (H.R. 5116) on April 22, 2010, he had high hopes for the bill's trouble- free passage through the House. The bill jacked up spending on research programs at three federal agencies and departments, and was designated a "key vote" by at least three business groups, including the Chamber of Commerce, who hoped it would eventually add up to new jobs and new products for American companies.
Gordon thought his bill threaded the political needle; business support meant Republicans would fall into line, increased federal spending meant Democratic support.
Instead of threading that needle, however, Gordon jabbed himself with it.
Republicans and even some Democrats took immediate issue with the cost of the brimming $96 billion bill at a time when the federal deficit was projected to hit $1.3 trillion. Gordon's reauthorization bill pumped up budgets for programs at the Departments of Energy, Commerce and the National Science Foundation at a rate of 8-10 percent a year over a five-year period. He topped that off with dollops of new spending on new programs, some of them seemingly duplicative of existing programs in each place. The annual cost for Gordon's bill was $17.2 billion a year, compared to $8 billion a year for the original bill passed in 2007 in response to a 2005 National Academy of Sciences (NAS) committee report called Rising Above the Gathering Storm, which said the U.S. industrial/exporting/high-paying job sector "appears to be on a losing path."
Three years later, not much had changed. "There is disturbing evidence that our overall innovation lead has not only been lost, but that we are continuing to rapidly lose ground," says Robert D. Atkinson, president, ITIF. Information Technology and Innovation Foundation (ITIF).
But here was Gordon, back with the same basic bill, only fatter. The big budget increases for existing programs during fiscal 2011-2015 seemed particularly irresponsible since Congress had not appropriated funds at the authorization levels for those programs during fiscal 2008-2010. So why even suggest higher authorizations? It was as if Gordon, who is retiring at the end of this session, was sending a message that the deficit be damned. The new programs Gordon insisted on authorizing such as Energy Innovation Hubs and Energy Frontier Research Centers seemed especially excessive given that the marquee new energy program authorized in the 2007 bill-- an Advanced Research Projects Agency-Energy, meant to reproduce the kind of results that the Defense version, called DARPA--had barely gotten off the ground because of Congress's refusal to appropriate funds for it.
The deficit headwinds forced Gordon a month after introduction of the bill to cut its $96 billion, five -year price tag by 10.2 percent. But when that $86 billion bill went to the House floor on May 19, Republicans offered what is called a "motion to recommit" which lopped $40 billion off the bill's price tag by cutting some new programs and freezing spending. It passed by a vote of 292 to 126, the margin in part reflecting inclusion of an amendment--which would have been hard to vote against-- authorizing firing of federal employees who look at pornography on taxpayers' time. The Democratic House leadership then pulled the bill off the floor, found a parliamentary way around the pornography amendment, and brought the $86 billion bill back to the House floor on May 28 when it passed by a vote of 262-150 with some GOP support.
Sen. Jay Rockefeller (D-W. Va.), chairman of the Senate Commerce Committee, and sponsor of the Senate version of America COMPETES, has made it clear that the House bill is unaffordable.
The debate in the House and now the Senate over the America COMPETES reauthorization illustrates how concern over the federal budget deficit is strewing rocks in front of all sorts of key business-favored legislation which would have had a smooth ride through Congress just a few years before. But business groups are responsible for some of the bumps. On the one hand, groups like the Chamber and National Association of Manufacturers (NAM) press legislators such as Gordon to authorize new programs like the Energy Innovation Hubs, Energy Frontier Research Centers and loan guarantees for small- and medium-sized manufacturers included in the America COMPETES reauthorization while at the same time calling for federal spending discipline to reduce the $1.3 trillion deficit.
Asked to reconcile higher federal spending and deficit reduction, Jeff Ostermayer, senior media strategist for the NAM, says, "We have always held the position that the federal government has a role to play to help spur investment and foster economic growth. With our economy still recovering we have supported policies that will help stimulate economic growth and create jobs."
But how to reconcile spending with deficit reduction, that is the question.
President Obama and other world leaders took up that question a month after the House passed the expensive America COMPETES reauthorization during the Group of 20 meeting in Toronto. The agenda there focused on how the world's biggest economies could coordinate to defeat both the global economic slowdown and the looming worldwide deficit debacle. The final G20 communiqué pledged the signatories to a goal of cutting government deficits in half by 2013 and stabilizing the ratio of public debt to gross domestic product by 2016. Although Obama insisted emphatically that there was “violent agreement” on the need to reduce debt over time, the final communiqué included a delicately worded call for deficit reduction “tailored to national circumstances.”
The U.S. national debt stands at $12.88 trillion and the Congressional Budget Office (CBO) expects the nation to add another $1 trillion a year for another decade. Obama, though, hopes to put the debt on a diet; the White House has forecast the projected 2010 deficit of $1.3 trillion will be reduced to $700 billion by 2013.The CBO has given credence to that Obama prediction, prophesying that the deficit will shrink from 10 percent of the economy today to about 4.5 percent in 2013 under Obama's long-range budget blueprint. But reaching that short-term goal depends on Obama's projected budget cuts and tax increases coming to fruition. Moreover, the CBO's June 2010 report The Long Term Budget Outlook calls the long-term budget outlook "daunting."
Obama's big push is toward 2015 when he wants to have a balanced budget excluding interest on the national debt. He has set up a bipartisan National Commission on Fiscal Responsibility and Reform to make recommendations on how that balanced budget can be achieved. Fourteen of the 18 members would have to agree on a package of domestic spending cuts and tax increases for Obama to then submit the recommendations to Congress for approval. Matt Miller, senior director for government affairs at FEI, expects the commission to engage in some good, open-ended dialogue focused on entitlement programs and revenue and tax policy. "A lot of times in these kinds of exercises you will see tight parameters for discussion," he explains. "This is a good inquiry. But it will be extremely difficult for the commission to put forth numerous serious recommendations."
Marty Sullivan, a contributing editor at Tax Analysts, a non-profit publisher of tax information and publications, explains just how extremely difficult it will be for the Commission to prescribe a palatable deficit Rx. "The changes needed to get to a balanced budget in 2015 excluding interest on the debt are earth shaking," Sullivan avers. What might be possible, he says, is to reduce the ratio of U.S. debt to gross domestic product (GDP) from today's level of 65-70 percent. To do that would mean reducing the deficit from its current 10 percent of GDP last year to three percent in 2015. Sullivan estimates that reduction would mean the U.S. would have to cut the federal budget by about $500 billion by 2015. Sullivan posits seven options for performing that gastric surgery:
1) raising all personal income taxes by 30 percent
2) raising all taxes, personal and corporate income taxes, estate taxes, Social Security taxes, etc. by 15 percent
3) cutting Medicare, Medicaid and Social Security spending by 25 percent
4) cutting all discretionary spending by 40 per, including defense, (but not "entitlement" spending such as Medicare, Medicaid and Social Security)
5) cutting all spending, entitlement and discretionary by 13 percent
6) cutting all taxes by 8 percent and all spending by 7 percent
7) imposing a new value added tax at 8 percent
" The current deficit is unsustainable and unprecedented." states Sullivan. "Congress is just taking baby steps. It needs to think outside the box just to get to a minimum level of sustainability."
Of course, the dimensions of the expanding federal deficit and needed solutions were pretty clear before the creation of the National Commission on Fiscal Responsibility and Reform. The long term outlook as viewed by the non-partisan CBO resembles nothing more than the blackening skies in the Wizard of Oz before the tornado swept Dorothy to Oz. And it is going to take more than some short guy with a booming voice behind a curtain to significantly reduce the deficit. The June 2010 CBO report looked at spending trends for Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and insurance subsidies that will be provided through the exchanges created by the recently enacted health care legislation. Under both of CBO’s scenarios, total outlays for those health programs would roughly double as a share of GDP over the next 25 years, from 5.5 percent in 2010 to about 10 percent or 11 percent in 2035. Spending on Social Security would rise much more slowly, from almost 5 percent of GDP in 2009 to about 6 percent in the 2030s and beyond.
Some of the ways of cutting spending on those programs are obvious. J.D. Foster, Norman B. Ture Senior Fellow in the Economics of Fiscal Policy, The Heritage Foundation, says there is agreement "right to left" on the need for Medicare reform. "On the benefit side, every beneficiary is getting a federal subsidy of $6000," he states. " It makes sense to subsidize the health care of low- or middle-income seniors but does it make sense to subsidize Medicare for rich seniors?"
Maya MacGuineas, president, Committee for a Responsible Federal Budget and director, fiscal program policy, New America Foundation, suggests even more radical solutions. "Over time, it would be advisable to fundamentally restructure Medicare to provide a voucher program, which would introduce more cost consciousness and cost controls. Given the progress in creating exchanges in the recent health reforms, this is now more of a possibility. Broad spending controls will have to be introduced to federal health care spending, including a cap on spending growth and triggers to ensure that projected health care savings are realized."
The CBO estimates that these kinds of spending reductions would stabilize the debt-to-GDP ratio at 67 percent for the next decade only if the Bush tax cuts approved in 2001 and 2003 are allowed to expire, if provisions designed to limit the reach of the alternative minimum tax (AMT) are allowed to expire and if annual appropriations drop below the pace of growth of GDP. If some or all of those things don't happen, the public debt would reach almost 90 percent of GDP in 2020. Experts like MacGuineas say the debt ratio should be at 40 percent.
A failure to tame the federal deficit would have myriad unappetizing implications. Most obviously, bills such as America COMPETES will not pass Congress and even if they do appropriators won't approve annual budgets up to the authorization levels. It is interesting to note that when Sen. Jay Rockefeller (D-W. Va.) introduced his version of the America COMPETES reauthorization in mid-July, the bill had a three-year authorization--not five years as in the House--as a way of cutting the bill's cost.
On the tax side, an out-of-control deficit means Congress won't even consider a reduction in the corporate income tax, which even many Democrats support. Nearly everyone with an eye on the global competitive situation understands that American companies are at a severe disadvantage when the U.S. corporate rate is at 39 percent, where it has remained for two decades, compared to the average rate of 26 percent for countries in the Organization for Economic Cooperation and Development (OECD). The only OECD country with a higher rate than the U.S., Japan at 40 percent, recently announced a planned, phased reduction in its corporate income tax as one way of jolting Japan out of its long-term economic malaise, although those plans are somewhat indistinct. But at least the recognition is there.
Not only does a yawning deficit mitigate against corporate tax cuts and an ensuing expansion of capital spending and investment, it also insures expanded borrowing by the U.S. Treasury. That leads to lower national saving which also leads to lower domestic investment. Then there is the whole suite of unappetizing "Greece-like" scenarios revolving around investor confidence and interest rates.
Some Democrats and Republicans in Congress have paid lip service to the need to cut federal spending and, to a much lesser extent, to raise taxes. It didn't go unnoticed in June when House majority Leader Rep. Steny Hoyer (D-MD) raised the possibility of raising the retirement age for Social Security as well as breaking President Obama's presidential campaign promise not to raise taxes on those earning less than $250,000. But even there Hoyer was tentative, saying President Bush's "middle class" tax cuts, which expire at the end of 2010, should be extended but only for one year, which was a way of saying that this Congress didn't have the courage to make that move, but maybe the next Congress would. Then, a week later, Rep. John Boehner (R-Ohio), the House Republican leader, said he favored raising the Social Security retirement age, too, and tying cost-of-living increases to the consumer price index rather than wage inflation and trimming benefits for retirees with substantial non-Social Security income.
But talk has clearly not translated into action, as House passage of the arguably bloated America COMPETES reauthorization proved. Neither the House nor the Senate has considered Obama's "Reduce Unnecessary Spending Act of 2010." The bill would give the president, whomever he or she is, the authority to delete spending from a recently-passed appropriations bill and send that bill back to Congress. The legislation would require the Congress to vote up or down on the presidential cuts. However, a president's spending cuts would be limited to discretionary programs, meaning excluding Social Security, Medicare, Medicaid; tax cut bills would also be off limits. The Obama-proposed authority is far weaker than the line-item veto power a GOP-dominated Congress gave President Clinton in 1996. Under that bill, before it was struck down by the Supreme Court in 1998, Clinton's line-item vetoes automatically went into effect unless overturned by a two-thirds vote of both the House and Senate. It is highly unlikely Congress will pass even Obama's diluted proposal which, as of the end of July, had not moved forward one inch.
Congress's refusal to entertain the Obama bill is just one example of its inability to confront the deficit issue. There are starker examples. In July, it became clear the House would not, for the first time since 1974, introduce, much last pass, a budget resolution. These are annual bills laying out five-year spending and tax plans which serve as a guideline for the Appropriations Committees in both houses. They indicate the size of the federal deficit over that period. The failure of the House to produce a budget resolution was a result of a split within the Democratic caucus. Conservative Blue Dog Democrats wanted a budget resolution which produced, again symbolically, cuts in some federal programs between fiscal 2011 and 2015, showing significant progress toward Obama's goal of a balanced budget minus interest on the federal debt.
Progressive Democrats wanted the resolution to reflect even greater deficits in the short term as a way of jolting the economy out of its continuing doldrums and producing more jobs. House Democrats produced instead what is called a "deeming" resolution which sets targets for only the next fiscal year.
Of course it is not just the Democrats who are hiding from the deficit problem. Republicans resolutely oppose any tax increases. Sullivan argues that the Republicans would be more willing to countenance a tax increase if business groups supported the idea. He notes that the Business Roundtable has at least opened the door to consideration of a value-added tax (VAT) in the U.S. Almost all European countries have one in the area of 15-20 percent. Imposition of a VAT, says Sullivan, would allow Corporate America to demand in return a reduction in the corporate income tax. "Obviously, there have to be spending cuts first," Sullivan notes. "But the second phase has to be broad-based tax increases." He explains that without those tax increases, President Obama and congressional Democrats will continue to look to business for new tax income each year. "It is death by a million cuts," he states. Other countries have recognized the link between lower corporate income taxes and a higher VAT. The new Japanese prime minister has just proposed a cut in that country's 40 percent corporate income tax as part of an increase from 5 to 10 percent in the Japanese VAT.
The new Great Britain government of Prime Minister David Cameron has taken a similar step to address that country's deficit problem. Cameron's plan, agreed to by his coalition of Conservatives and Liberal Democrats, cuts the budgets of most government departments by 25 percent over the next five years. The steps outlined to the House of Commons by George Osborne, the chancellor of the Exchequer, would cut the annual government deficit by nearly $180 billion over the next five years. Great Britain will increase its VAT to 20 percent from 17.5 percent and raise its capital gains tax to a new high of 28 percent. In exchange, the corporate income tax rate will be reduced over a five-year period to 24 percent from 28 percent.
MacGuineas says Great Britain has the formula for austerity about right mixing four pounds in spending cuts for every pound in tax increases. "That is the right model for the U.S." she says. "Although some of the spending cuts have not be specified, what the British government has done is quite remarkable. They are off to a credible start."
She pauses, then adds, " It would be nice if the U.S. were off to any start. It is sort of shameful to watch other countries get their act together while we squabble over petty partisan problems."
Grappling with Retiree Health
Human Resource Executive...August 2010
While it’s still too soon to tell exactly how healthcare reform will affect retiree health, here are a few known facts—pro and con—to base a few predictions on.
BY STEPHEN BARLAS
The primary rationale for the health-insurance-reform bill Congress passed in March was to provide medical, hospital and drug care for the employed uninsured—meaning the self-employed and workers in small companies whose employers did not offer insurance.
But the provisions in the Patient Protection and Affordable Care Act, which kick in first, focus on retirees who already have insurance through their employers. Moreover, the two provisions that got out of the gate first take off in opposite directions: One is a boon to many companies and their retirees; the other is a bust, albeit with a possible silver lining.
The two PPACA provisions include the elimination of a tax deduction for corporations that provide non-Medicare Part D drug coverage for retirees and the establishment of a $5 billion federal fund companies can tap into, either to reduce the subsidies the company pays for healthcare for early retirees—ages 55 to 64—or for the premiums and co-pays the early retirees pay themselves.
Companies that have been providing drug coverage to retirees through private, non-Medicare plans have been receiving 28-percent subsidies for every retiree’s costs from the federal government, and have been able to deduct from corporate taxes what amounts to a $600-per-retiree drug subsidy. The loss of deductibility of the $600 subsidy happens in 2013; but the PPACA provision caused immediate corporate heartburn because accounting rules require employers that receive an RDS and deduct it to record an accounting charge in their first-quarter 2010 financial results to reflect the impact of the change in RDS tax status.
External sources estimated these charges cumulatively at more than $14 billion nationally. So that provision drew blood immediately.
“That had a major impact on many of the companies affected. It was real money and [would] show up in their tax bill,” says Mike Thompson, a principal at PricewaterhouseCoopers.
Medco Health Solutions estimates that, starting in 2013, when the RDS tax liability kicks in, the cost to the average taxable RDS plan sponsor will be in the range of $14 to $21 per member per month (assuming a 35-percent tax rate)—which, for a typical plan, means millions to tens of millions of dollars in lost value annually. The estimated 1,400 U.S. companies that will be affected have a number of options including moving retirees into one of the Medicare Part D options. Most companies, however, are taking a wait-and-see approach. Says Steve Wojcik, vice president of public policy at the Washington-based National Business Group on Health: “No one is rushing to make an immediate decision.”
Some company retirees are already in Part D, perhaps receiving a corporate subsidy for premiums, perhaps not, but with the former employer subsidizing a “wrap-around” supplemental drug plan that kicks in when the retiree enters the so-called “doughnut hole.” Medicare subscribers who spend $2,830 on subsidized prescription drugs must then pay the full amount on all their prescriptions until they reach the next threshold of spending, which begins at $4,550—called the “catastrophic coverage” level. The PPACA gives seniors affected by the coverage gap a $250 rebate in 2010. From 2011 on, those reaching the “doughnut hole” will receive a 50 percent discount on their prescription-drug costs.
As a result, employers are likely to end subsidization of supplemental Part D plans. So that will be a net corporate savings. The filling of the doughnut hole is also another reason—there are actually multiple reasons—why companies with non-Medicare retiree-drug plans will undoubtedly move retirees into Medicare Part D drug coverage, which offers at least four permutations: (1) a conventional prescription drug plan purchased directly by the individual; (2) an employer-group-waiver plan (also known as an EGWP or “egg whip”), by which the employer contracts with a PDP on behalf of retirees; (3) a plan in which the employer sets up its own EGWP and administers it (very few companies have done this); and (4) a plan in which the employer contracts with a Medicare Advantage-Prescription Drug plan, which provides both medical and drug benefits.
EGWPs seem to be the popular choice for companies seeking to move retirees into a Part D option. The advantage of an EGWP is that an employer can shape that drug plan to look exactly like its current retiree drug plan. Employers can often provide as much or as little per-employee subsidies as they want, as long as the benefits are equal to those in an individual PDP. Employers also get federal subsidies for retirees in EGWPs. However, instead of a per-retiree subsidy based on claims incurred by the individual under an RDS, which is up to a $600 subsidy, under a Part D EGWP, the employer gets a subsidy up front based on a “national-average” subsidy set by the government. That “prospective” EGWP subsidy is then adjusted based on the demographics of the group members, etc.
The benefits of the EGWP, according to Steve Wogen, vice president of Medco Retiree Solutions, are that the value of the per-retiree subsidy to the employer may very well exceed the value of the RDS subsidy once RDS tax deductibility is lost in 2013. Moreover, in some cases, employers will lose that $600 subsidy completely in the 2013-2014 period because their per-retiree contributions will have reached a ceiling, causing them to fail the gross- and net-benefit tests employers have to meet to qualify for the RDS subsidy.
On the Plus Side …
To the extent that the loss of RDS tax deductibility means higher corporate costs, at least on its face, the availability of a new $5 billion federal Early Retiree Reinsurance Program means higher corporate revenue. The money ostensibly became available as of June 21, 2010. But the Department of Health and Human Services won’t actually be dispensing payments until companies submit claims, which won’t be for some time. Reinsurance reimbursements will be issued on a per-retiree basis, for 80 percent of the medical, surgical or drug costs between $15,000 and $90,000 in a given year. Companies can use those payments to lower health-insurance costs for employees or to reduce corporate subsidies paid to the early retirees for premiums, co-insurance and deductibility requirements.
While the funds look enticing, not all eligible companies will apply. “Companies will make a decision on whether to apply based on the number of early retirees they have. If they have a small number of pre-65 retirees, the claims submissions, audits and other requirements for the program may not make applying worth it,” PwC’s Thompson says. He adds, however, that companies that do apply, and are accepted into the program, would generally expect to receive somewhere between 30 percent and 35 percent of their expenditures back. How that money is distributed is up to the company; the HHS has apparently set no requirements one way or the other. However, the retirees’ essential benefits cannot be reduced.
The concern has been that the $5 billion won’t last until 2014, when the fund disappears. The Employee Benefit Research Institute threw gasoline on that fire with a report in June saying $2.5 billion of the available $5 billion would be exhausted in the first year of the program—that is, in the year beginning June 21, 2010. No money would be left by the time 2012 rolled around, EBRI hypothesized.
But Paul Fronstin, director of the EBRI health research and education program, admits his prognostication rests on assumptions that very well may not bear out. In calculating the drawdown of the $5 billion, assuming all companies that are eligible to apply would apply, they would be approved and they would be reimbursed at the maximum for each early retiree’s eligible costs.
“Is it reasonable to expect that?” says Fronstin. “Probably not.” He admits the HHS could cap per-individual payments, or company payments, or allot $1.25 billion in each of the four years Congress says money could be available. The HHS has not tipped its hand on any of that yet. The department has said that the $5 billion will be available on a first-come, first-served basis, and that has created anxieties in the corporate world, especially among companies that, for whatever reason, could be laggard applicants.
Companies have to meet a number of requirements in order for the HHS to approve an application. First and foremost, a company must have in place a cost-containment plan for high-cost chronic diseases. That could be a diabetes-management program, for example. The key language here is that the HHS expects employers to “take a reasonable approach when identifying such conditions and selecting programs and procedures to lower the cost of care.” The HHS will audit these measures, and companies will have to prove—and there is some wiggle room here—that their cost-containment measures “have generated or have the potential to generate savings,” the HHS literature reads.
Although the program started on June 21, companies with calendar-2010 plan years can use costs incurred by an employee between Jan. 1, 2010 to June 21, 2010 toward the $15,000 floor. But only costs incurred after June 21, 2010 are eligible for 80 percent reimbursement. Those eligible expenditures must be “net” any negotiated rebates from the health-insurance company or any drug rebates. Those rebates are often paid after the plan year. So the HHS will specify the form and manner of such disclosures in future guidance.
While it’s still too soon to tell exactly how healthcare reform will affect retiree health, here are a few known facts—pro and con—to base a few predictions on.
BY STEPHEN BARLAS
The primary rationale for the health-insurance-reform bill Congress passed in March was to provide medical, hospital and drug care for the employed uninsured—meaning the self-employed and workers in small companies whose employers did not offer insurance.
But the provisions in the Patient Protection and Affordable Care Act, which kick in first, focus on retirees who already have insurance through their employers. Moreover, the two provisions that got out of the gate first take off in opposite directions: One is a boon to many companies and their retirees; the other is a bust, albeit with a possible silver lining.
The two PPACA provisions include the elimination of a tax deduction for corporations that provide non-Medicare Part D drug coverage for retirees and the establishment of a $5 billion federal fund companies can tap into, either to reduce the subsidies the company pays for healthcare for early retirees—ages 55 to 64—or for the premiums and co-pays the early retirees pay themselves.
Companies that have been providing drug coverage to retirees through private, non-Medicare plans have been receiving 28-percent subsidies for every retiree’s costs from the federal government, and have been able to deduct from corporate taxes what amounts to a $600-per-retiree drug subsidy. The loss of deductibility of the $600 subsidy happens in 2013; but the PPACA provision caused immediate corporate heartburn because accounting rules require employers that receive an RDS and deduct it to record an accounting charge in their first-quarter 2010 financial results to reflect the impact of the change in RDS tax status.
External sources estimated these charges cumulatively at more than $14 billion nationally. So that provision drew blood immediately.
“That had a major impact on many of the companies affected. It was real money and [would] show up in their tax bill,” says Mike Thompson, a principal at PricewaterhouseCoopers.
Medco Health Solutions estimates that, starting in 2013, when the RDS tax liability kicks in, the cost to the average taxable RDS plan sponsor will be in the range of $14 to $21 per member per month (assuming a 35-percent tax rate)—which, for a typical plan, means millions to tens of millions of dollars in lost value annually. The estimated 1,400 U.S. companies that will be affected have a number of options including moving retirees into one of the Medicare Part D options. Most companies, however, are taking a wait-and-see approach. Says Steve Wojcik, vice president of public policy at the Washington-based National Business Group on Health: “No one is rushing to make an immediate decision.”
Some company retirees are already in Part D, perhaps receiving a corporate subsidy for premiums, perhaps not, but with the former employer subsidizing a “wrap-around” supplemental drug plan that kicks in when the retiree enters the so-called “doughnut hole.” Medicare subscribers who spend $2,830 on subsidized prescription drugs must then pay the full amount on all their prescriptions until they reach the next threshold of spending, which begins at $4,550—called the “catastrophic coverage” level. The PPACA gives seniors affected by the coverage gap a $250 rebate in 2010. From 2011 on, those reaching the “doughnut hole” will receive a 50 percent discount on their prescription-drug costs.
As a result, employers are likely to end subsidization of supplemental Part D plans. So that will be a net corporate savings. The filling of the doughnut hole is also another reason—there are actually multiple reasons—why companies with non-Medicare retiree-drug plans will undoubtedly move retirees into Medicare Part D drug coverage, which offers at least four permutations: (1) a conventional prescription drug plan purchased directly by the individual; (2) an employer-group-waiver plan (also known as an EGWP or “egg whip”), by which the employer contracts with a PDP on behalf of retirees; (3) a plan in which the employer sets up its own EGWP and administers it (very few companies have done this); and (4) a plan in which the employer contracts with a Medicare Advantage-Prescription Drug plan, which provides both medical and drug benefits.
EGWPs seem to be the popular choice for companies seeking to move retirees into a Part D option. The advantage of an EGWP is that an employer can shape that drug plan to look exactly like its current retiree drug plan. Employers can often provide as much or as little per-employee subsidies as they want, as long as the benefits are equal to those in an individual PDP. Employers also get federal subsidies for retirees in EGWPs. However, instead of a per-retiree subsidy based on claims incurred by the individual under an RDS, which is up to a $600 subsidy, under a Part D EGWP, the employer gets a subsidy up front based on a “national-average” subsidy set by the government. That “prospective” EGWP subsidy is then adjusted based on the demographics of the group members, etc.
The benefits of the EGWP, according to Steve Wogen, vice president of Medco Retiree Solutions, are that the value of the per-retiree subsidy to the employer may very well exceed the value of the RDS subsidy once RDS tax deductibility is lost in 2013. Moreover, in some cases, employers will lose that $600 subsidy completely in the 2013-2014 period because their per-retiree contributions will have reached a ceiling, causing them to fail the gross- and net-benefit tests employers have to meet to qualify for the RDS subsidy.
On the Plus Side …
To the extent that the loss of RDS tax deductibility means higher corporate costs, at least on its face, the availability of a new $5 billion federal Early Retiree Reinsurance Program means higher corporate revenue. The money ostensibly became available as of June 21, 2010. But the Department of Health and Human Services won’t actually be dispensing payments until companies submit claims, which won’t be for some time. Reinsurance reimbursements will be issued on a per-retiree basis, for 80 percent of the medical, surgical or drug costs between $15,000 and $90,000 in a given year. Companies can use those payments to lower health-insurance costs for employees or to reduce corporate subsidies paid to the early retirees for premiums, co-insurance and deductibility requirements.
While the funds look enticing, not all eligible companies will apply. “Companies will make a decision on whether to apply based on the number of early retirees they have. If they have a small number of pre-65 retirees, the claims submissions, audits and other requirements for the program may not make applying worth it,” PwC’s Thompson says. He adds, however, that companies that do apply, and are accepted into the program, would generally expect to receive somewhere between 30 percent and 35 percent of their expenditures back. How that money is distributed is up to the company; the HHS has apparently set no requirements one way or the other. However, the retirees’ essential benefits cannot be reduced.
The concern has been that the $5 billion won’t last until 2014, when the fund disappears. The Employee Benefit Research Institute threw gasoline on that fire with a report in June saying $2.5 billion of the available $5 billion would be exhausted in the first year of the program—that is, in the year beginning June 21, 2010. No money would be left by the time 2012 rolled around, EBRI hypothesized.
But Paul Fronstin, director of the EBRI health research and education program, admits his prognostication rests on assumptions that very well may not bear out. In calculating the drawdown of the $5 billion, assuming all companies that are eligible to apply would apply, they would be approved and they would be reimbursed at the maximum for each early retiree’s eligible costs.
“Is it reasonable to expect that?” says Fronstin. “Probably not.” He admits the HHS could cap per-individual payments, or company payments, or allot $1.25 billion in each of the four years Congress says money could be available. The HHS has not tipped its hand on any of that yet. The department has said that the $5 billion will be available on a first-come, first-served basis, and that has created anxieties in the corporate world, especially among companies that, for whatever reason, could be laggard applicants.
Companies have to meet a number of requirements in order for the HHS to approve an application. First and foremost, a company must have in place a cost-containment plan for high-cost chronic diseases. That could be a diabetes-management program, for example. The key language here is that the HHS expects employers to “take a reasonable approach when identifying such conditions and selecting programs and procedures to lower the cost of care.” The HHS will audit these measures, and companies will have to prove—and there is some wiggle room here—that their cost-containment measures “have generated or have the potential to generate savings,” the HHS literature reads.
Although the program started on June 21, companies with calendar-2010 plan years can use costs incurred by an employee between Jan. 1, 2010 to June 21, 2010 toward the $15,000 floor. But only costs incurred after June 21, 2010 are eligible for 80 percent reimbursement. Those eligible expenditures must be “net” any negotiated rebates from the health-insurance company or any drug rebates. Those rebates are often paid after the plan year. So the HHS will specify the form and manner of such disclosures in future guidance.
Drug Package Serialization
Contract Pharma magazine...June 2010
THE FDA’S PUBLICATION OF THE FINAL guidance on a standard
numerical identifier (SNI) for pharmaceutical packages
at the end of March awoke the drug industry from
its track and trace slumber. Manufacturers, distributors, pharmacies
and their vendors had been snoozing since September
2008, when California pushed back its e-Pedigree implementation
date, an action with significant national implications.
Instead of having to put unique serial numbers on packages
starting January 1, 2011, California, responding to pleas from
an ill-prepared drug industry, pushed back that e-Pedigree
deadline to January 1, 2015. One-half of all drug packages
arriving in the state on that date will have to have unique serial
numbers printed on them. The other half will have to follow
suit one year later.
“Everybody took a deep breath when the California Board of
Pharmacy delayed its e-Pedigree requirement,” agreed Ruby
Raley, director, healthcare solutions, Axway, a company that
provides the software to run the data repositories that hold
information about drug package pedigrees as an individual
package moves from the manufacturer to (perhaps) a repackager
to a wholesaler and on to the retail or hospital pharmacy.
Axway is involved in numerous track and trace pilots with comTHE FDA’S PUBLICATION OF THE FINAL guidance on a standard
numerical identifier (SNI) for pharmaceutical packages
at the end of March awoke the drug industry from
its track and trace slumber. Manufacturers, distributors, pharmacies
and their vendors had been snoozing since September
2008, when California pushed back its e-Pedigree implementation
date, an action with significant national implications.
Instead of having to put unique serial numbers on packages
starting January 1, 2011, California, responding to pleas from
an ill-prepared drug industry, pushed back that e-Pedigree
deadline to January 1, 2015. One-half of all drug packages
arriving in the state on that date will have to have unique serial
numbers printed on them. The other half will have to follow
suit one year later.
“Everybody took a deep breath when the California Board of
Pharmacy delayed its e-Pedigree requirement,” agreed Ruby
Raley, director, healthcare solutions, Axway, a company that
provides the software to run the data repositories that hold
information about drug package pedigrees as an individual
package moves from the manufacturer to (perhaps) a repackager
to a wholesaler and on to the retail or hospital pharmacy.
Axway is involved in numerous track and trace pilotswith companies
such as AstraZeneca, Johnson & Johnson, and Glaxo-
SmithKline. “Nothing happened last year,” she remarked.
Now, publication of an FDA-approved package serialization
scheme has given the pharmaceutical industry a reason to
restart its version of California Here I Come. Whereas the
California Board of Pharmacy provided no specifics on package
serialization, the FDAhas; manufacturers no longer have to
wait and guess what might be acceptable in the Golden State
come January 1, 2015, a date that, given the complexities of e-
Pedigree compliance, isn’t so far away.
James McCrory, vice president, products and technology at
rfXcel Corp., said, “The SNI guidance is a big deal in three
ways. It reflects new interest in federal government safety of
prescription drugs, provides endorsement of GS1, which is
pretty big since people have been hanging back waiting to see
what happens, and matches what leaders and distributors and
manufacturers are doing in their own pilots.” The SNI essentially
endorses the serialization standard adopted by the international
standards group GS1. GS1 has one serialization standard
for numbers printed in 2D barcodes (GT10) and a second
one for numbers printed on radio frequency identification
(RFID) tags (G10).
An agreed-upon format for an item-level SNI is only the first
step in a closed-loop e-Pedigree (often used synonymously
with track and trace) system such as the one adopted
by California, and likely to be endorsed by Congress. Other
follow-on elements include:• security framework for data exchange,
• record retention policies,
• SNIs at the pallet and case level,
• standardized chain-of-custody data to be tracked by
logistical units,
• standardized electronic data exchange format,
• data carriers with specific encoding formats identified,
• guidelines for reporting exceptions noted by supply chain
participants, and
• hierarchy of the SNIs expected in a shipment.
The FDA SNI provides a first-step level of certainty to manufacturers,
in terms of compliance with federal expectations,
and assures them that the U.S. is moving in the same basic
direction as other countries, many of whom are far more
advanced in their national track and trace requirements. That is
all true despite the limitations of the FDA guidance: it is a suggested
package identification formula. There is no federal
requirement that drug manufacturers follow it, much less put a
serial number on each item-level package. The limits of the FDA guidance, some of its nuances and its
failure to address the important issue of which technology
should be used to print the SNI have all combined, apparently,
to seal the lips of pharmaceutical manufacturers who just three
years ago were touting their track and trace efforts. Prominent
proselytizers such as Pfizer, Abbott and Purdue Pharma have
declined to comment on the FDA final guidance on an SNI. “I
ran this request up the flag pole and have learned that we are
unable to grant interviews on this topic,” explained Libby
Holman, spokeswoman for Purdue Pharma, which has been an
aggressive track and trace experimenter because of its manufacture
of OxyContin, a popular target of drug diverters.
Tom McPhillips, vice president, U.S. Trade Group, Pfizer
Inc., did not return an e-mail requesting comment. Mr.
McPhillips, in his comments to the FDA after the draft guidance
was published, asked the agency not to require manufacturers
to print the national drug code (NDC) as part of both the
machine readable and human readable SNI. The FDA rejected
that request.
Nonetheless, manufacturers support the specificity of the
SNI, and its agreement with GS1 standards, which gives them
more certainty than California’s prescription for a unique serial
number. The only guidance in the Golden State law, according
to Virginia Herold, executive officer of the California Board
of Pharmacy, is that the number be part of an “interoperable”prospective impact of counterfeit drugs on public health and
safety. The 2007 Heparin recall underlined the value of track
and trace (had it been deployed by the pharmaceutical chain)
with regard to drug recalls. Preventing thefts is an important
affiliate benefit, too. In March, thieves broke into an Eli Lilly
warehouse in Enfield, CT and stole $75 million worth of prescription
drugs. The crooks took pallets of the anti-cancer
drugs Gemzar and Alimta, the schizophrenia drug Zyprexa,
the antidepressant Cymbalta and other prescription medicines.
Theoretically, those stolen drugs could not come back into the
legal distribution chain if they had SNIs printed on 2D barcodes
or RFID tags on each package’s label.
It is clear that manufacturers are the big winners, relatively
speaking, from the final guidance. Scott Melville, senior vice
president for government affairs for the Healthcare
Distribution Management Association (HDMA), said, “The
FDA guidance provides manufacturers and the entire pharmaceutical
supply chain with needed. But while the HDMA has
welcomed the guidance, it clearly did not get everything it
wanted. For example, the HDMA had not wanted the FDA to
endorse an ‘alphanumeric’ as a serial number option.”
However, Anita Ducca, senior director, regulatory affairs at
HDMA, acknowledged the FDAwas responsive to her group’s
concerns. “We had a number of things we wanted the FDA to
change fromits draft guidance and for themost part the agency did that,” she states. “Our members are ready and willing to
work within the parameters of the guidance.”
Neither did hospitals and pharmacies get exactly what they
wanted. Some pharmacy groups had also pushed for a different
SNI. The American Society of Health System Pharmacists
(ASHP) had urged the FDAto modify the NDC number so that
its components included the RxNorm CUI as the drug/form/
dose component of the code. Justine Coffey, JD, LLM, director,
federal regulatory affairs, said, “Currently, ASHP members are
struggling with inconsistencies relating to the National Drug
Code (NDC) and its application to barcode point-of-care, clinical
information systems, and hospital financial systems.”
Axway’sMs. Raley noted that hospitals are particularly concerned
about avoiding medication errors, especially given the
passage of the health care reform bill, which mandates a number
of new payment methodologies based on the hospital
reducing errors of all kinds. She explained that many drugs
come in many formulations and doses, information which will
not be gleaned from the SNI endorsed by the FDA. Ms. Raley
pointed out that hospitals are particularly sensitive to this issue
given the publicity generated by the misadministration of
Heparin to twins born in November 2007 to the actor Dennis
Quaid and his wife.
Minor reservations aside, the HDMA’s Mr. Melville emphasized
that the final guidance allows his members and everyone
else to move forward. “The first step in an e-Pedigree system is
putting a number on the package,” he said. “The second step is
what you do with that number.”
For distributors a big issue is how the SNI is printed on the
item-level package label. The two options that have emerged
over the past half-decade are a 2D barcode or a radio frequency
identification (RFID) tag. Distributors have generally favored
RFID tagging, since they could check in packages to their warehouses
without a reader having to be “in the line of sight” with
the individual package. This saves them time, which is important
because any e-Pedigree requirement costs the distributor
money and earns the company no profit. But RFID tags are
expensive, and manufacturers have generally pushed for printing
serial numbers within 2D barcodes, not just because the
labels are cheaper, but because the packaging lines can run
faster than they could if RFID tags are printed on the package.
Moreover, RFID tags cannot be used on some products.
The final guidance on the SNI appears, however, to endorse
2D barcode serialization without actually saying so. “The FDA
landed on 2D,” stated Ms. Raley. “It is very clear they talked
about the total acceptability of 2D although they did not rule out RFID.” RFID does have some significant shortcomings when it
comes to package use, such as its deleterious effect on biologics.
Robert Celeste, director, healthcare, GS1 US, said that in fact
all the manufacturers who have done pilots, and are doing
them now, are putting serial numbers on packages via 2D barcodes.
Some are also putting RFID tags on the product label,
and on cartons and pallets. He believes it is possible that RFID
tags on item-level packages may have utility—if their per unit
price comes down — in certain applications, for example,
where products must be kept at certain temperatures.
The final guidance, however, is silent on serialization of cartons
and pallets, which the California Board of Pharmacy, just
to cite one interested party, had pushed for, and on which the
FDA had asked for comments.
While the pharmaceutical supply chain now knows that the
SNI is the baseline for complying with California’s e-Pedigree
requirement, everyone up and down the chain is pushing for
federal legislation that would make the California requirement,
or some close version of it, national law and might resolve outstanding
technology questions as well. The 2007 congressional
law that required the FDAto publish some sort of SNI within 30
months—it did not specify guidance versus more legal regulation
— also told the FDA to “develop standards and identify
and validate effective technologies for the purpose of securing
the drug supply chain against counterfeit, diverted, subpotent,
substandard, adulterated, misbranded, or expired drugs.” The
FDAreceived comments but has done nothing to impose a technology
solution, which various players in the drug distribution
chain would probably oppose, but which is clearly necessary.
In the 2007-2008 session of Congress, Reps. Steve Buyer (RIN)
and Jim Matheson (D-UT) introduced the Safeguarding
America’s Pharmaceuticals Act, which would have established
a federal e-Pedigree mandate. That law has not been reintroduced
in the current Congress, perhaps, suggested Ms. Herold
of California’s Board of Pharmacy, because members of the
House and Senate have been overwhelmed with healthcare
reform, financial reform and economic recovery. Also, the same
sense of urgency that disappeared in California in September
2008 disappeared from Congress at about the same time.
As the HDMA’sMr.Melville put it, “We want a uniformfederal
pedigree standard. We can’t have barriers to movement of
products.” He added that Reps. Buyer andMatheson, at a hearing
onMarch 10, stated they are working on a redrafted version
of their bill. “We are very hopeful it will be reintroduced soon,”
said Mr. Melville. “We expect it to look like the California
implementation schedule.”
THE FDA’S PUBLICATION OF THE FINAL guidance on a standard
numerical identifier (SNI) for pharmaceutical packages
at the end of March awoke the drug industry from
its track and trace slumber. Manufacturers, distributors, pharmacies
and their vendors had been snoozing since September
2008, when California pushed back its e-Pedigree implementation
date, an action with significant national implications.
Instead of having to put unique serial numbers on packages
starting January 1, 2011, California, responding to pleas from
an ill-prepared drug industry, pushed back that e-Pedigree
deadline to January 1, 2015. One-half of all drug packages
arriving in the state on that date will have to have unique serial
numbers printed on them. The other half will have to follow
suit one year later.
“Everybody took a deep breath when the California Board of
Pharmacy delayed its e-Pedigree requirement,” agreed Ruby
Raley, director, healthcare solutions, Axway, a company that
provides the software to run the data repositories that hold
information about drug package pedigrees as an individual
package moves from the manufacturer to (perhaps) a repackager
to a wholesaler and on to the retail or hospital pharmacy.
Axway is involved in numerous track and trace pilots with comTHE FDA’S PUBLICATION OF THE FINAL guidance on a standard
numerical identifier (SNI) for pharmaceutical packages
at the end of March awoke the drug industry from
its track and trace slumber. Manufacturers, distributors, pharmacies
and their vendors had been snoozing since September
2008, when California pushed back its e-Pedigree implementation
date, an action with significant national implications.
Instead of having to put unique serial numbers on packages
starting January 1, 2011, California, responding to pleas from
an ill-prepared drug industry, pushed back that e-Pedigree
deadline to January 1, 2015. One-half of all drug packages
arriving in the state on that date will have to have unique serial
numbers printed on them. The other half will have to follow
suit one year later.
“Everybody took a deep breath when the California Board of
Pharmacy delayed its e-Pedigree requirement,” agreed Ruby
Raley, director, healthcare solutions, Axway, a company that
provides the software to run the data repositories that hold
information about drug package pedigrees as an individual
package moves from the manufacturer to (perhaps) a repackager
to a wholesaler and on to the retail or hospital pharmacy.
Axway is involved in numerous track and trace pilotswith companies
such as AstraZeneca, Johnson & Johnson, and Glaxo-
SmithKline. “Nothing happened last year,” she remarked.
Now, publication of an FDA-approved package serialization
scheme has given the pharmaceutical industry a reason to
restart its version of California Here I Come. Whereas the
California Board of Pharmacy provided no specifics on package
serialization, the FDAhas; manufacturers no longer have to
wait and guess what might be acceptable in the Golden State
come January 1, 2015, a date that, given the complexities of e-
Pedigree compliance, isn’t so far away.
James McCrory, vice president, products and technology at
rfXcel Corp., said, “The SNI guidance is a big deal in three
ways. It reflects new interest in federal government safety of
prescription drugs, provides endorsement of GS1, which is
pretty big since people have been hanging back waiting to see
what happens, and matches what leaders and distributors and
manufacturers are doing in their own pilots.” The SNI essentially
endorses the serialization standard adopted by the international
standards group GS1. GS1 has one serialization standard
for numbers printed in 2D barcodes (GT10) and a second
one for numbers printed on radio frequency identification
(RFID) tags (G10).
An agreed-upon format for an item-level SNI is only the first
step in a closed-loop e-Pedigree (often used synonymously
with track and trace) system such as the one adopted
by California, and likely to be endorsed by Congress. Other
follow-on elements include:• security framework for data exchange,
• record retention policies,
• SNIs at the pallet and case level,
• standardized chain-of-custody data to be tracked by
logistical units,
• standardized electronic data exchange format,
• data carriers with specific encoding formats identified,
• guidelines for reporting exceptions noted by supply chain
participants, and
• hierarchy of the SNIs expected in a shipment.
The FDA SNI provides a first-step level of certainty to manufacturers,
in terms of compliance with federal expectations,
and assures them that the U.S. is moving in the same basic
direction as other countries, many of whom are far more
advanced in their national track and trace requirements. That is
all true despite the limitations of the FDA guidance: it is a suggested
package identification formula. There is no federal
requirement that drug manufacturers follow it, much less put a
serial number on each item-level package. The limits of the FDA guidance, some of its nuances and its
failure to address the important issue of which technology
should be used to print the SNI have all combined, apparently,
to seal the lips of pharmaceutical manufacturers who just three
years ago were touting their track and trace efforts. Prominent
proselytizers such as Pfizer, Abbott and Purdue Pharma have
declined to comment on the FDA final guidance on an SNI. “I
ran this request up the flag pole and have learned that we are
unable to grant interviews on this topic,” explained Libby
Holman, spokeswoman for Purdue Pharma, which has been an
aggressive track and trace experimenter because of its manufacture
of OxyContin, a popular target of drug diverters.
Tom McPhillips, vice president, U.S. Trade Group, Pfizer
Inc., did not return an e-mail requesting comment. Mr.
McPhillips, in his comments to the FDA after the draft guidance
was published, asked the agency not to require manufacturers
to print the national drug code (NDC) as part of both the
machine readable and human readable SNI. The FDA rejected
that request.
Nonetheless, manufacturers support the specificity of the
SNI, and its agreement with GS1 standards, which gives them
more certainty than California’s prescription for a unique serial
number. The only guidance in the Golden State law, according
to Virginia Herold, executive officer of the California Board
of Pharmacy, is that the number be part of an “interoperable”prospective impact of counterfeit drugs on public health and
safety. The 2007 Heparin recall underlined the value of track
and trace (had it been deployed by the pharmaceutical chain)
with regard to drug recalls. Preventing thefts is an important
affiliate benefit, too. In March, thieves broke into an Eli Lilly
warehouse in Enfield, CT and stole $75 million worth of prescription
drugs. The crooks took pallets of the anti-cancer
drugs Gemzar and Alimta, the schizophrenia drug Zyprexa,
the antidepressant Cymbalta and other prescription medicines.
Theoretically, those stolen drugs could not come back into the
legal distribution chain if they had SNIs printed on 2D barcodes
or RFID tags on each package’s label.
It is clear that manufacturers are the big winners, relatively
speaking, from the final guidance. Scott Melville, senior vice
president for government affairs for the Healthcare
Distribution Management Association (HDMA), said, “The
FDA guidance provides manufacturers and the entire pharmaceutical
supply chain with needed. But while the HDMA has
welcomed the guidance, it clearly did not get everything it
wanted. For example, the HDMA had not wanted the FDA to
endorse an ‘alphanumeric’ as a serial number option.”
However, Anita Ducca, senior director, regulatory affairs at
HDMA, acknowledged the FDAwas responsive to her group’s
concerns. “We had a number of things we wanted the FDA to
change fromits draft guidance and for themost part the agency did that,” she states. “Our members are ready and willing to
work within the parameters of the guidance.”
Neither did hospitals and pharmacies get exactly what they
wanted. Some pharmacy groups had also pushed for a different
SNI. The American Society of Health System Pharmacists
(ASHP) had urged the FDAto modify the NDC number so that
its components included the RxNorm CUI as the drug/form/
dose component of the code. Justine Coffey, JD, LLM, director,
federal regulatory affairs, said, “Currently, ASHP members are
struggling with inconsistencies relating to the National Drug
Code (NDC) and its application to barcode point-of-care, clinical
information systems, and hospital financial systems.”
Axway’sMs. Raley noted that hospitals are particularly concerned
about avoiding medication errors, especially given the
passage of the health care reform bill, which mandates a number
of new payment methodologies based on the hospital
reducing errors of all kinds. She explained that many drugs
come in many formulations and doses, information which will
not be gleaned from the SNI endorsed by the FDA. Ms. Raley
pointed out that hospitals are particularly sensitive to this issue
given the publicity generated by the misadministration of
Heparin to twins born in November 2007 to the actor Dennis
Quaid and his wife.
Minor reservations aside, the HDMA’s Mr. Melville emphasized
that the final guidance allows his members and everyone
else to move forward. “The first step in an e-Pedigree system is
putting a number on the package,” he said. “The second step is
what you do with that number.”
For distributors a big issue is how the SNI is printed on the
item-level package label. The two options that have emerged
over the past half-decade are a 2D barcode or a radio frequency
identification (RFID) tag. Distributors have generally favored
RFID tagging, since they could check in packages to their warehouses
without a reader having to be “in the line of sight” with
the individual package. This saves them time, which is important
because any e-Pedigree requirement costs the distributor
money and earns the company no profit. But RFID tags are
expensive, and manufacturers have generally pushed for printing
serial numbers within 2D barcodes, not just because the
labels are cheaper, but because the packaging lines can run
faster than they could if RFID tags are printed on the package.
Moreover, RFID tags cannot be used on some products.
The final guidance on the SNI appears, however, to endorse
2D barcode serialization without actually saying so. “The FDA
landed on 2D,” stated Ms. Raley. “It is very clear they talked
about the total acceptability of 2D although they did not rule out RFID.” RFID does have some significant shortcomings when it
comes to package use, such as its deleterious effect on biologics.
Robert Celeste, director, healthcare, GS1 US, said that in fact
all the manufacturers who have done pilots, and are doing
them now, are putting serial numbers on packages via 2D barcodes.
Some are also putting RFID tags on the product label,
and on cartons and pallets. He believes it is possible that RFID
tags on item-level packages may have utility—if their per unit
price comes down — in certain applications, for example,
where products must be kept at certain temperatures.
The final guidance, however, is silent on serialization of cartons
and pallets, which the California Board of Pharmacy, just
to cite one interested party, had pushed for, and on which the
FDA had asked for comments.
While the pharmaceutical supply chain now knows that the
SNI is the baseline for complying with California’s e-Pedigree
requirement, everyone up and down the chain is pushing for
federal legislation that would make the California requirement,
or some close version of it, national law and might resolve outstanding
technology questions as well. The 2007 congressional
law that required the FDAto publish some sort of SNI within 30
months—it did not specify guidance versus more legal regulation
— also told the FDA to “develop standards and identify
and validate effective technologies for the purpose of securing
the drug supply chain against counterfeit, diverted, subpotent,
substandard, adulterated, misbranded, or expired drugs.” The
FDAreceived comments but has done nothing to impose a technology
solution, which various players in the drug distribution
chain would probably oppose, but which is clearly necessary.
In the 2007-2008 session of Congress, Reps. Steve Buyer (RIN)
and Jim Matheson (D-UT) introduced the Safeguarding
America’s Pharmaceuticals Act, which would have established
a federal e-Pedigree mandate. That law has not been reintroduced
in the current Congress, perhaps, suggested Ms. Herold
of California’s Board of Pharmacy, because members of the
House and Senate have been overwhelmed with healthcare
reform, financial reform and economic recovery. Also, the same
sense of urgency that disappeared in California in September
2008 disappeared from Congress at about the same time.
As the HDMA’sMr.Melville put it, “We want a uniformfederal
pedigree standard. We can’t have barriers to movement of
products.” He added that Reps. Buyer andMatheson, at a hearing
onMarch 10, stated they are working on a redrafted version
of their bill. “We are very hopeful it will be reintroduced soon,”
said Mr. Melville. “We expect it to look like the California
implementation schedule.”
Performance Metrics
Energy Biz Magazine...May-June 2010
FERC Takes Stock
by Stephen Barlas
Retail, municipal and industrial consumers of electricity are pressing the Federal Energy Regulatory Commission (FERC) to impose new "performance metric" reporting requirements on Regional Transmission Organizations (RTOs), the big grid management organizations who wholesale energy to about two-thirds of the users in the United States. Ultimately, the aim of groups such as the Electricity Consumers Resource Council (ELCON) and American Public Power Association (APPA) is to get more information on electric generator costs and pricing to prove their suspicion that RTO rates are unreasonably high.
A rulemaking is expected this year as the result of FERC's issued on February 3 of 14 draft metrics in three categories: reliability, market and organization. One market performance metric, for example, would be market pricing, where the RTOs and ISOs would have to report three things, including load-weighted locational marginal price. Publication of those draft metrics, which are only a first cut, was FERC's response to a Government Accountability Office (GAO) report in 2008 whose conclusion stated: "It has been over 10 years since major federal electricity restructuring was introduced and some of the first RTOs were developed to facilitate it, yet there is little agreement about whether restructuring and RTOs have been good for consumers, how they have affected electricity prices, and whether they have produced the benefits FERC envisioned."
Barbara Connors, a FERC spokeswoman, says the commission is reviewing the comments it received on its draft metrics and is determining its next step. The GAO report was requested by Sens. Joseph Lieberman (Ind.-CT) and Susan Collins (R-ME). They are the chairman and top GOPer on the Senate Committee on Homeland Security and Governmental Affairs. "They are watching what FERC is doing," says one consumer lobbyist.
The RTOs have been in operation since 1999 when the FERC issued Order 2000 to encourage the formation of independent entities to manage regional networks of electric transmission lines. FERC estimated the benefits of RTOs would be at least $2.4 billion annually, due to cost savings from the improved operational efficiency of generators, easier access to transmission service, and other factors. The Independent System Operators (ISOs) were formed prior to Order 2000, and are very similar to RTOs except they cover single states; but FERC and everyone else uses the terms RTO to encompass ISOs.
FERC has approved six RTOs: ISO New England, Midwest ISO, PJM Interconnection, Southwest Power Pool, California ISO and New York ISO. The Electric Reliability Council of Texas, an Independent System Operator, is primarily regulated by the Public Utility Commission of Texas.
The draft metrics FERC released on February 3 became the major controversy at a February 4 technical conference called to examine a second RTO issue related to organizational governance. At that meeting, John Anderson, president of ELCON, complained that the metrics FERC had suggested the day before had no metric devoted to electric generators. "Our organizations strongly believe that measurement of the revenues and production costs of the generators selling power into RTO markets is highly relevant to the questions the GAO posed,” Anderson said.
But FERC Chairman Jon Wellinghoff responded, “Now my colleagues may differ with me, but I will tell you today personally that I don’t think that metric is one that I’m going to be advocating for unless you can somehow compellingly convince me that it is, and right now, today, I’m not convinced.”
Joe Nipper, senior vice president of the APPA, says his group was "distressed" by Wellinghoff's comments. Consumers want generator metrics in order to prove their suspicion, buttressed by previous though inconclusive studies, that electric rates inside RTOs are higher than outside RTOs. But given Wellinghoff's stated position and the fact that Commissioners Moeller and Spitzer are not considered APPA allies, the odds of FERC mandating generator-specific metrics seem low.
Tara Ormond, director of regulatory affairs for the Electric Power Supply Association, which represents most of the large electric generators and transmission companies participating in RTOs, says, "There is a huge divergence between APPA, ELCON and us. They want sweeping changes." She adds that some of the metrics FERC proposed are good, some might be detrimental. More broadly, she states, "Consumers are better served by RTOs given that there is little transparency on rates in bilateral markets."
FERC Takes Stock
by Stephen Barlas
Retail, municipal and industrial consumers of electricity are pressing the Federal Energy Regulatory Commission (FERC) to impose new "performance metric" reporting requirements on Regional Transmission Organizations (RTOs), the big grid management organizations who wholesale energy to about two-thirds of the users in the United States. Ultimately, the aim of groups such as the Electricity Consumers Resource Council (ELCON) and American Public Power Association (APPA) is to get more information on electric generator costs and pricing to prove their suspicion that RTO rates are unreasonably high.
A rulemaking is expected this year as the result of FERC's issued on February 3 of 14 draft metrics in three categories: reliability, market and organization. One market performance metric, for example, would be market pricing, where the RTOs and ISOs would have to report three things, including load-weighted locational marginal price. Publication of those draft metrics, which are only a first cut, was FERC's response to a Government Accountability Office (GAO) report in 2008 whose conclusion stated: "It has been over 10 years since major federal electricity restructuring was introduced and some of the first RTOs were developed to facilitate it, yet there is little agreement about whether restructuring and RTOs have been good for consumers, how they have affected electricity prices, and whether they have produced the benefits FERC envisioned."
Barbara Connors, a FERC spokeswoman, says the commission is reviewing the comments it received on its draft metrics and is determining its next step. The GAO report was requested by Sens. Joseph Lieberman (Ind.-CT) and Susan Collins (R-ME). They are the chairman and top GOPer on the Senate Committee on Homeland Security and Governmental Affairs. "They are watching what FERC is doing," says one consumer lobbyist.
The RTOs have been in operation since 1999 when the FERC issued Order 2000 to encourage the formation of independent entities to manage regional networks of electric transmission lines. FERC estimated the benefits of RTOs would be at least $2.4 billion annually, due to cost savings from the improved operational efficiency of generators, easier access to transmission service, and other factors. The Independent System Operators (ISOs) were formed prior to Order 2000, and are very similar to RTOs except they cover single states; but FERC and everyone else uses the terms RTO to encompass ISOs.
FERC has approved six RTOs: ISO New England, Midwest ISO, PJM Interconnection, Southwest Power Pool, California ISO and New York ISO. The Electric Reliability Council of Texas, an Independent System Operator, is primarily regulated by the Public Utility Commission of Texas.
The draft metrics FERC released on February 3 became the major controversy at a February 4 technical conference called to examine a second RTO issue related to organizational governance. At that meeting, John Anderson, president of ELCON, complained that the metrics FERC had suggested the day before had no metric devoted to electric generators. "Our organizations strongly believe that measurement of the revenues and production costs of the generators selling power into RTO markets is highly relevant to the questions the GAO posed,” Anderson said.
But FERC Chairman Jon Wellinghoff responded, “Now my colleagues may differ with me, but I will tell you today personally that I don’t think that metric is one that I’m going to be advocating for unless you can somehow compellingly convince me that it is, and right now, today, I’m not convinced.”
Joe Nipper, senior vice president of the APPA, says his group was "distressed" by Wellinghoff's comments. Consumers want generator metrics in order to prove their suspicion, buttressed by previous though inconclusive studies, that electric rates inside RTOs are higher than outside RTOs. But given Wellinghoff's stated position and the fact that Commissioners Moeller and Spitzer are not considered APPA allies, the odds of FERC mandating generator-specific metrics seem low.
Tara Ormond, director of regulatory affairs for the Electric Power Supply Association, which represents most of the large electric generators and transmission companies participating in RTOs, says, "There is a huge divergence between APPA, ELCON and us. They want sweeping changes." She adds that some of the metrics FERC proposed are good, some might be detrimental. More broadly, she states, "Consumers are better served by RTOs given that there is little transparency on rates in bilateral markets."
Under 26 Coverage?
Treasury & Risk Magazine...May 2010
Companies struggle with ambiguity as they figure out how to implement the healthcare reform law's first provisions.
By
* Stephen Barlas
Companies putting together 2011 health benefits—and many have already begun the process—are in the uncomfortable position of having to make big-dollar decisions before some of the blurry language in the healthcare reform bill is clarified. The first complicated requirements set by the Patient Protection and Affordable Care Act go into effect for plan years starting after Sept. 23. “People are not appreciating how much of this law we won’t know for a long time,” says Susan Relland of the law firm Miller & Chevalier, who’s a board member at the American Benefits Council.
Probably the most significant provision says employees’ children under 26 who are not enrolled in another group plan must be allowed to enroll in company plans in the next plan year, which for most companies probably starts Jan. 1, 2011. Beginning in 2014, plans must cover children up to age 26 whether or not they have access to another plan. Companies are considering whether to face the administrative hassle of determining whether adult children have access to other plans or just let all employees’ children up to age 26 participate starting with the next plan year, explains Relland.
“Inclusion of adult children up to age 26 has been the No. 1 question raised by our clients,” says Randall Abbott, senior consultant at Towers Watson. However, he doubts companies will decide to cover all adult children. One scenario, Abbott says, is that a company could set up a separate rate category for adult children and levy a different charge.
Further complicating the issue, says Gretchen Young, senior vice president for health policy at the ERISA Industry Committee (ERIC), is uncertainty about whether the new law requires adult offspring to be dependents for tax purposes to qualify for the health coverage.
Another major provision outlaws lifetime and annual limits for essential benefits in plan years starting after Sept. 23. The Department of Health and Human Services will define which benefits are essential. Non-essential benefits might include chiropractic, occupational therapy or fertility services. “If employers have to eliminate annual limits for those ancillary benefits, they may choose to simply eliminate the coverage completely,” explains Relland.
“This is a huge issue in terms of cost control,” says Young. ERIC’s biggest concern is how HHS defines the term “grandfathered,” she says, since grandfathered plans will not have to comply with the law’s requirements that plans immediately eliminate co-pays for preventive care, ditch separate plans for higher-paid executives and other provisions.
Companies struggle with ambiguity as they figure out how to implement the healthcare reform law's first provisions.
By
* Stephen Barlas
Companies putting together 2011 health benefits—and many have already begun the process—are in the uncomfortable position of having to make big-dollar decisions before some of the blurry language in the healthcare reform bill is clarified. The first complicated requirements set by the Patient Protection and Affordable Care Act go into effect for plan years starting after Sept. 23. “People are not appreciating how much of this law we won’t know for a long time,” says Susan Relland of the law firm Miller & Chevalier, who’s a board member at the American Benefits Council.
Probably the most significant provision says employees’ children under 26 who are not enrolled in another group plan must be allowed to enroll in company plans in the next plan year, which for most companies probably starts Jan. 1, 2011. Beginning in 2014, plans must cover children up to age 26 whether or not they have access to another plan. Companies are considering whether to face the administrative hassle of determining whether adult children have access to other plans or just let all employees’ children up to age 26 participate starting with the next plan year, explains Relland.
“Inclusion of adult children up to age 26 has been the No. 1 question raised by our clients,” says Randall Abbott, senior consultant at Towers Watson. However, he doubts companies will decide to cover all adult children. One scenario, Abbott says, is that a company could set up a separate rate category for adult children and levy a different charge.
Further complicating the issue, says Gretchen Young, senior vice president for health policy at the ERISA Industry Committee (ERIC), is uncertainty about whether the new law requires adult offspring to be dependents for tax purposes to qualify for the health coverage.
Another major provision outlaws lifetime and annual limits for essential benefits in plan years starting after Sept. 23. The Department of Health and Human Services will define which benefits are essential. Non-essential benefits might include chiropractic, occupational therapy or fertility services. “If employers have to eliminate annual limits for those ancillary benefits, they may choose to simply eliminate the coverage completely,” explains Relland.
“This is a huge issue in terms of cost control,” says Young. ERIC’s biggest concern is how HHS defines the term “grandfathered,” she says, since grandfathered plans will not have to comply with the law’s requirements that plans immediately eliminate co-pays for preventive care, ditch separate plans for higher-paid executives and other provisions.
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