Drug Money

he Food and Drug Administration has a problem that many other agencies would like to share. FDA's budget has been increasing by more than 6 percent a year, on average, since 1992. But FDA's bounty comes not from Congress, but from user fees paid by the pharmaceutical companies the agency regulates. Most of the increase occurred between 1992 and 1994, when new user fees increased the agency's budget by almost 20 percent. Without the user fees, the agency's budget would have been only slightly higher in 1998 than it was in 1994.

While FDA is happy to get funds unfettered by legislators' whims and requirements, the fees have created a complicated set of incentives that raise the possibility that the agency could be driven to focus increasingly on industry priorities, even if this interferes with the agency's broader mission of consumer protection. The dilemma will continue: FDA proposes to raise an estimated $740 million in fees over the next five years.

In response to widespread complaints from the pharmaceutical industry about FDA's lengthy process for reviewing drug applications, Congress passed the Prescription Drug User Fee Act (PDUFA), which took effect in 1992. The law authorized FDA to collect fees from the pharmaceutical industry to expedite reviews. The application fees were to be paid in two installments--half when the application was submitted and half when it was acted on. Thus, there was a direct financial relationship between the speed of application processing and the receipt of funds. The fees came in addition to FDA's annual appropriation, and PDUFA prevented Congress from reducing appropriations to offset fee income.

In 1997, FDA was authorized to spend more than $87 million in user fees, which it used to hire almost 700 additional employees. Drug application fees provided almost 10 percent of FDA's 1997 budget and financed about 8 percent of agency staff. Most importantly, almost 40 percent of the total amount FDA spent on processing human drug applications in 1997 came from user fees.

PDUFA was originally intended as a five-year experiment, with reauthorization contingent on industry satisfaction with the law's effects. By all accounts, the experiment has been a success. Since 1992, drug approval times have been cut in half and the number of new drugs approved each year has doubled. In fact, the reform of the FDA drug approval process received a Ford Foundation "Innovations in American Government" award in 1997.

PDUFA was reauthorized in November 1997 in the FDA Modernization Act (FDAMA), which extended the user fees for five more years. FDAMA altered the two-part application fee system so the entire fee now is paid up front, reducing FDA's incentive to speed processing in order to more quickly receive the fee balance.

Nevertheless, FDA continues to face the challenge of accomplishing its regulatory mission when it depends increasingly on the regulated industry to pay for basic resources. This challenge is particularly stark when the requirements of FDA modernization are compared with the underlying premise of the 1993 Government Performance and Results Act (GPRA). While GPRA should focus FDA's attention on improvements in health outcomes resulting from FDA-approved drugs, the modernization law would have FDA focus on streamlining and speeding up the drug approval process. In most cases, faster drugs do contribute to better health outcomes. But emphasizing review times as a performance measure signals staff that faster reviews are the top priority for the agency.

FDA is constantly trying to strike a balance between the viewpoints of its many stakeholders, according to Robert Byrd, the agency's chief financial officer, who says FDA was very careful to keep health outcomes at center stage when implementing PDUFA. "The idea was that if we could bring drugs to the public faster, there would be a public health benefit," says Byrd. He does not believe public health is being compromised. FDA shares with many agencies the difficulty of measuring outcomes under GPRA, Byrd says. But, he notes, it is a "legitimate public policy question" whether the complex incentives created by FDA's reliance on user fees may eventually give pharmaceutical companies a greater say in how FDA uses its resources.

Endangered Expertise

FDA works aggressively to attract top scientists to review new drugs and vaccines. Nevertheless, Byrd says, "It is a challenge for the agency to attract and retain scientists that it needs to support its science base." FDA also has problems keeping up with private-sector research. The agency often is asked to approve products that result from cutting-edge research, but FDA cannot be an effective regulator without maintaining the expertise necessary to review trailblazing products.

Ironically, FDA recently has reduced the resources being put into basic research. More than a third of approximately 200 research jobs in FDA's Center for Biologics Evaluation and Research (CBER) are slated to disappear over the next two years. The downsizing came after the FDA agreed to demands by the pharmaceutical industry that the agency stop funding research positions in CBER from user fees.

CBER performs product reviews, but also does pure scientific research, a model scientists inside and outside the agency contend is vital if FDA is to keep pace with rapid pharmaceutical, biological and medical advances. The research cuts raise a red flag about FDA's future ability to understand the science used to create the products it will be asked to approve.

Mission and staffing challenges aside, FDA's basic management systems appear sound. The agency performs its basic financial management functions well. Its information technology processes have recently been reformed, allowing centralized attention to planning and performance while delegating substantial autonomy to managers. Its human resource management system is largely centralized, but regional HR staff ensure the system is responsive to users. FDA benefits from having been an early advocate of strategic planning and performance measurement.

Fees Impose Order

FDA gets generally high marks for financial management from the General Accounting Office and inspector general audits. Because of the user fees, FDA has been attentive to cost accounting and to allocating its resources consistent with its priorities, at least in the fee-funded area. If FDA is going to continue to satisfy the drug applicants who are paying the freight, they must be convinced there is some relationship between the amount they are paying and the cost of processing drug applications. Managers say they have sufficient control over their budgets, yet FDA's internal controls are rated highly by auditors. The agency requires its contractors to meet specific performance targets and monitors compliance.

Still, FDA faces several financial management challenges. One involves correcting a long-standing problem in accounting for property, plant and equipment, such as computers. Because of this problem, FDA was unable to receive unqualified audit opinions on its financial statements for fiscal 1996 and fiscal 1997. The House Commerce Committee summoned agency officials to a hearing last April to explain the property management problems. FDA is taking the problem seriously, says Byrd. He notes that property "was not going out the back door, it just wasn't being properly recorded."

While FDA had hoped to have an unqualified opinion for fiscal 1997, the audit's timing and the magnitude of FDA's property challenge (the agency occupies 40 different sites in the Washington metropolitan area alone) made the agency unable to "get ahead of the cycle," according to Byrd. Still he notes that "we have every reason to believe that we will get a clean audit opinion for fiscal 1998."

Flexible Centralization

In the area of human resources management, FDA has a mix of centralization and decentralization that serves the agency well. Most FDA human resources professionals work for the Office of Management and Systems, a centralized human resource office, but each of the agency's seven centers has a complement of HR staffers as well.

Health and Human Services Secretary Donna Shalala's advocacy of improving workplace quality has paid off at FDA. Morale is high. In a survey conducted a year ago, 84 percent of 616 FDA employees said they almost always or usually were able to balance work and family life through the use of flexible schedules and leave options. FDA has been aggressive in providing flexible work options.

FDA has few labor relations problems. The National Treasury Employees Union, which had represented only about 20 percent of FDA field employees, won an election in April 1997 that will extend its representation to approximately 60 percent. Union officials praise FDA managers for their attention to labor relations since the election.

Getting Information ASAP <> FDA also seems to have been able to strike a balance between centralization and decentralization in managing information technology. Chief Information Officer William Bristow has instituted a planning process that provides effective coordination.

In fact, Byrd says the turnaround in technology management began with Bristow's arrival in December 1996. "He brought the level of expertise that the agency needed at a critical point in its development," according to Byrd. Bristow has central authority regarding policy, informed by a standard-setting process managed by an Information Resource Management Council. Technology managers in FDA's operating centers are council members. As long as managers comply with agency standards, they have substantial autonomy in acquiring hardware and software. Further, IT projects are monitored throughout their life cycles to ensure that they come in on schedule and stay within budget.

Unfortunately, the development of this process did not come without costs. Soon after his arrival, Bristow suspended the Administrative Systems Automation Process (ASAP) project, which was designed to provide employees access to an integrated agencywide administrative data system. But after a year and a half and an expenditure of $6 million, "the deliverable was not testable and was inoperable," Bristow says. The failure stemmed in part from the fact that FDA had not been clear enough with the contractor about its expectations. After Bristow suspended the project, FDA gave more specific instructions about what was expected. The system is now employed to track time and attendance and is ready to accept other applications. The failure and subsequent recovery of ASAP shows FDA is able to make hard decisions about systems that are not meeting the agency's needs, and to respond by reforming contract awards and monitoring.

FDA also recently won a Government Technology Leadership Award from Government Executive for improving its system of reviewing shipments of food, drugs, cosmetics and medical devices to the United States. The agency must inspect nearly 8 million such shipments every year, a 50 percent increase over four years ago. Faced with a growing workload, the FDA developed the $8.2 million OASIS system, which was implemented in 1997. Under OASIS, importers electronically submit documentation that is quickly reviewed on PCs by FDA employees. FDA returns its admissibility decisions to the importers within minutes instead of days under the previous manual system. Now, 85 percent of shipments are handled electronically, without paper documentation.

Chief among FDA's future IT concerns is providing managers with easy access to mission-critical data. For example, managers report that state regulatory data are not readily available. Therefore, FDA regulators cannot easily track the status of state actions concerning particular drugs, medical devices, or foods. Further, information FDA already has is sometimes not easily accessible. Information from one FDA center is sometimes unavailable to another because each center tends to develop its own computer applications. For example, inspectors at the Center for Food Safety have a tough time gaining access to information from the Center for Veterinary Medicine, even though developments in veterinary medicine significantly affect the quality of food.

Process vs. Outcomes

FDA has a difficult time specifying and measuring the outcomes of its programs, since they are ultimately related to many factors outside of the agency's direct control. For example, two of FDA's top priorities--reducing teen smoking and reducing illness resulting from food contamination--are largely outside of its control.

The third priority--reducing time to bring new drugs to the public--is less of an outcome measure than a measure of FDA processes. While it is certainly possible, perhaps even likely, that public health will improve as a result of FDA moving more quickly to approve new drugs, it is not certain. FDA also does not feel free to move too far toward measuring outcomes in the drug approval area. Because FDAMA makes it so clear that the reauthorization of user fees is tied to FDA's ability to meet its process goals, the agency's strategic planning and performance measurement systems tend to focus on these process outputs.

There is no question that FDA engages in strategic planning and that its planning process considers input from outsiders. But to meet the goals of the Results Act, FDA, like many other agencies, has some distance to go before it will be able to clearly specify the relationship between its activities and real-world outcomes.

FDA's biggest management challenge is balancing its accountability to the public with the need to pay heed to the industry that provides an increasing share of its resources. Agency officials must continue to walk the tightrope between the two. Perhaps nowhere is the potential problem more obvious than in the difficulties FDA has in maintaining the scientific expertise necessary to perform its missions. If FDA is unable to maintain a knowledge base that matches that of the drug companies, its ability to regulate may be compromised.

Management Grades