Pharmacy & Therapeutics Journal, May 2009
The advent of electronic prescribing was supposed to be a large part of the cure for improving patient outcomes and reducing prescription errors, but only a fraction of scripts are being sent electronically. Independent and hospital pharmacies continue to lag behind the technology wave because of the expense involved.
Stephen Barlas
My personal physician, let’s call him Dr. Smith, is a young,
enthusiastic guy whose eyes light up when he talks about his
two-year-old son who just taught himself to gargle. The kid
thinks he is a young Robin Williams. The toddler comedian
likes to throw back his head at the dinner table, juggle some
orange juice in his mouth, and see if his parents break into
guffaws.
Believe it or not, Dr. Smith is just as animated
when he’s asked about electronic health records
(EHRs) and electronic prescribing; however, his
tone quickly changes from pleasure to pain. His
office has experimented with all sorts of off-theshelf
EHR software but to no avail. His mediumsized
practice in well-off Arlington, Virginia, has
had to hire an information technology (IT) guru
with a background in medical records to develop
a customized EHR system. My doctor laughs
derisively when I ask him about the $17.2 billion
in Medicare and Medicaid health IT (HIT) incentive
money for physicians and hospitals in the stimulus package
Congress passed in February 2009. He doesn’t think it will
convince many physicians to jump into the HIT arena, especially
with standards and certification in such a mess.
The doctor’s frustration is palpable when he pulls a prescription
pad from his pocket. His practice does have legacy
e-prescribing software. He can send electronic prescriptions
through the Surescripts network—the only e-prescribing highway
available—to all local pharmacies; no problem here. But
if a patient comes in and wants a 90-day supply of a medication
from a mail-order pharmacy, that’s a no-go. His software does
not allow him to get onto the Surescripts highway to reach
Medco Health Solutions, CVS Caremark, and other big prescription
benefit managers (PBMs) and mail-order pharmacies.
EHRs and e-prescribing have been held up as saviors of our
medical system—literally and figuratively—since a National
Academy of Sciences report in 1999 detailed the average number
of deaths from hospital errors in the U.S. Most of these
deaths were the result of botched prescriptions with faulty
handwriting or other similar deficiencies. Through the early
part of the 21st century, EHRs gained momentum in the public’s
mind, if not the physicians’ office, as a way to save timeand resources and as a gateway to better health outcomes
more broadly, not just as a way to reduce prescription errors.
President Obama provided the most recent rationale for EHRs
when he linked them to job creation, mostly from sales of
e-health software and hardware.
The President’s support of EHRs catapulted previously landlocked
congressional legislation onto the deck of the fast-moving
stimulus bill. Known as the American Recovery
and Reinvestment Act (ARRA), the stimulus
bill aims to create a new digital health nirvana in
which federal dollars would be pumped into physician
practices and hospitals (but not pharmacies)
so that they can purchase off-the-shelf software
systems that will become magically robust and, at
long last, interoperable.
The ARRA has three general components:
• $19.2 billion in funding ($17.2 billion plus another
$2 billion going to the National Coordinator
for Health Information Technology)
• establishment of voluntary standards
• privacy provisions
Some top health care executives have heralded the arrival
of the new stimulus-funded era. David B. Snow, Jr., MHCA,
Chief Executive Officer (CEO) of Medco Health Solutions,
Inc.—the mail-order company to which my physician cannot
connect electronically—delivered a speech on March 18 at the
American Enterprise Institute, a mainline think tank, entitled
“Health IT: Empowering Precision Medicine.” The Pharmaceutical
Care Management Association (PCMA) issued a study
in March that predicted that HIT funding in the ARRA would
increase the number of prescribers using e-prescribing to
more than 75% over the next five years.
But a cow has more chance of jumping over the moon than
the PCMA’s guesstimate has of being correct. A June 2008
report from the eHealth Initiative and the Center for Improving
Medication Management estimated that only 6% of ambulatory
health care providers are using e-prescribing, including
those using EHRs and stand-alone e-prescribing solutions.
The PCMA’s estimate is close to astounding. Adoption by hospitals
and retail pharmacies isn’t much more impressive.
Karl F. Gumpper, RPh, BCNSP, BCPS, Director of the Section
of Pharmacy Informatics & Technology of the American
Society of Health-System Pharmacists (ASHP), says that an
association survey at the end of 2007 found that 20% of hospitals
had some e-prescribing capability.
“Whether they are using that capability to its full extent, for
example, by connecting to outside retail pharmacies or doctors’
offices, we don’t know,” he adds.
In-patient hospital pharmacies are almost totally in the dark,
according to Michael Van Ornum, RPh, RN, BCPS, a consulting
clinical pharmacist at Greater Rochester Independent Practice
Association and author of a book on e-prescribing. Inpatient
pharmacies connect to physicians making rounds via
computerized provider order entry (CPOE) systems.
“They don’t connect to the outside world via Surescripts, so
medication history is a weak spot, for example,” he explains.
Almost all chain pharmacies have pharmacy dispensing systems
with e-prescribing capability, but this is not true in
smaller, independent pharmacies. The eHealth Initiative report
said approximately 73% of independent pharmacies are not connected
even though most of them are using certified software.
Mr. Van Ornum describes the dilemma of an owner of an
independent pharmacy who had to choose whether or not to
buy a pharmacy dispensing system that cost $10,000 extra for
an e-prescribing component.
“He said he wasn’t going to pay an extra $10,000 just for the
privilege of paying Surescripts an extra 25 to 35 cents per
transaction,” Mr. Van Ornum relates.
Surescripts provides a valuable service to pharmacies and
physicians (who do not pay a per-transaction cost) by ensuring
that some (but often not all) information about a patient’s
medication history, insurance benefits, and formulary flexibility
is available to the physician or the pharmacy when the
patient is standing in front of them. Although connectivity to
Surescripts saves providers a considerable amount of time, Mr.
Van Ornum says that the pharmacy costs can add up to the
equivalent of a full-time technician. Such an expense offsets the
time savings gained by the pharmacy.
That is where e-prescribing adoption stands today. At the end
of 2007, according to the eHealth report, only 2% of the 1.47 billion
prescriptions each year that were eligible to be sent electronically
were sent that way. Progress has been made, no
question, but the task of completing the job is enormous. This
is where the stimulus bill comes in, although there are many
skeptics.
Kevin Hutchinson, President and CEO of Prematics, Inc.,
and founding CEO of Surescripts, says that the incentive funds
for physicians and hospitals are a positive step. However, the
one-year injection of money won’t be enough to encourage
many physicians in small and medium-sized practices—like my
physician—to fully embrace e-prescribing, much less fullblown
EHR systems. He explains:
Two things have to happen first. Health care reform has to change
the way reimbursement is done so [that] doctors see that the way
they deliver care is aligned with the way they get paid for care. Second,
physicians have to be sure that investments they make in 2009
will be reimbursed with stimulus money, which first becomes available
in 2011. Because these kinds of payment promises have been
broken in the past, there is a little bit of skepticism on the part of
physicians.
Even if the money is there in 2011 and beyond, a study
released in March by Avalere Health, a consulting firm in“Whether they are using that capability to its full extent, for example, by connecting to outside retail pharmacies or doctors’
offices, we don’t know,” he adds.
Washington, DC, suggested that absent a leap of faith that new
HIT systems would increase their efficiency, up to 50% of
physicians in solo practice or in small groups perceived themselves
as better off financially by refusing to adopt e-prescribing
and EHRs and forgoing HIT funding in the stimulus bill;
they would instead pay a penalty for noncompliance.
The stimulus package would pay physicians incentives for
five years; the total amount would depend on which year they
first complied with certain standards. If that first year were
2011 or 2012, the doctors would get $44,000 over five years.
Total payments would be $3,000 less if they implemented
e-prescribing in 2013, 2014, or 2015. The Avalere researchers
found that solo practitioners and physicians in small group
practices would need to spend approximately $124,000 over the
five-year period of 2011 to 2015 to adopt EHRs.
Subtracting the potential $44,000 in federal incentive payments,
the resulting financial cost would be $70,000, or an
average of $14,000 a year. This represents about 8% of this
physician’s annual Medicare receipts, contrasted with the legislation’s
provisions to impose an $8,500 penalty on nonadopters
of e-prescribing. The penalties would be the result of
reduced Medicare fees for non-adopters in 2015 and beyond.
Unlike physicians and hospitals, pharmacies receive no
direct funding from the stimulus bill, even though, unlike
physicians, they will incur substantial recurring costs from
Surescript’s connection charges.
Brian Morris, RPh, and Director of Product Management
and Public Affairs at McKesson Pharmacy Systems, says,
“Pharmacies do not see the same opportunities and incentives
as physicians.”
Today, a pharmacy management system could cost a pharmacy
more than $10,000 depending on hardware, training,
and implementation requirements.
Some stimulus funding could flow indirectly to pharmacies,
however. The ARRA gives $2 billion to the Office of the
National Coordinator for Health Information Technology
(ONC) for a basket of loan and grant programs, including one
to establish regional implementation centers that provide guidance
to physicians and pharmacies. The latter provision is
why Mark Kinney, RPh, Vice President of Government Affairs
for the Independent Pharmacy Cooperative (whose members
are generally small pharmacies in more rural areas) thinks that
the legislation will be very valuable.
Dan Rode, MBA,Vice President of Policy and Government
Relations at the American Health Information Management
Association, describes those “regional exchanges” as HIT
versions of the U.S. Department of Agriculture’s extension
center offices. They would ostensibly be staffed with HIT
experts who would venture into physicians’ offices and pharmacies
and help with e-prescribing and implementing EHR
systems. This would be a free service.
“I don’t imagine the consultants industry is too happy about
this,” Dan Rode jokes.
But physicians and pharmacies need more than money to
convince them to make substantial e-prescribing investments.
They need the software to be mature and interoperable, which
is currently far from the case. The stimulus bill is supposed to
help here too.
On standards and certification, the stimulus bill says that the
Department of Health and Human Services (DHHS) Secretary
has to adopt an initial set of HIT standards and certification procedures
by December 31, 2009. However, the ARRA is silent
on how detailed or far-reaching those new DHHS standards
should be; it is also mute on whether the Obama DHHS will
endorse the standards already adopted by the Bush admin -
istration-endorsed Healthcare Information Technologies Standards
Panel (HITSP) and the certifications based on those
standards, as issued by the Certification Commission for
Healthcare InformationTechnology (CCHIT) at the end of this
year. In fact, the bill’s silence on that topic and its creation of
a new broad-based standards committee to advise DHHS was,
to some extent, a repudiation of the fractured, confusing standards
and certification-setting system endorsed by the wellmeaning
Bush administration, which had outsourced the work
to the HITSP and CCHIT. These two private-sector groups
are heavily influenced by software vendors.
Even if new DHHS Secretary Kathleen Sebelius, MPA, endorses
the CCHIT certification process at the end of 2009
(which is likely), that will not quiet the concerns of either
physicians or pharmacies. The CCHIT has been certifying
EHR systems but not stand-alone e-prescribing systems, which
would obviously be cheaper and would make it easier for physicians
and pharmacies to get on board. All EHR systems that
have been certified by the CCHIT have e-prescribing functionality,
but that functionality has considerable limits.
For the most part, the earlier e-prescribing systems based
their functions on the Medicare e-prescribing “foundation”
standards adopted in 2006. However, the first-generation systems
certified by CCHIT, which are now being used by physicians
and pharmacies, do not necessarily allow physicians to
connect to all pharmacies, as in the case of my personal physician.
Some EHR systems connect only to retail pharmacies,
others only to mail-order pharmacies. Even rival software
packages connecting physicians to mail-order pharmacies provide
different levels of data, depending on what Medco, CVS
Caremark, and others agree to release.
Generally, there is no ability to look up formularies in real
time. In part, those shortcomings were the result of the cost
of the certification process; some vendors simply could not pay
the CCHIT charge for complete certification. In addition, the
mail-order pharmacies really saw the light on e-prescribing
only a few years ago. They were late to the party, according to
Prematics CEO Hutchinson, who says that this has changed
markedly now. Nonetheless, there are all these legacy EHR
systems out there that cannot meet the new standards set by
the Medicare Improvements for Patients and Providers Act of
2008 (MIPPA).
This is the Medicare reform legislation that provides
Medicare payment incentives to physicians for e-prescribing.
That bill specified three new e-prescribing standards, in addition
to the three “foundation” standards: (1) formulary and
benefit transactions, (2) medication history transactions, and
(3) fill status notifications.
Although CHIT will have 50 full EHR systems certified to the
entire six-standard suite by the end of June, no stand-alone
e-prescribing systems have been certified by CCHIT. However,
John Morrissey, a CCHIT spokesperson, says that stand-alone
systems will be certified in the fall of 2009, again based on the
Medicare standards.
So what happens to a physician like mine with a legacy EHR
system after his software vendor has the latest version, which
is compliant with the three new Medicare standards, certified
by the CCHIT?
Theoretically, the legacy system can be upgraded at no cost,
based on the initial contract with the software vendor. But Mr.
Hutchinson claims that upgrades can present challenges as a
result of additional new features that can adjust the workflow
of users, “sometimes expectantly and sometimes not. It is important
that training follow significant upgrades, especially
one that will add true electronic prescribing capabilities.”
Yet even with the addition of three new standards in April
2009, the Medicare Part D suite, now being used by the CCHIT,
vendors and physicians are still skeptical. That is because the
suite omits three standards that Medicare pilot-tested in 2006
but found wanting. Probably the most significant one is the
standard for RxNorm drug nomenclature, developed and maintained
by the National Library of Medicine (NLM).
In the March–April 2009 issue of Health Affairs, Maria Friedman,
Anthony Schueth, and Douglas S. Bell wrote that the latest
Medicare e-prescribing standard “will be critical for driving
more advanced functionality and e-prescribing adoption by
payers and vendors that have not yet fully participated in e-prescribing.”
1
However, they add: “On the other hand, the fact that three
other standards were pilot-tested but not adoptedmay have created
a perception that e-prescribing is generally not mature.
“There are a lot of people on the RxNorm bandwagon,”
acknowledges Mr. Hutchinson.
Moreover, the new Medicare standard, based on the
National Council for Prescription Drug Programs (NCPDP)
SCRIPT 8.1 standard, does not accommodate e-prescribing in
long-term-care facilities, in which specialized long-term care
pharmacies are located off-site and drugs are delivered to the
facility. The NCPDP has made changes to standard 8.1 to accommodate
long-term care facilities; the new standard is 10.5.
The problem is that vendors are using NCPDP SCRIPT 8.1 as
a yardstick. If standard 10.5 turns out to be compatible with earlier
versions, long-term care facilities and their pharmacies may
be able to use vendor systems certified to prior version 8.1. A
number of different players will be involved in making that
“backwards-compatible” decision, meaning that it is going to
take a considerable amount of time.
Although the CCHIT’s certification of physician systems
may leave something to be desired, its certification of pharmacy
systems is nonexistent. Surescripts certifies pharmacy
e-prescribing software products that use its network; a physician-
dispensing system without that certification is useless
for e-prescribing. That certification is based on compliance with
NCPDP SCRIPT 8.1. Like physicians, pharmacies also face
challenges when a vendor certifies the newest version of a
pharmacy management system to standard 8.1; legacy systems
must then be upgraded.
At least CCHIT has had the federal government’s imprimatur.
The DHHS has never blessed Surescripts. McKesson’s
Brian Morris thinks that CCHIT could extend its reach to
pharmacy systems under the ARRA and that national standards
could prevent adoption impediments arising from in-terstate differences. Several states such as Ohio and New
York, for example, have their own pharmacy system certification
process with requirements that aren’t in harmony with
those of other states and industry standards.
The stimulus bill is silent about the Drug Enforcement
Agency’s (DEA’s) prohibition against e-prescribing of controlled
substances. Those drugs account for about 20% of all
prescriptions, according to the report from the eHealth Initiative.
The DEA has proposed a rule that would ease its restrictions
against e-prescribing.
Maria Friedman, one of the authors of the Health Affairs
article and a former Medicare official, says that the DEA and
DHHS are currently arguing over the proposed rule, which
many pharmacy and physician groups have criticized. Privacy
and security concerns factor into the DEA rule-making, as
they do into the stimulus provisions affecting the Health Insurance
Portability and Accountability Act (HIPAA).
The ARRA expands HIPAA protections for individuals.
These new privacy requirements in some cases would force
EHRs and e-prescribing systems to contain functionality
beyond what is required by the Medicare Part D standards. For
example, Section 14405 of the ARRA expands HIPAA to allow
patients with health insurance to pay for a test with cash and
to instruct physicians not to report the test results to the
patient’s employer or medical insurance company. Currently
under HIPAA, physicians have no choice and must report the
results. In the future, physicians and pharmacies would be able
to segregate patient information that does not get sent to the
payer.
“That complicates things, to be honest,” states Dan Rode,
who notes that this provision is one of many that will be up for
grabs during the DHHS rule-making process that will unfold
this year. He adds:
It is way too early to know whether this bill will positively [affect]
innovation. But we believe that there still is more needed than what
the stimulus bill provides to achieve interoperability. The bill is
where Congress left us on February 17. We will move forward.
COMMENTARY: The Stimulus Bill and Electronic Health Records
248 P&T® • May 2009 • Vol. 34 No. 5
Reining in Executive Compensation
Human Resource Executive online, June 15, 2009
While the administration is keeping a hands-off approach, thus far, to imposing salary ceilings on all companies, there continues to be increased focus on more transparency for executive compensation. New rules expected to be released by the SEC in July will mandate additional proxy-statement disclosures, including "say on pay" and information about potential conflicts of interest by comp consultants.
ByStephen Barlas
While the administration is keeping a hands-off approach, thus far, to imposing salary ceilings on all companies, there continues to be increased focus on more transparency for executive compensation. New rules expected to be released by the SEC in July will mandate additional proxy-statement disclosures, including "say on pay" and information about potential conflicts of interest by comp consultants.
By
The Obama administration's restrictions on executive compensation announced last week created a lot of smoke but there wasn't much fire in evidence.
Certainly few people will get burned, given that the most potentially onerous restrictions affect only seven large companies and any additional companies who take Troubled Asset Relief Program funds in the future.
Moreover, while new federal pay czar Kenneth Feinberg has the authority to set executive pay for those TARP fund recipients, where he sets those levels is anyone's guess.
Nonetheless, at a briefing on June 12, Timothy Bartl, vice president and general counsel at the Center On Executive Compensation, an offshoot of the Washington-based HR Policy Association, said he is concerned that any salary ceilings imposed on TARP companies might find their way into much more widespread mandates on all public companies -- either via congressional legislation or administrative action by the Securities and Exchange Commission, which is scheduled to publish a new rule on executive compensation disclosure in July.
"The discussion to apply TARP-type caps more broadly will occur, but I think there will be an awful lot of reluctance on the part of those who might see such a step as undermining the recovery," Bartl said.
He welcomed the SEC intention to revise its exec-comp rules, which have come under fire from both corporations and institutional investors, and he predicted the SEC "will look at a lot more than people think when they announce their plans in July."
Those plans, according to hearings on June 11 at the House Financial Services Committee, include mandating additional disclosures with regard to how a company, and its board in particular, manages risk; how salaries are set for other executives below the levels now prescribed; and new disclosure requirements regarding compensation consultant conflicts of interest, according to the testimony of Brian Breheny, deputy director of the division of corporate finance at the SEC.
The main focus of the Center on Executive Compensation regarding any SEC rulemaking is to convince the agency to revamp the summary pay tables in the compensation disclosure and analysis section of the proxy statement.
Those tables have been criticized for obscuring the actual annual pay for top corporate executives, in part because the calculation for each "named" executive mixes pay earned in the prior year or current year and the estimated accounting expense of equity-based incentives granted in the current year.
"No one takes the total compensation figure for an executive to be the total number," said Charles Tharp, executive vice president for policy at the Center.
Tharp's organization has developed a substitute table that describes actual annual pay and how it was determined; and explains how that pay, in each of a number of categories such as salary, annual incentive, long-term incentive payout, etc.; was linked to corporate performance.
Tharp said that a more understandable executive-compensation disclosure is far more preferable to the SEC mandating that companies conduct an annual advisory -- but nonbinding -- vote among shareholders on executive pay.
Treasury Secretary Timothy Geithner, however, endorsed "say on pay" last week, and observers believe the SEC will undoubtedly start working on it, probably as part of its July exec-comp rulemaking package.
Tharp said the British experience with "say on pay" has shown that compensation levels remained unaffected, although retirement benefits and golden parachutes have been reined in to some extent.
Both Tharp and Bartl advocated a "board-centric" approach to compensation reform, as opposed to a federal-mandated approach.
The SEC's Breheny did not give any specifics during the June 11 hearing on the commission's "board-centric" approach to reining in compensation consultants -- who were criticized in congressional hearings a few years ago for doing business with corporate executives whose salaries they were opining on to that company's board of directors.
Tharp said those kinds of conflicts have been rooted out for the most part over the past few years via various company policies.
Congress Turns Up Heat for OSHA
Human Resource Executive, May 7, 2009
The potential for criminal convictions and increased financial penalties for OSHA violations -- coupled with an increased funding for enforcement activities -- mean that companies need to refocus on their health-and-safety policies and procedures. An emphasis on recordkeeping is also a necessity.
By Stephen Barlas
The drive by congressional Democrats to upgrade civil and criminal penalties for workplace-safety violations should be warning enough for companies to take a close look at their internal Occupational Safety and Health Administration compliance programs.
Jason Schwartz, an attorney in the Washington office of Gibson, Dunn & Crutcher, who counsels large companies on Labor Department compliance issues, says Democrats will pass The Protecting America's Workers Act, a bill which fell short in the past few sessions of Congress, primarily because of the threat of a George W. Bush veto.
The bill would allow the Justice Department to seek felony criminal penalties instead of the misdemeanors that the current law allows.
Moreover, the bill allows felony penalties in the case of serious bodily injury, and extends such penalties to responsible corporate officers.Current law allows misdemeanor criminal penalties only in the case of a "willful" corporate action resulting in a worker's death. Conviction results in no more than six months in jail.
Schwartz points out that another significant provision of the proposed legislation would require companies to immediately fix problems identified by OSHA citations. Currently, a company can challenge a citation in court, and put off making the changes sought by OSHA until the legal case is resolved.
Keith Smith, director of employment and labor policy at the National Association of Manufacturers in Washington, says his organization is "quite concerned" by the reintroduction of the Protecting America's Workersbill.
"Nothing in the bill assists employers with compliance with the already rigorous OSHA requirements," he says.
The Protecting America's Workers Act, reintroduced in April by Rep. Lynn Woolsey, D-Calif., chairwoman of the Workforce Protection Subcommittee at the Education and Labor Committee, was one of the subjects of two days of hearings in the full committee on April 28 and 30.
Congressional legislative action is being propelled by the sense that the Bush administration ignored OSHA enforcement -- and that feeling was buttressed at the hearings by testimony from Elliot Lewis, assistant inspector general for audit at the Department of Labor.
Lewis reported OSHA's enhanced enforcement program (EEP), established by the agency in 2003 specifically to focus on "indifferent" employers, was a bust.
Jordan Barab, the deputy assistant secretary of labor for occupational safety and health, told the committee that "it is not acceptable to fail to follow through with inspections or enhanced settlement agreements with employers OSHA has placed in the EEP."
At present, Barab is the top Obama appointee at OSHA, awaiting the White House nomination of an OSHA administrator, the top position. Barab came to OSHA from the Education & Labor Committee, where he was a top staffer to Rep. George Miller, D-Calif., chairman of the committee and a strong backer of the Woolsey bill.
Barab says OSHA has formed an EEP Revision Task Force, which is designing a new enforcement program to be called the Severe Violators Inspection Program.
OSHA now has significant new funding for enforcement, which will be used for severe violators and other programs, including the agency's Site-Specific Targeting Plan, which targets workplaces that have 40 or more employees and have reported the highest injury/illness rates.
Congress recently appropriated $80 million in the stimulus package targeted for more enforcement in various DOL agencies including OSHA, and expanded OSHA's fiscal year 2008 appropriations by $27 million for fiscal 2009 -- with explicit instructions to focus on enforcement.
Schwartz, who testified on behalf of the U.S. Chamber of Commerce at the April 30 hearings, says the EEP concept not only makes good sense, but is a practical necessity if OSHA is to fulfill its mission.
He says the business community should be involved as OSHA formulates the severe-violators program. He also says OSHA should revise the targeting criteria of its site-specific plan, which he asserts is "often misdirected."
Upcoming, increased OSHA enforcement and the potential new penalty authority makes it incumbent, particularly on major national employers with multi-site workplaces -- whom Schwartz believes OSHA will be focusing on -- to really put a top-flight compliance program in place.
It is important to hire health and safety professionals who "really understand the regulations." Schwartz says. "This stuff is not easy; the OSHA regs are very dense."
He also highlights the need to focus on injury and illness recordkeeping systems, which, he says, "are often delegated to employees who don't have a sophisticated grasp of OSHA health and safety concepts.
"Recordkeeping requires very careful work," Schwartz says, "and given the specter of increased criminal penalties, companies should be putting a lot of focus on this."
The potential for criminal convictions and increased financial penalties for OSHA violations -- coupled with an increased funding for enforcement activities -- mean that companies need to refocus on their health-and-safety policies and procedures. An emphasis on recordkeeping is also a necessity.
By Stephen Barlas
The drive by congressional Democrats to upgrade civil and criminal penalties for workplace-safety violations should be warning enough for companies to take a close look at their internal Occupational Safety and Health Administration compliance programs.
Jason Schwartz, an attorney in the Washington office of Gibson, Dunn & Crutcher, who counsels large companies on Labor Department compliance issues, says Democrats will pass The Protecting America's Workers Act, a bill which fell short in the past few sessions of Congress, primarily because of the threat of a George W. Bush veto.
The bill would allow the Justice Department to seek felony criminal penalties instead of the misdemeanors that the current law allows.
Moreover, the bill allows felony penalties in the case of serious bodily injury, and extends such penalties to responsible corporate officers.Current law allows misdemeanor criminal penalties only in the case of a "willful" corporate action resulting in a worker's death. Conviction results in no more than six months in jail.
Schwartz points out that another significant provision of the proposed legislation would require companies to immediately fix problems identified by OSHA citations. Currently, a company can challenge a citation in court, and put off making the changes sought by OSHA until the legal case is resolved.
Keith Smith, director of employment and labor policy at the National Association of Manufacturers in Washington, says his organization is "quite concerned" by the reintroduction of the Protecting America's Workersbill.
"Nothing in the bill assists employers with compliance with the already rigorous OSHA requirements," he says.
The Protecting America's Workers Act, reintroduced in April by Rep. Lynn Woolsey, D-Calif., chairwoman of the Workforce Protection Subcommittee at the Education and Labor Committee, was one of the subjects of two days of hearings in the full committee on April 28 and 30.
Congressional legislative action is being propelled by the sense that the Bush administration ignored OSHA enforcement -- and that feeling was buttressed at the hearings by testimony from Elliot Lewis, assistant inspector general for audit at the Department of Labor.
Lewis reported OSHA's enhanced enforcement program (EEP), established by the agency in 2003 specifically to focus on "indifferent" employers, was a bust.
Jordan Barab, the deputy assistant secretary of labor for occupational safety and health, told the committee that "it is not acceptable to fail to follow through with inspections or enhanced settlement agreements with employers OSHA has placed in the EEP."
At present, Barab is the top Obama appointee at OSHA, awaiting the White House nomination of an OSHA administrator, the top position. Barab came to OSHA from the Education & Labor Committee, where he was a top staffer to Rep. George Miller, D-Calif., chairman of the committee and a strong backer of the Woolsey bill.
Barab says OSHA has formed an EEP Revision Task Force, which is designing a new enforcement program to be called the Severe Violators Inspection Program.
OSHA now has significant new funding for enforcement, which will be used for severe violators and other programs, including the agency's Site-Specific Targeting Plan, which targets workplaces that have 40 or more employees and have reported the highest injury/illness rates.
Congress recently appropriated $80 million in the stimulus package targeted for more enforcement in various DOL agencies including OSHA, and expanded OSHA's fiscal year 2008 appropriations by $27 million for fiscal 2009 -- with explicit instructions to focus on enforcement.
Schwartz, who testified on behalf of the U.S. Chamber of Commerce at the April 30 hearings, says the EEP concept not only makes good sense, but is a practical necessity if OSHA is to fulfill its mission.
He says the business community should be involved as OSHA formulates the severe-violators program. He also says OSHA should revise the targeting criteria of its site-specific plan, which he asserts is "often misdirected."
Upcoming, increased OSHA enforcement and the potential new penalty authority makes it incumbent, particularly on major national employers with multi-site workplaces -- whom Schwartz believes OSHA will be focusing on -- to really put a top-flight compliance program in place.
It is important to hire health and safety professionals who "really understand the regulations." Schwartz says. "This stuff is not easy; the OSHA regs are very dense."
He also highlights the need to focus on injury and illness recordkeeping systems, which, he says, "are often delegated to employees who don't have a sophisticated grasp of OSHA health and safety concepts.
"Recordkeeping requires very careful work," Schwartz says, "and given the specter of increased criminal penalties, companies should be putting a lot of focus on this."
Merits of California greenhouse-gas rule debated
Automotive Engineering, April 2009
The March 5 Environmental Protection Agency (EPA) hearings on California’s request to be able to set the first greenhouse gas tailpipe emission standards in the U.S. showcased the domestic industry’s engineering advances over the past half decade. Auto manufacturers are well-positioned technologically to meet those requirements in California but would face seemingly intractable product sales mix problems in the other states which want to adopt the California standard.
Even Golden State Senator Fran Pavley, in an interview with Automotive Engineering before the hearings began, metaphorically tipped her hat to Detroit saying the industry “has moved in the right direction.” Pavley was the author of the law the Calfornia legislature passed in 2001 requiring autos to reduce greenhouse gas emissions by 30 percent by 2016. The California Air Resources Board approved a regulation in 2004 dictating the steps car makers would have to take starting in model year 2009.
Pavley was among the California environmental heavyweights who came to Crystal City, Virginia to testify at a standing-room-only EPA public hearing. California has to meet certain conditions before the EPA can grant it a GHG emissions waiver from the Clean Air Act. Stephen Johnson, the EPA administrator at the end of the Bush administration, denied the waiver request in January 2008.
On January 21, 2009, Mary Nichols, chairman of the California Air Resources Board (CARB), wrote to then EPA administrator-designee Lisa Jackson asking her to reconsider Johnson’s denial. Jackson, with President Obama’s approval, agreed and scheduled the March 5 hearing.
In an interview prior to the hearing, Tom Cackette, chief deputy executive officer for CARB said auto manufacturers will be able to meet the California standard, which calls for a 30 percent reduction in GHG emissions by 2015 without any problem. Cackette said that if the California GHG standard in 2015 was converted into a miles per gallon equivalent, it would equate to a national mpg fleet average of 33.8 which would be a bit higher in California, 35.7, because his state has a 60/40 passenger/light duty ratio whereas the nation is 70/30. The California GHG standard does not increase after 2015.
“The auto makers can absolutely meet the California standard,” Cackette said in his interview with Automotive Engineering.
Charlie Territo, a spokesman for the Alliance of Automobile Manufacturers, essentially agreed with Cackette. He said that the CAFE standards the DOT is likely to adopt differ only “negligibly” from the California GHG standard in terms of mpg requirements. The problem with California, Territo explained, is that its standard is based on a “fleet average” whereas the DOT CAFE standard is based on the size and footprint of individual models.
Territo explained that California’s “fleet-based” standards are troublesome because of their prospective impact on auto sales in different states. “The structure and framework as it applies to compliance on a state by state level creates some real difficulties,” Territo said. Thirteen states and the District of Columbia have already passed laws adopting the California GHG standard which they will impose if and when the EPA grants California a waiver. So, for example, if California’s passenger car to light truck mix is 70/30, in a more rural state like Idaho it might be 40/60. That would mean that car manufacturers would have to sell a different mix of cars and trucks in Idaho and California. Idaho consumers who might want to buy a pickup might find them in very short supply, encouraging them to shop for those pickups in California.
Territo says the problem could be solved by the U.S. adopting one national standard for GHG emissions and fuel economy. That approach was endorsed by Sen. Carl Levin (D-Michigan). With his eyeglasses halfway down his nose, he argued that greenhouse gas emissions are not “unique” to California. Therefore, the state cannot claim that those emissions pose an “extraordinary and compelling” case for a Clean Air Act waiver. “A ton of carbon emitted in California is the same as a ton of carbon emitted in any other state,” Levin stated.
President Obama has seemed to endorse the “one national standard” concept. But neither Obama nor anyone else has talked about what that standard might look like. The problem is that the CAFE standard being considered by the DOT will not come close to producing the GHG emission reductions in California (or the 13 other states and DC) that the California standard calls for.
Cackette acknowledged that technologies aimed at reducing GHG emissions don’t always help as much in improving gas mileage. For example, substituting cleaner air conditioning refrigerants helps considerably to reduce GHG emissions, but does nothing to help with CAFE standards. Using diesel fuel in an engine can lead to a 35 percent increase in fuel economy in some models, Cackette said, but only a 20 percent gain in GHG emission reduction.
However, Cackette said the state would have no problem with one national automotive emission/CAFE standard. “If it would satisfy our needs, we don’t need two standards,” he admitted. But when asked whether CARB might ease its GHG emissions standard as part of a compromise—perhaps by ditching its “fleet-average” requirement—Cackette had a one word answer. “No.”
The March 5 Environmental Protection Agency (EPA) hearings on California’s request to be able to set the first greenhouse gas tailpipe emission standards in the U.S. showcased the domestic industry’s engineering advances over the past half decade. Auto manufacturers are well-positioned technologically to meet those requirements in California but would face seemingly intractable product sales mix problems in the other states which want to adopt the California standard.
Even Golden State Senator Fran Pavley, in an interview with Automotive Engineering before the hearings began, metaphorically tipped her hat to Detroit saying the industry “has moved in the right direction.” Pavley was the author of the law the Calfornia legislature passed in 2001 requiring autos to reduce greenhouse gas emissions by 30 percent by 2016. The California Air Resources Board approved a regulation in 2004 dictating the steps car makers would have to take starting in model year 2009.
Pavley was among the California environmental heavyweights who came to Crystal City, Virginia to testify at a standing-room-only EPA public hearing. California has to meet certain conditions before the EPA can grant it a GHG emissions waiver from the Clean Air Act. Stephen Johnson, the EPA administrator at the end of the Bush administration, denied the waiver request in January 2008.
On January 21, 2009, Mary Nichols, chairman of the California Air Resources Board (CARB), wrote to then EPA administrator-designee Lisa Jackson asking her to reconsider Johnson’s denial. Jackson, with President Obama’s approval, agreed and scheduled the March 5 hearing.
In an interview prior to the hearing, Tom Cackette, chief deputy executive officer for CARB said auto manufacturers will be able to meet the California standard, which calls for a 30 percent reduction in GHG emissions by 2015 without any problem. Cackette said that if the California GHG standard in 2015 was converted into a miles per gallon equivalent, it would equate to a national mpg fleet average of 33.8 which would be a bit higher in California, 35.7, because his state has a 60/40 passenger/light duty ratio whereas the nation is 70/30. The California GHG standard does not increase after 2015.
“The auto makers can absolutely meet the California standard,” Cackette said in his interview with Automotive Engineering.
Charlie Territo, a spokesman for the Alliance of Automobile Manufacturers, essentially agreed with Cackette. He said that the CAFE standards the DOT is likely to adopt differ only “negligibly” from the California GHG standard in terms of mpg requirements. The problem with California, Territo explained, is that its standard is based on a “fleet average” whereas the DOT CAFE standard is based on the size and footprint of individual models.
Territo explained that California’s “fleet-based” standards are troublesome because of their prospective impact on auto sales in different states. “The structure and framework as it applies to compliance on a state by state level creates some real difficulties,” Territo said. Thirteen states and the District of Columbia have already passed laws adopting the California GHG standard which they will impose if and when the EPA grants California a waiver. So, for example, if California’s passenger car to light truck mix is 70/30, in a more rural state like Idaho it might be 40/60. That would mean that car manufacturers would have to sell a different mix of cars and trucks in Idaho and California. Idaho consumers who might want to buy a pickup might find them in very short supply, encouraging them to shop for those pickups in California.
Territo says the problem could be solved by the U.S. adopting one national standard for GHG emissions and fuel economy. That approach was endorsed by Sen. Carl Levin (D-Michigan). With his eyeglasses halfway down his nose, he argued that greenhouse gas emissions are not “unique” to California. Therefore, the state cannot claim that those emissions pose an “extraordinary and compelling” case for a Clean Air Act waiver. “A ton of carbon emitted in California is the same as a ton of carbon emitted in any other state,” Levin stated.
President Obama has seemed to endorse the “one national standard” concept. But neither Obama nor anyone else has talked about what that standard might look like. The problem is that the CAFE standard being considered by the DOT will not come close to producing the GHG emission reductions in California (or the 13 other states and DC) that the California standard calls for.
Cackette acknowledged that technologies aimed at reducing GHG emissions don’t always help as much in improving gas mileage. For example, substituting cleaner air conditioning refrigerants helps considerably to reduce GHG emissions, but does nothing to help with CAFE standards. Using diesel fuel in an engine can lead to a 35 percent increase in fuel economy in some models, Cackette said, but only a 20 percent gain in GHG emission reduction.
However, Cackette said the state would have no problem with one national automotive emission/CAFE standard. “If it would satisfy our needs, we don’t need two standards,” he admitted. But when asked whether CARB might ease its GHG emissions standard as part of a compromise—perhaps by ditching its “fleet-average” requirement—Cackette had a one word answer. “No.”
Obama's Renewables Boost
Renewable Energy Focus, March-April 2009
http://e-ditionsbyfry.com/Olive/AM3/RRF/Default.htm?href=RRF/2009/03/01
Stimulus Plan Includes Spending and Tax Breaks for Renewables
The economic stimulus package passed by the U.S. Congress in mid-February has numerous provisions aimed at boosting the renewable energy industry; but some may be more useful than others, depending on what exactly a company does. The tax credit extensions will be most useful to big utilities such as Southern California Edison (SCE) who have made a concerted push into renewable generation and—this is the important part—have profits which make the tax credits useful. Emerging solar and wind companies such as BrightSource—which announced a big deal with SCE in February to build seven projects worth a total of 1.3 gigawatts—are engineering companies and unprofitable, so the credits can’t be used. But there is a new “clean energy manufacturing” tax credit in the bill which is targeted at companies who make wind turbines and solar panels. In addition, the legislation contains $6 billion for a troubled Department of Energy loan guarantee which is suppose to provide loans to companies such as BrightSource (see separate item below).
Utilities moving to include renewables in their portfolio will undoubtedly be aided by extension of the wind-power-dedicated Production Tax Credit (PTC) from December 31, 2009 to December 31, 2012. The bill also would extend the placed-in-service sunset dates for closed-loop biomass, open-loop biomass, geothermal, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities from December 31, 2010 (2011 in the case of marine and hydrokinetic renewable energy facilities) to December 31, 2013. This is a $13 billion provision over 10 years, and was one of the major tax provisions in the bill. “One of the key elements of the stimulus package is the Production Tax Credit extension,” says Vanessa McGrady, a spokeswoman for SCE. “That is key to meeting our goals with projects already contracted and in development over the next couple of years.”
But the PTC doesn’t do emerging wind power producers—as opposed to the utilities who buy the wind—much good. Don Furman, senior vice president for development, transmission, and policy for Iberdrola Renewables, Inc., says companies like his have had to form tax equity partnerships with companies who had a large amount of taxable income. These were large Wall Street companies. The collapse of large finance companies has wiped away even the opportunity to use the PTC and the Investment Tax Credit (ITC), which is a smaller benefit anyway. Iberdrola is America’s second-largest developer and operator of wind energy generating facilities. The ITC, though, is generally available to only solar companies.
Furman’s criticism explains why Congress included a provision in the bill which allows a company to convert an unusable PTC or ITC into a federal grant. Companies would be eligible for the conversion grants for property placed in service in 2009 and 2010. Property placed in service after 2010 and on or before the applicable credit termination date could qualify for the grants, but only if construction began in 2009 or 2010. The amount of a grant generally would be equal to the amount of the ITC for which the owner of the project otherwise would have been eligible (i.e., generally 30% of the qualified cost of the project, but 10% of the qualified cost of geothermal, qualified microturbine, combined heat and power system, and geothermal heat pump property).
Greg Wetstone, senior director of governmental affairs for the American Wind Energy Association (AWEA), calls that grant conversion provision “very useful” for companies who don’t have enough tax liability to use the PTC. He says it is hard to know exactly what will be available in grants, but notes that an estimate last year suggested that the ITC would cost the Treasury $4.5 billion in 2009.
Congress Implored to Change or Scuttle DOE Loan Guarantee Program
Now that Congress has passed an economic stimulus package, it will turn its attention to major energy legislation. A top priority there will be, at a minimum, changes to the current Department of Energy loan guarantee program, created by the 2005 Energy Policy Act. Section 17 of that bill gave the DOE authority to fund $4 billion worth of loans for renewable energy projects such as BrightSource Energy’s two solar facilities in the Mojave Desert which will supply power to Pacific Gas & Electric. Totaling 300 megawatts, the two would be the first facilities built by BrightSource, which submitted an application in 2006 to DOE for loan guarantees to be used in the Mojave construction. Two and a half years later, DOE has still not made any loans guarantees, to Mojave or anyone else. But Keely Wachs, a BrightSource spokesman, says the company has been told that it is one of 11 applicants in the running for guarantees. Wachs declines to say whether BrightSource needs the loans—which would come from a bank--to build those two solar facilities.
David Frantz, the director of the DOE program, told the Senate Energy Committee on February 12 that Energy Secretary Steven Chu has ordered him to “accelerate progress immediately” in awarding the first guarantees. But both Frantz and Andy Karsner, a former assistant secretary of energy and now a fellow at the Council on Competitiveness, ticked off numerous problems which have left the program a morass. Chief among those problems, and this is Congress’s fault, is that applicants themselves, like BrightSource, have to pay what Karsner described as “exorbitant” fees as part of their applications. Karnser advocated throwing the current Section 17 program in the garbage and starting fresh with a Clean Energy Bank, which could be established in whatever energy bill Congress passes.
Cabinet Secretary Stresses Wind and Wave Energy Development Offshore
Ken Salazar, the new secretary of the Department of Interior, made waves in Washington on February 10 when he announced a new initiative to include wind and wave energy development as part of the federal government’s long-term plan to develop offshore energy resources. The departing Bush Interior Department had proposed a five-year offshore development plan on January 16, its last business day in office. The proposed plan—for the five year period starting in 2012—for the first time incorporated new offshore areas now available because of the elimination of long-term congressional and presidential moratoriums on offshore development. Salazar criticized the Bush administration proposed rule for two reasons: for focusing almost exclusively on oil and gas development in the 300 million acres offshore which would, for the first time, be open to development and for the compressed deadlines for doing the preliminary work on the five year plan, which, again, would not go into effect until 2012. “It was a headlong rush of the worst kind,” Salazar complained. “It was a process tilted toward the usual energy players while renewable energy companies and the interests of American consumers and taxpayers were overlooked.”
On a parallel track with revising Bush’s proposed five year plan Salazar plans to issue a final rule which would lay out a framework for offshore renewable energy development “so that we incorporate the great potential for wind, wave, and ocean current energy into our offshore energy strategy.” The 2005 Energy Policy Act included an amendment requiring the Department of the Interior to move quickly and issue, within nine months, rules and regulations to guide the development of offshore energy resources like wind, wave, and tidal power. It took the Bush Administration three years to prepare a proposed rule for offshore renewable energy development. Bush left office without putting any final regulations in place. Salazar plans to issue a final rule within the next few months.
The Bush proposed rule on renewables drew criticism from utilities such as Florida Power & Light, which owns NextEra Energy Resources, a major wind energy generator across the U.S. In comments to the Minerals Management Service, which issued the proposed rule for the Interior Department, FPL said the production payment structure proposed by MMS “will likely hinder the development of ocean energy technologies. The proposed structure resembles that of a mature industry, one that is already cost competitive and reliable.”
Renewable Advocate Takes Over Key Agency
It is not just cabinet secretaries who are talking about renewable energy development, so are newly-appointed heads of federal regulatory agencies. None is more outspoken on the issue than Jon Wellinghoff, whom President Obama appointed as the acting chairman of the Federal Energy Regulatory Commission (FERC). Wellinghoff came to FERC in 2006, first appointed by President George W. Bush. Wellinghoff made his name as primary author of the Nevada state’s renewable portfolio standard (RPS). He received a full, five-year term in December 2007, and quickly became a vocal advocate at FERC for wind and solar power. But betting men are placing big money on Obama removing the “acting” designation from Wellinghoff’s title. That is because the former Nevada Consumer Advocate for Customers of Public Utilities is very close politically to Sen. Harry Reid (D-Nev.), the Senate majority leader.
Of course, at the moment, there is no U.S. RPS, a shortcoming the Congress is expected to remedy this year (see item below). Wellinghoff has talked incessantly about implementing “demand response” describing it as the “glue” that can “stabilize the grid, allow us to bring in a lot of variable energy resources like wind and solar, and allow us to do that in a way that the grid remains reliable,” he told the EnergyWashington newsletter.
But Wellinghoff hasn’t just “talked the talk,” he has “walked the walk.” Last September, he was the only one of five commissioners to vote against the Bradwood Landing liquid natural gas (LNG) project. There he disputed the FERC staff’s own environmental impact statement (EIS), which he said underestimated the amount of wind and solar energy which was available as an alternative to the new LNG terminal and associated pipeline. In mid-January, two weeks before being appointed “acting,” he again was the sole “no” vote against the AES Sparrows Point LNG facility near Baltimore. There he underlined the importance of taking federal action which would help states in the region meet their own RPS requirements, which would not be satisfied by LNG.
National RPS Likely in 2009; But Questions Raised about Particulars
Congress has played kicked the can with a Renewable Portfolio Standard (RPS) in the last four Congresses, with either the House or Senate passing legislation, and kicking it over to the other side of Capitol Hill, only to see the bill get squashed. That is not likely to happen in the new 111th Congress, given the wider Democratic majorities and a more supportive occupant of the White House, Barack Obama.
The process is already moving forward in the Senate, where an Energy Committee staff draft was vetted at hearings in that committee on February 10. That draft looked very similar to past legislation, with some exceptions. The draft’s main feature parallels the legislation introduced in the House by Reps. Ed Markey (D-Mass) and Todd Platts (R-Pa.) called the American Renewable Energy Act, except the Senate sets a goal of 16 percent of power from renewables in year 2020 while Markey makes it 17. 5 percent. There are some differences in later years, too, with the Senate staying at 20 percent in 2021-2029 and Markey going higher. The emerging Senate plan backed by Senate Energy Committee Chairman Sen. Jeff Bingaman (D-N.M.) has a controversial provision, not in the Markey bill, which allows up to one-quarter of the requirement for renewable generation to come from energy efficiency. That was inserted in the bill to assuage states, particularly in the southeastern portion of the U.S., who argue their renewable resources are scarce.
At the hearings in the committee on February 10, Ralph Izzo, president, chairman and CEO of Public Service Enterprise Group, said he supported the 20 percent requirement, which matches the New Jersey RPS. However, he opposed including energy conservation gains in the 20 percent. PSEG owns and operates approximately 17,000 megawatts of electric generating capacity concentrated in the Northeast, Mid-Atlantic and Texas.
Izzo said his company had filed a petition that same day with the New Jersey state regulators asking to be able to invest almost $800 million in solar generation over the next five years. That will include putting solar generation on brownfields, low-income housing and government buildings. It also will include roughly 200,000 solar installations on top of our utility poles. That is in addition to the more than $100 million PSEG is already investing in solar generation.
Izzo’s position in favor of a RPS set him apart from the mainline trade association representing investor-owned electric utilities in the U.S., the Edison Electric Institute (EEI). The EEI opposed previous bills which passed the House and Senate, generally arguing that a RPS would be “essentially a tax on many electricity customers.” The National Association of Manufacturers has also opposed a federal RPS mandate.
http://e-ditionsbyfry.com/Olive/AM3/RRF/Default.htm?href=RRF/2009/03/01
Stimulus Plan Includes Spending and Tax Breaks for Renewables
The economic stimulus package passed by the U.S. Congress in mid-February has numerous provisions aimed at boosting the renewable energy industry; but some may be more useful than others, depending on what exactly a company does. The tax credit extensions will be most useful to big utilities such as Southern California Edison (SCE) who have made a concerted push into renewable generation and—this is the important part—have profits which make the tax credits useful. Emerging solar and wind companies such as BrightSource—which announced a big deal with SCE in February to build seven projects worth a total of 1.3 gigawatts—are engineering companies and unprofitable, so the credits can’t be used. But there is a new “clean energy manufacturing” tax credit in the bill which is targeted at companies who make wind turbines and solar panels. In addition, the legislation contains $6 billion for a troubled Department of Energy loan guarantee which is suppose to provide loans to companies such as BrightSource (see separate item below).
Utilities moving to include renewables in their portfolio will undoubtedly be aided by extension of the wind-power-dedicated Production Tax Credit (PTC) from December 31, 2009 to December 31, 2012. The bill also would extend the placed-in-service sunset dates for closed-loop biomass, open-loop biomass, geothermal, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities from December 31, 2010 (2011 in the case of marine and hydrokinetic renewable energy facilities) to December 31, 2013. This is a $13 billion provision over 10 years, and was one of the major tax provisions in the bill. “One of the key elements of the stimulus package is the Production Tax Credit extension,” says Vanessa McGrady, a spokeswoman for SCE. “That is key to meeting our goals with projects already contracted and in development over the next couple of years.”
But the PTC doesn’t do emerging wind power producers—as opposed to the utilities who buy the wind—much good. Don Furman, senior vice president for development, transmission, and policy for Iberdrola Renewables, Inc., says companies like his have had to form tax equity partnerships with companies who had a large amount of taxable income. These were large Wall Street companies. The collapse of large finance companies has wiped away even the opportunity to use the PTC and the Investment Tax Credit (ITC), which is a smaller benefit anyway. Iberdrola is America’s second-largest developer and operator of wind energy generating facilities. The ITC, though, is generally available to only solar companies.
Furman’s criticism explains why Congress included a provision in the bill which allows a company to convert an unusable PTC or ITC into a federal grant. Companies would be eligible for the conversion grants for property placed in service in 2009 and 2010. Property placed in service after 2010 and on or before the applicable credit termination date could qualify for the grants, but only if construction began in 2009 or 2010. The amount of a grant generally would be equal to the amount of the ITC for which the owner of the project otherwise would have been eligible (i.e., generally 30% of the qualified cost of the project, but 10% of the qualified cost of geothermal, qualified microturbine, combined heat and power system, and geothermal heat pump property).
Greg Wetstone, senior director of governmental affairs for the American Wind Energy Association (AWEA), calls that grant conversion provision “very useful” for companies who don’t have enough tax liability to use the PTC. He says it is hard to know exactly what will be available in grants, but notes that an estimate last year suggested that the ITC would cost the Treasury $4.5 billion in 2009.
Congress Implored to Change or Scuttle DOE Loan Guarantee Program
Now that Congress has passed an economic stimulus package, it will turn its attention to major energy legislation. A top priority there will be, at a minimum, changes to the current Department of Energy loan guarantee program, created by the 2005 Energy Policy Act. Section 17 of that bill gave the DOE authority to fund $4 billion worth of loans for renewable energy projects such as BrightSource Energy’s two solar facilities in the Mojave Desert which will supply power to Pacific Gas & Electric. Totaling 300 megawatts, the two would be the first facilities built by BrightSource, which submitted an application in 2006 to DOE for loan guarantees to be used in the Mojave construction. Two and a half years later, DOE has still not made any loans guarantees, to Mojave or anyone else. But Keely Wachs, a BrightSource spokesman, says the company has been told that it is one of 11 applicants in the running for guarantees. Wachs declines to say whether BrightSource needs the loans—which would come from a bank--to build those two solar facilities.
David Frantz, the director of the DOE program, told the Senate Energy Committee on February 12 that Energy Secretary Steven Chu has ordered him to “accelerate progress immediately” in awarding the first guarantees. But both Frantz and Andy Karsner, a former assistant secretary of energy and now a fellow at the Council on Competitiveness, ticked off numerous problems which have left the program a morass. Chief among those problems, and this is Congress’s fault, is that applicants themselves, like BrightSource, have to pay what Karsner described as “exorbitant” fees as part of their applications. Karnser advocated throwing the current Section 17 program in the garbage and starting fresh with a Clean Energy Bank, which could be established in whatever energy bill Congress passes.
Cabinet Secretary Stresses Wind and Wave Energy Development Offshore
Ken Salazar, the new secretary of the Department of Interior, made waves in Washington on February 10 when he announced a new initiative to include wind and wave energy development as part of the federal government’s long-term plan to develop offshore energy resources. The departing Bush Interior Department had proposed a five-year offshore development plan on January 16, its last business day in office. The proposed plan—for the five year period starting in 2012—for the first time incorporated new offshore areas now available because of the elimination of long-term congressional and presidential moratoriums on offshore development. Salazar criticized the Bush administration proposed rule for two reasons: for focusing almost exclusively on oil and gas development in the 300 million acres offshore which would, for the first time, be open to development and for the compressed deadlines for doing the preliminary work on the five year plan, which, again, would not go into effect until 2012. “It was a headlong rush of the worst kind,” Salazar complained. “It was a process tilted toward the usual energy players while renewable energy companies and the interests of American consumers and taxpayers were overlooked.”
On a parallel track with revising Bush’s proposed five year plan Salazar plans to issue a final rule which would lay out a framework for offshore renewable energy development “so that we incorporate the great potential for wind, wave, and ocean current energy into our offshore energy strategy.” The 2005 Energy Policy Act included an amendment requiring the Department of the Interior to move quickly and issue, within nine months, rules and regulations to guide the development of offshore energy resources like wind, wave, and tidal power. It took the Bush Administration three years to prepare a proposed rule for offshore renewable energy development. Bush left office without putting any final regulations in place. Salazar plans to issue a final rule within the next few months.
The Bush proposed rule on renewables drew criticism from utilities such as Florida Power & Light, which owns NextEra Energy Resources, a major wind energy generator across the U.S. In comments to the Minerals Management Service, which issued the proposed rule for the Interior Department, FPL said the production payment structure proposed by MMS “will likely hinder the development of ocean energy technologies. The proposed structure resembles that of a mature industry, one that is already cost competitive and reliable.”
Renewable Advocate Takes Over Key Agency
It is not just cabinet secretaries who are talking about renewable energy development, so are newly-appointed heads of federal regulatory agencies. None is more outspoken on the issue than Jon Wellinghoff, whom President Obama appointed as the acting chairman of the Federal Energy Regulatory Commission (FERC). Wellinghoff came to FERC in 2006, first appointed by President George W. Bush. Wellinghoff made his name as primary author of the Nevada state’s renewable portfolio standard (RPS). He received a full, five-year term in December 2007, and quickly became a vocal advocate at FERC for wind and solar power. But betting men are placing big money on Obama removing the “acting” designation from Wellinghoff’s title. That is because the former Nevada Consumer Advocate for Customers of Public Utilities is very close politically to Sen. Harry Reid (D-Nev.), the Senate majority leader.
Of course, at the moment, there is no U.S. RPS, a shortcoming the Congress is expected to remedy this year (see item below). Wellinghoff has talked incessantly about implementing “demand response” describing it as the “glue” that can “stabilize the grid, allow us to bring in a lot of variable energy resources like wind and solar, and allow us to do that in a way that the grid remains reliable,” he told the EnergyWashington newsletter.
But Wellinghoff hasn’t just “talked the talk,” he has “walked the walk.” Last September, he was the only one of five commissioners to vote against the Bradwood Landing liquid natural gas (LNG) project. There he disputed the FERC staff’s own environmental impact statement (EIS), which he said underestimated the amount of wind and solar energy which was available as an alternative to the new LNG terminal and associated pipeline. In mid-January, two weeks before being appointed “acting,” he again was the sole “no” vote against the AES Sparrows Point LNG facility near Baltimore. There he underlined the importance of taking federal action which would help states in the region meet their own RPS requirements, which would not be satisfied by LNG.
National RPS Likely in 2009; But Questions Raised about Particulars
Congress has played kicked the can with a Renewable Portfolio Standard (RPS) in the last four Congresses, with either the House or Senate passing legislation, and kicking it over to the other side of Capitol Hill, only to see the bill get squashed. That is not likely to happen in the new 111th Congress, given the wider Democratic majorities and a more supportive occupant of the White House, Barack Obama.
The process is already moving forward in the Senate, where an Energy Committee staff draft was vetted at hearings in that committee on February 10. That draft looked very similar to past legislation, with some exceptions. The draft’s main feature parallels the legislation introduced in the House by Reps. Ed Markey (D-Mass) and Todd Platts (R-Pa.) called the American Renewable Energy Act, except the Senate sets a goal of 16 percent of power from renewables in year 2020 while Markey makes it 17. 5 percent. There are some differences in later years, too, with the Senate staying at 20 percent in 2021-2029 and Markey going higher. The emerging Senate plan backed by Senate Energy Committee Chairman Sen. Jeff Bingaman (D-N.M.) has a controversial provision, not in the Markey bill, which allows up to one-quarter of the requirement for renewable generation to come from energy efficiency. That was inserted in the bill to assuage states, particularly in the southeastern portion of the U.S., who argue their renewable resources are scarce.
At the hearings in the committee on February 10, Ralph Izzo, president, chairman and CEO of Public Service Enterprise Group, said he supported the 20 percent requirement, which matches the New Jersey RPS. However, he opposed including energy conservation gains in the 20 percent. PSEG owns and operates approximately 17,000 megawatts of electric generating capacity concentrated in the Northeast, Mid-Atlantic and Texas.
Izzo said his company had filed a petition that same day with the New Jersey state regulators asking to be able to invest almost $800 million in solar generation over the next five years. That will include putting solar generation on brownfields, low-income housing and government buildings. It also will include roughly 200,000 solar installations on top of our utility poles. That is in addition to the more than $100 million PSEG is already investing in solar generation.
Izzo’s position in favor of a RPS set him apart from the mainline trade association representing investor-owned electric utilities in the U.S., the Edison Electric Institute (EEI). The EEI opposed previous bills which passed the House and Senate, generally arguing that a RPS would be “essentially a tax on many electricity customers.” The National Association of Manufacturers has also opposed a federal RPS mandate.
California delay provides temporary relief
Published in Packaging World Magazine, February 2009 , p. 47
Written by Steve Barlas, Contributing Editor
Uncertainty colored most discussions at a recent healthcare track-and-trace conference. A key question: How will FDA actions differ from California’s e-pedigree program?
It was clear that packagers attending the “RFID Track and Trace” conference sponsored on November 16-18 by the Healthcare Distribution Management Assn. and the National Assn. of Chain Drug Stores were breathing a sigh of relief now that California has (again) delayed implementation deadlines for its mass serialization/e-pedigree requirement. Yet there was considerable concern about how congressional legislation and Food and Drug Administration action might affect the California program and whether new standards from international groups might impose new software and hardware costs on companies that had already spent money on track-and-trace databases.
Moreover, there was a quiet notion afoot that California’s decision to allow “inference” into the e-pedigree process might have dealt a momentary blow to manufacturers who had been betting on RFID. For those not familiar with the term’s use in this context, inference is all about confidence. For example, suppose a drug maker puts 48 uniquely serialized bottles into a case that has a 2D bar code associating the 48 bottles with the case. The distributor receiving the case can scan the case code and infer that the 48 unique serial numbers on the bottles are being received into the e-pedigree system even though each individual bottle has not been scanned. If indeed inference becomes part of the California legislation, the need for RFID as the tagging method of choice becomes less critical because there is no need to scan each individual bottle.
Guesswork about inference aside, Jeffrey Shuren, FDA associate commissioner, made it clear at the conference that FDA—which will be publishing a numerical identifier standard no later than March 2010—still prefers an RFID e-pedigree solution.
Typical of the uncertainty circulating at the conference was the presentation of Ron Yakubison, associate director for packaging facilities and equipment technology at Merck, which completed two separate e-pedigree projects at the end of 2007, one with RFID tagging, the other with 2D bar codes. The RFID tagging pilot involving Fosamex, Merck’s osteoporosis drug, was conducted at Merck’s manufacturing site in Arecibo, Puerto Rico. There, 13.56 mhz RFID tags and 2D datamatrix bar codes were put on item-level labels that were then applied to each 70-mg “wallet” of Fosamex, each of which received a serialized numerical identifier. Ten wallets were then bundled, the identifiers for the bundle and each wallet were “synched up” on the packaging line, and then 18 bundles went into a case, for a total of 180 wallets. The cases were labeled with UHF Gen2 tags, 2D datamatrix bar codes, and linear bar codes.
To accommodate the RFID pilot, Merck made significant investments to one of its multiple Fosamex Arecibo packaging lines, including adding six new systems such as a line management system, a tag commissioning station, and a Quality Assurance work station. Yakubison estimated the costs at $900,000 to $1.1 million, but noted Merck’s costs for the Fosamex line may be considerably more or less than another company’s costs for line conversion, depending, for example, on whether an existing labeler can be upgraded. In addition, there are “infrastructure” costs over and above packaging line conversion, such as setting up a data repository, although those costs would be spread out over multiple RFID lines.
Asked whether Merck would be instituting another pilot with other products, Yakubison alluded to a “high-speed bottle line.” But he declined to be specific. He implied Merck’s next big challenge was deciding on a drug pedigree messaging standard. Merck is one of the few large drug companies that hasn’t selected Axway or SupplyScape as its e-pedigree software provider. Both Axway and SupplyScape sell e-pedigree systems designed to meet Florida’s requirement, which essentially was for a detailed paper pedigree that could be embedded into an electronic document. The thinking back then was that printed information was more secure than an electronic version. Other states adopted Florida’s “paper pedigree” strategy. But California essentially blew that strategy out of the water, creating the need for a track-and-trace standard, which GS1 is now developing, and which may be ready as part of whatever standards the federal government issues in March 2010.
That deadline was dictated by the FDA Amendments Act of 2007, which requires the FDA to publish a standard for identification, validation, authentication, and tracking and tracing of prescription drugs via a “standardized numerical identifier on each drug package.”
FDA’s Shuren spoke at the conference, and a standing-room only audience of 200-plus hung on his every word. He said the FDA was likely to adopt whatever industry standard was ratified for mass serialization. That is likely to be the standard published by EPCglobal, the standards group. It is in the home stretch of finalizing a numerical serialization standard for the drug industry. Up until now, manufacturers doing pilot programs on serialization—such as Merck—have simply made up their own numbers. The controversy within EPCglobal has been over whether to include the National Drug Code (NDC) number as part of the serial number at the unit-dose level. Wholesalers have been in favor of that, but manufacturers have opposed it because they thought it might enhance the chances that some RFID pirate could steal the NDC numbers off an individual’s drug vial, violating their privacy, which has been an issue particularly with regard to AIDS drugs. The wholesalers wanted the NDC embedded in the serial number because it allows them to have more flexibility automation-wise in a warehouse.
The FDA March 2010 deadline only applies to standards, not implementation. With regard to the latter, though, Congress is likely to either endorse the California implementation schedule as a national schedule or modify it. Shuren said he expected Congress to pass this year a version of the Safeguarding America’s Pharmaceuticals Act sponsored by Reps. Steve Buyer (R-IN) and Jim Matheson (D-UT). That requires the FDA to develop a list of “high-risk for being counterfeited” drugs and then requires the manufacturers to tag those drugs with a unique numerical identifier, similar to the requirement in the FDA. The actual timetable for compliance is a little foggy based on the bill’s language, something that the two sponsors were expected to clear up in a new version of the bill.
The version of Buyer-Matheson from 2008 pre-empted the California law; but with California making significant modifications last September in its timetable, it is more likely that the 2009 version of Buyer-Matheson will just adopt the California program, since the industry agreed to its requirements in return for the relaxed implementation timetable. The bill California Governor Arnold Schwarzenegger signed on September 30, 2008, requires that pharmaceutical manufacturers doing business in California serialize all item-level packages and pass an e-pedigree for half their packages by January 1, 2015, and the remaining half one year later. For distributors to be able to “read” e-pedigrees, the deadline is July 2016. Pharmacies must be able to authenticate those pedigrees by July 2017.
“I don’t know why they would want to reinvent the wheel,” FDA’s Shuren said about Congress.
Although any FDA standard will probably be technology-neutral, the FDA has long backed the use of RFID tags on drug packages. Shuren seemed to emphasize the agency’s preference for RFID when he noted that the agency has found no diminution of drug quality from the electromagnetic interference associated with RF waves penetrating dosage forms.
Written by Steve Barlas, Contributing Editor
Uncertainty colored most discussions at a recent healthcare track-and-trace conference. A key question: How will FDA actions differ from California’s e-pedigree program?
It was clear that packagers attending the “RFID Track and Trace” conference sponsored on November 16-18 by the Healthcare Distribution Management Assn. and the National Assn. of Chain Drug Stores were breathing a sigh of relief now that California has (again) delayed implementation deadlines for its mass serialization/e-pedigree requirement. Yet there was considerable concern about how congressional legislation and Food and Drug Administration action might affect the California program and whether new standards from international groups might impose new software and hardware costs on companies that had already spent money on track-and-trace databases.
Moreover, there was a quiet notion afoot that California’s decision to allow “inference” into the e-pedigree process might have dealt a momentary blow to manufacturers who had been betting on RFID. For those not familiar with the term’s use in this context, inference is all about confidence. For example, suppose a drug maker puts 48 uniquely serialized bottles into a case that has a 2D bar code associating the 48 bottles with the case. The distributor receiving the case can scan the case code and infer that the 48 unique serial numbers on the bottles are being received into the e-pedigree system even though each individual bottle has not been scanned. If indeed inference becomes part of the California legislation, the need for RFID as the tagging method of choice becomes less critical because there is no need to scan each individual bottle.
Guesswork about inference aside, Jeffrey Shuren, FDA associate commissioner, made it clear at the conference that FDA—which will be publishing a numerical identifier standard no later than March 2010—still prefers an RFID e-pedigree solution.
Typical of the uncertainty circulating at the conference was the presentation of Ron Yakubison, associate director for packaging facilities and equipment technology at Merck, which completed two separate e-pedigree projects at the end of 2007, one with RFID tagging, the other with 2D bar codes. The RFID tagging pilot involving Fosamex, Merck’s osteoporosis drug, was conducted at Merck’s manufacturing site in Arecibo, Puerto Rico. There, 13.56 mhz RFID tags and 2D datamatrix bar codes were put on item-level labels that were then applied to each 70-mg “wallet” of Fosamex, each of which received a serialized numerical identifier. Ten wallets were then bundled, the identifiers for the bundle and each wallet were “synched up” on the packaging line, and then 18 bundles went into a case, for a total of 180 wallets. The cases were labeled with UHF Gen2 tags, 2D datamatrix bar codes, and linear bar codes.
To accommodate the RFID pilot, Merck made significant investments to one of its multiple Fosamex Arecibo packaging lines, including adding six new systems such as a line management system, a tag commissioning station, and a Quality Assurance work station. Yakubison estimated the costs at $900,000 to $1.1 million, but noted Merck’s costs for the Fosamex line may be considerably more or less than another company’s costs for line conversion, depending, for example, on whether an existing labeler can be upgraded. In addition, there are “infrastructure” costs over and above packaging line conversion, such as setting up a data repository, although those costs would be spread out over multiple RFID lines.
Asked whether Merck would be instituting another pilot with other products, Yakubison alluded to a “high-speed bottle line.” But he declined to be specific. He implied Merck’s next big challenge was deciding on a drug pedigree messaging standard. Merck is one of the few large drug companies that hasn’t selected Axway or SupplyScape as its e-pedigree software provider. Both Axway and SupplyScape sell e-pedigree systems designed to meet Florida’s requirement, which essentially was for a detailed paper pedigree that could be embedded into an electronic document. The thinking back then was that printed information was more secure than an electronic version. Other states adopted Florida’s “paper pedigree” strategy. But California essentially blew that strategy out of the water, creating the need for a track-and-trace standard, which GS1 is now developing, and which may be ready as part of whatever standards the federal government issues in March 2010.
That deadline was dictated by the FDA Amendments Act of 2007, which requires the FDA to publish a standard for identification, validation, authentication, and tracking and tracing of prescription drugs via a “standardized numerical identifier on each drug package.”
FDA’s Shuren spoke at the conference, and a standing-room only audience of 200-plus hung on his every word. He said the FDA was likely to adopt whatever industry standard was ratified for mass serialization. That is likely to be the standard published by EPCglobal, the standards group. It is in the home stretch of finalizing a numerical serialization standard for the drug industry. Up until now, manufacturers doing pilot programs on serialization—such as Merck—have simply made up their own numbers. The controversy within EPCglobal has been over whether to include the National Drug Code (NDC) number as part of the serial number at the unit-dose level. Wholesalers have been in favor of that, but manufacturers have opposed it because they thought it might enhance the chances that some RFID pirate could steal the NDC numbers off an individual’s drug vial, violating their privacy, which has been an issue particularly with regard to AIDS drugs. The wholesalers wanted the NDC embedded in the serial number because it allows them to have more flexibility automation-wise in a warehouse.
The FDA March 2010 deadline only applies to standards, not implementation. With regard to the latter, though, Congress is likely to either endorse the California implementation schedule as a national schedule or modify it. Shuren said he expected Congress to pass this year a version of the Safeguarding America’s Pharmaceuticals Act sponsored by Reps. Steve Buyer (R-IN) and Jim Matheson (D-UT). That requires the FDA to develop a list of “high-risk for being counterfeited” drugs and then requires the manufacturers to tag those drugs with a unique numerical identifier, similar to the requirement in the FDA. The actual timetable for compliance is a little foggy based on the bill’s language, something that the two sponsors were expected to clear up in a new version of the bill.
The version of Buyer-Matheson from 2008 pre-empted the California law; but with California making significant modifications last September in its timetable, it is more likely that the 2009 version of Buyer-Matheson will just adopt the California program, since the industry agreed to its requirements in return for the relaxed implementation timetable. The bill California Governor Arnold Schwarzenegger signed on September 30, 2008, requires that pharmaceutical manufacturers doing business in California serialize all item-level packages and pass an e-pedigree for half their packages by January 1, 2015, and the remaining half one year later. For distributors to be able to “read” e-pedigrees, the deadline is July 2016. Pharmacies must be able to authenticate those pedigrees by July 2017.
“I don’t know why they would want to reinvent the wheel,” FDA’s Shuren said about Congress.
Although any FDA standard will probably be technology-neutral, the FDA has long backed the use of RFID tags on drug packages. Shuren seemed to emphasize the agency’s preference for RFID when he noted that the agency has found no diminution of drug quality from the electromagnetic interference associated with RF waves penetrating dosage forms.
Groups to Push for Expanded Role for Pharmacists
Pharmacy & Therapeutics Journal, January 2009
Medicare, SCHIP and Health Insurance Debates Present Ample Opportunities
Medicare, SCHIP and Health Insurance Debates Present Ample Opportunities
The pharmaceutical industry faces a radically different political environment in Washington in 2009 than at any time in the recent past; but opportunities and threats differ from sector to sector. Barack Obama’s ascension to the White House, the fattening of the Democratic majority in Congress and the shift in leadership of at least one key committee signals the acceleration of three trends: a shift in emphasis from treatment of disease to prevention, from brand-name drugs to generics and to comparative research on which brand-name drugs really work. These trends will likely highlight the value of pharmacists, for example, and undercut the appeal of brand-name drugs, to mention the prospects for two sectors, for example.
What will be a new emphasis on prevention and better-informed patients presents the opportunity for pharmacists to get federal backing to elevate their role from prescription fillers to health care advisors. “There is going to be an emphasis on prevention in any legislation targeting the uninsured and that means there will be opportunities for advancing the health care role of pharmacists,” says John M. Coster, vice president, federal affairs and public policy, RiteAid. “There will be a concerted effort in 2009 among pharmacy groups to push for direct payment of pharmacists for medication therapy management (MTM) and immunization services, including by Medicare.” But the health insurance industry is expected to lobby hard against new, discrete payments to pharmacists since, with regard to Medicare, it receives payments directly for MTM services which can be provided by any health professional, not just pharmacists.
There will be numerous legislative opportunities for pharmacists to expand their roles in both private and federal health programs. A Medicare Part D “reform” bill will probably move much more quickly than an “uninsured” bill because the House passed such a bill—its main feature was allowing the federal government to negotiate Medicare drug prices directly with drug companies--in 2007 only to see it derailed in the Senate by Republican opposition and a George W. Bush veto threat. The Democrats have, at this writing—with the occupants of two seats still in doubt—58 votes in the Senate, including those of two independents, Sens. Joe Lieberman (Conn.) and Bernie Sanders (Vt.), who caucus with the Democrats. In addition, a couple of Senate Republicans remaining in Congress voted for the Medicare Part D reform bill in 2007. The question for that bill, as for State Childrens’ Health Insurance Program (SCHIP), which is a “must pass” because of the impending expiration of the program’s authorization in March, is just how many pharmaceutical amendments will be attached to those legislative vehicles.
As with the potential expansion of the role of pharmacists, the tightening or loosening of restrictions on Medicare formulary policies are probably also up for grabs as in the form of amendments to either a Part D or SCHIP bill. The issue cropped up in 2008 because of passage last summer of the Medicare Improvement for Patients and Providers Act of 2008 (MIPPA). The main purpose of that bill was to eliminate a big cut in Medicare pay for physicians in the second half of 2008 and calendar 2009, and replace it with a minimal increase. The bill was introduced in June and passed within weeks without any hearings being held because of a June 30 deadline for a precipitous decline in physician pay. The frenzy surrounding the bill made it an appealing target for all sorts of amendments which Congress, had it acted in a more purposeful manner, might not have considered, much less passed.
Drug manufacturers, aligned with patients’ and some physicians’ advocacy groups, used the haphazard environment to get an amendment attached to the MIPPA which could potentially expand the Part D formulary program. Currently, Medicare has a limited “mandated” formulary, established by way of guidance issued by the Centers for Medicare and Medicaid Services, which says all Part D drug plans are required to provide “all or substantially all” medications within six classifications: including the immunosuppressants, antidepressants, antipsychotics, anticonvulsants, antiretrovirals and antineoplastics. That guidance was issued at the beginning of 2006, when the Medicare outpatient drug benefit kicked in. The guidance was established to protect the stream of fragile Medicaid recipients who were being transferred to the Part D program, the so-called “dual eligibles,” so that whether they were being treated for depression, psychosis or any of the other four conditions, they would not be taken off their current medication.
Patients’ groups and drug manufacturers wanted a more permanent, and potentially broader, Medicare formulary program. That is where section 176 of the MIPPA came in. It cancelled the six categories—because dual eligibles are no longer coming into Part D—and set up a new process whereby the secretary of the Department of Health and Human Services designates drug classes which meet both of two conditions: 1) Restricted access to drugs in the category or class would have major or life threatening clinical consequences for individuals who have a disease or disorder treated by the drugs in such category or class and 2) there is significant clinical need for such individuals to have access to multiple drugs within a category or class due to unique chemical actions and pharmacological effects of the drugs within the category or class, such as drugs used in the treatment of cancer. Formularies would have to provide all available drugs in each of those categories, although exceptions could be made. The secretary could designate as many categories as applicable with the hope of drug companies and patients groups being that the number would be far beyond six.
Among those who have had second thoughts about some provisions in the MIPPA is Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee. He wrote a technical corrections bill which would make some ostensibly minor changes—that is why it is called a “technical corrections” bill--including eliminating Section 176. The Baucus bill would simply reinstate the CMS guidance. But groups such as the Academy of Managed Care Pharmacy oppose both section 176 and the CMS guidance. Judith A. Cahill, executive director, AMCP, said, “We would suggest that the appropriate ‘corrective’ action that should be taken by the Congress is to repeal Section 176 with language that reaffirms the independent, evidence-based Part D formulary decision-making process that is applicable for all therapeutic drug classes.” The AMCP has produced a study showing that the regulations requiring Medicare’s Part D prescription drug plans to include all drugs in the six designated classes could be costing U.S. taxpayers an additional $511 million per year.
The upcoming Medicare reform bill will also be the venue for a full-court press from pharmacy groups for direct payment to pharmacists for expanded MTM services. The Medicare Modernization Act (MMA) of 2003, which established the Part D drug benefit, defined MTM services very narrowly, and dictated that prescription drug plans (PDPs) only had to offer them to a small subset of beneficiaries: 1-those with multiple chronic conditions; 2-who take multiple medications; and 3-who have drug costs that are expected to exceed $4,000 per year. For those patients, MTM services can be provided by anyone, not just the pharmacist at the point of prescription delivery. Services can be provided via a telephone call; and that call can be made by any type of health professional. Medicare reimbursement for MTM services is not dictated either; it is part of the administrative fee Medicare pays a particular PDP. The plan then decides how much to pay whichever professional delivers the service.
The American Pharmacists Association (APhA) is part of a broad coalition called the
Leadership for Medication Management which has developed a MTM legislative agenda which includes payment to pharmacists for activities outside the current scope narrowly defined by the MMA. Payments to pharmacists could be approved for such things as collaboration with the physician to provide feedback on drug therapy and development and implementation of a medication management plan, in collaboration with the caregiver and others.
But questions have been raised about the effectiveness of MTM services. MedPac, the group which advises Congress on Medicare policy, issued a report on November 6, 2008 saying that there was no data that MTM services are effective. It recommended some things Medicare could be doing, such as setting minimum standards for MTM programs and requiring outcomes reporting. Both those ideas leave the APhA queasy. “We are concerned that a minimum could become the maximum and could remove the discretion of the health care providers, working with patients, to determine the needs of an individual patient,” says John A. Gans, PharmD, executive vice president and CEO, APhA.
Any legislation expanding MTM services and payment would have to be negotiated with Tom Daschle, the new secretary of the Department of Health and Human Services. The former leader of Senate Democrats, who has been out of Congress for a few years,
was a leading supporter of federal negotiation with drug companies over Part D prices and, as an analog to that, development of a national, Medicare formulary. But besides wrestling with Medicare reform efforts, Daschle will confront congressional efforts to toughen up regulation of the drug industry by the FDA, an agency which is part of the HHS.
In terms of FDA oversight and legislation, the House has a new Drug Lord, Rep. Henry Waxman (D-Calif.). He replaces Rep. John Dingell (D-MI) as chairman of the House Energy & Commerce Committee which has considerable authority over health policy. Dingell, who remains at the committee, is an old bull, the longest serving member of the House, a bit crotchety and better known these past few years for his dyspeptic questioning of committee testifiers rather than for getting bills passed. Waxman is a ball of energy. Moreover, he has been a pesky antagonist of the brand-name drug industry, constantly investigating its drug pricing policies and highlighting questionable aspects. In 2008, as chairman of the House Oversight & Investigations Committee, Waxman had no legislative authority. In 2009, he has more legislative authority than almost anyone in the House, and he is closer to House Speaker Rep. Nancy Pelosi (D-Calif.) than Dingell.
The flip side of Waxman’s antipathy to the brand-name industry is his support for greater use of generics. It was Waxman who last year teamed up with Sen. Charles Schumer (D-N.Y.) to introduce a bill called the Access to Life-Saving Medicine Act which created a pathway at the FDA for approval of generic versions of the most advanced types of biotechnology drugs such as various types of interferons. The point here is that the Waxman bill is considerably more pro-generic than a rival bill which actually passed a Senate committee last June. That is called the Biologics Price Competition and Innovation Act. Its chief sponsor is Sen. Edward Kennedy (D-Mass.). The Pharmaceutical Care Management Association preferred the Waxman bill because it conferred no market exclusivity on innovator biological drugs. The Biologics Price bill gave innovator companies 12 years plus the possibility of additional time through minor changes to its preference product.
Waxman’s increased prominence and Obama’s presence—he made wider use of generics a major plank in his “uninsured” platform--means not only the likely passage of a biopharmaceuticals bill but of legislation allowing reimportation of brand-name drugs from other Western countries, a proposal the Pharmaceutical Research and Manufacturers of America (PhRMA) has hotly opposed.
But President Obama and his allies in Congress will be shoving quite bit down the throat of PhRMA in 2009. Fortunately, pharmacists face a more promising fate.
WHAT’S AHEAD NOW THAT THE BAILOUT (ER, THE “RESCUE”) IS BEING IMPLEMENTED?
STRATEGIC FINANCE November 2008
IN the long term, Americans will view the $700 billion bailout package Congress passed during the first week of October as a preview of a much more dramatic reordering of the federal regulatory system that will have more serious implications for American corporations than the short-term emergency steps this fall. History may cast the popular outrage over the need for a bailout (er, rescue) as a kind of preliminary political tremor, not unlike the February Revolution that shook St. Petersburg in March 1917 and led to Czar Nicholas II packing his bags and leaving town while a provisional government took over. Six months later, Vladimir Lenin and the Bolsheviks took over the entire country. Things were never the same again.
Neither Barack Obama nor John McCain (this is being written prior to November 4) is a Lenin, nor are Barney Frank or Chris Dodd, the two leading congressional Democrats on financial issues, Bolsheviks. In all cases, they are far from it. But they will be riding a populist wave generated by outrage over bad business decisionmaking, golden parachutes, faulty federal oversight, and a
number of other pre-election revelations—all of which spell potentially revolutionary regulatory changes for American business.
One Washington lobbyist noted that the earliest version of the bailout package included provisions expanding shareholder access to corporate proxies and allowing voluntary votes on executive pay. Those provisions were eventually kicked out. But this lobbyist does expect the new Congress to propose wholesale regulatory changes in numerous areas.
At its fall conference in Chicago, which took place the week after Congress passed the bailout bill, the Council of Institutional Investors “licked its chops” as its investor advocates and state pension fund directors pored over 10 pages of previously adopted corporate governance recommendations that were being sifted for inclusion in what one participant predicted would be “dramatic changes to our regulatory structure.”
Steve Seelig, executive compensation counsel at Watson Wyatt, explains that both Sen. Chris Dodd (D.-Conn.) and Rep. Barney Frank (D.-Mass.) included punitive executive compensation provisions in their respective initial versions of the bailout package. Frank’s provision was
included in the final bill. It contains such things as an expansion of the 280(g) rules on golden parachutes (expanding them to severance packages), limits on compensation if a pay package forced an executive to take excessive risks, and an expansion of limits on the 162(m)
corporate deduction for pay. In the bailout bill, these provisions apply to either companies the Treasury purchases or companies that avail themselves of more than $300 million in bailout relief. In the short term, these compensation knives won’t draw blood from too many
executives, and certainly not more than a tiny handful, if that, outside the financial services industry. But Seelig sees Frank getting much further down the warpath in 2009 than he did in the last session of Congress when his voluntary “say on pay” bill passed the House but got stuck in Dodd’s Banking Committee. “Barney Frank said in an interview on CNBC that he intends
to apply the compensation restrictions in the bailout bill to a broad cross section of U.S. companies,” Seelig reports, “and it seems like the stars are aligned for more action.”
MORE IMMEDIATE CONCERNS
Obviously, though, at the moment, U.S. corporations are worried about more immediate problems such as the inability to sell commercial paper and the costs of issuing
corporate bonds. The bailout package will probably help
alleviate corporate borrowing pressures by the time the
new Congress takes office, although it will do that indirectly
because neither corporations nor their pension
plans—that is, those at nonfinancial corporations—have
invested heavily in the kinds of mortgage-backed securities
that the Emergency Economic Stabilization Act
(EESA) was aimed at. That law established a Troubled
Asset Relief Program (TARP) that will purchase or insure
underwater assets and whose work is being overseen by a
Financial Stability Oversight Board.
The EESA certainly has some provisions that would
affect financial companies immediately. The legislation
prohibits golden parachutes for “senior executives” in
companies whose assets are purchased by the Treasury
Department. But that applies only to executives hired
after the bailout and at companies that auction more
than $300 million. For executives with existing contracts
prior to a company’s dealings with TARP, those golden
parachutes may be subject to a 20% excise tax. Companies
that auction assets will see their tax deductions for
executive compensation cut in half to $500,000.
ACCOUNTING ISSUES
The bill also includes two sections on fair value accounting.
Section 132 of the EESA simply restates the authority
for the Securities & Exchange Commission (SEC) to
suspend the application of Statement of Financial
Accounting Standards (SFAS) No. 157, “Fair Value
Measurements,” “if the SEC determines that it is in the
public interest and protects investors.” One Washington
lobbyist for consumer groups calls that “a nothing provision”
inserted to keep the American Bankers Association
happy. Section 133 requires the SEC, in consultation
with the Federal Reserve and the Treasury, to conduct a
study on mark-to-market accounting standards that has
to be completed in 90 days.
The accounting and executive compensation provisions
in the bailout bill are notable more as fuses for the bigger
bangs they will set off once Congress returns to town in
January.Meanwhile, financial companies especially hope
the TARP helps them quickly turn the corner on their
troubles.Most nonfinancial companies will ignore TARP.
Eric Palley, director, Americas Pensions Team, BNP
Paribas Securities Corp., says that, in some instances,
asset managers working for corporate pension plans mayhave purchased some questionable investments in an
effort to beat an index, thus providing a “kicker” to plan
growth. But Palley also says that because federal law
requires plans to diversify their investments, the impact
of any suspect investments will only be on the margin.
Very few pension plans are holding bonds issued by
Lehman Brothers or Bear Stearns. In fact, strange as it
may sound, corporate plans will benefit over the medium
term. “As credit spreads have widened, they made pension
liabilities look smaller, so companies will not have to put
as much cash into underfunded pension plans,” Palley
explains. “That will make balance sheets look better.”
OTHER PROBLEMS
Of course the stock market has clobbered the value of
pension funds. TARP’s purchase of illiquid assets, if this
calms public fears about the economy, will provide the
beginnings of a bounce to the market and pension fund
balances as well as a contraction of the gap between the
interest rates companies have to offer for corporate bonds
and the rate paid by Treasuries. The market for corporate
bonds would seem to be a more important issue than the
availability of commercial paper, which companies sell
for periods of one day to nine months in order to raise
working capital. One investment company executive who
doesn’t want to be quoted estimates that only the Fortune
400 depend on commercial paper. And among top companies,
many were having no trouble getting loans even
as the flames from the credit crisis roared. Tim Pistell,
CFO at Parker Hannifin Corp., a manufacturer of
hydraulic equipment, told The Wall Street Journal a few
days before the bailout passed Congress: “I can get all the
capital I need, as can most of my big customers—the
Boeings, the Cats, the Deeres.”
General Motors, of course; the other two Detroit biggies;
and other manufacturers with shaky credit ratings aren’t in
such a position. But Parker Hannifin and many others are
far from crippled. In fact, Pistell told the WSJ that Parker
Hannifin, rated single A (not even AAA), is getting calls
from members of its banking syndicate—the survivors of
the financial mess and now colossuses like Citigroup,
Morgan Stanley, Bank of America, and Goldman Sachs—
and going after acquisitions in Asia, where targets look
considerably cheaper than they were six months ago. On
October 1, Parker announced an acquisition of three companies
whose total sales for their most recently reported
fiscal years approaches a half billion dollars.
The inability to sell bonds may be a bigger problem.
Jim Turner, head of debt capital markets at BNP Paribas,cites the example of Union Pacific Railroad, which in late
September issued a 10-year bond whose interest rate was
425 basis points over the 10-year Treasury. In April 2007,
by contrast, Union Pacific issued a 10-year bond that was
93 basis points over the Treasury rate at that time. “The
Emergency Economic Stabilization Act will help if it succeeds
in restoring confidence and credit spreads return to
lower levels,” Turner notes. “And I think it will be helpful
in cleaning up the balance sheets of banks.”
Beyond deflating the interest rates companies pay on
bonds, the bailout package, to the extent it underlines the
consolidation of commercial lenders and underwriters,
may change the way corporate CFOs, treasurers, controllers,
and others view lenders. Citigroup, Bank of
America, and JPMorgan Chase hold more than 40% of
bank loans to corporations. And the number of underwriters
has shrunk considerably with the demise of
Lehman Brothers and Bear Stearns and the elimination of
the entire “investment bank” regulatory category.
Of course, BNP Paribas believes that this consolidation
means that the “Big Boys” will be better capitalized. But
to the extent that BNP, Citibank, and Goldman Sachs will
be loaning their own money, the costs to corporate borrowers
for lines of credit and the like will certainly go up
since the banks are paying more for that money, too.
Joseph C. Stein, managing director of Peter J. Solomon
Co., which employs about 50 people, says the difference
between his private boutique investment company and
the Goldman Sachses of the world is that the boutiques
don’t have their own capital. That means that when a corporation
comes to them to underwrite a loan, for example,
Solomon essentially holds an auction and takes the
banks that make the lowest bids in terms of interest rates.
“And CFOs and treasurers rely on independent firms like
us to analyze situations in an unbiased way,” Stein says. “If
we run the right competitive process, we can get financial
institutions to bid more competitively and therefore save
companies money.”
LONG-TERM IMPLICATIONS
Again, this “New World Order” of vendors serving corporations
for financing is just another indirect impact of the
financial crisis, one with long-term implications. The
same is true of the accounting provisions in sections 132
and 133 of the bailout package. Fair value accounting has
been an issue for a while, with banks pushing hard for
changes to SFAS No. 157, whose deadlines the Financial
Accounting Standards Board (FASB) had previously The SEC already has the authority to suspend
157, and it has shown no indication
that it has the slightest desire to do so. It
would be straining credulity, given all
the abuse SEC Chairman Chris Cox has
taken for allegedly abetting the crisis
with weak regulation of investment
banks, to think he would, as one of his
last efforts as chairman, send Congress
recommendations to gut SFAS No. 157.
What isn’t generally known is that
some of the nation’s biggest banks oppose
the American Bankers Association, which is
the leading critic of SFAS No. 157. An accounting
policy executive at a large money center
bank explained he was on an ABA conference
call in early October. “A number of small bank accountants
expressed frustration that they are pressured or bullied
by their auditors on valuations. I can understand why
they are pushing for suspension of SFAS No. 157,” he
explains. “I think the difference is that we have the depth
of staff to value and support the prices we use.We also
have the ability to second-guess our auditors if they
attempt to take issue with our valuations. Frankly, our
experts know more about valuations than their experts.”
In fact, what the financial fallout does is obscure the
need for more modest changes to SFAS No. 157 that both
large banks and many nonfinancial corporations agree
are necessary. Alfred M. King, vice chairman of Marshall
& Stevens, notes that the current FASB definition of fair
value strays considerably from the old definition of fair
market value, which depended on there being a willing
buyer and willing seller, among other tests. Now, fair value
is the price at which a market participant would buy
an asset, even if there is no buyer. The current definition
is confusing for nonfinancial companies, too. For example,
a consumer products company that sells toilet paper
buys the division of a second consumer products company,
also with a toilet paper product. The buyer takes the
second product, cancels its trade name, and stamps its
own trade name on the competitor’s product.What’s the
fair value of the second company’s toilet paper trade
name under the current fair value definition? It’s impossible
to tell.
SMALL STEPS
Unfortunately, the bailout package and the wave of public
revulsion that greeted it make it more difficult for the 157. For its part, the FASB has been taking
its sweet time anyway on its various projects
dedicated to SFAS No. 157 reform.
The September 30 FASB/SEC press
release containing guidance on 157—
which simply restated what everyone
already knew—mentioned the Valuation
Resource Group (VRG), an advisory
committee within the FASB that
has been meeting for the past year with
the aim of making recommendations on
changes to the Standard, a process the
FASB began in January 2007. The VRG’s
last meeting was on September 23, 2008.
But the VRG hasn’t made any recommendations,
nor has the FASB moved very far on any of
its internal revision projects, such as one on SFAS No.
157-c,“Measuring Liabilities under FASB Statement No.
157.” A staff proposal was issued on January 18, 2008.
The comment period ended February 18, 2008. There
was considerable pushback, mostly by accounting firms.
Then, at its April 9, 2008, meeting, the Board directed
the staff to make changes. Ronald Maples, the staffer
working on 157-c, says nothing has happened on this
since April.
The danger is that the current crisis won’t only scare
off the SEC and FASB, but also the International
Accounting Standards Board (IASB), which is wrestling
with convergence issues generally and SFAS No. 157
specifically.When the IASB sent out a draft consensus
document on 157 last spring, it essentially used the FASB
Standard. Al King notes there was significant sentiment
within the IASB to make changes to the Standard that
would move it back closer to the original definition of
fair market value. “The IASB could give FASB political
cover to make some changes to 157 without appearing to
be bowing to political pressure one way or the other,”
King says.
Of course, neither the new administration nor the new
Congress will need political cover to revolutionize federal
regulatory policies.With regard to the need for changes
to executive compensation, corporate governance, and
other aspects of corporate life, the voice of public opinion
will be the voice of the rabble. n
Stephen Barlas has covered Washington for Strategic
Finance since 1984. He is a full-time freelance journalist
and writes for numerous trade and professional magazines.
You can reach him at sbarlas@verizon.net.
SEC and the FASB to make needed changes to SFAS No.
relaxed for both financial and nonfinancial companies.
IN the long term, Americans will view the $700 billion bailout package Congress passed during the first week of October as a preview of a much more dramatic reordering of the federal regulatory system that will have more serious implications for American corporations than the short-term emergency steps this fall. History may cast the popular outrage over the need for a bailout (er, rescue) as a kind of preliminary political tremor, not unlike the February Revolution that shook St. Petersburg in March 1917 and led to Czar Nicholas II packing his bags and leaving town while a provisional government took over. Six months later, Vladimir Lenin and the Bolsheviks took over the entire country. Things were never the same again.
Neither Barack Obama nor John McCain (this is being written prior to November 4) is a Lenin, nor are Barney Frank or Chris Dodd, the two leading congressional Democrats on financial issues, Bolsheviks. In all cases, they are far from it. But they will be riding a populist wave generated by outrage over bad business decisionmaking, golden parachutes, faulty federal oversight, and a
number of other pre-election revelations—all of which spell potentially revolutionary regulatory changes for American business.
One Washington lobbyist noted that the earliest version of the bailout package included provisions expanding shareholder access to corporate proxies and allowing voluntary votes on executive pay. Those provisions were eventually kicked out. But this lobbyist does expect the new Congress to propose wholesale regulatory changes in numerous areas.
At its fall conference in Chicago, which took place the week after Congress passed the bailout bill, the Council of Institutional Investors “licked its chops” as its investor advocates and state pension fund directors pored over 10 pages of previously adopted corporate governance recommendations that were being sifted for inclusion in what one participant predicted would be “dramatic changes to our regulatory structure.”
Steve Seelig, executive compensation counsel at Watson Wyatt, explains that both Sen. Chris Dodd (D.-Conn.) and Rep. Barney Frank (D.-Mass.) included punitive executive compensation provisions in their respective initial versions of the bailout package. Frank’s provision was
included in the final bill. It contains such things as an expansion of the 280(g) rules on golden parachutes (expanding them to severance packages), limits on compensation if a pay package forced an executive to take excessive risks, and an expansion of limits on the 162(m)
corporate deduction for pay. In the bailout bill, these provisions apply to either companies the Treasury purchases or companies that avail themselves of more than $300 million in bailout relief. In the short term, these compensation knives won’t draw blood from too many
executives, and certainly not more than a tiny handful, if that, outside the financial services industry. But Seelig sees Frank getting much further down the warpath in 2009 than he did in the last session of Congress when his voluntary “say on pay” bill passed the House but got stuck in Dodd’s Banking Committee. “Barney Frank said in an interview on CNBC that he intends
to apply the compensation restrictions in the bailout bill to a broad cross section of U.S. companies,” Seelig reports, “and it seems like the stars are aligned for more action.”
MORE IMMEDIATE CONCERNS
Obviously, though, at the moment, U.S. corporations are worried about more immediate problems such as the inability to sell commercial paper and the costs of issuing
corporate bonds. The bailout package will probably help
alleviate corporate borrowing pressures by the time the
new Congress takes office, although it will do that indirectly
because neither corporations nor their pension
plans—that is, those at nonfinancial corporations—have
invested heavily in the kinds of mortgage-backed securities
that the Emergency Economic Stabilization Act
(EESA) was aimed at. That law established a Troubled
Asset Relief Program (TARP) that will purchase or insure
underwater assets and whose work is being overseen by a
Financial Stability Oversight Board.
The EESA certainly has some provisions that would
affect financial companies immediately. The legislation
prohibits golden parachutes for “senior executives” in
companies whose assets are purchased by the Treasury
Department. But that applies only to executives hired
after the bailout and at companies that auction more
than $300 million. For executives with existing contracts
prior to a company’s dealings with TARP, those golden
parachutes may be subject to a 20% excise tax. Companies
that auction assets will see their tax deductions for
executive compensation cut in half to $500,000.
ACCOUNTING ISSUES
The bill also includes two sections on fair value accounting.
Section 132 of the EESA simply restates the authority
for the Securities & Exchange Commission (SEC) to
suspend the application of Statement of Financial
Accounting Standards (SFAS) No. 157, “Fair Value
Measurements,” “if the SEC determines that it is in the
public interest and protects investors.” One Washington
lobbyist for consumer groups calls that “a nothing provision”
inserted to keep the American Bankers Association
happy. Section 133 requires the SEC, in consultation
with the Federal Reserve and the Treasury, to conduct a
study on mark-to-market accounting standards that has
to be completed in 90 days.
The accounting and executive compensation provisions
in the bailout bill are notable more as fuses for the bigger
bangs they will set off once Congress returns to town in
January.Meanwhile, financial companies especially hope
the TARP helps them quickly turn the corner on their
troubles.Most nonfinancial companies will ignore TARP.
Eric Palley, director, Americas Pensions Team, BNP
Paribas Securities Corp., says that, in some instances,
asset managers working for corporate pension plans mayhave purchased some questionable investments in an
effort to beat an index, thus providing a “kicker” to plan
growth. But Palley also says that because federal law
requires plans to diversify their investments, the impact
of any suspect investments will only be on the margin.
Very few pension plans are holding bonds issued by
Lehman Brothers or Bear Stearns. In fact, strange as it
may sound, corporate plans will benefit over the medium
term. “As credit spreads have widened, they made pension
liabilities look smaller, so companies will not have to put
as much cash into underfunded pension plans,” Palley
explains. “That will make balance sheets look better.”
OTHER PROBLEMS
Of course the stock market has clobbered the value of
pension funds. TARP’s purchase of illiquid assets, if this
calms public fears about the economy, will provide the
beginnings of a bounce to the market and pension fund
balances as well as a contraction of the gap between the
interest rates companies have to offer for corporate bonds
and the rate paid by Treasuries. The market for corporate
bonds would seem to be a more important issue than the
availability of commercial paper, which companies sell
for periods of one day to nine months in order to raise
working capital. One investment company executive who
doesn’t want to be quoted estimates that only the Fortune
400 depend on commercial paper. And among top companies,
many were having no trouble getting loans even
as the flames from the credit crisis roared. Tim Pistell,
CFO at Parker Hannifin Corp., a manufacturer of
hydraulic equipment, told The Wall Street Journal a few
days before the bailout passed Congress: “I can get all the
capital I need, as can most of my big customers—the
Boeings, the Cats, the Deeres.”
General Motors, of course; the other two Detroit biggies;
and other manufacturers with shaky credit ratings aren’t in
such a position. But Parker Hannifin and many others are
far from crippled. In fact, Pistell told the WSJ that Parker
Hannifin, rated single A (not even AAA), is getting calls
from members of its banking syndicate—the survivors of
the financial mess and now colossuses like Citigroup,
Morgan Stanley, Bank of America, and Goldman Sachs—
and going after acquisitions in Asia, where targets look
considerably cheaper than they were six months ago. On
October 1, Parker announced an acquisition of three companies
whose total sales for their most recently reported
fiscal years approaches a half billion dollars.
The inability to sell bonds may be a bigger problem.
Jim Turner, head of debt capital markets at BNP Paribas,cites the example of Union Pacific Railroad, which in late
September issued a 10-year bond whose interest rate was
425 basis points over the 10-year Treasury. In April 2007,
by contrast, Union Pacific issued a 10-year bond that was
93 basis points over the Treasury rate at that time. “The
Emergency Economic Stabilization Act will help if it succeeds
in restoring confidence and credit spreads return to
lower levels,” Turner notes. “And I think it will be helpful
in cleaning up the balance sheets of banks.”
Beyond deflating the interest rates companies pay on
bonds, the bailout package, to the extent it underlines the
consolidation of commercial lenders and underwriters,
may change the way corporate CFOs, treasurers, controllers,
and others view lenders. Citigroup, Bank of
America, and JPMorgan Chase hold more than 40% of
bank loans to corporations. And the number of underwriters
has shrunk considerably with the demise of
Lehman Brothers and Bear Stearns and the elimination of
the entire “investment bank” regulatory category.
Of course, BNP Paribas believes that this consolidation
means that the “Big Boys” will be better capitalized. But
to the extent that BNP, Citibank, and Goldman Sachs will
be loaning their own money, the costs to corporate borrowers
for lines of credit and the like will certainly go up
since the banks are paying more for that money, too.
Joseph C. Stein, managing director of Peter J. Solomon
Co., which employs about 50 people, says the difference
between his private boutique investment company and
the Goldman Sachses of the world is that the boutiques
don’t have their own capital. That means that when a corporation
comes to them to underwrite a loan, for example,
Solomon essentially holds an auction and takes the
banks that make the lowest bids in terms of interest rates.
“And CFOs and treasurers rely on independent firms like
us to analyze situations in an unbiased way,” Stein says. “If
we run the right competitive process, we can get financial
institutions to bid more competitively and therefore save
companies money.”
LONG-TERM IMPLICATIONS
Again, this “New World Order” of vendors serving corporations
for financing is just another indirect impact of the
financial crisis, one with long-term implications. The
same is true of the accounting provisions in sections 132
and 133 of the bailout package. Fair value accounting has
been an issue for a while, with banks pushing hard for
changes to SFAS No. 157, whose deadlines the Financial
Accounting Standards Board (FASB) had previously The SEC already has the authority to suspend
157, and it has shown no indication
that it has the slightest desire to do so. It
would be straining credulity, given all
the abuse SEC Chairman Chris Cox has
taken for allegedly abetting the crisis
with weak regulation of investment
banks, to think he would, as one of his
last efforts as chairman, send Congress
recommendations to gut SFAS No. 157.
What isn’t generally known is that
some of the nation’s biggest banks oppose
the American Bankers Association, which is
the leading critic of SFAS No. 157. An accounting
policy executive at a large money center
bank explained he was on an ABA conference
call in early October. “A number of small bank accountants
expressed frustration that they are pressured or bullied
by their auditors on valuations. I can understand why
they are pushing for suspension of SFAS No. 157,” he
explains. “I think the difference is that we have the depth
of staff to value and support the prices we use.We also
have the ability to second-guess our auditors if they
attempt to take issue with our valuations. Frankly, our
experts know more about valuations than their experts.”
In fact, what the financial fallout does is obscure the
need for more modest changes to SFAS No. 157 that both
large banks and many nonfinancial corporations agree
are necessary. Alfred M. King, vice chairman of Marshall
& Stevens, notes that the current FASB definition of fair
value strays considerably from the old definition of fair
market value, which depended on there being a willing
buyer and willing seller, among other tests. Now, fair value
is the price at which a market participant would buy
an asset, even if there is no buyer. The current definition
is confusing for nonfinancial companies, too. For example,
a consumer products company that sells toilet paper
buys the division of a second consumer products company,
also with a toilet paper product. The buyer takes the
second product, cancels its trade name, and stamps its
own trade name on the competitor’s product.What’s the
fair value of the second company’s toilet paper trade
name under the current fair value definition? It’s impossible
to tell.
SMALL STEPS
Unfortunately, the bailout package and the wave of public
revulsion that greeted it make it more difficult for the 157. For its part, the FASB has been taking
its sweet time anyway on its various projects
dedicated to SFAS No. 157 reform.
The September 30 FASB/SEC press
release containing guidance on 157—
which simply restated what everyone
already knew—mentioned the Valuation
Resource Group (VRG), an advisory
committee within the FASB that
has been meeting for the past year with
the aim of making recommendations on
changes to the Standard, a process the
FASB began in January 2007. The VRG’s
last meeting was on September 23, 2008.
But the VRG hasn’t made any recommendations,
nor has the FASB moved very far on any of
its internal revision projects, such as one on SFAS No.
157-c,“Measuring Liabilities under FASB Statement No.
157.” A staff proposal was issued on January 18, 2008.
The comment period ended February 18, 2008. There
was considerable pushback, mostly by accounting firms.
Then, at its April 9, 2008, meeting, the Board directed
the staff to make changes. Ronald Maples, the staffer
working on 157-c, says nothing has happened on this
since April.
The danger is that the current crisis won’t only scare
off the SEC and FASB, but also the International
Accounting Standards Board (IASB), which is wrestling
with convergence issues generally and SFAS No. 157
specifically.When the IASB sent out a draft consensus
document on 157 last spring, it essentially used the FASB
Standard. Al King notes there was significant sentiment
within the IASB to make changes to the Standard that
would move it back closer to the original definition of
fair market value. “The IASB could give FASB political
cover to make some changes to 157 without appearing to
be bowing to political pressure one way or the other,”
King says.
Of course, neither the new administration nor the new
Congress will need political cover to revolutionize federal
regulatory policies.With regard to the need for changes
to executive compensation, corporate governance, and
other aspects of corporate life, the voice of public opinion
will be the voice of the rabble. n
Stephen Barlas has covered Washington for Strategic
Finance since 1984. He is a full-time freelance journalist
and writes for numerous trade and professional magazines.
You can reach him at sbarlas@verizon.net.
SEC and the FASB to make needed changes to SFAS No.
relaxed for both financial and nonfinancial companies.
Pharma faces Congressional battles in 2009
Drug Discovery News, 2008 September
When BIO, the trade group for biotechnology pharmaceutical companies, held a press briefing on the 2008 presidential election on Sept. 3, Jim Greenwood, the president and CEO of BIO, and a former Republican congressman from Pennsylvania, was asked if BIO would be endorsing either Barack Obama or John McCain for president. He didn’t have to think about the answer for very long. “No,” he said, explaining that there wasn’t enough difference between the two on issues of importance to pharmaceutical companies for BIO to make an endorsement.Not only are the votes and positions of the two candidates near mirror images on many drug issues (except providing health insurance for the “uninsured”), but so is their rhetoric, which is sharp. 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.”
The propensity toward populist pandering, plus support for long-time, brand-name anathemas such as reimportation of drugs and greater use of generics, explains why most of the research-based pharmaceutical industry is bringing its political cannons up to the front lines in anticipation of pitched legislative battles in 2009, and not just those led by an antagonistic White House. Congress, which is likely to be more Democratic, will reprise some anti-industry proposals which fell short in the 2007-2008 term, in part because of the threat of a George W. Bush veto, in part because of Republican opposition in the Senate.
But there are some opportunities for the industry in the offing. Both McCain and Obama have talked about extending health insurance to the uninsured, which, if it becomes a reality, would lead to significant new spending on drug prescriptions. Kathryn Wilber, senior counsel, health policy, American Benefits Council, which represents Fortune 500 companies, says, “Health care reform is clearly a priority issue for both candidates.”
The Pharmaceutical Research and Manufacturers of America (PhRMA) understands that the elevation of the “uninsured” to the level of primetime issue presents all sorts of possibilities, good and bad. Billy Tauzin, president and CEO of PhRMA, says the group’s “Platform for a Healthy America” aims to assure all Americans have access to high-quality, affordable health insurance coverage.
“‘Platform for a Healthy America’ builds on the existing employer-based system and expands coverage through a public-private approach—with a focus on private health insurance expansions and leveraging such public health insurance programs as Medicaid and SCHIP to extend access to high-quality, affordable health insurance coverage to all Americans,” says Tauzin.
Finding the middle
The ‘Platform’ contains a little bit of the Obama plan and a little bit of the McCain plan; so it might be the kind of middle ground which many observers expect any final health insurance expansion—if there is a final bill—to occupy. McCain’s health insurance access proposal centers on eliminating the tax subsidies for employers to provide health insurance and instead giving individuals and families $2500/$5000 tax credits with which to purchase insurance in the private market. Obama would create a national insurance program, run by the federal government, that the uninsured could buy into, if they so desire. “The debate over the Obama plan versus the McCain plan is a little bit of a phony debate,” says one lobbyist for the PBM industry. “The final product is probably going to be something in the middle.”
A couple factors bear out that compromise notion. There are some key Democrats, such as Finance Committee Chairman Sen. Max Baucus (D-Mont.), who think the employer-provided health insurance system has outlived its usefulness. So in that respect, he agrees with McCain. And there are Republicans who already support an Obama-type plan; it is called the Healthy Americans Act, introduced early in 2007 by Sen. Ron Wyden (D-Ore.), with numerous Republican co-sponsors, including Sen. Charles Grassley (R-Iowa), influential ranking Republican on the Senate Finance Committee. The bill eliminates employer health insurance tax deductions, forces them to pass along what they would have deducted per employee as increased salary, sets up a federal program and allows individuals to buy in, with subsidies to those below 400 percent of the poverty level.
The Wyden bill covers a lot of ground, including changes to the Medicare Part D outpatient prescription program, where the bill gives Medicare the authority to negotiate prices with manufacturers of prescription drugs. Obama supports direct negotiation within the context of both his “access” proposal and within the Part D program.
McCain supports negotiation in Part D just as heartily as Obama does. In November 2003, as the House and Senate were adopting a conference agreement establishing the Part D program, McCain complained that providing an outpatient drug benefit to seniors without first getting drug costs under control was like “rearranging the deck chairs on the Titanic.” He expressly bemoaned the absence of a negotiation provision, saying, “Taxpayers should be able to expect Medicare, as a large purchaser of prescription drugs, to be able to derive some discount from its new market share. Instead, taxpayers will provide an estimated $13 billion a year in increased profits to the pharmaceutical industry.”
A broader Medicare Part D?
The Medicare Part D reform bill that comes up in 2009 will probably be broader than last year’s House and Senate bills, which were narrow in an effort, ultimately unsuccessful, to get a perceived “modest” proposal past a disapproving White House. In 2009, the Oval Office becomes a friend, not a foe, in terms of numerous anti-PhRMA proposals, with regard to Part D and much else. So House Democrats like Rep. Henry Waxman (D-Calif,) are licking their chops. Waxman, chairman of the House Oversight and Investigations Committee, pummeled the drug industry during two hearings in this past session and raised questions about inflated Medicare payments to the prescription drug plans (PDPs) which offer the Part D benefit. “Amendments to Part D will probably be front and center fairly early,” says one lobbyist for the drug store industry.
Be they bills on the uninsured or on Part D, rest assured that proposals aimed at cutting prescription drug costs will be flying like hungry birds around a just-stocked backyard feeder. One proposal Obama has made is to set up a federal entity of some sort and charge it with doing “comparativeness research,” that is looking at all drugs within a class and determining which one is the most effective. PhRMA supports that kind of research in principle, as long as it is “structured to promote better patient health and timely patient access to needed therapies, and avoids denying or delaying patients’ access to beneficial care, as what often occurs in Europe and Australia.” Whether the free-standing Comparative Effectiveness Research Act of 2008, introduced by Baucus and Sen. Kent Conrad (D-N.D.) in late July 2008, meets PhRMA’s yardstick is unknown.
Reimportation and generics
Obama also supports two proposals which made appearances in past Congresses: reimportation of drugs and wider use of generics, including establishing a first-time regulatory pathway at the Food and Drug Administration (FDA) for biogenerics. McCain is just as enthusiastic about these proposals; in fact, he was championing them long before Obama reached the Senate. As early as 2000, McCain joined with Sen. Charles Schumer (D-N.Y.) to sponsor the Greater Access to Affordable Pharmaceuticals Act, which would have made changes in the 1984 Hatch-Waxman Act designed to prevent brand-name companies from slowing (albeit legally) introduction of generics. That bill passed the Senate by a wide margin in 2002, but never cleared Congress, and would have probably been vetoed by President Bush anyway.
Six years later, that bill is long forgotten, and in its place is the latest generic legislative effort: the Biologics Price Competition and Innovation Act. It would create a pathway at the FDA for approval of biological generics under the Public Health Act, which is the law under which almost all major biologics such as Rituxan, Humira, Herceptin, Tysabri and Avonex are approved. Conventional chemical drugs and a small handful of biologics are approved under the FDA Act, which includes the Hatch-Waxman pathway for generics, which has been well-trod. The Senate Health, Education, Labor and Pensions Committee approved the Biologics Price bill in late June. BIO’s Greenwood says the bill is an improvement over an earlier version. But he wants a data exclusivity period of 14 years, not 12, and he has some problems with both the patent and pharmacist prescribing provisions.
Charlie Mayr, spokesman for the Generic Pharmaceutical Association, says the Democratic presidential platform includes an endorsement of both generics and biological generics. The Republican platform is less specific. “Both candidates have gone on record being supportive of generic drugs,” says Mayr. “Things are moving forward dramatically with legislation on biologic generics. They will be a reality; it is just a question of time.”
Legislation allowing drug wholesalers to import brand-name prescription drugs from developed countries will probably also become a reality. Both Obama and McCain support reimportation, which the pharmaceutical industry opposes.
So come January 20, 2009, whether it is McCain or Obama sitting in the Oval Office, pharmaceutical companies will be dodging the return of some detested drug initiatives, coming at them like so many boomerangs, but at the same time, keeping their heads up amidst opportunities generated by the health insurance access debate. DDN
Stephen Barlas is a Washington, D.C.-based freelance writer.
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