
Sequestration: What Does it Mean for Pharma?
Lurking in the shadows of the US General Elections is something called The Sequestration Transparency Act of 2011.
You may have read horror stories about the looming Sequestration Act, but what exactly is it? And what does it mean for US pharma? Tom Norton reports.
Lurking in the shadows of the US General Elections is something called
So, with near Armageddon apparently on the horizon, what in the world is this Sequestration Act and more importantly, what impact, if any, will it have an on the US Pharma? Read on, and I think you will be surprised at the answers. I was.
First of all, what the heck is a “sequestration”? According to dictionary.com, as a legal term, sequestration means “confiscation” or “seizure”. So, this law is designed to confiscate, or seize money out of the existing US budget. Interesting that we have to pass a law to take back our own money…
Anyway, this 2011 act of Congress mandates that the President and Congress must:
“Revise the discretionary spending limits and reduce the discretionary appropriations and direct spending specified in the 1985 Gramm-Rudman-Hollings Act unless a joint committee bill achieving an amount greater than $1.2 trillion in deficit reduction would be enacted by January 15, 2012.” (
Further, this $1.2 trillion dollars in federal spending
Where it becomes particularly interesting is that under the law the so-called ‘mandated spending’ - Medicare, Social Security, Medicaid (For 2012, it’s $2.25 trillion) - is exempt, and not ‘Sequesterable’ during this nine year mandate. Indeed, all the Sequester cuts will be coming from only the remaining ‘discretionary’ spending, which totals approximately $1.6 trillion in 2012.
And so, under the theoretical Sequester for 2013, US ‘discretionary spending’ will be reduced by about $110 billion and go from $1.6 trillion to $1.5 trillion. These cuts will be spread across the bureaucracy at rates that are set at 7.6% to 9.6%, plus a 2% cut to Medicare provider.
That’s it. Armageddon? Obviously not. And really, who among us has not had to deal with somewhere around 10% in business cutbacks over the last nine years?
But let’s get back to my original question. How could this impact the US Pharmaceutical industry? There’s an interesting list of effects that are being projected. And by the way-as a point of transparency - the estimates for these cuts are all over the place given the many unknowns that surround the actual implementation of the Sequester. I purposely have included those that appear to be on the ‘conservative’ side of the many guesstimates that are out there.
FDA
For starters, let’s take a look at what the Sequester could mean at the FDA. According to the 2012 OMB report, the ‘sequesterable’ budget authority (BA) for FDA is $3.873 billion. Therefore, for FY 2013,
A mess, to be sure. So if nothing else, such an action could slow down the 2013 FDA drug approval process…and clearly not good for the Rx industry.
National Institutes of Health (NIH)
Another major Sequester impact point for the Rx industry would be at NIH. An awful lot of basic research and development on new drug entities is done by the NIH,
National Science Foundation (NSF)
This independent federal agency, created in 1950, was designed to support outstanding “science” being generated in academic centers around the nation. Today, 20% of federally sponsored academic research is underwritten by the NSF including biologic research into plant and animal genomic characteristics. Given the prescription drug revolution in genomic medicine that is currently underway, it hardly needs saying that slashing the NSF would not seem wise thing to do at this point. According to the
Medicare 2% cut in Reimbursement to Providers
In my mind, probably the biggest “sleeper impact” of the Sequester on the RX industry, and really this entire Sequester, will come in the form to the proposed 2% cut in reimbursement fees to Medicare providers. Why? Well, consider the following:
Further of those being laid off, in the first year, 40,000 would be physicians, dentists, and other practitioners.
Why all the employment impact? The study reasons that the delivery of Medicare services flows downstream, through many professional and support sectors in each medical institution that receives Medicare funding. When a provider cut like this occurs, the business operations of these organizations take over. Services are reduced or stopped; procedures curtailed or eliminated; and staffs laid off. End result? Diminished care to patients.
Oh, and have any of you been through one of these Medicare health center cut backs? I have experienced many, and among the first things to go is access to Rx pharmaceuticals. So it doesn’t take too much imagination to figure out how major teaching hospitals in large cities around the US will respond to their Medicare cuts. In their pharmacy services area, say good bye to brand name products, and say ‘hello’ to therapeutic substitution, using all generic formularies…
Overview
So let’s step back and take a look at all of this for a moment. Unless Congress gets it act together “H.R. 5872: The Sequestration Transparency Act of 2012” will go into effect on January 2, 2013. The impact of $110 billion being cut from the federal budget could no doubt lead to major losses in public and private employment, and a likely reduction of industrial capacity in many areas of the economy. All dire, and all very serious, especially at this time.
But from the standpoint of the Rx industry, think about a few of the variables floating around this issue, too.
· For instance, if the proposed cuts to the military (
· Or let’s say you’re an Rx R & D director who is trying to move forward with NIH research in a critical cancer project. If the National Cancer Institute, one of the NIH’s largest, stands in line to be one of those drastically cut in the Sequester, do you, or even can you…continue your project partnership with NIH? Do you simply stop the project? What happens to your research and the promise it holds for cancer patients around the world?
· And finally, what if you are a CEO, or the SVP of sales & marketing at a US Pharma company? How do you plan for 2% cuts to Medicare provider reimbursements, slowed FDA new drug approvals, reduced NSF support for key company research, and promising NIH projects that may simply evaporate? Answer: You do what this industry always does when markets contract: Cut overhead, close plant, fire employees, and hunker down until this passes, if it does.
So, I would suggest it definitely could be tough sledding for the Rx business if the Sequester comes on line. For every employee of the Rx industry, it bears careful study. Given all the other challenges facing the US Pharma business right now, being shot in the foot by our own Congressional Sequestration Law just doesn’t seem to be the best thing to do. But it seems, unless our better spirits rise up here, this is where we could come out on January 2, 2013. Those are my thoughts on the Great Sequester of 2013. I’d be interested to hear what you think about this situation, too.
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