FDA Considers a New Paradigm For Over-the-Counter Medications

P&T Journal...May 2012

    

     The Scott and White Health Plan, which laps over 50 counties in central, east and west Texas, owns 12 drug stores which are part of the health plan network, which also includes 2,400 physicians, 30 hospitals and another 400 or so independent community pharmacies. Twelve pharmacists shuttle between the 12 company-owned S&W drug stores each day performing pharmacist-plus duties because of a collaborative practice agreement signed by each one of those pharmacists and one of the health plan's physicians. Each pharmacist has either completed a 12-month, post-doctoral training program in ambulatory pharmacy practice or a special certification program. The 12 pharmacists saw 500 diabetes patients in 2011, all of whom agreed to an initial one hour visit with one of the 12 pharmacists and monthly 15-30 minute follow visits. For agreeing to participate in the diabetes control program, the health plan members were freed of co-pay requirements and given other concessions. 

       The collaborative practice agreement--blessed by the Texas state medical and pharmacy boards--allows the pharmacists to do for those diabetic patients some of what pharmacists traditionally do not do: adjust and even implement medication for diabetes medications (for a pre-selected group of pharmaceuticals) including insulin, a medication usually not subject to pharmacist "intervention" in any state in the union. The pharmacists also have leeway to adjust medications for co-morbidities such as hypertension and hyperlipidemia. 

        Rumor has it, because of all these unconventional, extra responsibilities, the 12 pharmacists at the S&W pharmacy come to work each day with a cape with an "S" engraved on its back. But if that were true, the "S" would not stand for "Superman," it would stand for "Savings." Paul Godley, Pharm.D., Director, Clinical Pharmacy Services, Scott and White Health Plan, says the 12 pharmacists saw about 6,000 patients in 2011. The S&W health plan "reimbursed" the pharmacists an average of $70 per visit ($105 for initial, $55 for monthly follow-up). However, the health plan saved $1800 per person enrolled in the diabetes program compared to a control group. Given 500 health plan members participated, that is an annual savings to the S&W health plan of $900,000. Patients in the intervention group also demonstrated an improvement in medication adherence and a trend of greater decline in hemoglobin A1c.

      The S&W diabetes management program and the collaborative practice agreement which allowed it to go forward resonate loudly in the current discussion about whether the Food and Drug Administration (FDA) should create a new class of over-the-counter drugs which would be available to customers only with "conditions of safe use (CSU)" in place. These conditions would in some instances require pharmacist interaction with patients considering purchase of a CSU drug, and concomitant payment to the pharmacist for time spent with the customer helping him or her decide whether a CSU drug was right for them, entering the drug into a patient's medical record and other administrative and counseling tasks. 

      The FDA announced in February that it is considering this new "paradigm" for switching more Rx drugs to OTC and followed up with a two-day public meeting at its White Oak headquarters in Silver Spring, Maryland on March 22 and 23. The idea is to increase access to prescription drugs which might not otherwise be approved for OTC status minus the "conditions of safe use" the FDA would attach to drugs in this new OTC class. FDA is also considering whether the same drug product could be simultaneously available as both a prescription and nonprescription product with conditions of safe use. Pharmacists and pharmacies would play an important role in the success of this new paradigm, if the FDA decides to move forward. That led to numerous questions from the 12 FDA officials on the "questioning" panel about collaborative practice agreements and their potential application to the new paradigm.

     Making available drugs currently classified as prescription only as presumably less expensive  OTC with CSU would be important especially for the poor and uninsured, but would undoubtedly  improve compliance for a broad range of patients and have subsidiary benefits such as  unclogging emergency rooms, reducing the  impact of the shortage of primary care 

physicians and lowering costs for health plans, both private and federal, meaning Medicare

 and Medicaid. The kinds of drugs which could fit into this new class, according 

to the American Society of Health System Pharmacists (ASHP), are HMG-CoA reductase

 inhibitors, or statins, inhaled corticosteroids and beta-2 agonists used in the treatment 

of asthma, and select therapies for hypertension, osteoporosis and diabetes, 

and vaccines.

     A recent Booz & Company study reported that 240 million people each year treat

 illnesses with OTC medicines. According to the study, an estimated 60 million of these 

consumers would not otherwise seek treatment. OTC medicines save the U.S. healthcare

system $102 billion annually. The study goes on to note that for every dollar spent on OTC

 medicines, the healthcare system saves six to seven dollars.

     The paradigm will shift some of the balance of power in drug prescribing from the

 physician to the pharmacist and pharmacy. The FDA has outlined a potentially broad role

 for pharmacists in this new paradigm. For example, some diseases or conditions might

 require confirmation of a diagnosis or routine monitoring using a diagnostic test

 (e.g., a blood test for cholesterol levels or liver function) that could be available in a 

pharmacy. A pharmacist, or consumer, could then use the results to determine 

whether use of a certain drug product is appropriate. Other potential roles for 

the pharmacist include assessing whether the consumer has any conditions or other

 risk factors that would indicate that the drug should not be used, or assisting the 

consumer in choosing between various drug products. For drugs that require use of 

a diagnostic test, creating a pathway for nonprescription use may result in the development

by industry of diagnostics suitable for use by the patient or a pharmacy

professional.

 

     Depending on how aggressive the FDA decides to be, changes for the pharmacy industry could be cataclysmic, in both good and bad ways. The paradigm opens the door to pharmacists achieving a long-term goal: the ability to perform a broad menu of medication therapy management (MTM) services and, more importantly, to be paid for performing those services. Currently, Medicare, for example, pays for some MTM services for some Part D recipients. But Medicare, and a few private payors, has only dipped its toe in that water, and it is a pinky toe at that. Any "New World Order" would also impose considerable new administrative burdens on pharmacists, such as perhaps verifying the accuracy of a customer's use of an algorithm, entering customer information into electronic health records, sending data to the manufacturer of a drug and more.

     Just the prospect of pharmacists invading their turf has put  physician stethoscopes in a tizzy. At the meeting at the FDA on March 22, Sandra Adamson Fryhofer, M.D., MACP, FRCP, who was representing the American Medical Association, answered an FDA official who had asked her what training pharmacists should get in order to obtain broader authority to initiate drug intervention. "They should go to medical school," she answered. "Bypassing physicians for chronic disease is a mistake," she added. It hurts patients and could threaten their lives."

     Pharmacists, on the other hand, contend they are already saving payors and patients large sums of health care dollars through MTM programs designed to serve patients with chronic diseases such as diabetes, asthma and chronic heart failure. Many of these MTM programs, such as the Scott & White diabetes program, function because of "collaborative practice agreements" which are legal in 46 states. Those agreements between specific physician groups and specific pharmacies allow the pharmacist to make patient drug decisions that a physician might normally make. These collaborative agreements allow pharmacists to work at a "higher power," a level at which they perform exactly the kind of services that the FDA anticipates would be included in the services required to be provided if the agency switches an Rx drug to OTC under this new paradigm.

      The new paradigm will affect community retail pharmacies, of course. But Cynthia Reilly, B.S., Pharm, ASHP, says hospitals and health systems will be affected, too. The reason for that is that 50 percent of hospitals have out-patient pharmacies. In addition, health systems often have satellite clinics, often numerous ones, some of which also have pharmacies attached. "Those pharmacies are in an ideal position to contribute to the new paradigm," Reilly says. That is particularly true because pharmacists in hospital and clinic pharmacies are must closer to physicians, often in a geographic sense, but certain operationally, given the health plan setting and the integration of  health plan staffs. That integration is also, more and more these days, "electronic," given the broadening use of electronic health records in health plans and hospitals. Moreover, hospitals are under increasing pressure to reduce readmission rates. One way they could do that, explains Reilly, is by giving out-patient pharmacists access to broader "chronic"-targeted OTC drugs and a broader role in assuring departing hospital patients either stay on those drugs, such as anticoagulants, for example, or are switched to more amenable alternatives, insuring higher compliance rates and fewer return trips to the hospital.

     Reilly says that the FDA should approve drugs for the new "OTC with CSU" class on a drug by drug basis, not on a class-by-class basis. Beyond that, the ASHP has four conditions of safe use it would like the FDA to adopt: 1) meet many of the criteria currently used to reclassify prescription drugs to nonprescription status such as the drug product having a well-established benefit-to-risk ratio, a wide safety margin, and is not a systemic or other anti-infective agent to which emergence of resistance is a concern; 2) have been marketed as a prescription product for a sufficient length of time and been used in sufficiently large numbers of patients to detect serious adverse effects; 3) have evidence of effectiveness and safety at the dose and regimen that would be available without a prescription; and 4) be used to treat a disease, symptom, or condition that can be readily detected or diagnosed by the patient, pharmacist, or health care provider. Further, if the drug is used for a condition that requires laboratory or other medical monitoring, the pharmacist should be able to perform or obtain the results of the monitoring.

     Given the fact that the paradigm would switch some of the balance of power from physician to pharmacist, and potentially open up new sources of payment, pharmacy groups are enthusiastic about the new paradigm. "We view the new drug paradigm concept being considered by the FDA as an exciting opportunity to utilize this open access to pharmacists to safely increase the availability of certain medications and to optimize the important role pharmacists play in improving public health," says Thomas Menighan, BS Pharm, MBA, FAPhA, Executive Vice President of the American Pharmacists Association.

     In one sense, it is a bit surprising that pharmacy groups would be, essentially, "all in" for a new class of OTC drugs which would have special conditions of use often involving pharmacist attention. The "conditions of safe use" the FDA would attach to this new OTC category sound a lot like the Risk Evaluation and Mitigation Strategies (REMS) Congress in 2007 gave the FDA authority to require of important new prescription drugs that the agency might not otherwise have approved. The REMS that drug companies have produced--the FDA has not established a standard format--have come in different sizes and colors, making life difficult for pharmacists. The drug companies themselves haven't been much happier with the FDA's unfocused administration of its REMS authority. That has led to industry pressure on Congress to rewrite the REMS provisions in the 2007 law as it reauthorizes the Prescription Drug User Fee Act (PDUFA), the law first passed in 1992. The REMS provision was inserted into PDUFA IV, passed in 2007.

     However, the "REMS resemblance" has caught the eyes of some pharmacy groups. Anita Ducca, Vice President, Regulatory Affairs, Healthcare Distribution Management Association, notes that REMS such as the "iPledge" program require wholesale distributors to verify the status of eligible pharmacies and requires manufacturers to maintain registries of qualified dispensing sites. The iPledge program requires physicians and pharmacists to take certain steps, too, and to record those steps, to verify that a female patient taking Accutane or another isoltretinoin medicaiton such as Sotret, or Amnesteem does not become pregnant. The pharmacist filling a prescription must verify through the iPledge system website (or over the phone) that all criteria has been met. The pharmacist must obtain authorization before dispensing the medication.

     "We have found through experience with REMS programs that variations in the elements of data to be communicated among these organizations increases the complexity of the data sharing," explains Ducca. "This complexity would only be  magnified if, as with REMS, drugs in this class experience varying restricted distribution data, requirements and components."

     Pharmacy groups certainly have some qualms about workflow burdens that may be imposed by a new "OTC with CSU" category, not to mention concerns about whether payment for added responsibilities would be forthcoming, much less sufficient. However, they cite perhaps a somewhat more "telling" piece of history as they look on the bright side of the potential new OTC class. That would be the shift of flu immunization from the physician's office to the pharmacy. Of course, the states, not the FDA,  passed the necessary laws to expand pharmacist scope of practice to allow that shift. But the APhA says about 175,000 pharmacists have completed a certificate training program allowing them to immunize. And, in the 2010-2011 influenza season, it is estimated that pharmacists administered approximately 20 million influenza vaccinations. "APhA believes that the new paradigm being considered can build on the successful immunization public health model," states Menighan.

    

     But Adamson Fryhofer, Chair-Elect of the AMA's Council on Science and Public Health and a primary care physician in Atlanta, argues the immunization model doesn't apply to chronic disease. "Treating chronic disease is much different," she explains. "Other co-morbidities might evolve or a different therapy might be needed."

      But Menighan answers that broader pharmacist involvement in a new OTC category would improve, not hinder, as Adamson Fryhofer implied, care coordination. "It is widely known in pharmacy, but often not well documented, that pharmacists routinely refer patients to an appropriate provider, and improve care coordination everyday," he states. "The new paradigm being considered should not segment or silo patient care activity in the pharmacy but rather provide for redirecting undertreated patients back into care to reduce morbidity and decrease costs."

     That, of course, is what the FDA hopes to accomplish by establishing this new category. It believes that the requirement to obtain a prescription for appropriate medication may contribute to undertreatment of certain common medical conditions including hyperlipidemia (high cholesterol), hypertension (high blood pressure), migraine headaches, and asthma. Some medications require routine monitoring through the prescribing practitioner--i.e. currently the physician--such as blood tests to assist in the diagnosis of a condition, or to determine whether or how well the medication is working, or to adjust the dose. The new paradigm might require an initial visit to a physician who might approve a certain number of refills beyond those that would normally be authorized without a return visit under specialized conditions of safe use. This paradigm might be useful for certain rescue medicines, such as inhalers used to treat asthma or epinephrine for allergic reactions, that patients need to keep on hand for use in emergencies.

  

      One thing that is a bit unclear at this point is whether the FDA has the authority to establish a new "OTC with CSU" category without a congressional blessing. Janet Woodcock, Director of the FDA Center for Drug Evaluation and Research, has said that Congress could give the FDA the authority when it reauthorizes PDUFA this year. The FDA made a PDUFA V proposal to the Congress in January. It did not include a request for "OTC with CSU" authority.

      The FDA's current authority allows it to approve an Rx to OTC switch if it is convinced all of the necessary safety information that needs to be conveyed to consumers can be included in the Drug Facts label which appears on the package. That label is a limiting factor, and it has stood in the way of FDA approval of some switches, for example, in the case of statins. For example, three FDA advisory panels have rejected Merck & Co. Inc.'s Mevacor Daily (lovostatin) for OTC use. In that instance, FDA officials were left wishing they had additional tools for helping a consumer decide they had hypercholesterolemia and were "right" for a statin.

     Drug manufacturers have been testing algorithms that are consumer friendly in an effort to  rectify the Mevacor "problem," David Schifkovitz, Vice President, Wellness Category, Global Regulatory and Quality, GlaxoSmithKline Consumer Healthcare. He walked the audience at the March 22 FDA meeting through an algorithm his company has developed for Cardiocor, an Rx betablocker.

     However, Schifkovitz fielded a number of probing questions from the 12 FDA officials sitting as inquisitors at the dais. He really didn't have an answer for a question about how the FDA could be assured a consumer actually correctly completed an algorithm, whether at a kiosk, at a home computer or on a cell phone. He admitted that the proliferation of kiosks in drug stores, not to mention in other less floor-space friendly venues such as convenience stores, would pose a problem. Asked whether senior citizens would be able to navigate algorithms, Schifkovitz  responded, "It would be up to the designers to make the algorithms as simple as possible."

       Whether it would have helped Merck to have a highly-rated algorithm in place back in 2007 when Mevacor last banged its knee on the FDA OTC hurdle remains to be seen. What is clear, however, is that the FDA has been very hesitant to approve prescription to OTC switches. There were no switches in 2010 (no 2011 data on FDA website), two in 2009, and none in 2008. The FDA did approve the switch of Allegra in 2011; but that was hardly path-breaking given the approval of the same for Claritan a decade ago.

     While FDA has been very tough on switches in recent years -  like everything at FDA  - the pendulum continues to swing," says Cindy DiBiasi, partner, 3D Communications, LLC. "I think what’s most promising of all is that there seems to be a lot of interest, motivation, and activity from both the FDA and industry on switch – and sometimes it just takes that type of momentum to get things moving again."

Administration Makes Two Regulatory Moves On Oil And Gas Operations

Pipeline & Gas Journal...May 2012

     The Obama administration took its first two regulatory steps, one final one tentative, toward guarding against air and ground water pollution from fracking. The final rule on air emissions from the Environmental Protection Agency (EPA) and proposed rule from the Department of Interior (DOI) covered different regulatory terrain. The EPA limits emissions of volatile organic chemicals, chiefly methane, from fracked oil and gas wells while the DOI wants gas companies and their well digging contractors to disclose more information about the fracking chemicals they use and about their well digging and construction practices.

      Lost in the headlines over the controversial fracking implications was the EPA's decision, in its final rule, to step back from what interstate pipelines worried would be onerous new, emission reduction requirements on transmission and storage operations. There, the EPA proposed rule issued previously would have expanded New Source Performance Standards (NSPS) for the oil and gas industry. Those standards regulate emissions of volatile organic chemicals, the chief one being, with regard to pipelines, methane. The EPA had proposed to broaden the reach of the NSPS to cover, for the first time, transmission and storage operations and fracking.

       In the final rule published in April, the EPA stayed with the first-time fracking requirements, but softened them considerably. The transmission and storage enhancements were, for the most part, ditched. Compressor and pneumatic controller reductions were omitted...for the moment. The final rule exempted from regulation low-bleed controllers (with bleed rates below 6 standard cubic feet per hour) located between the well-head and the point where the gas enters the transmission line, to encourage a quicker transition from high-bleed controllers. The requirements for high-bleed controllers were also phased in over one year to give manufacturers of these devices the time needed to test and document the gas bleed rate. A different metric was also identified to simplify the determination of which storage tanks are covered by the standards. Instead of the proposed throughput measurement, the final rule identified a regulatory cutoff of 6 tons of VOC emissions.

        With regard to fracked wells going forward, operators there will have to either flare their emissions or use emissions reduction technology called “green completions,” technologies that are already widely deployed at wells. In 2015, all new fractured wells will be required to use green completions. The final rule does not require new federal permits.

     "We are very pleased that EPA was convinced by our arguments that there are very few VOC emissions from the transmission sector and thus they chose not to regulate that segment in this rule," says  Lisa S. Beal, Vice President, Environment & Construction Policy, Interstate Natural Gas Association of America (INGAA). "However, we are still perplexed by some of the language in the rule that suggests this might just be temporary.  We do not believe that further analysis will result in a different conclusion. Simply put, EPA would be chasing something that just isn't there.  So, in short, yes, the final rule addressed our concerns but until EPA makes a definitive determination that VOC controls on the transmission sector are unnecessary, we will remain vigilant."

      The EPA also softened proposed changes to the Maximum Achievable Control Technology (MACT) standards which apply to emissions of air toxics. Richard N. Wheatley,

Manager, Media Relations/Emergency Response Communications, El Paso Corporation, says the NSPS and MACT changes in the final rule "are a significant improvement."

     The Department of Interior proposed rule on fracking was issued by the Bureau of Land Management (BLM), and will apply, once finalized to state, federal and Indian lands. The rule would (1) provide disclosure to the public of chemicals used in hydraulic fracturing on public land and Indian land, (2) strengthen regulations related to well-bore integrity, and (3) address issues related to flowback water.

   

     The proposed rule would require that disclosure of the chemicals used in the fracturing process be provided to the BLM after the fracturing operation is completed. This information is intended to be posted on a public web site, and the BLM is working with the Ground Water Protection Council to determine whether the disclosure can be integrated into the existing website known as FracFocus.org.

     Prior approval would be required for well stimulation activities, generally in connection with the prior approval process that already is in place for general well drilling activities through the Application for Permit to Drill (APD) process. Operators also will be required to submit cement bond logs before fracturing operations begin. The running of cement bond logs on surface casing, which is currently an optional practice, would now be required for new wells. Existing wells would require mechanical integrity testing prior to hydraulic fracturing.

    

     In a teleconference with reporters on May 9, Jack Gerard, President and CEO of the American Petroleum Institute, didn't mince words in criticizing the BLM proposed rule. He said the states are fully able to handle regulation of hydraulic fracturing . "It is simply not necessary to add a new federal regulatory regime for fracking on top of an already highly competent state regime," he explained. Asked whether the API would ask the BLM to withdraw the proposed rule, Gerard did not answer directly. He said the API would continue to work with the White House and the BLM and look closely at the proposed rule. "But at the end of the exercise, we have to answer a  fundamental question. That is 'What is the need for these regulation.'" He pointed out that EPA Administration Lisa Jackson said the week before there was no evidence of groundwater contamination from fracking, and allegations of contamination in specific places have been found to be hollow. Rather than concerning itself with a new layer of federal fracking rules, Gerard emphasized that the federal government ought to be spending its time modifying oil and gas permitting rules,'" he stated.

      He noted that Secretary of the Interior Salazar had just approved a permit for Anadarko to drill over 3,600 natural gas wells in Utah’s Uinta Basin. It took DOI six years to approve that permit, Gerard stated. "North Dakota can issue a permit in 14 days," he continued. "The federal government should be looking at those models."

Growing Concern Over Chinese Auto Part and Material Export Policies

Aftermarket Business...April 2012

     Concern about the impact of imported Chinese auto parts on U.S. parts manufacturers was at the heart of a letter sent almost exclusively by congressional Democrats to President Obama in March. The letter argues: "An unfortunate result of China's predatory and protectionist policies in the auto parts sector has been to begin to sever the traditional link between auto assemblers, parts producers, and aftermarket producers."

      The concern about China is two-fold. First, the Chinese are undercutting U.S. parts manufacturers by subsidizing the price of cheap Chinese auto parts sold here. Second, they are restricting exports to the U.S. of what are called rare earths which are used in the manufacture of auto parts. Both policies stem from a single goal: to develop an indigenous Chinese auto parts manufacturing distribution chain, an objective which essentially depends, in one way or another, on hobbling the U.S. parts industry so the Chinese can step in and build a launch pad which can then be used to transfer market share back home, to China. Rare earths are a group of concentrates, intermediate compounds, and individual oxides based on the minerals bastnasite, monazite, and loparite and the lateritic ion-adsorption clays. Rare-earths are used in automotive catalytic converters and many metals which in turn find their way into auto parts.

      Congressional pressure on China probably had a lot to do with U.S. Trade Representative Ron Kirk announcing in March that he was undertaking consultations with the People’s Republic of China at the World Trade Organization (WTO) in March concerning China’s unfair export restraints on rare earths, as well as tungsten and molybdenum. The last two are often used in auto electronics. Scott Paul, Executive Director of the Alliance of American Manufacturing, says rare earths are used in a relatively narrow band of auto parts, but where they are used they have "an enormous impact" on the final part. Under WTO rules, if the matter is not resolved through consultations within 60 days, the United States may request the establishment of a WTO dispute settlement panel.

     With regard to the flood of imported Chinese auto parts, well, in a political sense, not much is happening there. However, that deluge is probably playing a role in the energizing of U.S. parts "remanufacturers." So to the extent, for example, that the Chinese hold back on supplying virgin material, be it rare earths or something else, to U.S. manufacturers of aftermarket auto starters, that creates an opportunity for "remanufactured" starters, which, according to Robert McKenna, President and CEO of the Motor & Equipment Manufacturers Association, require nine times less virgin materials.

     Remanufactured parts offer two advantages to aftermarket retailers and their customers. Parts remanufactured in the U.S., be they starters, alternators, engines, turbo chargers or whatever, typically cost 20-50 percent less than a new part. In addition, those parts can be marketed as "green" products. They typically save 80 percent of the energy and material used to manufacture equivalent new parts.

     The benefits of remanufacturing were on display at a hearing in the U.S. International Trade Commission in late February. The ITC will produce a "Remanufactured Goods Study" this summer, and it will go to Congress. Remanufacturers want the federal government to give their industry new, formal status through a series of measures which would allow them to compete better, not only in U.S. markets, but in export markets, too. For example, there is no NAICS code for remanufactured goods, much less for remanufactured auto parts.      

      Of course, aftermarket customers sometimes have a bias against remanufactured parts, be it justified or not. However, in some instances, retail shoppers--and the stores they visit--may actually want Chinese auto parts because they are lower cost. But in the current political climate, Chinese auto parts sold in the U.S. aftermarket--or Chinese auto part materials withheld from U.S. parts manufacturers--are equated with lost American jobs. “China is not penetrating our market the old-fashioned way, by outcompeting us," says Paul of the AAM. "Instead, Beijing has pumped $27 billion of subsidies into its auto parts sector, with an additional $10 billion planned."

     Asked whether aftermarket retailers and their customers might in some instances prefer less expensive Chinese auto parts, he answers, "It is not fair for U.S. companies to compete against state subsidized Chinese companies."

Corporate Accounting Issues Will Influence Tax Reform Debate

Strategic Finance ...April 2012

     It has been a long time since financial accounting has been a topic of discussion in Congress. But suddenly it is in vogue as the House begins to consider a corporate tax reform bill. Rep. Dave Camp (R-MI), chairman of the House Ways and Means Committee, held a hearing in February on how accounting rules affect corporate evaluations of potential changes to tax policy. This discussion generally devolves into a comparison of the financial accounting effects of lower corporate income tax rates versus their effects with regard to retaining accelerated depreciation or expensing. Those accounting effects are important because Corporate America is going to have to chose between lower rates and tax incentives. They can't have both.

    Of course some tax incentives have stronger GAAP implications than others. "Like most companies, we are strongly influenced by tax incentives that improve our GAAP financial reporting metrics, such as our reported income, effective tax rate and earnings per share," states Mark Schichtel, senior vice president, chief tax officer, Time Warner Cable, Inc. He mentions the research credit and Section 199 domestic production incentive as examples.

     But he adds, "Given the capital intensity of our business, we rely even more on timing incentives that do not impact GAAP financial reporting, such as expensing and accelerated depreciation, which significantly enhance our actual cash flows and our ability to invest."

      Economists, however, cite financial accounting implications to dispute those who claim "timing incentives" such as accelerated depreciation should be valued above lower corporate tax rates. Thomas Neubig, national director of Ernst & Young LLP's Quantitative Economics and Statistics Practice, says a lower corporate tax rate would lower financial statement effective tax rates and increase book net income for most corporations. Accelerated depreciation offers only a timing benefit, and doesn't reduce corporations' financial statement effective tax rate or increase reported book profits. "Many corporate tax executives value permanent book-tax differences higher than temporary book-tax differences," Neubig emphasizes. "They also value the permanent benefit of a lower corporate tax rate more than a temporary cash-flow benefit. Reducing the corporate tax rate would immediately lower corporations' financial statement effective tax rates, thereby increasing their reported after-tax book profits."

      Michelle Hanlon, associate professor of accounting and taxation at the Sloan School of Management at the Massachusetts Institute of Technology, argues that tax incentives aren't all they are cranked up to be anyway. She mentions bonus depreciation and the Section 199 deduction. For example, she explains that companies respond less than predicted to bonus depreciation partly because the tax savings are not reflected on a firm’s accounting income statement.