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Agencies Prepare for Hair Trigger of Sequestration

By Mari Serebrov
Washington Editor

With sequestration set to trigger in less than three weeks, the FDA, National Institutes of Health (NIH) and other federal agencies are preparing for the worst while still hoping to be spared.

The agencies sent out notices last week to their employees, informing them that furloughs, or unpaid leave, may be necessary over the next seven months to help achieve the $85 billion in across-the-board cuts mandated by the revised 2011 Budget Control Act.

The "agencies are working through exactly how they are going to execute under this very significant cut in their budgetary resources," Danny Werfel, federal controller for the Office of Management and Budget (OMB), said at a White House news briefing Friday. "Those planning activities are ongoing."

The problem is that sequestration takes a shotgun approach to budget cutting, leaving the agencies little room to target or shield specific programs. Under the revision that granted a two-month delay for the sequester, which was supposed to trigger Jan. 2, agencies are facing about a 5 percent cut to most of their programs, projects and activities. The original Budget Control Act had called for an 8.2 percent cut to all discretionary spending to achieve $109 million in savings in fiscal 2013. (See BioWorld Today, Sept. 17, 2012.)

The Obama administration released a fact sheet Friday outlining some of the impact of the sequester. For instance, cuts to NIH funding would force the agency to delay or halt projects and offer fewer research awards. With each award supporting up to seven research positions, the loss of hundreds of awards could result in several thousand researchers losing their jobs, according to the fact sheet.

"Many projects would be difficult to pursue at reduced levels and would need to be cancelled, putting prior year investments at risk," the administration said. "These cuts would delay progress on the prevention of debilitating chronic conditions that are costly to society and delay development of more effective treatments for common and rare diseases affecting millions of Americans."

Sequestration also would force delays at the FDA's drug center in translating new science and technology into policy and decision-making, which would result in delays in new drug approvals. Faced with cuts in operational support, the agency would likely miss review performance goals negotiated in PDUFA V, the fact sheet noted.

In addition, the administration is anticipating cuts to the AIDS Drug Assistance Program that could result in 7,400 fewer patients having access to HIV drugs and about 424,000 fewer HIV tests being administered by Centers for Disease Control and Prevention state grantees. A cut in testing could result in increased HIV transmissions, the White House said.

Other cuts that could affect the biotech industry include a decrease in defense spending and reductions in small business assistance.

Under the amended Balanced Budget and Emergency Deficit Control Act, which laid the ground rules in 1985 for any federal sequestration, programs such as Medicaid, Medicare Part D and Social Security would be exempt from a sequester. Exemptions for some Department of Veterans Affairs programs are discretionary, as is military pay. While the act allows a 4 percent sequestration for nonexempt Medicare programs, the 2011 Budget Control Act reduced the Medicare cuts to no more than 2 percent. (See BioWorld Today, Sept. 10, 2012.)

Meanwhile, two options are floating around Capitol Hill to deal with the sequester, which was triggered by Congress' failure to pass legislation as of Jan. 15, 2012, to trim $1.2 trillion from the deficit by 2021. One option would let the sequester hit March 1 as scheduled; the second one would provide another short-term delay with the hope that Congress could work out a deal to avoid sequestration permanently. There's no question that the second option would be far superior economically, according to the administration.

If the sequester were delayed again, Werfel said the automatic cuts would probably be less drastic, but they would have to occur in a more condensed time frame, so there would still be a significant impact.

In the meantime, Werfel added that he doesn't advise agencies to rely on hope that the sequester would be totally averted. "They need to execute plans that protect their mission. . . . And every agency is going to have to approach that differently," he said.

His advice is a change from the OMB's bulletin last September in which the office, confident that the sequester would be shot down, encouraged agencies to ignore the possible cuts as they planned their 2013 spending under a continuing resolution. (See BioWorld Today, Oct. 2, 2012.)

Now, OMB is dealing with the realities of the looming cuts. If the sequester trigger is pulled, the office will work with the agencies to ensure that "they're doing prudent things to meet" the legal constraints of the law, Werfel said, warning that despite those efforts, "their mission will be compromised."

Pressure on for Health Spending

As Congress and the White House wrangle over sequestration, a national health policy adviser is warning that this is the opening act in what looks to be a protracted battle over health care spending.

Citing the Congressional Budget Office's (CBO) latest outlook for fiscal 2013-2023, the Farragut Square Group (FSG) said, "Even if the sequester is resolved and a big budget deal is reached this year, federal health spending will continue to face enormous pressure in the future as it begins to exceed both Social Security and domestic discretionary spending as a share of GDP."

Health care spending is expected to grow rapidly over the next decade, according to the CBO, due to the aging population and the dramatic increases in the number of people who will be receiving government support for health care under the Affordable Care Act. (See BioWorld Today, Feb. 7, 2013.)

As a result, Medicare spending is projected to double in the next 10 years, which means it will be a target when "policymakers are looking for budget savings," according to FSG. The research firm expects both providers and beneficiaries to be "the focus of cost-containment efforts."

No Pain, No Gain

The CBO is making it pretty clear that there's no painless way out of the nation's financial crisis, with the federal debt expected to reach at least 77 percent of GDP by 2023 under current law. It's just a matter of when the pain is felt.

To help Congress better assess the macroeconomic effects of possible changes in its tax and spending policies, the CBO issued a report that analyzes three possible budgetary paths. The first path would increase the deficit by $2 trillion. While the increase in spending would boost the economy 0.3 percent by the fourth quarter of fiscal 2014, it would lead to a 0.9 percent loss by 2023. Under this scenario, the federal debt would hit 87 percent of GDP in 10 years.

The other two paths would reduce the deficit by $2 trillion and $4 trillion. The smaller cut would lead to a short-term loss of 0.3 percent, but a long-term gain of 0.9 percent and a federal debt, in 2023, equivalent to 67 percent of the GDP.

The deeper cut would lead to a 0.6 percent decline in the economy in the near term, but it would yield a 1.7 percent increase over the long haul. And it would reduce the debt to 58 percent of GDP.