Automotive Policy Goes to the Polls

Automotive Engineering, October 2008

It was 100 years ago that Henry Ford launched the revolutionary Model T, a car whose technology was a marked departure from what had been used in the incipient autos in the industry’s gestation stage. The Model T’s steering wheel was on the left and the entire engine and transmission were enclosed; the four cylinders were cast in a solid block; the suspension used two semi-elliptic springs.

Now, too, Ford, General Motors and Chrysler are attempting to design and produce revolutionary autos and light trucks, those that run on alternative fuels such as E85 and those that run on batteries and even fuel cells. But while Henry Ford did not ask for help from the U.S. government to launch the Model T, Detroit, in more ways than one, is on its knees. Without the tax credits, research and development funding, reasonable auto energy mileage goals and foreign market opening assistance only the President and Congress can provide, Detroit could sink deeper into the financial morass from which only advanced technology vehicles can tow it out.

Before and during their respective primaries, neither Sen. Barack Obama (D-Ill.) nor Sen. John McCain (R-Ariz.) showed much sympathy for imperiled U.S. auto companies. Obama famously told the Detroit Economic Club in May 2007 that car makers deserved their just rewards for resisting the production of fuel efficient cars. He then campaigned across the country bragging about how he gored the lion in its own den. While Obama’s tone was sharper, McCain’s fangs had been growing for a much longer time. As early as 2002, he introduced legislation which would have upped the corporate average fuel economy (CAFE) standard to 36 miles per gallon by 2016, and explained on the Senate floor, when he introduced that bill on February 2, 2002, that his Fuel Economy & Security Act focused on “one of the major industrial greenhouse gas emitters, the automotive industry.”

Singing a new song; but will music stop after election?

Now fast forward to fall 2008. As the election draws within one month of votes being cast, both Obama and McCain are wearing cheerleading uniforms with big “Ds” on the front, “D” for Detroit. They have been in and out of Michigan of late on campaign swings journeying to GM, Ford and Chrysler plants in places like Warren, Flint and Sterling Heights. In July at the Warren, Michigan plant where the Chevy Volt will be produced, McCain praised GM and said he wants “to help in every way” to insure the success of that all-electric sedan. In Pittsburgh in June, Obama, sitting next to GM CEO Rick Wagoner during a panel discussion on the future of the auto industry, solicitously asked Wagoner: “The question is, assuming I’m president, what would be the one or two things that the federal government can do most constructive to make certain that in the race against time for the U.S. automakers that you are able to make this pivot as quickly as possible?”

What a difference a presidential party nomination makes! Greg Martin, GM’s spokesman in Washington, says, “The Detroit bashing has stopped and both candidates are being very supportive of the industry’s efforts.” That is because, he explains, both Obama and McCain have woken up to the importance of Michigan’s and Ohio’s status as “key states,” ones whose electoral votes could determine who wins the presidency on November 4, 2008.

The question is, of course, whether this change in tone is one of substance or convenience. It is an important question because this may be the most important presidential election for the auto industry in 100 years, a view shared by David Cole chairman of the Center for Automotive Research. Cole will vote for McCain. “They are both intensely focused on energy conservation and alternative energy,” says Cole, whose CAR sponsored a major industry confab in Traverse City, Michigan in August, where the candidates’ positions were dissected in the corridors. “But McCain has a more pragmatic view, supporting a more balanced approach to energy exploration, conservation and alterative energy. Obama tends to be overly optimistic and operates more in the theoretical space.”

But one official at another industry research group, who declines to be identified, prefers Obama because of his support for federal aid to auto manufacturers and their suppliers. Both candidates back some new federal assistance. GM’s Martin points out that visits like McCain’s to GM’s Warren technical center helps raise the profile of the need for federal help for battery technology development. McCain has proposed funding a $300 million award payable to the first company who develops an electric battery. After he made the comment, his campaign quickly jumped in and said the proposal would not be fleshed out until the Arizona senator became president. So there are no details. Obama derided the proposal as a ‘’bounty’’ for some ‘’rocket scientist’’ to win. The U.S. Department of Energy is already giving three consortiums involving GM, Ford and Chrysler $10 million each over three years for battery development, that money coming out of the $41 million a year the DOE has for its entire “energy storage program,” which funds R&D for passenger vehicles.

Mark Fields, executive vice president, Ford Motor Co., told a Washington, D.C. audience on June 11, 2008 that much more money was needed, and not just for battery chemistry, but for development of a manufacturing infrastructure, too. “Just as the Department of Energy recently placed nearly $400 million with various ethanol producers to hasten commercial applications, bold and dramatic incentives are needed to accelerate the commercial development of high-energy power batteries in the U.S.,” he said.

Mark Wagner, vice president, government relations, for Johnson Controls/Saft, says the U.S. is in danger of losing the lithium ion battery manufacturing base to the Asians. In fact, his company is supplying lithium ion batteries for the 2009 Mercedes S Class sedan, and manufacturing those batteries in France.

Obama pushes for revitalization of auto manufacturing base; McCain hesitant on aid

While Obama has not focused specifically on lithium ion development, either in the lab or on the manufacturing floor, he has said quite a bit about the need to convert auto company and supplier manufacturing facilities into launching pads for advanced vehicles. He was an original co-sponsor of Sen. Orrin Hatch’s (R-Utah) FREEDOM Act, a 2006 bill which offered first-year expensing for auto and component companies setting up production capacity in the United States for plug-in electric drive vehicles. Those provisions morphed into a different form in the Energy Independence and Security Act (EISA) which Congress approved in December 2007. That bill included provisions for low-interest loans to auto companies and their suppliers for retooling factories for “advanced technology” vehicles and a separate grant program for “refurbishment and retooling” of auto and component manufacturing facilities for manufacture of efficient hybrid, plug-in electric hybrid, plug-in electric drive, and advanced diesel vehicles. The low-interest loans would be made through a new Advanced Technology Vehicles Manufacturing Incentive Program (ATVMIP). Obama supports “immediate” funding of the ATVMIP. McCain at first refused to endorse federal money. But on August 22 he began to shift his position, saying he believed Congress should fund the ATVMIP.

Besides his battery “prize,” McCain has talked up his support for a $5,000 tax credit for consumers who purchase a plug-in electric vehicle such as the Chevy Volt GM hopes to have on its dealers’ lots for the 2010 model year. The FREEDOM Act, which Obama supports, and which the auto companies have consistently pressed for since Hatch introduced it, allows for a plug-in credit as high as $7500 depending on the kilowattage of the battery. Equally important, Obama backs eliminating the 60,000 unit per manufacturer limit on the number of vehicles which could qualify for the plug-in credit, a ceiling that applied to the hybrid tax credit in the 2005 energy bill, and which Toyota hit very quickly with Prius and Lexus sales.

Both favor federal incentives to consumers on electric plug-ins

Talking about tax credits, Obama has been a leading Senate proponent of tax credits to service station owners for the cost of building new E85 vehicle refueling facilities, introducing legislation to that effect in May 2005, two years before GM CEO Rick Wagoner, Jr. told the House Energy and Commerce Committee that the best opportunity for addressing the twin problems of high gas prices and CO2 emissions was “through increased use of bio-fuels.” McCain has been anti-ethanol, especially from a federal subsidy standpoint. He has warmed up to ethanol as a fuel—sans subsidy--of late.

“Senator Obama’s record regarding the use of domestic-renewable fuels such as ethanol is first-rate. Senator Obama has personally participated in E85 station Grand Opening events and offers a strong case as the Presidential candidate promoting change in our long dependence on the use of hydrocarbons,” says Phillip Lampert, executive director, National Ethanol Vehicle Coalition. “From my experience in working energy policy issues at the federal level, Senator McCain has only recently become aware that flexible fuel vehicles even exist. I don’t recall a single bill or proposal introduced or co-sponsored by Senator McCain that would have advanced the use of domestic-renewable transportation fuels.”

Obama and McCain green peas in pod on greenhouse gases

Of course, auto manufacturers see E85 vehicles not only as a way to reduce dependence on imported and expensive gasoline, but as a way to reduce greenhouse gas emissions. Both Obama and McCain are supporters of a national “cap-and-trade” greenhouse gas emissions program; one was incorporated into the Lieberman-Warner Climate Security Act of 2008 which came to the floor of the Senate for a vote on June 6, 2008 but failed to gain the necessary 60 votes to end debate. Obama and McCain supported the bill, although they have proposed slightly different carbon reduction targets, with Obama’s being a bit more aggressive. The auto industry doesn’t necessarily oppose a federal greenhouse gas mandate. Prior for the bill coming up for a vote, Ford said that it supports “a comprehensive, climate solution for reducing emissions through a economy-wide cap and trade federal framework with complementary state and local government roles.” Neither Ford nor GM or Chrysler took a position on the Lieberman-Warner bill itself, although Ford said, “This legislation is helping to progress the dialogue on climate legislation.”

The problem, from the auto companies’ standpoint, with that particular bill, is that an amendment was inserted on the Senate floor allowing California (and other states) to establish its own greenhouse gas limits on auto tailpipe emissions, which the EPA has so far prohibited the state from doing. Both McCain and Obama favor allowing states to adopt the California limits, or others of their own choosing, which would result in states imposing CAFE limits that are harder to meet than the 35 mpg by 2020 mandate in the EISA.

Positions on South Korea free trade agreement diverge; but industry ambivalent on issue

While Obama and McCain are pretty much twins on greenhouse gas regulation and CAFE standards, they diverge considerably on trade issues, which are increasingly important, particularly with regard to the Far East. McCain supports and Obama opposes the U.S.-South Korea free trade agreement President Bush negotiated in 2007, which includes a number of automotive proposals aimed at reducing the current automotive trade imbalance between the two countries. In 2006, according to the UAW, U.S. imports of Hyundai Motor Co. and Kia Motors products into the United States were valued at $12.4 billion, while U.S. exports of similar products to Korea amounted to just $751 million.

Obama has sided with the UAW, which opposes the agreement, even though it would result in elimination of Korea’s current eight percent tariff on imported U.S. vehicles (and, in return, the U.S. 2.5 percent tariff on Kias and Hyundis). The UAW has criticized the deal because it says it contains no hard-and-fast assurances that the Koreans would eliminate their non-tariff barriers. The pact poses a conundrum for the U.S. auto companies, who on the one hand want to be able to expand in Korea and Asia generally, but don’t want to impose conditions on South Korea which backfire, leading to restrictions on operations in that country, the latter factor weighing most heavily on GM. That balancing act explains why Martin, the GM spokesman, says, “We are agnostic on the U.S.-Korea agreement.” GM builds the Chevy Aveo in Korea. Ford and Chrysler, which have very limited operations in Korea, oppose the deal. Steve Biegun, Ford’s vice president, international governmental affairs, said in a statement after the Bush administration announced the agreement, “As a company that operates and competes in 200 markets globally, we see the real and tangible benefits of free trade. Unfortunately this agreement, as we understand it, will not open the Korean market to free trade in automobiles.”

Of course, in the end, U.S. auto manufacturers are most concerned about a freer flow of vehicles in America, where high gasoline prices have dammed up sales for the past year. Both Obama and McCain have shown their ears are now open to industry entreaties. “The next administration will be a lot more engaged with us than the current Bush administration,” says an official at a major auto industry research group.

FDA’s Janet Woodcock Riding High

Pharmacy & Therapeutics Journal, July 2008

CDER Director Wins “Wows” Amid Agency Woes
Stephen Barlas

Representative John Dingell (D-Mich.), the irascible, octogenarian Democratic chairman of the House Energy and Commerce Committee, normally sinks his teeth into Bush administration officials like a lion falling on a springbok. At a very contentious hearing on April 29, he tore into
FDA Commissioner Andrew von Eschenbach, MD, for spouting “hooey.” Mr. Dingell ranted, “Let’s come down to the nutcutting stage. I don’t want to weasel words.” But here John Dingell was two weeks later, listening to Dr. von Eschenbach’s deputy, Janet Woodcock, MD, and purring like a kitten.
“Again, I want it known that I appreciate Dr. Woodcock’s candor,” intoned Mr. Dingell,
whose committee has jurisdiction over the FDA. “To her credit, she has stepped forth in
the midst of a public health crisis to deal honestly with Congress. How I wish others in the
administration showed the same vigor, responsiveness, and leadership.”
Why was John Dingell stroking a Bush administration official? A few days before, at a different hearing, Dr. Woodcock, an internist and rheumatologist, had supplied what Dr. von Eschenbach had refused to furnish: an estimate that the FDA would need another $225 million per year to
inspect foreign drug-manufacturing firms such as the ones in China—the source of the contaminated active ingredient in heparin that has caused 81 deaths in the U.S. so far.
Heparin is just the most recent FDA drug disaster in a string of misadventures that started with Merck’s rofecoxib (Vioxx) and moved on to other public relations fiascos involving the
selective serotonin reuptake inhibitor (SSRI) class of anti - depressants, GlaxoSmithKline’s rosiglitazone (Avandia), and too many others to mention. In all those instances, including
heparin recently, FDA regulatory oversight has been, if not quite blind, then fuzzy enough to defy even the most talented optometrist. Never has the FDA’s regulation of drugs been
held in lower regard by Congress and the public.
But in a seeming paradox, amid the agency’s woes, its top drug regulator has been getting “wows.” In her roomy sixth floor office in the FDA’s new office building just outside the
Beltway off New Hampshire Avenue in suburban Maryland, Dr. Woodcock, who has worked at the FDA in one position or another since 1986—including an earlier stint as director of the
Center for Drug Evaluation and Research (CDER) from 1994to 2005—agrees that this has been the most contentious period for the FDA since she has been at the agency. She points to a
generic drug scandal in the late 1980s but calls that event more of “a tempest in a teapot,” compared with what is going on now.
“I regard the heparin problem as a landmark type of event,” she adds. “It demonstrated that an essential drug used everyday all over the health care system can be contaminated. That
is pretty bad.”
It is not often that one hears a top federal official admit to a serious mistake. Democrats
and Republicans on Capitol Hill appreciate Dr. Woodcock’s attempts to push candor to the
limits. Referring to her colloquy with Representative Dingell on May 1, Bill Hubbard, longtime
(now retired) Associate Commissioner at the FDA, who was also testifying at that hearing
and who worked with her at the FDA, says: “Janet was willing to speak her mind, which
is refreshing and also somewhat unusual. Usually, administration witnesses have to spout the
party line. She is very popular now on Capitol Hill, but she may have ticked off people in the
Bush administration.”
Pressed as to whether anyone in the White House has come down on her for making nice
with John Dingell, she demurs. “The chips will fall where they may,” she adds.
Director Woodcock is also apparently willing to take more than just rhetorical risks. Although she is well regarded by the drug industry, a few noses there might have gotten out of
joint when the FDA decided on April 28 not to approve Cordaptive, Merck’s new cholesterol-lowering medication. Analysts who had been predicting that the drug could easily top $1 billion
in sales were surprised by the news that the FDA sent a “Not Approved” letter to Merck. Dr. Woodcock refuses to discuss the case but explains, “Every year we learn more, and we
apply it moving forward.”
Ron Rodgers, a spokesman for Merck, says, “The question we sometimes get is whether the FDA is changing the standard for approval. We believe the rejection had to do with the ‘science’
and we hope to get an understanding of the agency’s reasoning in an upcoming meeting.”
Asked whether the black eyes the agency has earned in the past few years over Vioxx, SSRIs, and other drugs led the FDA to make a statement to the public by canning Cordaptive,
Dr. Woodcock laughs and says, “We don’t make decisions that pander to public approval.”
Heparin is the latest, if not the most disturbing, drug dis aster she has had to live through at the FDA. After taking over as Director of CDER in 1994, she was kicked upstairs in 2005 and
given the title of deputy commissioner and chief medicalofficer. Dr. von Eschenbach brought her back to the CDER, first as the acting director in October 2007, because then current
direct or, Rear Admiral Steven Galston, MD, MPH, was named acting surgeon general. With the Bush administration nearing the end of its line, not too many people were lobbying for the CDER director’s job, especially since its domain new drug approval and postmarketing surveillance—
was in serious dis repair as a result of successive political earthquakes. Dr. Woodcock’s “acting” designation was removed in March 2008.
Bush administration officials won’t say whether Dr. Woodcock returned to the CDER willingly or whether her arm had to be twisted. Bill Hubbard thinks she was frustrated with a
lack of discipline in the Commissioner’s office and is “probably glad to be back at CDER.” But now that she is back and has some political capital from Democrats to spend, expect her to keep speaking her mind, which she does politely but not pointedly. She laughs frequently throughout an hour-long interview, and smiles, two devices that seem to be used to make her refusal to get too colorful or too specific more palatable. Looking back over the past decade and a half, she can see where the seeds of many of the FDA’s current problems were planted. And in many of the cases, the Johnny Appleseeds were congressmen like John Dingell.
Throughout the 1990s, Congress piled new drug regulatory programs on the FDA: the Best Pharmaceuticals for Children program, the FDA Modernization Act of 1997, and others.
Dr. Woodcock cites former FDA official Peter Barton Hutt, who estimated that Congress had given the FDA 125 additional mandates over the past 15 years. However, even though those
laws heaped new responsibilities on the FDA’s shoulders, Congress did not provide increased appropriations to run those new programs. The CDER staff was stretched thinner than a
piece of Saran Wrap. The pharmaceutical industry kept paying higher user fees, of course, but those funds can be used only for restricted purposes.
Steadily increasing responsibilities and a lagging congressional appropriation eroded by inflation has led to a hollowing out of the CDER’s capabilities in terms of staff and infra -
structure. So it should have been no surprise when an FDA scientific advisory subcommittee published a report called FDA Science and Mission at Risk in November 2007. Garret
FitzGerald, MD, Professor of Medicine and Chair of Pharmacology at the University of Pennsylvania and one of the report’s authors, referred in testimony on January 29 to “a disturbingly systemic set of problems in the agency.”
Dr. Woodcock agrees with the conclusions of that report. “Our infrastructure is in very disturbing shape,” she concedes. But she sees the glass as being only half empty. “Our
level of scientific sophistication is unparalleled; there is no comparison to 20 years ago. While we are finding problems more frequently, our ability to identify them is at a higher level than ever before.” Nonetheless, she agrees that higher appropriations over the past decade, for example, would have allowed the agency to bolster its information technology resources, which are not
exactly state of the art. However, Dr. Woodcock does not commit political suicide by blaming the Bush (or Clinton) administration, whatever her private feelings might be. She won’t criticize criticize Congress directly, either, although it is fairly easy to read her unspoken thoughts. She notes:
“When I was at a hearing this winter in Ms. [Rosa] DeLauro’s subcommittee, she said that was the first drug hearing the subcommittee had held in 25 years.” Representative DeLauro (D-Conn.) is chairman of the House FDA appropriations subcommittee, which holds the pursestrings for the FDA.
Bill Hubbard is more direct. “DeLauro is inconsistent,” he states. “She won’t give more money until the FDA does a better job.”
Dr. Woodcock continues, “The FDA has gotten a lot of blame, but we’re not in charge of setting the federal budget. Period.”
Last year, Representative DeLauro declined to appropriate money for the new Reagan–Udall Foundation, which is intended to be a nonprofit group dedicated to getting Dr. Woodcock’s
“baby”—the Critical Path Initiative (CPI)—further off the ground. Dr. Woodcock established the CPI in 2004 as a funding source for new science advances that might help the
FDA assess new drugs more quickly and accurately. Money goes to universities and to private researchers, but the CPI never received much in the way of congressional appropriations,
she concedes. “If you consider that the hallmark of success, that is not happening,”
she says. “But there is a tremendous amount going on in Critical Path.”
Nonetheless, the Reagan–Udall Foundation is supposed to raise private funds that would dwarf what the FDA has been able to spend on CPI projects. Dr. Woodcock is circumspect when she explains why the Foundation has taken so long to get off the ground. She does
not blame Rosa DeLauro for not providing funds in 2008, as the FDA Amendments Act allowed her to do. Instead, she explains that it is the “elaborate procedures” specified in the FDA Amendments Act that have stymied the Foundation, although she argues that it takes a year to get many nonprofit organizations off the ground. But even though the FDA appointed a board of directors last October, headed by former FDA Commissioner Mark McClellan, MD, PhD, Dr. Woodcock says that the board has not even written the Reagan–Udall Foundation’s by-laws yet. That has to happen before the Foundation can begin its work. She estimates it will be up and running by the end of 2008.
But don’t ask her to offer any opinion on the Bush administration’s handling of problems with drug safety or to compare it with the Clinton administration’s approach. “Here we go,” she mugs when the question is asked. She clearly expects any self-respecting journalist to test her
tongue—and she is ready with the parry.
“How smart would that be,” she sniffs, feigning being insulted that she could be baited, as if she just fell off the hay wagon in Washington.
Just the opposite, actually; Janet Woodcock is riding high.

Who`s Best for Corporate Coffers?

Financial Executive magazine cover story, September 2008

By Stephen Barlas

Arguably the longest and highest-profile presidential campaign in history, its days are now numbered. Here are some insights on what U.S. businesses can expect — beginning on Jan. 20, 2009 — Day One of the new administration.

During their campaigns for president of the United States, both Sens. Barack Obama (D-Ill.) and John McCain (R-Ariz.) have beaten — like dusty rugs — on corporate executives, and sometimes corporations.

They have battered mortgage executives for their severance packages. The two have wrapped their rhetoric around the necks of auto executives for shortsightedness. McCain tells pharmaceutical companies they “must worry less about squeezing additional profits from old medicines.” Obama promises to prevent drug companies from “abusing their monopoly power through unjustified price increases.”

To rein in executive compensation, Obama sponsored a voluntary “say on pay” bill. McCain has gone further, backing a mandatory vote by shareholders.

The two sometimes seem to be competing for the William Jennings Bryan “Populist of the Year” award. The times make their anti-corporate rhetoric understandable, if not necessarily justifiable. And, given their “villainization” of corporations, it is not surprising that neither candidate has tossed out a lifeline to companies sinking in a recession, some of which face borrowing costs of crippling magnitude.

Kingman Penniman, president of KDP Investment Advisors, says the rate of default on corporate high- yield bonds was somewhere around 2 percent in June. He expects an increase to 6 to 8 percent in 2009.

“This raises the premium on risk,” he explains. “There is a tremendous amount of reservation on the part of each of them [Obama and McCain] to come up with a solution at this time to a situation as volatile as this. They are probably trying to keep their powder dry as long as they can to see what unfolds,” says Penniman.

The Candidates, the Issues

Regardless of which candidate a senior finance executive is personally backing, it’s a good time to consider what it would be like if either McCain or Obama is elected, and which would be a better choice for the U.S. economy and business. For financial executives, the choice for this 2008 election is not easy. It is much less clear than either 2000 or 2004, when George W. Bush faced Al Gore and John Kerry, respectively. Obama and McCain are “peas in a pod” on numerous issues of importance to U.S. corporations.

They are essentially twins on immigration reform, foreign investment in the U.S., global warming and the need for industries to become more energy efficient and produce more energy-efficient products. Even on corporate taxes, the similarities between the two are striking.

Both would drop the corporate income tax rate, though Obama would not go as low as McCain. Both would continue the Bush tax cuts for those earning less than $250,000 a year. In fact, argues Alan Viard, a resident scholar at the American Enterprise Institute, one could make the argument that Obama is apt to be the deeper slasher of taxes.

A Democratic Congress would likely block a number of McCain’s proposals. It would likely approve many of Obama’s proposed new tax cuts aimed at correcting income inequalities, such as a new $1,000 work credit, an expanded child care credit and an expanded tax credit for low-income savers — all of which are income limited in an effort to restrict them to families earning less than $150,000 a year. “McCain is proposing more tax cuts; Obama will get more through,” Viard says.

Still, there are some differences between the two. Their positions on the AFL-CIO’s agenda are a chasm apart. Obama is more protectionist on trade; although without Sen. Hillary Clinton (D-N.Y.) to worry about, the Illinois Democrat has been softening his talk about the North American Free Trade Agreement’s shortcomings.

McCain has pushed for more U.S.-based oil and gas drilling, including offshore exploration, something Obama had opposed. In early August, however, he softened his position, saying he’d accept some offshore drilling. But even here the dichotomy is narrow, with McCain having pushed hard for higher auto-efficiency standards via sponsorship of legislation in 2002, two years before Obama arrived in Washington, and began to introduce his own gas-saving bills.

Many Beltway business lobbyists express an off-the-record, begrudging, “best of two evils” preference for McCain, citing his expected opposition to union-organizing legislation, his free-market orientation and his opposition to federal pork spending. Obama, meanwhile, is seen as a traditional liberal, reflexively hostile to corporate interests.

Tom Lehner, director of public policy for the Business Roundtable, which is neutral in the presidential race, says: “If Obama wins, expect him to reach out to outsiders and academicians without Washington experience. That’s been done in the past, with mixed results. Nell Minow and Rich Ferlauto are the kinds of people he might appoint as [U.S.] Securities and Exchange Commission commissioners.” Minow is editor and co-founder of the Corporate Library and Ferlauto is director of pensions and benefits policy for the American Federation of State, County and Municipal Employees (AFSCME). Both are strong proponents of investors’ rights.

Day One: Jan. 20, 2009

Regardless of which man lands in the Oval Office in January, the U.S. corporate world will find itself confronting a president who will be much less sympathetic to business positions on a range of issues than his predecessor George W. Bush. Add to that the likelihood of a more heavily Democratic Congress and the picture gets even more pessimistic. Nowhere will the change be starker than at the SEC.

Under Chairman Christopher Cox, the commission has not been as cuddly with business as groups as the U.S. Chamber of Commerce would have liked. Nonetheless, the agency under either McCain or Obama may make the Bush SEC look like Valhalla. “They have to be scared,” says one Washington lobbyist for shareholder groups, referring to the business community and particularly the outlook at the SEC. “It won’t be good for them either way; even with McCain, they won’t have the kind of salad days they have had with George W. Bush.”

Corporate reporting issues rarely draw headlines; so neither McCain nor Obama has been outspoken recently except for their comments on executive pay. But those with long memories may remember McCain as the Republican running buddy for Sen. Carl Levin (D-Mich.), both of whom pushed hard in the wake of the Enron scandal to resurrect a bill — Ending the Double Standard for Stock Options Act — which first came up for a Senate vote in 1994.

When the Enron scandal broke, McCain brought the bill back, saying on the Senate floor in February 2002: “This double standard is exactly the kind of inequitable corporate benefit that makes the American people irate and must be eliminated. If companies do not want to fully disclose on their books how much they are compensating their employees, then they should not be able to claim a tax benefit for it.”

Obama has been just as critical of the use of stock options. He said in New York on Sept. 17, 2007: “It’s bad for business when boards allow their executives to set the price of their stock options to guarantee that they’ll get rich regardless of how they perform. It’s bad for the bottom line when CEOs receive massive severance packages after letting down shareholders, firing workers and dumping their pensions; or when they throw lavish birthday parties with company funds.”

McCain and Obama’s similar positions on executive compensation and stock options raises the possibility that whomever becomes the next SEC chairman may steer the agency in an anti-business direction on upcoming issues, like the U.S. moving toward using International Financial Reporting Standards (IFRS), which Cox has been championing under Bush.

Neither Obama nor McCain have addressed the issue in campaign speeches thus far, and neither sits on the Senate Banking Committee, which has jurisdiction over such issues. But key Senate Democrats such as Sen. Jack Reed (D-R.I.), chairman of the Banking Committee’s Securities Subcommittee, have made it clear they will ensure that the SEC decelerates consideration of U.S. corporate use of IFRS once Cox leaves the SEC.

Corporate transparency will definitely be a watchword for 2009. Both McCain and Obama complained and assailed the “bailout” feature of the Federal Reserve’s rescue of Bear Stearns Cos. Inc. taking a populist tack by inveighing against corporate greed. They did not raise major objections to the underlying action, nor to the Fed’s extension of the program through Jan. 30, 2009. But Fed loans to investments banks will get very close scrutiny in the next Congress.

Obama supports new standards on how investment banks manage liquidity risk, which has been neglected in the past. Disclosure requirements would be heightened. “Though transparency cannot rectify everything that has gone wrong, it is imperative that we enhance information flows to shareholders and counterparties of financial institutions in order to increase market discipline, as well as greater disclosure of off-balance sheet risks, such as exposure to structured investment vehicles,” Obama says.

McCain’s 15-page economic plan does not mention regulation of investment banks. When U.S. Treasury Secretary Henry Paulson announced his plan to rescue Bear Stearns, McCain said it was “not the duty of government” to bail out irresponsible lenders. But that is about as much as he said overall on the subject.

A detailed profile of McCain, which appeared in The Washington Post on Aug. 1, quoted an anonymous financial markets expert who said he met with McCain this summer. The source told the Post that McCain spoke about the subprime crisis “only ‘in platitudes,’ relying on populist political talking points.” McCain did not seem to understand economics, or to be interested in the subject, said this person, who insisted on anonymity to discuss the meeting.

But McCain’s Teddy Roosevelt-like view of big business makes him just as likely as Obama to sign onto the corporate reporting/transparency legislation that Democrats — emboldened by the removal of a Bush veto threat — will undoubtedly be sending to 1600 Pennsylvania Ave. next year.

An example of the kind of Democratic bill that may land in a new president’s lap — and be signed — is Rep. Barney Frank’s (D-Mass.) Extractive Industries Transparency Disclosure Act (H.R. 6066). This legislation would force all U.S. natural- resource companies to report royalty, tax, profits and other payments they make to foreign governments for extraction rights to the SEC, to give shareholders a sense of whether the company was pursuing risky strategies with perhaps undependable Third-world countries.

Frank, who is chairman of the House Financial Services Committee, held two hearings on his bill in the past session of Congress; but an anticipated Bush veto has kept it tied to its moorings.

Trade and Global Competitiveness

Given the current state of the economy and unemployment, as president, either Obama or McCain will have to address the competitive position of U.S. companies abroad and their attractiveness as investment magnets at home. Discussion about NAFTA has exposed a fairly sizeable rift between the two, with Obama implying during the primaries, that he might make considerable changes in the agreement.

On his Web site, Obama states: “NAFTA and its potential were oversold to the American people” and that he will “use trade agreements to spread good labor and environmental standards around the world and stand firm against agreements like the Central American Free Trade Agreement that fail to live up to those important benchmarks.”

Trade is one issue where McCain is a traditional Republican. He traveled to Canada, Colombia and Mexico in June — much to the dismay of the AFL-CIO — and tried to split the difference on the issue, voicing understanding for the loss of jobs that trade agreements have sometimes led to, adding, in typical McCain fashion: “But for me to give up my advocacy of free trade would be a betrayal of trust.”

Skirting specifics on certain areas of world trade, neither candidate has descended very deep into, much less said anything penetrating on this issue. And though the Doha round of World Trade Organizations talks collapsed amid squabbling in early August, experts say WTO liberalization is critical to U.S. business hopes for new markets for export trade.

Perhaps of equal importance to business is access of foreign companies and foreign financing to U.S. markets. This is particularly important as businesses have looked overseas — especially to China and the oil-rich Gulf countries — for sources of capital, often hoping to attract investments in sovereign wealth funds. Investments in U.S. businesses by sovereign wealth funds, foreign governments and foreign companies must be reviewed by the Committee on Foreign Investment in the United States, known as CFIUS, if the acquisition target has some national defense or critical infrastructure component.

Composed of federal financial officials, CIFUS uses as its guide the Foreign Investment and National Security Act, a bill Congress approved last year that made some changes in the operation of CFIUS in the wake of the 2006 proposed acquisition of some U.S. ports by Dubai Ports World, a government-owned entity based in the United Arab Emirates. According to a private equity lobbyist in Washington, both Obama and McCain supported FINSA, and both are “generally supportive,” he says, of foreign direct investment in the U.S.

Corporate Taxes

Encouraging foreign sovereign wealth funds and companies to invest in U.S. companies is one thing; helping U.S. companies invest in themselves is another. Certainly, a reduction in the corporate income tax from 35 percent to 25 percent, which McCain has proposed, would do that. But there is little chance that McCain would get that 10 percentage-point rate cut through a Democratic Congress.

Democrats have been open to reducing the corporate rate as they understand U.S. companies pay considerably higher rates than their foreign competitors. Rep. Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, supports a reduction of the rate to 30.5 percent, which is still considerably above the 28.5 percent average within the Organization for Economic Cooperation and Development member countries.

Obama would “pay for” the loss in federal revenue by, among other things, increasing the tax on capital gains and dividends and eliminating corporate tax law benefits. One Washington business lobbyist points out that Obama has spoken consistently about eliminating or reducing the ability of U.S. companies to defer payment of taxes on foreign-earned income. “If a company is trying to compete overseas,” she says, “deferral makes a lot of sense.”

Closing corporate tax “loopholes,” such as the ability to defer taxes on foreign income has been part of the AFL-CIO’s agenda for years; union leaders have been decrying corporate “inversion” since the turn of this decade, complaining that companies are locating overseas to avoid paying U.S. taxes.

The AFL-CIO’s agenda would resonate with Obama in numerous areas. When the union endorsed Obama in June, it noted that Obama has a 98 percent voting record on “working families” issues, compared to just 16 percent for McCain.

One of the highest-priority issues for unions is passage of the Employee Free Choice Act, a bill that would allow workers in a company to decide to be represented by a union based on a majority of them signing cards to that effect. There would no longer have to be an actual election. That bill passed the House by a vote of 241-185 in early 2007; but when it came to the Senate floor in June of that year, Democrats could only muster 51 votes in favor, nine short of the 60 needed for cloture, meaning the end of debate and start of a vote.

Obama voted for cloture; McCain against. David Chavern, executive vice president, chief operating officer, the U.S. Chamber of Commerce, says: “Obama has come out full force in favor of union card check legislation and a whole host of pro-union legislation.”

McCain did not vote when the Senate took up a second AFL-CIO priority in April, the Lilly Ledbetter bill (H.R. 2831), which would allow employees greater latitude to sue a company for back pay. Obama voted for the bill. McCain was one of two senators absent for the vote; once again, a labor bill failed to get 60 votes, getting 56 instead.

McCain was also absent for some key cloture votes in the Senate in May and June last year, when the immigration reform bill came to the floor. But there wasn’t any uncertainty regarding where he or Obama stood on this issue.

Both favored the Secure Borders, Economic Opportunity and Immigration Reform Act of 2007, which McCain helped write along with Sen. Ted Kennedy (D-Mass.) and Sen. John Kyl (R-Ariz.). The bill opens up a path to citizenship for illegal immigrants through a new “Z” visa and a new “Y” visa category for guest workers.

Business groups, such as the Chamber of Commerce, supported the bill — especially its new employer verification system, though the Chamber noted that some of the provisions were objectionable; but the more important objective was to get comprehensive reform through Congress, which Secure Borders generally would have been.

Health-Care Solutions Differ

Another area slated for comprehensive reform is health care. This is one of the few issues where McCain and Obama have stated substantive differences, though both agree on the need to do something about the 47 million Americans without health insurance.

McCain wants to give every family a refundable tax credit — cash towards insurance — of $5,000 ($2,500 for individuals). For those who still can’t afford insurance, even with the tax credits, McCain would work with governors to develop a best practice model that states can follow — a guaranteed-access plan (GAP) — that would reflect the best experience of the states to ensure the patients have access to health coverage.

One approach would establish a nonprofit corporation that would contract with insurers to cover patients who have been denied insurance and could join with other state plans to enlarge pools and lower overhead costs. There would be reasonable limits on premiums and assistance would be available for Americans below a certain income level.

Obama would be more aggressive about covering the uninsured. He would establish a federal insurance system open to anyone who is not covered by Medicaid or the State Children’s Health Insurance Program (SCHIP), the federal insurance program for low-income children, or whose employer does not offer health insurance. Employers who do not offer insurance to workers would have to pay additional payroll taxes.

It is unclear how Obama would force insurance companies to participate in his program, or how he would guarantee that premiums would be affordable. That would be less of an issue with McCain’s plan, since $5,000 would buy the kind of high-deductible health plan already available on the market.

Despite the press of “social issues,” such as health care and immigration, the flagging economy will probably subsume the early days of the next president.

One Washington think tank official, who worked in the George W. Bush administration, says a heightened attention to corporate governance — in the wake of the Fannie Mae and Freddie Mac problems, bank failures and corporate bond defaults — will be a priority for either Obama or McCain.

No matter who becomes president, he says, there will be close scrutiny of issues such as how compensation packages are dealt with, what the board responsibility is. “It doesn’t take a genius to see that.”

Stephen Barlas (sbarlas@verizon.net) is a freelance writer who has covered developments in Washington, D.C., for 26 years. His profile of SEC Chairman Christopher Cox in the July/August 2007 issue of Financial Executive recently won an Apex Award for editorial excellence.

CFOs and the Presidential Election:

FEI Member Survey

Results of FEI’s quarterly survey to members — conducted in early August — indicate a majority of respondents leaning toward Sen. John McCain as more favorable for their business than Sen. Barack Obama. This, at a time when overall results showed CFOs at an all-time low in economic optimism.

FEI quarterly surveys generally comprise questions on a variety of subjects based on current conditions. The following summarizes the respondent results concerning the presidential election:

Selection of the next president of the United States is currently a focus nationwide, and as CFOs gear up to hit the polls, they are evaluating which candidate’s policies best align with their companies. When asked which candidate, if elected to office, would be most beneficial to their company overall, an overwhelming majority of CFOs selected Republican presidential candidate McCain (71 percent), while only 13 percent of respondents chose Democratic presidential candidate Obama.

Respondents were also asked to gauge the impact that each candidate’s policies would have on their companies regarding issues such as health-care coverage, taxes, foreign trade/commerce, production and manufacturing costs and energy costs. On average, less than 10 percent of respondents felt that McCain’s policies would have a negative impact on any of these factors, while a majority of respondents felt that Obama’s policies would have negative impacts on taxes (87 percent) and production and manufacturing costs (60 percent). Collectively, CFOs appear to be unimpressed by both candidates' health-care policies, revealing that most do not believe that either candidate will help control health-care costs. While nearly three quarters of respondents (70 percent) stated that Obama's polices would have a negative impact on their companies, an even larger number of CFOs (74 percent) said McCain would have no impact. Only 15 percent said he would have a positive impact on their firms.

Caregivers Unite

Human Resource Executive, June 16, 2008

A growing number of workers are filing lawsuits, some as class-actions, against organizations they say punish them for attending to family and caregiving responsibilities.

By Stephen Barlas

With his mother suffering from congestive heart problems and severe diabetes and his father succumbing to Alzheimer's disease, Chris Schultz, a 26-year veteran of the maintenance staff at Christ Hospital and Medical Center in Chicago, did what any good son would do.

It was 1999. The hospital had just made him employee of the year, choosing him from among about 5,000 employees. His picture hung in the lobby. He never thought taking intermittent time off from work to care for his parents would jeopardize his job. After all, leave taken in dribs and drabs for personal or family health reasons is his guaranteed right under the Family and Medical Leave Act of 1993.

But Schultz thought wrong. After he began taking the leave, which ultimately stretched into many months, his supervisor set up new monthly work standards employees had to meet in the building-operations department. These "productivity" standards varied from employee to employee.

"They held me responsible for all this work when I wasn't there," said Schultz in 2002, after a federal jury in Chicago awarded him $11.65 million in damages, the largest jury award ever for a case in the ever-growing area of family responsibilities discrimination (FRD). "I tried my best to get the work done. It just took a toll on me. But my parents came first."

Ultimately, rather than go through an inevitable appeal at the U.S. Seventh Circuit Court of Appeals, Schultz and the hospital agreed on a confidential settlement. Cynthia Thomas Calvert, deputy director of the San Francisco-based Center for WorkLife Law, says it's her understanding that the case was settled for less than $11.65 million, "but not a whole lot less. When you have a verdict like that, there are some things an appellate court can do to trim the judgment, but not a lot."

It is the multiple and increasingly sky-high state and federal court judgments that help explain -- along with other factors -- the very significant increase in the number of FRD lawsuits filed in the very recent past, after a long fallow period beginning after the Supreme Court decided the first FRD case in 1971.

According to Calvert, there were nearly 300 verdicts in 2007 alone. They included three multimillion-dollar jury awards: a $3 million judgment against FedEx Corp., a $2.23 million judgment against Bimbo Bakeries USA Inc. and a $2.1 million verdict against Kohl's Department Stores. The FedEx and Bimbo Bakeries cases were filed under Title VII of the 1964 Civil Rights Act and California's Fair Employment and Housing Act, which allows plaintiffs to surpass the $300,000 damage cap on Title VII claims by alleging intentional infliction of emotional distress.

FRD lawsuits come in numerous sizes and flavors. They always jump off from allegations that an employee was disadvantaged in terms of pay, promotion and work because he -- and men are increasingly filing suits -- or she either took time off, legally (under the FMLA) to care for a child or a parent, or was perceived to be less qualified for a promotion track because of the worker's presumed preference for caregiving over career climbing.

These lawsuits are typically filed under Title VII, which outlaws sexual discrimination, and the FMLA. But cases have been filed under other federal laws, such as the Americans with Disabilities Act. In addition, there are numerous state laws that parallel those federal laws, plus additional individual state tort laws that also come into play. Whereas the Schultz $11.25 million jury verdict tops the individual-award category, class-action awards have reached $25 million.

In such a climate, human resource executives would be wise to examine policies and transparencies at their organizations, and study up on this category of discrimination fast taking hold in the employment law landscape.

Back to the Beginning

The Supreme Court opened the door to litigation back in 1971 in Phillips vs. Martin Marietta Corp. In that case, the court ruled that Martin Marietta discriminated against women who were mothers because the company barred mothers of school-aged children from applying for jobs that fathers of school-aged children occupied. But that court decision only rustled the sleeping giant; it didn't wake her.

Congress laid the groundwork for the surge of litigation when it passed the Civil Rights Act of 1991. That gave employees claiming sex discrimination the right to a jury trial, and the right to recover damages for emotional suffering and punitive damages.

"It is likely that both of these changes positively affected employees' decisions to file discrimination suits, including FRD suits," states a 2006 WorkLife Law report. "As one would expect, the number of FRD lawsuits resolved by the courts began to increase soon after the 1991 act."

The FMLA came along in 1993. As the legal launching pad was being spring-loaded by those 1990s laws, the children of baby boomers were entering the workforce starting in the late 1990s with stronger feelings about the need for flexible work schedules to accommodate family responsibilities.

It was this new generation, men and women in their 20s and early 30s, who provided the bodies for the catapult as the new century opened. Cases began to proliferate, and as juries began handing out substantial awards, plaintiffs' attorneys began trolling for cases, especially since discrimination cases appeared to be considerably easier to win than other ones.

Family-discrimination cases were already gaining momentum when Schultz filed his case -- but the $11.25 million verdict in 2002 may have really ignited the trend. It sent out a couple of loud messages, that really big money was available, that men could successfully win FRD suits, and that the baby boomers -- who perhaps had been slow in the 1970s and 1980s to use Title VII to combat workplace discrimination on their own behalf -- could take advantage of the FMLA to help out their elderly parents.

The Supreme Court sent the next loud message in 2006, when it re-entered the fray after first kicking off the FRD movement in 1971. The nation's top court said, in Burlington Northern & Santa Fe Railway Co. vs. White, "[a] schedule change in an employee's work schedule may make little difference to most workers, but may matter enormously to a young mother with school-age children."

The WLL's Calvert says the Burlington Northern case was very important because it built on an Illinois case called Washington vs. Illinois Revenue Service, in which an African-American, female plaintiff had charged that her employer retaliated against her for filing a racial-discrimination lawsuit by eliminating her flexible work schedule, which she needed to attend to her child with Down syndrome.

In the Burlington Northern case, Tennessee rail yard forklift driver Sheila White claimed her 37-day suspension and subsequent reassignment to more administrative tasks was gender discrimination and retaliation for her having lodged a complaint with the company about sexual advances from a supervisor.

In that case, the Supreme Court established a new standard on what actions constitute retaliation under Title VII. The court opinion said retaliation under Title VII is not limited to the actions and harms that are "related to employment or occur at the workplace." Rather, it covers any employer action "that would have been materially adverse to a reasonable employee or job applicant."

The Burlington Northern decision underscored the nuances of the civil-rights laws as they applied to caregivers, and convinced the Equal Employment Opportunity Commission that some of those nuances were smudged and needed a little Windex.

So, in May 2007, the EEOC issued a guidance document called Unlawful Disparate Treatment of Workers with Caregiving Responsibilities .

Camille Olson, a partner of Chicago-based Seyfarth Shaw LLP and a member of its labor and employment law steering committee, says most employers were pretty surprised when they read the EEOC guidance. Olson has represented numerous employers in FRD lawsuits. Companies weren't aware that "caregivers," as a category, were protected under Title VII, Olson says.

"But it is the EEOC's view that there is a sufficient nexus between the issue of caregiving responsibilities and someone's gender to bring it under Title VII," Olson says. "The EEOC really reaffirmed what employers and managers should already know, that you cannot stereotype people, not even in a benevolent way, in terms of what they will or won't want to do in the workplace based on them being a caregiver."

The EEOC guidance -- even though it simply reiterated what all companies should have known for years -- probably proved valuable for some of them. But it may have bounced off the front door of other organizations where stereotyping is still de rigueur among managers. That was the allegation the EEOC tossed at Bloomberg L.P., according to Lisa Sirkin, supervisory trial attorney in the New York District Office of the EEOC.

Sirkin's office filed a class-action lawsuit against Bloomberg in October 2007, alleging that the media company discriminated against female employees who became pregnant and took maternity leave. In its suit, the EEOC asserted that Bloomberg engaged in a pattern of demoting and reducing the pay of female employees after they announced their pregnancies and after they took maternity leave. Some women were replaced by more junior male employees, the EEOC said.

The lawsuit also alleged that the same pregnant women and new mothers were excluded from management meetings and subjected to stereotyping about their abilities to do their jobs because of their family and caregiver responsibilities.

Complaints made by the women to Bloomberg's human resource department were dismissed, according to the EEOC.

"In these kinds of cultures, those kinds of actions are not seen as discrimination, but as acceptable," says Sirkin. Bloomberg declined to agree to a settlement, and the case probably will not go to court for a couple of years, says Sirkin.

She contrasts Bloomberg's allegedly illegal actions with what would be, in individual cases, a perfectly legal approach: discussing with a pregnant woman what her options will be upon her return to her job, the impact those options would have on promotion, pay and other work-related benefits, and then allowing the woman to make the choice that is right for her.

A Bloomberg spokeswoman did not respond to requests for comment.

Complex Issues

The issue of disparate treatment of caregivers, be they male or female, is not always clear. For example, a company's refusal to promote a mother with young children could just as easily be the result of her work history before coming to that company, her performance on the job or her failure to apply for a particular job opening. "That is where the debate is being waged in the courtroom," says Olson.

That is why it is important, she adds, for a company to have transparent leave and promotion policies, ones that are, for example, posted on the company Web site. The way those policies are applied to each individual should be documented. Beyond that, though, employees should understand how they get to an upper promotion track. "A lot of companies are doing a great job identifying high achievers, making sure they have well-rounded portfolios," Olson says.

Training is another important component. "Upper management should literally have conversations with its managers, not about what a particular law requires, but how they should view employees, how you promote employees, looking at the actual protocol," Olson says. Sirkin suggests that companies include a supervisor's handling of caregiving issues in that supervisor's performance review.

In the end, fair, legal, enlightened employee-leave and promotion policies are good business. "It is much cheaper for a company to retain a good worker than to go out and find a new worker and train her," says Calvert. "Also, employee continuity leads to better morale and accrues to the bottom line. There are many reasons to get rid of FRD in the workplace."

Lowering the Ozone Standard

Aftermarket Business, May 2008

The Environmental Protection Agency's new lower ozone standard will force many states to reassess their automobile inspection and maintenance (I&M) plans. The plans, which vary from state to state, require motorists to get periodic safety and emission checks for designated model-year autos. Each state specifies how onboard diagnostic (OBD) systems should be checked and when defective parts need to be replaced. In California, for example, higher quality aftermarket catalytic converters will be required in some instances starting in 2009.

The EPA announced on March 12 that it was lowering its ozone standard from .084 parts per million (ppm) to .075 ppm. Ozone is formed in the atmosphere as the result of a chemical reaction between nitrogen oxide and volatile organic compounds, both of which are emitted from auto exhaust systems. States will have approximately three years to determine which of their counties are out of compliance with the new standard and to submit a plan to the EPA laying out how they will bring those counties into attainment with the new standard. From that point, nonattainment counties will have between three and 20 years — depending how severe their air pollution is — to meet the .075 ppm standard.

Many newspapers serving those counties have carried stories quoting local air control officials on the immense task in front of them. In Jefferson County, Ky., which includes Louisville, for example, officials say cars, trucks and other motor vehicles are responsible for about 31 percent of the area's nitrogen oxide and volatile organic compound emissions, while industrial plants are responsible for 40 percent. Kentucky and Indiana officials produced maps showing 19 Kentucky counties and 25 Indiana counties that would violate the new .075 ppm standard based on the current three years of air monitoring.

The regulatory impact analysis (RIA) accompanying the EPA rule suggests that one way nonattainment counties could reduce ozone levels would be through adoption of continuous inspection and maintenance (I&M), which involves equipping vehicles with a transmitter that attaches to the OBD port. The device transmits the status of the OBD system to receivers distributed around the I&M area. Transmission may be through radio frequency, cellular or Wi-Fi means.

Aaron Lowe, vice president of government affairs for the Automotive Aftermarket Industry Association (AAIA), says that upgraded I&M programs would be good for the aftermarket as long as auto owners are allowed to bring their cars to independent service stations.

Damage to the aftermarket auto parts industry from warranty work may also come into play if the lower ozone standards encourage states to adopt a California-style program, which mandates that a certain percentage of autos sold in the state be low-emission vehicles. A contingent part of that California requirement is that the manufacturers of those cars must give extended warranties for the emission systems to the buyer. In California, the requirement is 15 years and 150,000 miles.

Changes in state I&M programs and higher low-emission vehicle thresholds will be even more radical if Congress decides to lower the EPA's new .075 ppm standard further. However, President Bush would likely veto any law setting the standard lower — but a President McCain, Clinton or Obama might well applaud a further reduction.

Stephen Barlas has been a full-time freelance Washington editor since 1981, reporting for trade, professional magazines and newspapers on regulatory agency, congressional and White House actions and issues. He also writes a column forAutomotive Engineering,the monthly publication from the Society of Automotive Engineers.

The Perils of Physician Profiling

EyeNet magazine, May 2008

When the letter from BlueCross and BlueShield of Texas landed on his desk last October, oculoplastic surgeon John W. Shore, M.D. couldn’t believe his eyes. The insurance company was creating a new network of “low-cost” physicians who follow evidence-based practices. BlueChoice Solutions was to be an all-star team. Shore had not made the cut. The Austin-based ophthalmologist who co-founded Texas Oculoplastic Consultants in 1997 sees patients from all the other BCBS plans—even the low cost plans offered by BCBS that have unattractive rates. He thought for sure he would have made the Solutions team.

“We were rankled,” remembers Shore. “It wasn’t that we were going to lose that much money. It is more from the patient’s perspective. They were going to have to pay out-of-network prices to see us since we would not be a part of that plan” After all, many patients needing oculoplastic surgery in Austin are probably going to Texas Oculoplastic Consultants (TOC). It is the only practice in town limited to oculoplastic surgery. But suddenly, patients were walking through the doors of TOC and being confronted by potential roadblocks and significant financial barriers to care. “We knew some patients would not seek needed care because of significant out-of-network charges since we were excluded from the Solutions network,” Shore states. “We try to be proactive with our patients and make sure they understand the situation before they get here. We were sure we would get constant haggling about bills because of co-pays approaching 30 percent. For some people the difference between a $50 co-pay and a $210 co-pay is a major stumbling block.”

Ted Haynes, vice president of health care delivery, BlueCross and BlueShield of Texas, acknowledges that an individual choosing Solutions or an employee whose company only offers Solutions—and not the broader BlueChoice network, of which Solutions is a subset--does face some conflict over cost of the health plan versus access to physicians.

Angry patients, angry docs. Their ranks are growing as insurance companies across the country introduce new, exclusive networks like BlueChoice Solutions catering to cost-conscious companies and consumers. The networks offer lower premiums and co-pays in exchange for restricted networks which ostensibly—and that is the key word, ostensibly—feature physicians whose per episode treatment costs are lower, and who have shown they are “quality” providers. BlueChoice Solutions is far from the only network of this kind. In January, UnitedHealthcare introduced an affordable health plan called EDGE which United’s CEO described as offering “an affordable alternative to consumers who receive care from specialists recognized for high-quality, cost-efficient care.” In Massachusetts two years ago, the head of the Group Insurance Commission, a quasi-state agency, ordered all insurance companies offering health plans to all state and many municipal employees to group all physicians in two tiers. All the health plans, be they Tufts, Harvard Pilgrim, Unicare or the others, do their tiering a little differently. But in all cases, the plans try to steer members to purportedly less expensive Tier 1 physicians, visits with whom call for lower co-pays. Bill Rich, M.D., medical director for health policy for the AAO, says similar plans are starting to crop up in states such as Georgia and Alabama.

Everyone agrees, emphasizes Rich, that a health plan which carefully and transparently evaluates physician costs and uses established, respected quality measures ought to be able to establish networks based on those clear, clean facts. But so far, none of these new networks advertised as “low-cost, high-quality” are fully transparent, nor are their cost and quality measures carefully developed. This past February, Linda Lacewell, who heads New York Attorney General Andrew Cuomo’s health-care industry task force, characterized the Ingenix database owned by UnitedHealthcare, which is the major health claims data base, as “garbage in, garbage out,” according to a story in the Wall Street Journal.

Most health plans use that Ingenix database and run the claims information through what is called “grouper” software, where the claims are grouped into episodes of care and each physician is then given a total cost for an episode. The three grouper products out there are Ingenix’s Episode Treatment Group (ETG), MedStat Episode Groups (MEGs) and Cave Consulting Grouper (CCG). Of these illness classification systems using groupers, the ETG methodology has 90 percent of the market. For ophthalmologists, a typical episode of care might be chronic open angle glaucoma. Bill Rich explains that when grouper software looks at chronic open angle glaucoma, for example, it tosses in an ophthalmologist’s charges to the insurance company for imaging of the nerve, diagnostic testing, surgery, drugs, facility fees for surgery and more. Those charges, of course, are probably greater in the practice of a glaucoma subspecialist where where many end-stage patients are seen, as opposed to a general ophthalmologist such as Bill Rich, for whom glaucoma patients may only be 20 percent of his patient load, with many in the early stage of the disease. Yet the grouper software compares Rich’s costs for treating chronic open angle glaucoma to the costs of the academic physician, and designates the latter as a “high cost” provider.

Haynes of BCBS of Texas says BlueChoice Solutions does not use the Ingenix data and uses MEGs as its grouper software. “We look at episodes, and case mix adjust them, meaning we account for more serious versus less serious cases, take into account co-morbidities and any other complicating factors.” In fact, Solutions puts a considerable amount of information on its Web site (http://www.bcbstx.com/provider/bluechoice_solutions/tool_raci.htm) explaining how its risk adjustment process works. However, they are unable to risk adjust diseases like glaucoma with no co-morbidities and only one ICD9 code for both early and advanced disease. Nonetheless, Solutions is one of the better networks out there, a fact recognized by the Medicare Payment Advisory Committee, which advises Congress. In an October 2007 report, MedPac wrote: “Health plans included in the study were generally in the early stages of using resource measures to assess provider efficiency, with fairly limited applications to benefit design, payment, or provider
selection. However, BCBS of Texas was well ahead of the other plans.”

Solutions may be risk adjusting better than other similar “low cost” plans, but even its methodology is not fully transparent, nor is it without significant shortcomings. For example, Solutions averages episode costs among similar physicians in each of Texas’s 23 regions. That means that John Shore’s average costs are compared to the average costs for other eye surgeons—not oculoplastic surgeons—in an area that includes Austin and perhaps other nearby counties.

“The data they use is totally flawed in my opinion,” Shore explains. He asked for, and was given by BlueChoice Solutions, bar graphs comparing his per episode costs to those of other eye physicians, all of whom presumably were eye surgeons of some type. “We were being compared to practices whose patients did not need the same services our patients require.” For instance, as an oculoplastic specialist Shore is called upon to repair complex lacerations, fractures, infections and major head and neck trauma. Patients with these injuries require intensive services such as CAT scans, hospitalization for intravenous antibiotics, or intensive nursing care. ”Ours is an intense surgical practice,” he explains. “Therefore our use of hospital resources is more and our costs are correspondingly higher.”

Moreover, in Shore’s case, he may treat an episode of orbital inflammatory syndrome (pseudotumor) requiring a four or five day stay in the hospital as the result of a referral from an optometrist to a comprehensive ophthalmologist who then refers the patient to Shore. The “episode” costs for the patient’s office visits reported by the first two physicians may be thrown into Shore’s episode costs. That is because some insurance companies typically assign responsibility for each episode’s actual and expected costs to a physician based on an attribution rule such as: “responsibility is assigned to the physician who accounts for 30% or more of professional and prescribing costs included in the episode.” For BlueChoice Solutions, an episode is billed to the physician or professional provider who bills the greatest total Relative Value Units (RVUs) in that episode (excluding those billed by anesthesiologists, pathologists, and radiologists).

Another problem is that an ophthalmologist may only have a couple of episodes, and so it would be statistically invalid to assign him an “average” cost.

Not only are there some imperfections in the way episode costs are calculated and analyzed for these new “low cost” or “tiered” networks, but health plan claims that the networks contain “high quality” physicians are also open to question. Haynes of BlueChoice Solutions says that network doesn’t make a “high quality” claim, only that the physicians included follow evidence-based measures (EBMs), the identity of which is published on the BCBS Texas web site. For ophthalmologists, the EBM is an annual visual field test for patients with primary open angle glaucoma. Any physician who is more than two standard deviations from the mean is excluded from Solutions. Haynes says this EBM comes from the AAO. But Flora Lum, MD, AAO policy director for quality of care and knowledge based development, says that is not a performance measure developed for CMS’ PQRI, but is based on a recommended frequency in the Academy’s Preferred Practice Patterns.

In Massachusetts, according to Cynthia Mattox, MD, vice chair and director, glaucoma and cataract service at the New England Eye Center, Tufts University School of Medicine, and a member of AAO's Health Policy Committee, health plans use as their quality determination whether a diabetic patient had a dilated exam in the past year. That is it. What made it worse, at least initially, was that the companies were only counting exams billed by an ophthalmologist using evaluation and management CPT codes. The Bay State Group Insurance Commission was not recognizing diabetic dilated exams when the claim listed a "V" code, which is used for documenting "routine eye exams" billed to vision care plans. Michael Price, M.D., uncovered that discrepancy and brought it to the attention of the GIC which corrected the oversight. Overnight, the percentage of ophthalmologists rating in the highest quality tier went from 65% to 98%.

No private insurance plan has come close to the quality determination effort made by the Centers for Medicare and Medicaid Services (CMS). It developed a Medicare Physician Quality Reporting Initiative (PQRI) in 2007, which is being continued in 2008, where physicians are offered a 1.5 percent bonus based on their reporting of stated quality measures, four of which were designed in 2007 exclusively for ophthalmologists, and which were developed by a workgroup co-chaired by the American Academy of Ophthalmology.

For primary open-angle glaucoma, an ophthalmologist has to dilate the pupil and evaluate the optic nerve in 80 percent of the patients he or she sees. For age-related macular degeneration, the quality standard is a dilated macular examination with documentation of presence or absence of macular thickening or hemorrhage, and the level of macular degeneration severity. For diabetic retinopathy, there are two indicators. For one, the physician has to document the presence or absence of macular edema and the level of severity of retinopathy. The other requires communication with the primary care physician managing the on-going diabetes care. The fifth indicator, new in 2008, is a diabetic eye exam annually, or every two years if there was a negative exam performed the year before. There are also two structural measures available for all physicians also: whether a physician has and uses electronic health records and whether he or she uses electronic prescribing.

Typically, ophthalmologists have to bill the “quality” codes for 80 percent of their patients, and for three of the four indicators, unless they do not see patients for whom those indicators come into play. In some instances, an ophthalmologist may only show 80 percent for one indicator. The maximum annual Medicare bonus amount available is approximately $4,400. Rich says that is very simple for ophthalmologists to document those quality measures, and points to the fact that ophthalmologists, at 60 percent, have the highest participation rate of any specialty in the PQRI.

The private “low cost, high quality” networks now cropping up around the U.S. are neither as credible nor as transparent as the PQRI. At least BlueChoice Solutions offers physicians an appeals process if they feel they have been unfairly excluded. Haynes says a peer review committee composed of physicians hears appeals, one of which was made by John Shore. “We stood up to them,” he says. “As soon as someone looked at data, they said ‘We’ll let you guys in.’” But the reason he really won his reprieve, probably, was that his practice is the only one in Austin that does ocuoplastic surgery.

That would be less likely to happen in Boston, for example, where there is a larger supply of eye surgeons, including those like Cynthia Mattox at the New England Eye Center. She says, as Shore does, it is the patients, not the physicians, who are ultimately hurt by these poorly-designed networks, which shift higher costs onto patients, and save the insurance company money. “Patients are going to be penalized for seeking subspecialty care, even if that is the most cost-efficient way for them to get their care,"Mattox says.