Critics Assail FDA Medical Device Approval Process

July 2011...P&T Journal

    Slow Review Time and Safety Are at Issue

 PRESCRIPTION:WASHINGTON

Stephen Barlas

Mr. Barlas is a freelance
writer based in Washington,
D.C., who covers
issues inside the Beltway.
Send ideas for topics
and your comments
to sbarlas@verizon. net.

The FDA is attempting to respond to
complaints about its procedures for
approving medical devices. Those
complaints come at the agency from different
angles.Medical device companies
say that if the FDA doesn’t speed up the
process, foreign competitors will win the
innovation race and hospitals in the U.S.
will see patients go overseas for cutting edge
treatments that domestic hospitals
can’t offer. The Government Accountability
Office (GAO), on the other hand,
has issued repeated reports criticizing
the FDA’s approval process for various
shortcomings that, hypothetically, could
endanger patients who might receive a
faulty implantable device, for example.
Stephen Ferguson, Chairman of the
Board of Cook Group, Inc., a holding
company for manufacturers of many diagnostic
and interventional devices, says:
“There is a real concern that without
improvement in the current regulatory
system, the role of the United States as
the leader in medical innovation will continue
to decline and [will] result in the
migration of patients seekingmedical intervention
abroad where innovation is
thriving and available.”
Diana Zuckerman, PhD, President of
the National Research Center for Women
& Families in Washington, D.C., takes
the opposing view. She says there are far
too many recalls of medical devices. Between
2005 and 2009, there were 3,510
voluntary recalls, an average of just over
700 per year. The majority—nearly 83%—
were classified by the FDA as Class II recalls.
A Class II recall means that the use
of, or exposure to, these devices could
cause temporary or medically reversible adverse health consequences or that the
probability of serious adverse health consequences
is remote. Class I recalls are
the most serious type, constituting only
4% of the total.
Dr. Zuckerman explains: “The bottom
line is that even ‘moderate-risk’ recalled
devices can sometimes result in death
during surgery and certainly add billions
to Medicare costs when they result
in additional surgery and hospitalizations
from the complications of defective
devices.”
Because of perceived problems with
the approval process, the GAO put the
FDA’s review program on the federal
government’s “high risk” list in 2009,
where it has stayed, as the GAO has
issued successive critical reports,mostly
about the extent of recalls. The FDA
responded by forming some internal
review groups that made recommendations.
In 2011, the agency announced that
it was implementing these recommendations.
To respond to complaints from industry
about the plodding pace of new device
review, the FDA is promoting an “innovation
pathway.” The agency held a
public meeting on that topic in March. Its
initial plan was to pick a couple of medical
devices each year for expedited review;
however, AdvaMed, the medical
device trade group, argues that the FDA
already has such a pathway—its Product
Development Protocol review.
Janet Trunzo, Executive Vice President
of Technical and Regulatory Affairs
at AvaMed, says:
The proposed Innovation Initiative contains
many good ideas, such as early and consistent
interaction and the focus on cooperative
effort, which ultimately should
be applied across the board to all devices to
get safe and effective products developed
and reviewed quickly. The FDA has a number
of tools to achieve these objectives
already available, and it should use them
more broadly and effectively. Minnie Baylor-Henry, worldwide Vice
President of Regulatory Affairs for Johnson
& Johnson Medical Devices and
Diagnostics, notes that the agency has
designated a brain-controlled robotic
prosthetic arm as the first device to enter
this innovation pathway. She agrees it is
a radically different and revolutionary
medical device and ought to be accorded
an expedited review. She adds, however:
“Significantly redesigning a marketed
device to allow it to be used safely and
effectively at home can be an innovative
breakthrough.”
She also says that the FDA should not
focus exclusively on “technologically
radical” developments.
The approval of new medical devices is
not the only pressing issue facing the
FDA—so is the classification of old devices.
Since 1976, the FDA has been
slowly classifying the 140 categories of
devices that were on the market before
that year, when Congress passed the
Medical Device Amendments of 1976.
That legislation, which amended the
federal Food,Drug, and Cosmetic Act of
1938, required the FDA to categorize all
medical devices as Class I, II, or III, with
III representing the most potentially
dangerous class, including, for example,
implantable devices. Manufacturers of
new Class III devices can submit a Premarket
Approval (PMA) application for
an innovative device, in which case a
clinical trial or similar study is required.
Alternatively, a premarket notification
states that the new device is similar to
one that is already on the market. In this
situation, detailed scientific information
about safety and efficacy is not required—
nor is it typically required for
“new” Class I or II devices.
The 140 categories of devices are referred
to as “pre-amendment” devices.
Only 26 categories remain to be classified,
but they include some widely used
devices that, if identified as Class III,
would have to be the subject of first-time
clinical trials. Examples include auto-mated external defibrillators, implantable
hip joints, and electroconvulsive therapy
devices that are used to treat depression.
Manufacturers of these medical devices
have hinted that they cannot afford clinical
trials and would stop manufacturing
the product if the FDA considered the
devices to be Class III. However, patient
advocacy groups counter that some of
these devices are dangerous and should
be banned or should at least be subject to
restrictions imposed on hospitals where
they are used.

Rules for Derivatives: Pit U.S. Business Against U.S. Treasury

June 2011...Financial Executive Magazine

The Obama administration's implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s provisions on derivatives has set off a political slugfest, with U.S. Treasury Secretary Timothy Geithner and other federal regulators in one corner and business financial executives in the other. What is surprising, and maybe ultimately the knock-out blow, is that despite the sharply partisan atmosphere
on Capitol Hill on many other issues, for this one both Republicans and many Democrats appear to be in the corporate corner.

Sen. Richard Shelby (R-Ala.) highlighted the bout on April 12 at hearings in the Senate Banking Committee when he asked Thomas C. Deas Jr., vice president and treasurer of FMC Corp., a hearing witness that day, whether he agreed with Geithner that derivatives “only benefit Wall Street, not Main Street.”

“No, sir, I don't,” Deas responded. “We are manufacturing goods consumed in theU.S. and derivatives help us offset risks we couldn't otherwise control.” Deas was representing the National Association of Corporate Treasurers and has been a leading lobbyist for the Coalition of Derivatives End-Users, of which Financial Executives International is also a member.

The Obama administration's implementation of Dodd-Frank's exemption for clearing and margin requirements for nonfinancial users of derivatives is a major sticking point with business, especially the margin requirements. The Federal Reserve, Federal Deposit Insurance Corp. and other banking regulators proposed a rule on margins on April 12. It was roundly criticized within the business community.

A week prior to the Senate Banking hearing, Sen. Tim Johnson (D-S.D.) and another Democratic Senate committee chairman had written to Geithner, Federal Reserve Chairman Ben Bernanke and other federal banking regulators pleading with them to prohibit margin set-asides for commercial end users of derivatives who are hedging business risks. But that plea fell on deaf ears.

“The letter sent by Sen. Johnson and others reaffirmed congressional intent and admonished regulators to ensure that end users were not subject to such requirements,” explains Deas. “However, the prudential regulators' proposal indeed subjects virtually all end users to margin requirements.”

The Obama administration, however, did pull its punch on one issue. In late April, the Treasury Department
announced its decision to exempt foreign exchange (FX) swaps and forwards from the definition of “swaps”—meaning they do not have to be cleared, nor is margin an issue. This was welcomed by the mostly large multinationals that do extensive exporting, or that have business units overseas. But according to Luke Zubrod, director of Derivatives Regulatory Advisory service for Chatham Financial, FX swaps and forwards constitute less than 10 percent of the hedging done by most major U.S. companies. Interest rate swaps account for perhaps 80 percent of commercial hedging, with commodities somewhere near FX swaps in terms of percentages. Moreover, FX options, cross-currency swaps, non-deliverable forwards and other FX products will still have to be cleared, and even forwards and swaps remain subject to Dodd-Frank reporting and business conduct requirements.

Congress Listens, Rulemakers
Make Rules

The Treasury decision to exempt FX swaps and forwards does nothing to erase business concerns about having to post margins on interest rate and commodity swaps, one of the issues that
dominated the April 12 Senate hearing. It was the committee's first oversight hearing on the controversial, far-reaching Dodd-Frank act, which requires agencies such as the Commodity Futures Trading Commission, U.S. Securities and Exchange Commission and the federal banking regulators, including the Federal
Reserve Board, to finalize numerous rules by July 2011.

For companies represented by the Coalition on Derivatives End-Users, there are two key rulemakings. The first involves the CFTC and SEC definition of “swap dealers” and “major swap participants.”
Companies that fit those definitions must register with the government and clear their swaps through a central
clearinghouse — two requirements that will add considerably to corporate costs. Commercial end users of swaps —those that are not market makers looking to make a profit but multinationals hedging
the risks arising from price swings in commodities, interest rates and foreign exchange rates — can qualify for an exemption from that clearing requirement. If they do, they would then be subject to margin requirements — if their risk threshold exceeds a certain level — set by the Federal Reserve Board, FDIC, Comptroller of the Currency and other financial agencies.

The second key rulemaking is really the more important of the two, since it affects many more companies, was published by the banking regulators on April 12. It describes how banks should set their risk thresholds below which no margins would be required. Most U.S. companies will not be swept into the “swap dealer” or “major swap participant” definitions, so they will not have to clear swap contracts where they hedge commercial risk. Very large companies such as Kraft Foods Inc. and Phillip Morris International Inc. that
use captive “centralized hedging centers” to hedge foreign commodity, interest rate and currency prices could, under certain conditions, have to work through the new swap clearinghouses, meaning systems and record-keeping costs.

However, the majority of U.S. companies that contract with their commercial lenders to hedge commodities,
foreign currency and interest rates — those are the “Big Three,” although sometimes companies even go so far as to hedge the weather — will not have to clear their swaps. If companies are exempt from clearing for commercial swaps, then the next question is whether their banks should have to collect “margin”
on those contracts. According to Ann Marie Svoboda, author of Actual Cash Flow and member of FEI’s Committee  on Corporate Treasury, companies currently with strong credit histories do not have to
post margin on derivatives they buy from their commercial banks. This could change under
the “margin” proposed rule.

The proposed rule says each bank must establish “credit exposure limits” for each customer or counterparty,
based on a computation using a standardized “lookup” table that specifies the minimum initial margin that
must be collected, expressed as a percentage of the notional amount of the swap or security-based swap.
These percentages depend on the broad asset class of the swap or securitybased swap. If a company's risk exposure is below that threshold, the bank would not have to collect margin, as long as the threshold was established under appropriate credit processes and standards.
Zubrod notes that proposed margin
rules allow for margin amounts to reflect
the credit strength of each company.
Although all companies will be
subject to margin requirements, highlyrated
companies may post less collateral
than companies with questionable
credit ratings.
Margins could be doubly troublesome
for companies that ordinarily secure
derivatives transactions with
physical assets — like real estate and
utilities. Such hard assets cannot be
used to satisfy margin requirements under the proposed rule.
Again, the prudential regulators do
not propose a standard method for setting
collateral thresholds. So banks have
some leeway to set thresholds but, because
regulators will be looking over
their shoulders, they could be very conservative
in their approach.
Moreover, Zubrod questions how
regulators will use their supervisory authority.
He notes that “the regulations
require that margin thresholds be ‘appropriate.’
We worry that regulators will require
banks to lower thresholds
during times of market stress —
when preserving liquidity is
most critical for end users.”
Even if regulators exercise
their authority judiciously,
banks may feel limited ability
to negotiate thresholds with
their corporate customers. They
may rebuff corporate efforts to
negotiate more favorable
thresholds, saying, “Sorry, I
can't give you a better deal
because I have the Fed breathing down
my neck.”
Where banks will set risk thresholds
for margin requirements is the big
issue for U.S. companies that use commercial
swaps. Diana Preston, vice
president and senior counsel, Center
for Securities, Trust & Investments for
the American Bankers Association, says
it is too early for ABA to comment. The
comment period for the proposed rule
closed after press time.

Pressing for Changes


While a broad swath of the business
community is pressing the banking agencies
to change some of the language in
the proposed rule on margins, a narrower
group of mostly large companies want
the SEC and CFTC to clarify their definitions
of swap dealers or major swap participants.
The battleground there is a proposed
rule issued on Dec. 9, 2010 by the
two agencies that defines an “end user
exemption” from clearing for companies
that otherwise might qualify as swap
dealers or major swap participants.
That exemption rests on whether the companies use swaps for commercial
operations hedging and whether they are
not a bona fide “financial entity.” Those
two agencies issued proposed rules on
the same day, but in some instances they
define the exemptions in slightly different
ways, which has added to the confusion
over who, in the end, will have to
clear swaps.
This fog covers a number of corporate
entities. Companies such as Kraft
Foods are concerned that their centralized
hedging centers (CHC) could be pulled into both the swap dealer and
major swap participant definitions. Those
two CHCs are Kraft Foods Finance Europe
(KFFE), which acts as in-house
treasury and centralizes global cash
management, and Taloca GmbH, a centralized
procurement unit for globally
managed commodities.
Philip Morris hedges foreign currency
risk through Philip Morris Finance
SA (PMF), a wholly-owned treasury subsidiary
of the parent company. Marco
Kuepfer, vice president finance and
treasurer of Philip Morris, says the company
“is concerned that swap transactions
entered into by PMF and other
wholly-owned treasury subsidiaries of
large nonfinancial companies, with their
affiliates on the one hand and
traditional swap dealers on the other,
will not be considered 'hedging or mitigating
commercial risk' under the proposed
rules.”
Companies that might otherwise fit
the definition of swap dealer or major
swap participant but that use swaps for
“hedging or mitigating commercial risk”
are exempt from clearing. While some large multinationals
worry that their foreign financing arms
will be caught up in the new swaps
clearing regime, other Fortune 500 companies
are concerned about their domestic
captive financing arms. The proposed
rule says captive financing arms will be
exempt from clearing if they use derivatives
to hedge “underlying commercial
risk related to interest rate and foreign
exchange exposures, 90 percent or more
of which arise from financing that facility’s
purchase or lease of products, 90
percent or more of which are
manufactured by the parent
company or another subsidiary
of the parent company.”
In a letter to CFTC at the
end of February, the top executives
of Caterpillar Financial
Services Corp. and counterparts
at Nissan Corp., Toyota
Motor Corp., John Deere Corp.
and American Honda Corp.
wrote: “We do not have a clear
understanding of how this provision
works in practice.”
These concerns over the SEC and
CFTC definitions and the prudential regulators
margin requirements have led Republican
members of the House to
introduce legislation prohibiting the agencies
from issuing implementation dates
for final rules prior to Dec. 31, 2012.
However, the bill, even if it passes
the House, probably would not pass
the Senate, especially since CFTC
Chairman Gensler went to great
lengths at the April 12 Senate Banking
hearings to take the wind out of the
bill's sails. Gensler proclaimed his
openness to a staggered, flexible derivatives
implementation schedule — one
coordinated with international regulators,
and said his agency was conducting
additional outreach hearings.
So readers are advised to stay informed
of current developments that
might impact their businesses.
Stephen Barlas (sbarlas@verizon.net)
is a freelance writer who has covered
Washington, D.C., since 1981 and frequently
writes for Financial Executive.

Track-and-Trace Drug Verification

P&T Journal ... April 2011

FDA Plans New National Standards, Pharmacies Tread With Trepidation
Stephen Barlas

As if the integration of electronic health records (EHRs) into
pharmacy operations hasn’t been difficult enough, hospitals
will soon face a secondHerculean technology task imposed by
the federal government—a challenge that most medical facilities
and pharmacies don’t even know is coming. A national
requirement to “track and trace” prescription drug packages—
in order to preventing counterfeit products from getting into
pharmacies—is coming down the pike, thanks to California.
That state already has its own deadline in place for January 1,
2015; however, the FDA will almost certainly be replacing the
requirement with a national standard in order to prevent the
drug-supply chain from getting tangled up in 50 different
state laws.

The California 2015 deadline formanufacturers to
apply an electronic pedigree (e-Pedigree) to each
item-level package has been delayed twice before
because of anguished cries from manufacturers,
wholesalers, and pharmacies that were not ready to
comply. The new final deadline is July 1, 2017, for all
California pharmacies to authenticate the e-Pedigrees
of all packages that arrive at their back door.

“The delays in California gave us a little breathing
room,” acknowledges Robert J. Bepko, Jr., RPh,MHA, Director
of Professional Services at Norwalk Hospital in Connecticut.
As a result of those delays, the National Council for PrescriptionDrug
Programs (NCPDP),which develops standards
for the pharmacy industry, set up its Work Group 17.

This group has been tracking the potential impact of a California
e-Pedigree requirement on pharmacies. In December 2010,
Work Group 17 issued a white paper on the topic.Mr. Bepko,
a member of the Work Group, says that even after California’s
deadline for implementation was delayed,Work Group 17 was
made aware of efforts by New York andMassachusetts to develop
their own e-Pedigree laws.

“We are hoping for a national law,” Mr. Bepko asserts.
FDA’s Role and Timetable Are Unclear

It is not clear when the FDA will establish a national requirement
that would brush away the California program or
whether the agency needs authorization fromCongress to do
that. At a suburban Maryland FDA workshop that took place
on February 14 and 15, 2011, Grant Hodgkins, Manager of
Strategy, Standards, and Processes at Alcon’s supply chain,
asked that very question of Ilisa Bernstein, Acting Deputy
Director of the Office of Compliance at the FDA’s Centers for
Drug Evaluation and Research (CDER).
“I will defer answering that,” she replied.

The FDA does have the authority to set national standards
drug packages, as permitted by the 2007 FDA Amendments
Act (FDAAA). The February workshop had been scheduled
to obtain industry input on standards for interoperability,
authentication, and data management that the FDA plans to
write. Many in the audience equated the writing of standards
with the imposition of a national requirement to track pharmaceutical
packages (forward) and trace them (backwards
from the pharmacy). There was also confusion about the
difference between California’s e-Pedigree requirements and
the prospective requirements of a track-and-trace system (to
be imposed by the FDA at a future date).

The confusion is understandable. There are three
major permutations of an item-level drug-tagging
system meant to make it impossible for counterfeiters
to divert products. All three steps start with a
Standardized Numerical Identifier (SNI), as follows:
(1) The SNI is established and printed on item-level;
(2) the SNI is incorporated into an e-Pedigree, which
is passed forward only; and (3) the e-Pedigree becomes
part of a track-and-trace system, with each
person along the distribution channel adding
information and being able to be queried “backwards” to obtain
information or to communicate (e.g., the pharmacy with
the wholesaler or manufacturer).

The SNI is printed in a two-dimensional (2D) datamatrix bar
code—or, alternatively, on a radiofrequency identification
(RFID) tag—on the immediate package as it goes down the
packaging line.

In March 2010, in response to a requirement in the 2007
FDAAA, the agency issued guidelines onwhat to include in the
SNI: a serializedNationalDrug Code (NDC), consisting of the
manufacturer’s NDC, plus a unique serial number generated
by the manufacturer or repackager for each individual package.
Serial numbers should be numeric or alphanumeric. The
SNI conforms to the structure of the serialized Global Trade
Item Number (GTIN), GS1’s standard for trade item identification.
GS1 is a nonprofit organization (formerly called EAN
International) with headquarters in Belgium.
Overseas Requirements Are Simpler Than
California e-Pedigree or Track and Trace
Turkey and France already have requirements for drug
packages to be printed with 2D data matrix codes when they
leave a manufacturer’s plant. In this first iteration of an anticounterfeiting
(“point-of-dispensing”) system, however, the
codes are simply uploaded to a data repository and then sent
down the distribution line to the pharmacy, where that SNI is
authenticated via a 2D data matrix bar-code reader.

The e-Pedigree system endorsed by California goes a couple
of steps further by requiring the creation of an e-Pedigree
manufacturer
to a third-party logistics carrier, through a warehouse,
and to the pharmacy. First, the package is placed at the end of
a packaging line inside a case with similar packages; the case
is also given an SNI. The package and case SNIs are matched
up, forming a “parent/child” relationship.
The information, in the form
of a digital shipping document
tied to a specific customer order, is passed along the distribution
channel and is added to the package every time it changes
ownership. These pedigrees would be formatted based on a
GS1 standard called the Drug Pedigree Messaging Standard,
which was developed in 2007. However, many consider that
standard to be antiquated. GS1 is working, ever so slowly, on
an updated standard.

A track-and-trace system is similar, allowing for communications
to go backward; however, an e-Pedigree can be forwarded
only. In track-and-trace systems, when the product
changes hands, the new data that were entered into the pedigree
are sent back to the repository, which maintains the product’s
travel history. For example, a pharmacy can query a
wholesaler or manufacturer or can send an acknowledgment
that a shipment was received. All participants in a manufacturer’s
supply chain would have some access to that data repository,
although access might be controlled by the drug’s manufacturer
or by a third party, often a government agency.

In both e-Pedigree and track-and-trace systems, theoretically
at least, cases must be opened in a warehouse, and the 2D bar
codes on the packages must be read to ensure that the packages
inside are the ones sent by the manufacturer. This is a
huge problem for manufacturers and distributors, especially
in terms of the time it is expected to take and the associated
costs. California allows inference, whereby wholesalers and
others would not have to pull the cases apart to check SNIs or
affirmthe parent/child relationship between each package and
the case.

Dirk Rodgers of RxTrace.com explains that California’s
Board of Pharmacymust draw up rules so that companies will
know how they can make use of inference. He says:
“It is possible that the Board could create rules that define
the concept so narrowly that it will be a far cry from what the
industry means when they use the term. We’ll have to see
where they take it.”

Costs Rise as Requirements Expand

There are also broader implications formanufacturers stemming
from requirements for repositories, inference, and the
like. Steve Drucker, Director of Global Pharmaceutical Commercialization
in Packaging Technologies and Compliance at
Merck, explains:

In a full track-and-trace system, you have to make changes to your
manufacturingmanagement systems, warehousemanagement systems,
and order-to-cash systems to track item-level SNIs andmaintain
the parent/child data instead of simply tracking lot numbers,
which is what we do now. It is a huge endeavor, and the complexity
is far beyond anything we have tried before, as are the costs.
He says that the estimated costs for full track-and-trace compliance
are as high as $100 million.

The challenges and costs for pharmacies mount as one
moves up from a point-of-dispensing system (the main requirement
is to verify the SNI), to e-Pedigree (pharmacists
must decommission the pedigree), to track and trace (pharmacists
must communicate with physicians as well as manufacturers).
These possibilities raise all sorts of questions for hospital
pharmacists such as Robert Bepko, Jr. He already has a
pharmaceutical inventory system that he purchased from
McKesson, his wholesaler. In addition, his hospital is in the
process of installing an electronic health record (EHR) system
from Cerner in order to qualify for Medicare incentive payments
for capital costs—and to avoidMedicare penalties for not
implementing an EHR system. He says:
If we knew what was going to be expected of us, we would work toward
that end. If the Joint Commission, the Drug Enforcement
Agency, or the FDA comes in to a pharmacy and asks a pharmacist
to showthempedigrees for themonth ofMarch, the pharmacist can
pull up that list from McKesson. But what if they want to see the
pedigrees for patientMr. Jones?Does that default to the Cerner system?
So you can see the difficulty we have here—preparing for what
we don’t know.

Each additional responsibility adds pharmacy costs, and a
full track-and-trace requirement is likely to be very costly to all
pharmacies. ChrissyKopple, Vice President ofMedia Relations
at theNational Association of ChainDrug Stores, says that proposals
that would mandate the tracking and tracing of prescription
drugs are faced with complexities, technical and
feasibility issues, and substantial costs for all drug supply
chain stakeholders. She says that these systems have not been
developed or fully tested yet and have not been evaluated in
pilot programs; they also lack uniform national standards and
patient privacy safeguards.

So far, wholesalers such as McKesson haven’t focused on
helping their pharmacy customers get ready for e-Pedigrees,
much less track and trace. Ron Bone, Senior Vice President of
Distribution Support at McKesson, explains:
Once we have established a process to quickly on-board manufacturers,
we will then be able to use this as a basis for on-boarding our
pharmacy provider community.With the California pedigree deadline
for the provider community at July 2017, we have not engaged
with this segment as yet.
Pharmacies Are Particularly Vulnerable
Pharmacies, to a large extent, have been at themercy of the
drug manufacturers, which have been driving the drug package
identification process through their involvement withGS1,
the global standards group. The FDA’s designation of an SNI
in March 2010—based on a GS1 standard—illustrates why
pharmacies in particular are worried about the FDA’s next
steps—establishing standards for interoperability, authentication,
and data management.
The FDA’s SNI guidance prescribed an identifier that contains
the National Drug Code and a second 20-digit alphanumeric
code that a company would choose and that would be
unique to a particular drug package. (There is no require-
Track-and-Trace Drug Verification
2 P&T® • April 2011 • Vol. 36 No. 4
continued on page 208

ment that the SNI guidance must be followed, but it is, in
essence, a de jure standard.) Pharmacy data systems, however,
use a field that allows for only 19 characters. That field is set
by a standard fromthe NCPDP, and pharmacies use it to send
data to health insurers when a patient comes in to fill a prescription.
“We would have to make changes to our data systems to
accommodate the FDA’s SNI,” says John Klimek, RPh, Senior
Vice President of Industry Information Technology at the
NCPDP.
Part of the concern within the pharmacy community is that
the FDA relied too heavily onGS1 in writing the SNI guidance,
and the agencymight do so again when it writes the new standards.
Phillip D. Scott, Senior Vice President of Business and
Development at the NCPDP, explains that GS1, which is
dominated by large drug manufacturers, has “owned” the
e-Pedigree space, but its initiatives essentially stop when the
package gets to the pharmacy back door.
“We have felt for some time that we need to make sure that
any transaction could translate once it got inside the pharmacy,
to the physical transaction of filling the prescription,” he
says.
The NCPDP set upWork Group 17 partly as a watch group
to provide information to the FDA, which would counterGS1’s
Big Pharma slant.
The formation of the NCPDP Work Group, as well as the
issuance of its December 2010 white paper, is just one indication
of the pharmacy industry’s interest in what the FDA is
doing. Companies represented at the FDA workshop on February
14 and 15 included Walgreens, Osborn Drugs, CVS
Caremark,Wal-Mart, Rite-Aid, and several pharmacy associations,
such as the American Society of Health-System Pharmacists.
Swedish Pharmacy Pilot Program Provides Hints
So far, almost nowork has been performed in theU.S. on the
potential impact of pharmacy authentication of drug package
pedigrees. The only pilot program ever instituted was in
Sweden under the auspices of the European Federation of
Pharmaceutical Industries and Associations. In this point-ofdispensing
pilot program, which took place in September 2009,
25 of Sweden’s Apoteket AB retail pharmacies verified 2D
datamatrix bar codes on 95,000 drug packages supplied by 14
drug manufacturers. All par ticipating pharmacies were
equipped with new scanners that could read these codes to
verify the products. Existing point-of-sale software was also
amended to include the necessary extra functionality. Product
verification and dispensing operations were fully integrated
into the ordinary pharmacy workflow.
Although each pharmacy in the pilot program received the
new camera-based scanning equipment, the pilot report does
not indicate that cost or the cost of software upgrades. The
pharmacies were basically able to integrate package verification
via the new bar-code readers into the everyday workflow
with little difficulty; however, this was possible only because
of the high rate of e-prescriptions already coming through the
pharmacies, the quality of the Apoteket point-of-sale systems,
and the standardization of systems within the Apoteket pharmacy
network.

Turkey already imposes a point-of-dispensing requirement
on all incoming drug products; thus, Americanmanufacturers
packaging products for Turkey are now serializing drug packages
for that country. These companies includeGEHealthcare,
which packages contrast media products used in conjunction
with x-ray and magnetic resonance imaging (MRI) devices at
its manufacturing facility in Cork, Ireland. Those products go
to Turkey, theU.S., and elsewhere.GEHealthcare hiredOptel
Vision of Canada to serialize that packaging line; as products
move down the line, each one is given a differentGlobal Trade
Item Number.
When the Cork packaging line becomes fully operational,
perhaps by the end of 2011, GE Healthcare will serialize 12
other lines in Norway, Ireland, and Shanghai, says Gordon
Glass, Director of Manufacturing Project management. He is
now deciding between two vendors for an Electronic Product
Code Information System (EPCIS) for data management.
EPCIS is a GS1 standard that allows “event” data on the packaging
line to be uploaded to a data repository and to be shared
with other company data systems as well as systems outside
the company.
Turkey uses GS1 standards (mainly the Global Item Trade
Number unique numbering scheme), as does France; other European
countries that are working on their own requirements
will probably also use it. That puts the pressure on the FDA to
also pay close attention to standards of interoperability, authentication,
and data management that GS1 is developing.
The FDA, however,will have to consider the needs of all players,
not just Big Pharma. That probably will force the agency
to make some tough choices. For example, according to Bill
Fletcher, Managing Partner of Pharma Logic Solutions, the
larger pharmaceutical companies favor a distributed database,
which each company controls, instead of a central data clearinghouse,
which is run by a third-party chosen by the FDA.
“Small pharmacies at the end of the supply chain will likely
not be able to support costly distributed systems and will likely
require faster authentication response times than largerwholesalers,”
he said.
How Heavily Will the FDA Lean on GS1?
Mr. Fletcher and others have argued that GS1 functions as
a “Big Pharma boys club.”Multinational companies can pay upwards
of five figures formembership in GS1, and they, for the
most part, “pay the bills,” sinceGS1 is a nonprofit organization.
Jon Mellor, a spokesman for GS1 Healthcare U.S., explains,
though, that more than 80% of GS1 members are small to
mediumbusinesses spending in the three or four figures. Bill
Fletcher is a member, but he has mixed feelings about GS1.
He says:
They are open to new ideas, but it would be easier to develop standards
for Pharma if we didn’t have to contend with their bureaucracy.
The weekly participants in the work groups are fromvery Big
Pharma, wholesalers, and a handful of solution providers. In fact,
my joining, because I aman unbiased subjectmatter expert and consultant,
required special approval.
Apart from questions about how representative the organization
is, GS1 has had some issues with the standards it has
already developed. Right now, even the e-Pedigreemessaging
standard that GS1 adopted in 2007 is under fire; it was rushed
into final formtomeet the needs of a Florida law that was going
into effect at the time.
Ruby Raley, Director of Health Care Solutions at Axway,
explains that the document pedigree-management system
standard adopted by GS1 focuses on collecting data on a package’s
chain of custody. The system does not provide information
about the physical location of the package at a particular
moment in time, based on an SNI.
Bob Celeste,Director ofGS1HealthcareUS, admits that the
current data-messaging standard is ill-suited to an e-Pedigree
system. He explains that it was developed in 2006 to meet the
requirements of a Florida law that required the passing of
master data, which every participant in the distribution chain
adds to, resulting in considerable redundancy of information.
However, he admits that there is not much going on with that
standard.
GS1 is now in the process of developing new standards that
could be used by the FDA as the basis for a robust track-andtrace
system, in which data would flow forward from the
manufacturer; the pharmacy could also query back to the
wholesaler andmanufacturer. For example, a pharmacy could
send a receipt back to a trading partner to acknowledge that
the pharmacy received a shipment or even a particular package.
To accommodate the needs of pharmacies for this type of
reverse data transmission, GS1 is developing a discovery
service standard.
Whether or not the FDA leans on GS1 as heavily as it did in
coming up with SNI guidance, the agency will be under pressure—
in an antiregulatory environment—not to go overboard
in terms of the complexity of the standards it writes. At its
February workshop, the FDA presented some preliminary
thoughts on its forthcoming standards.McKesson’s Ron Bone
says:
Authentication, as the FDA defined it at themeeting, is slightly different
than how the industry has been looking at it. Now that we
have insight into what the FDA is proposing, the industry can discuss
the ramifications and effectively address it in our responses to
the docket due on April 16.
The FDA is likely to be inundated with various entreaties.
Wholesalers such as McKesson and the large, multinational
drugmanufacturers will dominate the chorus. The question is
whether the pharmacy industry’s voice will be drowned out.

Congress Considers Regulatory Changes

Financial Executive ... April 2011

During the first few months of this new Congress, newly-empowered House Republicans and their increased numbers in the Senate have been sniffing after overactive federal regulators like bloodhounds on steroids. House committee chairmen have chased administrators and chairmen of regulatory agencies up to Capitol Hill oversight hearings amidst rhetorical baying over excesses of the Dodd-Frank and health care reform rulemakings, plus agency administration actions in the area of greenhouse gas emissions and internet access rules of the road.

"I have tasked our Committee Members to track down burdensome regulations that choke investment and destroy jobs," says Rep. Fred Upton (R-MI), chairman of House Energy & Commerce, which along with the Financial Services Committee focused its first hearings on business complaints about an over-ambitious Obama administration agenda. "We will identify these regulations, shine a light on them, and then seek repeal."

Complaints about regulatory overreaching, expressed repeatedly and strongly by business groups of all stripes, have apparently prompted signs of sympathy from President Obama, who issued an Executive Order in January requiring federal agencies to examine rules now on the books, whose costs may exceed their benefits. But that Executive Order won't affect the major rules going into effect in 2011 which business groups are most concerned with. "The President’s executive order ...will not affect regulations being written to implement health care reform or financial reform, arguably the two largest sources of regulatory uncertainty in the current economy," says Rep. Spencer Bachus (R-Ala.), chairman of the Financial Services Committee. "So it is hard not to conclude that this latest initiative is more about politics than real regulatory reform."

     For corporate financial executives, regulations growing out of the Dodd-Frank Wall Street Reform and Consumer Protection Act pose the biggest threat. The law firm Davis Polk & Wardwell estimates Dodd-Frank requires no fewer than 243 new rules by 11 agencies over 12 years. Compare that to Sarbanes-Oxley, passed in the wake of the Enron meltdown, which led to 16 rule-makings, most from the Securities and Exchange Commission (SEC). 

Many of the Dodd-Frank (DF) rulemakings affect only financial institutions, be they commercial banks, investment banks, credit unions and the like. A few of the rules affect narrow industries, such as the requirement that resource extraction issuers disclose payments made to U.S. or foreign governments for the commercial development of oil, natural gas or minerals.

Then there is the one key rulemaking which directly affects the ability of financial executives in every industry to hedge risk and use swaps for commercial, not trading, purposes. DF requires companies who use swaps and derivatives for financial trading purposes to clear those derivatives through clearinghouses, which will be new, non-profit organizations. Industrial and manufacturing companies argued that they were not abusers of derivatives, so they should not have to clear their risk-hedging trades, given the added costs that clearing will impose. Congress agreed, and provided an end-user exemption from clearing for companies who use derivatives for the purpose of hedging or mitigating commercial risk. The SEC and Commodity Futures Trading Commission (CFTC) put out proposed rules on December 23, 2010 providing their thinking on the exemption.

However, a number of critics have raised concern about the wording of the proposed regulation. For example, would utilizing an interest rate swap to convert a fixed rate financing to LIBOR to take advantage of the current low interest rate environment, which currently is a common strategy for some companies, qualify as hedging or mitigating commercial risk. It is not clear it would qualify for the exemption, according to Bruce C. Bennett, a partner at Covington & Burling.

Another unclear issue involves margin costs. Commercial end-users of swaps who take advantage of the exemption will not have to pay margin costs themselves. That much is clear.

However, a company buys a swap from a swap dealer. That would be an investment bank such as JP Morgan, just to take one example. That swap dealer may well have to pay margin costs on an "uncleared" swap. The question, still unanswered, according to Allison Lurton, another Covington & Burling attorney, and a recent CFTC expatriate, is whether the swap dealer can pass along margin costs to the end user.

Business groups already lost one regulatory battle with the SEC over one of the few Dodd-Frank provisions which affects corporate reporting. Corporate types such as Brenda C. Karickhoff, senior vice president & deputy general counsel at Time Warner, had argued that the SEC's intention to require companies to disclose in their Compensation Discussion & Analysis ("CD&A") whether advisory votes resulted in corporate compensation decisions went beyond what Dodd-Frank required. She says companies should have to disclose those actions only if they are material. When the SEC published its final rule on January 25, 2011, it stuck with its wording from its proposed rule, which Karickhoff and others objected to. "The requirement to include, as a mandatory topic in the CD&A, whether and how a company considered the results of previous shareholder say on pay votes in determining compensation policies and decisions has been included in the final rule," says Scott Olsen, PricewaterhouseCoopers. "The final rule is mandatory and not based on any materiality threshold."

A case can be made that business has been losing even more battles at the Environmental Protection Agency. The EPA, using a federal court ruling as justification, issued a final rule, which went into effect on January 2, 2011, which affects all big industrial and manufacturing plants which are newly built going forward and existing plants which make significant modifications. If that modification results in total air emissions exceeding a threshold because of the addition of greenhouse gas (GHG) emissions the plant must obtain a permit from the state which must be approved by the EPA. The permit will require the company to install "Best Available Control Technology (BACT)." The EPA has established some guidance to help states, which have flexibility, determine what constitutes BACT for different plants in different industries. Really persnickety states could require carbon capture, control and storage technology, a very expensive solution. "This is creating a business uncertainty that business abhors," states Howard Feldman, director of regulatory and scientific affairs for the American Petroleum Institute (API).

Going beyond GHG regulation, the agency was scheduled to issue in February a new air emissions rule affecting companies who use industrial boilers and process heaters. That rule will require "major sources''--large emitters in the auto, chemical, metalworking and many other industries--to install maximum achievable control technology (MACT), which is the equivalent of controls used by the top 12 percent performing plants. "Compliance costs associated with these harsh inflexible proposed rules will cost Virginia manufacturing jobs and hurt our global competitiveness," explains Joseph Croce, senior vice president of the Virginia Manufacturers Association. "

And it is not just the boiler MACT that has brought business tempers to a boil. Six months before it issued the proposed boiler MACT rule in the summer of 2010, the agency issued a proposed rule tightening national ambient air quality standards for ground-level ozone. Ground-level ozone is a primary component of smog. The agency wants to lower the George W. Bush administration standard of 75 parts per billion to between 60-70 ppb. A lower standard would affect virtually the entire country, even a place such as Yellowstone National Park, whose ground level ozone has reached 67 ppb, forcing Wyoming to take control measures there. "EPA is trying to do too much now," states Feldman.

Business compliance costs also explain why corporations want a rollback of some of the provisions in some of the interim final regulations issued under the Affordable Care Act (ACA), the health care reform bill Congress passed in 2010. Here the questions have to do with a company's ability to control costs in existing group health plans. Two examples are the ACA's definition of "grandfathered" health plans and of preventive services which must be provided, cost-sharing free, to employees in non-grandfathered companies. Companies whose employee health insurance plans were in effect on March 23, 2010 are "grandfathered"--meaning they do not have to provide some of the ACA's minimum services--unless they change the contours of that grandfathered plan. One of those minimum requirements starting in 2011 is that a non-grandfathered plan must provide preventive services without imposing cost-sharing on the employee.

The three agencies involved in ACA implementation--the Departments of Health and Human Services (HHS), Labor and the Internal Revenue Service--proposed interim final rules (IFRs) last summer on grandfathered plans and preventive services. Final rules have not been issued in either case, yet, and business groups have been lobbying for changes in the interim language. Joe Trauger, vice president, human resources policy, National Association of Manufacturers, says the interim final rule on grandfathered plans means that if employers "make even modest changes" in group plans in order to stem cost and premium increases they would lose their grandfathered status. He adds, "Controlling costs is essential to manufacturers and implementation of the rule as written will force employers to chose between increased costs as they lose grandfathered status and comply with additional reforms or increased costs as they absorb more of the burden of skyrocketing medical inflation."

If the interpretation of what constitutes a grandfathered plan, laid out in the IFR, becomes permanent, many corporate health plans will lose grandfathered status. So they will have to provide no-cost-sharing preventive services. There, group health plans must provide preventive care benefits, without cost-sharing, for evidence-based items or services that have in effect a rating of A or B in the current recommendations of the United States Preventive Services Task Force. Gretchen Young, senior vice president, health policy, of the ERISA Industry Committee, says, "In a number of cases, it is not clear which specific diagnostic and imaging tests are preventive and which would fall under the category of treatment."

Where interim health care reform regulations are still hanging fire, the final Federal Communications Commission (FCC) Order on net neutrality is creating waves. It was issued on December 21, 2010. The rules prevent Internet service providers from discriminating against content and applications, subject to reasonable network management.

Here is another case where Republicans in Congress may try to bring a wayward Obama agency to heel. After Verizon announced a lawsuit against the FCC in January, Rep. Upton praised the legal assault on the FCC net neutrality rule. "At stake is not just innovation and economic growth, although those concerns are vital," says Upton. "Equally important is putting a check on an FCC that is acting beyond the authority granted to it by Congress."

Some federal agencies such as the Occupational Safety and Health Administration have already backpedaled in the face of Republican and business snarling, using the Obama executive order as a rational. But the President has underlined that he is willing to retreat only so far. So it remains for Republicans in Congress to prove what is worse: their bark or their bite.

New Horizons for Growth at GE

February 11, 2011, Hispanic Business Magazine

Stephen Barlas, Contributing Writer

Leaning forward on the edge of a couch in a suite at one of Washington's premier hotels, Luis Manuel Ramirez, CEO of GE's Industrial Solutions division, emits energy like one of GE's new WATT electric vehicle chargers. His hands are in perpetual motion, now orchestrating through the air, now reaching out to gently touch the wrist of an interviewer for emphasis. The 44-year-old CEO has a lot to be excited about. Since he took over the $3 billion-a-year division in January 2010, sales of the once-stagnant unit's electrical components have jumped to double-digit growth rates in many of the 100 countries it operates in.

In his first year at the helm, Mr. Ramirez increased research and development spending 15 percent and added 200 engineers, sales and other personnel to a geriatric-appearing division that was created soon after Thomas Edison established the company in the late 1800s. "We went out and rebuilt the global structure by hiring leaders in key growth markets and approving new technology investments and adding resources we needed to grow," Mr. Ramirez explains.

He had plenty of prior international business experience during his 10-year career at GE, including cementing a $1 billion deal with Algeria in November 2008 to manage gas turbines at 13 power plants when he was general manager of GE's contractual services business. However, this is his first CEO position; he is in charge of 15,000 employees and 60 manufacturing facilities around the world.

Nothing about him says he is the top U.S.-based Hispanic executive at GE. He looks like any other member of the corporate elite, dressed in a light blue, pin-striped suit set off against the one-two punch of a bold purple tie against a subtle lilac shirt. Three aides buzz around the suite. But he pays them no mind. He is direct, engaged, plugged into the interviewer. Built compactly as a nine-volt battery, his words flow like electrons from a power source, smoothly, one precisely after another.

Becoming CEO
It was Mr. Ramirez's multicultural background and executive track recor--not his GQ fashion sense or his silky sentences--that made him a good choice for CEO of Industrial Solutions. The company sells electrical components for traditional markets such as electric- and gas-power producers, transportation and manufacturing plants, and increasingly for "green" markets such as electric vehicles. Sixty percent of its revenue is generated outside North America in countries like India and China.

One would have thought GE would have been attacking the Indian market for many years, given that country's economic growth. Not so. Industrial Solutions had been in India for 30 years; its product line was essentially 30 years old. Mr. Ramirez hired new leaders, revamped manufacturing teams, and expanded the products the division is localizing and introducing in the marketplace. "Our order rate in India has grown 50 percent this year, more than any other division within the GE Energy business segment," he says.

Industrial Solutions is poised for growth in China, too. In December, it broke ground on a Chinese manufacturing facility that is a joint venture with Shanghai Tianling Switchgear Co. The newly engineered, more energy-efficient voltage components produced there give Industrial Solutions a strong entry in the "green" power market, both inside China and outside.

Global Sensibility
Mr. Ramirez's global sensibility comes naturally. He has traveled widely since he was a teenager, starting to work at age 14 so he could pay for airfare to visit a friend who moved first to the Dominican Republic, then Costa Rica and finally Hawaii. "I went to college thinking I would join the Foreign Service," Mr. Ramirez laughs.

At home, he got heavy doses of Hispanic culture from his father, a Cuban emigre who first fought with Castro and then fled from his dictatorship, and his mother, who was born in Colombia. He has always been proud of his Hispanic heritage. But in the early years of his career it was never what he thought about. Yet, people around and above him saw him as a universal player, someone who could adapt to multiple, global environments.

"I didn't make the connection myself, at first," he admits. He does now.

"When they see my face in the Middle East, they think I am Middle Eastern. In India, they think I am Indian. In Europe, maybe I was born in southern Spain," he explains. "People see that I am not the typical Anglo-American, and they ask me where I am from, it is like an icebreaker."

Connecting With Employees
When he arrived at GE, the company had a Hispanic forum, which had been established in the mid-1990s. It was one of a number of "affinity groups" the company sponsored but was somewhat dormant. Mr. Ramirez started working on some forum committees, stepped up eventually to become co-chair and today is an executive sponsor. "It is a great way for me to get connected with a part of our employee base I wouldn't have been connected with," he acknowledges. "My experience with diversity inside the company is that whenever we have embraced it we get more creativity, and as a result, get more success."

His own latest personal success came 10 years after joining GE from Siemens, the German company which, diplomatically put, moved into new businesses very deliberatively. In GE, Mr. Ramirez saw a company which, once it decided to pursue a new market, moved with lightning speed. He started at GE Energy in 2000 as business development and integration leader for the Energy Management Services division. Then he jumped over to Contractual Services rising to vice president in 2008. In late 2009, Dan Heintzelman, the senior vice president at the energy business segment, offered Mr. Ramirez the CEO's position at Industrial Solutions. He didn't know a lot of the details, except that Industrial Solutions was a stand-alone business, global in reach, a turnaround situation, and a growth business GE wanted to invest in again. "It was right in my sweet spot," he explains. "Part of my brand inside GE is turning around limping businesses, globalizing them and giving them solid footing. I wanted to put my thumb print on it and there are not too many opportunities you get in the corporate world to do that."

Changing the Culture
His mission, he says, is to change the culture at Industrial Solutions from one of a sustainable business to one of a growth business. An important part of that strategy is to promote green business products that are part of GE's new, emerging EcoMagination portfolio, such as the WattStation--which decreases electric-vehicle charging time from 12-18 hours to as little as four to eight hours compared to standard charging. "When economy meets ecology, it is a good thing," he says.

Mr. Ramirez also has worked to improve the local ecology--living conditions as much as the flora and fauna--in Plainville, Conn., where Industrial Solutions is headquartered and where he and his wife, Delia Garced, live. Mr. Ramirez has challenged employees to devote energy to local charities such as the Plainville Community Food Pantry and the Petit Family Foundation. "It is a great way to shape the corporate culture when you have people working together like that," he says.

As he has helped shape employees at Industrial Solutions, so, too, has Hispanic culture helped shape him. But he wouldn't be where he is today without an even broader multicultural sensibility, taking French in high school, learning a little Italian during a college stint in Italy. He speaks fluent Spanish, too, of course. Odds are he is learning some Chinese, too, at this very moment. But in whatever language the Industrial Solutions' CEO speaks on any given day, one thing is certain: 15,000 employees listen.

The Future, The Deficit and the Federal Budget

Financial Executive...September 2010


When Rep. Bart Gordon (D-TN) introduced his America COMPETES reauthorization bill (H.R. 5116) on April 22, 2010, he had high hopes for the bill's trouble- free passage through the House. The bill jacked up spending on research programs at three federal agencies and departments, and was designated a "key vote" by at least three business groups, including the Chamber of Commerce, who hoped it would eventually add up to new jobs and new products for American companies.

Gordon thought his bill threaded the political needle; business support meant Republicans would fall into line, increased federal spending meant Democratic support.
Instead of threading that needle, however, Gordon jabbed himself with it.

Republicans and even some Democrats took immediate issue with the cost of the brimming $96 billion bill at a time when the federal deficit was projected to hit $1.3 trillion. Gordon's reauthorization bill pumped up budgets for programs at the Departments of Energy, Commerce and the National Science Foundation at a rate of 8-10 percent a year over a five-year period. He topped that off with dollops of new spending on new programs, some of them seemingly duplicative of existing programs in each place. The annual cost for Gordon's bill was $17.2 billion a year, compared to $8 billion a year for the original bill passed in 2007 in response to a 2005 National Academy of Sciences (NAS) committee report called Rising Above the Gathering Storm, which said the U.S. industrial/exporting/high-paying job sector "appears to be on a losing path."

Three years later, not much had changed. "There is disturbing evidence that our overall innovation lead has not only been lost, but that we are continuing to rapidly lose ground," says Robert D. Atkinson, president, ITIF. Information Technology and Innovation Foundation (ITIF).

But here was Gordon, back with the same basic bill, only fatter. The big budget increases for existing programs during fiscal 2011-2015 seemed particularly irresponsible since Congress had not appropriated funds at the authorization levels for those programs during fiscal 2008-2010. So why even suggest higher authorizations? It was as if Gordon, who is retiring at the end of this session, was sending a message that the deficit be damned. The new programs Gordon insisted on authorizing such as Energy Innovation Hubs and Energy Frontier Research Centers seemed especially excessive given that the marquee new energy program authorized in the 2007 bill-- an Advanced Research Projects Agency-Energy, meant to reproduce the kind of results that the Defense version, called DARPA--had barely gotten off the ground because of Congress's refusal to appropriate funds for it.

The deficit headwinds forced Gordon a month after introduction of the bill to cut its $96 billion, five -year price tag by 10.2 percent. But when that $86 billion bill went to the House floor on May 19, Republicans offered what is called a "motion to recommit" which lopped $40 billion off the bill's price tag by cutting some new programs and freezing spending. It passed by a vote of 292 to 126, the margin in part reflecting inclusion of an amendment--which would have been hard to vote against-- authorizing firing of federal employees who look at pornography on taxpayers' time. The Democratic House leadership then pulled the bill off the floor, found a parliamentary way around the pornography amendment, and brought the $86 billion bill back to the House floor on May 28 when it passed by a vote of 262-150 with some GOP support.

Sen. Jay Rockefeller (D-W. Va.), chairman of the Senate Commerce Committee, and sponsor of the Senate version of America COMPETES, has made it clear that the House bill is unaffordable.
The debate in the House and now the Senate over the America COMPETES reauthorization illustrates how concern over the federal budget deficit is strewing rocks in front of all sorts of key business-favored legislation which would have had a smooth ride through Congress just a few years before. But business groups are responsible for some of the bumps. On the one hand, groups like the Chamber and National Association of Manufacturers (NAM) press legislators such as Gordon to authorize new programs like the Energy Innovation Hubs, Energy Frontier Research Centers and loan guarantees for small- and medium-sized manufacturers included in the America COMPETES reauthorization while at the same time calling for federal spending discipline to reduce the $1.3 trillion deficit.

Asked to reconcile higher federal spending and deficit reduction, Jeff Ostermayer, senior media strategist for the NAM, says, "We have always held the position that the federal government has a role to play to help spur investment and foster economic growth. With our economy still recovering we have supported policies that will help stimulate economic growth and create jobs."
But how to reconcile spending with deficit reduction, that is the question.

President Obama and other world leaders took up that question a month after the House passed the expensive America COMPETES reauthorization during the Group of 20 meeting in Toronto. The agenda there focused on how the world's biggest economies could coordinate to defeat both the global economic slowdown and the looming worldwide deficit debacle. The final G20 communiqué pledged the signatories to a goal of cutting government deficits in half by 2013 and stabilizing the ratio of public debt to gross domestic product by 2016. Although Obama insisted emphatically that there was “violent agreement” on the need to reduce debt over time, the final communiqué included a delicately worded call for deficit reduction “tailored to national circumstances.”

The U.S. national debt stands at $12.88 trillion and the Congressional Budget Office (CBO) expects the nation to add another $1 trillion a year for another decade. Obama, though, hopes to put the debt on a diet; the White House has forecast the projected 2010 deficit of $1.3 trillion will be reduced to $700 billion by 2013.The CBO has given credence to that Obama prediction, prophesying that the deficit will shrink from 10 percent of the economy today to about 4.5 percent in 2013 under Obama's long-range budget blueprint. But reaching that short-term goal depends on Obama's projected budget cuts and tax increases coming to fruition. Moreover, the CBO's June 2010 report The Long Term Budget Outlook calls the long-term budget outlook "daunting."

Obama's big push is toward 2015 when he wants to have a balanced budget excluding interest on the national debt. He has set up a bipartisan National Commission on Fiscal Responsibility and Reform to make recommendations on how that balanced budget can be achieved. Fourteen of the 18 members would have to agree on a package of domestic spending cuts and tax increases for Obama to then submit the recommendations to Congress for approval. Matt Miller, senior director for government affairs at FEI, expects the commission to engage in some good, open-ended dialogue focused on entitlement programs and revenue and tax policy. "A lot of times in these kinds of exercises you will see tight parameters for discussion," he explains. "This is a good inquiry. But it will be extremely difficult for the commission to put forth numerous serious recommendations."

Marty Sullivan, a contributing editor at Tax Analysts, a non-profit publisher of tax information and publications, explains just how extremely difficult it will be for the Commission to prescribe a palatable deficit Rx. "The changes needed to get to a balanced budget in 2015 excluding interest on the debt are earth shaking," Sullivan avers. What might be possible, he says, is to reduce the ratio of U.S. debt to gross domestic product (GDP) from today's level of 65-70 percent. To do that would mean reducing the deficit from its current 10 percent of GDP last year to three percent in 2015. Sullivan estimates that reduction would mean the U.S. would have to cut the federal budget by about $500 billion by 2015. Sullivan posits seven options for performing that gastric surgery:

1) raising all personal income taxes by 30 percent
2) raising all taxes, personal and corporate income taxes, estate taxes, Social Security taxes, etc. by 15 percent
3) cutting Medicare, Medicaid and Social Security spending by 25 percent
4) cutting all discretionary spending by 40 per, including defense, (but not "entitlement" spending such as Medicare, Medicaid and Social Security)
5) cutting all spending, entitlement and discretionary by 13 percent
6) cutting all taxes by 8 percent and all spending by 7 percent
7) imposing a new value added tax at 8 percent

" The current deficit is unsustainable and unprecedented." states Sullivan. "Congress is just taking baby steps. It needs to think outside the box just to get to a minimum level of sustainability."

Of course, the dimensions of the expanding federal deficit and needed solutions were pretty clear before the creation of the National Commission on Fiscal Responsibility and Reform. The long term outlook as viewed by the non-partisan CBO resembles nothing more than the blackening skies in the Wizard of Oz before the tornado swept Dorothy to Oz. And it is going to take more than some short guy with a booming voice behind a curtain to significantly reduce the deficit. The June 2010 CBO report looked at spending trends for Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and insurance subsidies that will be provided through the exchanges created by the recently enacted health care legislation. Under both of CBO’s scenarios, total outlays for those health programs would roughly double as a share of GDP over the next 25 years, from 5.5 percent in 2010 to about 10 percent or 11 percent in 2035. Spending on Social Security would rise much more slowly, from almost 5 percent of GDP in 2009 to about 6 percent in the 2030s and beyond.

Some of the ways of cutting spending on those programs are obvious. J.D. Foster, Norman B. Ture Senior Fellow in the Economics of Fiscal Policy, The Heritage Foundation, says there is agreement "right to left" on the need for Medicare reform. "On the benefit side, every beneficiary is getting a federal subsidy of $6000," he states. " It makes sense to subsidize the health care of low- or middle-income seniors but does it make sense to subsidize Medicare for rich seniors?"

Maya MacGuineas, president, Committee for a Responsible Federal Budget and director, fiscal program policy, New America Foundation, suggests even more radical solutions. "Over time, it would be advisable to fundamentally restructure Medicare to provide a voucher program, which would introduce more cost consciousness and cost controls. Given the progress in creating exchanges in the recent health reforms, this is now more of a possibility. Broad spending controls will have to be introduced to federal health care spending, including a cap on spending growth and triggers to ensure that projected health care savings are realized."

The CBO estimates that these kinds of spending reductions would stabilize the debt-to-GDP ratio at 67 percent for the next decade only if the Bush tax cuts approved in 2001 and 2003 are allowed to expire, if provisions designed to limit the reach of the alternative minimum tax (AMT) are allowed to expire and if annual appropriations drop below the pace of growth of GDP. If some or all of those things don't happen, the public debt would reach almost 90 percent of GDP in 2020. Experts like MacGuineas say the debt ratio should be at 40 percent.

A failure to tame the federal deficit would have myriad unappetizing implications. Most obviously, bills such as America COMPETES will not pass Congress and even if they do appropriators won't approve annual budgets up to the authorization levels. It is interesting to note that when Sen. Jay Rockefeller (D-W. Va.) introduced his version of the America COMPETES reauthorization in mid-July, the bill had a three-year authorization--not five years as in the House--as a way of cutting the bill's cost.

On the tax side, an out-of-control deficit means Congress won't even consider a reduction in the corporate income tax, which even many Democrats support. Nearly everyone with an eye on the global competitive situation understands that American companies are at a severe disadvantage when the U.S. corporate rate is at 39 percent, where it has remained for two decades, compared to the average rate of 26 percent for countries in the Organization for Economic Cooperation and Development (OECD). The only OECD country with a higher rate than the U.S., Japan at 40 percent, recently announced a planned, phased reduction in its corporate income tax as one way of jolting Japan out of its long-term economic malaise, although those plans are somewhat indistinct. But at least the recognition is there.

Not only does a yawning deficit mitigate against corporate tax cuts and an ensuing expansion of capital spending and investment, it also insures expanded borrowing by the U.S. Treasury. That leads to lower national saving which also leads to lower domestic investment. Then there is the whole suite of unappetizing "Greece-like" scenarios revolving around investor confidence and interest rates.

Some Democrats and Republicans in Congress have paid lip service to the need to cut federal spending and, to a much lesser extent, to raise taxes. It didn't go unnoticed in June when House majority Leader Rep. Steny Hoyer (D-MD) raised the possibility of raising the retirement age for Social Security as well as breaking President Obama's presidential campaign promise not to raise taxes on those earning less than $250,000. But even there Hoyer was tentative, saying President Bush's "middle class" tax cuts, which expire at the end of 2010, should be extended but only for one year, which was a way of saying that this Congress didn't have the courage to make that move, but maybe the next Congress would. Then, a week later, Rep. John Boehner (R-Ohio), the House Republican leader, said he favored raising the Social Security retirement age, too, and tying cost-of-living increases to the consumer price index rather than wage inflation and trimming benefits for retirees with substantial non-Social Security income.

But talk has clearly not translated into action, as House passage of the arguably bloated America COMPETES reauthorization proved. Neither the House nor the Senate has considered Obama's "Reduce Unnecessary Spending Act of 2010." The bill would give the president, whomever he or she is, the authority to delete spending from a recently-passed appropriations bill and send that bill back to Congress. The legislation would require the Congress to vote up or down on the presidential cuts. However, a president's spending cuts would be limited to discretionary programs, meaning excluding Social Security, Medicare, Medicaid; tax cut bills would also be off limits. The Obama-proposed authority is far weaker than the line-item veto power a GOP-dominated Congress gave President Clinton in 1996. Under that bill, before it was struck down by the Supreme Court in 1998, Clinton's line-item vetoes automatically went into effect unless overturned by a two-thirds vote of both the House and Senate. It is highly unlikely Congress will pass even Obama's diluted proposal which, as of the end of July, had not moved forward one inch.

Congress's refusal to entertain the Obama bill is just one example of its inability to confront the deficit issue. There are starker examples. In July, it became clear the House would not, for the first time since 1974, introduce, much last pass, a budget resolution. These are annual bills laying out five-year spending and tax plans which serve as a guideline for the Appropriations Committees in both houses. They indicate the size of the federal deficit over that period. The failure of the House to produce a budget resolution was a result of a split within the Democratic caucus. Conservative Blue Dog Democrats wanted a budget resolution which produced, again symbolically, cuts in some federal programs between fiscal 2011 and 2015, showing significant progress toward Obama's goal of a balanced budget minus interest on the federal debt.

Progressive Democrats wanted the resolution to reflect even greater deficits in the short term as a way of jolting the economy out of its continuing doldrums and producing more jobs. House Democrats produced instead what is called a "deeming" resolution which sets targets for only the next fiscal year.
Of course it is not just the Democrats who are hiding from the deficit problem. Republicans resolutely oppose any tax increases. Sullivan argues that the Republicans would be more willing to countenance a tax increase if business groups supported the idea. He notes that the Business Roundtable has at least opened the door to consideration of a value-added tax (VAT) in the U.S. Almost all European countries have one in the area of 15-20 percent. Imposition of a VAT, says Sullivan, would allow Corporate America to demand in return a reduction in the corporate income tax. "Obviously, there have to be spending cuts first," Sullivan notes. "But the second phase has to be broad-based tax increases." He explains that without those tax increases, President Obama and congressional Democrats will continue to look to business for new tax income each year. "It is death by a million cuts," he states. Other countries have recognized the link between lower corporate income taxes and a higher VAT. The new Japanese prime minister has just proposed a cut in that country's 40 percent corporate income tax as part of an increase from 5 to 10 percent in the Japanese VAT.

The new Great Britain government of Prime Minister David Cameron has taken a similar step to address that country's deficit problem. Cameron's plan, agreed to by his coalition of Conservatives and Liberal Democrats, cuts the budgets of most government departments by 25 percent over the next five years. The steps outlined to the House of Commons by George Osborne, the chancellor of the Exchequer, would cut the annual government deficit by nearly $180 billion over the next five years. Great Britain will increase its VAT to 20 percent from 17.5 percent and raise its capital gains tax to a new high of 28 percent. In exchange, the corporate income tax rate will be reduced over a five-year period to 24 percent from 28 percent.
MacGuineas says Great Britain has the formula for austerity about right mixing four pounds in spending cuts for every pound in tax increases. "That is the right model for the U.S." she says. "Although some of the spending cuts have not be specified, what the British government has done is quite remarkable. They are off to a credible start."

She pauses, then adds, " It would be nice if the U.S. were off to any start. It is sort of shameful to watch other countries get their act together while we squabble over petty partisan problems."