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Sequester Sword Falling on U.S. Federal Programs

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By Mari Serebrov
Washington Editor

The thin thread suspending Damocles' sword inches from federal budgets snapped Friday as Congress and the president threw up their hands on averting a sequester that will bring across-the-board cuts to most government programs, including those at the FDA and National Institutes of Health.

Blaming the long-term deficit problem on the continued increase in health care costs, President Barack Obama warned that government-wide sequestration will be painful. He hoped that when Americans feel the pain, they will push Congress to end it.

How long that will take is anyone's guess. "It may take a couple of weeks. It may take a couple of months," the president said at a news conference Friday that followed a last-ditch meeting with congressional leaders to avoid what he called the "dumb, arbitrary cuts" of sequestration.

Despite his feelings about the cuts, the president had no choice but to sign an order before 11:59 p.m. Friday to implement the sequester, which was added to the Budget Control Act of 2011 as a way to force Congress to deal with the spiraling national deficit. The sequester was triggered by Congress' failure to pass legislation as of Jan. 15, 2012, to shave $1.2 trillion from the deficit by 2021. (See BioWorld Today, Feb. 12, 2013.)

Along with the presidential order, the law requires the White House Office of Management and Budget (OMB) to simultaneously submit a report to Congress detailing the reductions in each budgetary account.

Originally scheduled to start Jan. 2, the sequester was expected to chop about 8.2 percent from most government programs for a total fiscal 2013 savings of $109 billion. When Congress pushed the cuts back to March 1, it reduced the expected savings to $85 billion, estimating a 5 percent cut. (See BioWorld Today, Feb. 12, 2013.)

However, in a memo issued last week, OMB said the impact would be much deeper.

While its preliminary estimates indicate the cuts would be roughly 5 percent for nondefense programs and 8 percent for defense programs, those reductions were based on a full year's budget.

Since the impact of the sequester will be compacted into the remaining seven months of the fiscal year, the effective cuts will be closer to 9 percent for many nondefense programs and 13 percent for defense programs, according to OMB. (See BioWorld Today, March 1, 2013.)

Although the budget wounds may be deeper than some people had anticipated, the pain probably won't be immediate. Sequestration will have a ripple effect throughout the economy, though.

"The longer the cuts remain in place, the greater the damage to our economy," Obama said Friday. He wasn't optimistic that the sequester would end any time soon, but "we will get through it," he insisted. "It is not going to be an apocalypse. . . . It's just dumb."

Exempt User Fees?

Obama didn't address potential plans to alter the sequester to give agencies more flexibility in making the required cuts or to exempt user fees, nor did he discuss the prospects of ending it as part of the talks to renew the continuing resolution at the end of the month to keep the government running in lieu of a 2013 budget.

Having user fees exempted would be a boon to the FDA, which was granted permission last year to collect increased drug and device fees, along with new fees for generic drugs and biosimilars.

While the agency is getting the fees, its spending is limited to 2012 levels.

The sequester would restrict what it could spend even more, unless user fees were exempted.

Looking ahead, Obama said he would sign a new continuing resolution, so long as it lived up to the agreement reached in the Budget Control Act, even if the sequester remained in place.

As Congress turns its attention to renewing the continuing resolution, the president said tax reforms and reforms to Medicare and other entitlement programs will be needed to bring the deficit under control.

Meanwhile, biopharma is taking a "wait-and-see" stance on the sequester, which "just adds another level of uncertainty," said Glenn Engelmann, vice chairman of the Life Sciences Industry Group at McDermott Will & Emery. Possible delays in drug reviews, pre-approval inspections, re-inspections and guidance drafting create "one big 'if' for life sciences companies," he told BioWorld Today.

If there's some resolution in the next 30 to 60 days, Engelmann said much of the impact to biopharma would be mitigated. But if federal agencies hold off on making cuts in the hope that Congress will make the sequester go away, the last few months of fiscal 2013 could be even more painful should the cuts remain in place.

On another level, Engelmann said, the government's inability to step up and address the budget problems in a timely way brings uncertainty to the investment community. That could impact biopharma more than the sequester itself.