FY 2004 MDUFMA Financial Report: Main Report
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- Meeting the Legal Conditions for User Fees in FY 2004
- User Fee Revenues
- Obligation of User Fee Revenues
- Carryover Balances
- Total Costs of the Process for the Review of Device Applications
- Management Challenges for FY 2005
MDUFMA authorized FDA to collect fees from the medical device industry to augment appropriations spent on the device review process, and also required additional funding from appropriations. These resources are to be used to hire and support additional staff for the "process for the review of device applications" as defined in MDUFMA, so that safe and effective devices reach the American public more quickly. MDUFMA was patterned in part after the successful Prescription Drug User Fee Act (PDUFA).
Under MDUFMA, an application fee must be paid when certain device applications are submitted. Fee-paying applications include premarket applications (PMAs), product development protocols (PDPs), premarket reports (PMRs), modular PMAs, biologics license applications (BLAs), and certain supplements to all of them, as well as premarket notification submissions (510(k)s). The aggregate application fee revenue amount is set in statute, but is adjusted each year for cumulative inflation since FY 2003, and may be further adjusted for increases in workload and for revenue shortfalls from previous years. The individual fees for various types of applications are fixed in statute as a percent of the fee for a PMA. Fees are set in August of each year after the inflation, workload, and shortfall adjustments to the statutory fee amount have been determined. Unlike PDUFA, there are no product or establishment fees under MDUFMA.
MDUFMA requires FDA to submit two reports to Congress each fiscal year. A performance report is to be sent within 60 days of the end of the fiscal year, and a financial report is to be sent within 120 days. The FY 2004 MDUFMA Performance Report, which discusses FDA's progress in meeting the goals referred to in MDUFMA, is being separately transmitted to Congress. This is FDA's FY 2004 MDUFMA Financial Report, covering the period October 1, 2003 through September 30, 2004.
As required by statute, this report presents the legal conditions or "triggers" that must be satisfied before FDA can collect and spend the fees, and FDA's calculations showing the extent to which those conditions were met in FY 2004 (Appendix A). This report also describes in some detail (Appendix D) the process for the review of devices as defined in MDUFMA — a process that includes portions of activities in FDA's device and radiological health program, biologics program, field activities, and Office of the Commissioner. The total costs of the process for the review of medical device applications, as defined in MDUFMA, are presented — both the costs paid from fee revenues and the costs paid from appropriations. This report presents FY 2004 revenues and obligations from user fees and a summary statement of user fees collected.
In keeping with the requirements of the Chief Financial Officers Act of 1990, the Office of the Inspector General (OIG), Department of Health and Human Services, audits FDA's annual financial statements. The audit covers FDA's financial systems and funds, including MDUFMA revenues and expenses. The OIG issued unqualified audit opinions on FDA's financial statements for fiscal years 1998 through 2004. This is the most favorable category of audit opinion.
Meeting the Legal Conditions for User Fees in FY 2004
MDUFMA contains legal conditions or "triggers" that must be satisfied for FDA to collect and spend user fees. FDA's calculations showing the extent to which those conditions were met for FY 2003 and FY 2004 are summarized below and presented in more detail in Appendix A.
The first condition is a funding trigger which affects the collection of fees in FY 2006. MDUFMA set funding targets for FY 2003 – 2006 equaling $205,720,000 for FY 2003, and that level adjusted for inflation in subsequent years. The appropriation of those specific funding levels was not required to collect fees in fiscal years 2003, 2004, and 2005. Instead, MDU FMA set a trigger that must be met before fees can be collected in FY 2006.
To collect fees in FY 2006, the sum of appropriations for FY 2003 – 2006 for the devices and radiological product program must equal the sum of the funding targets set by MDUFMA for those years. Given current projections of the April 2005 CPI -U, this amount is anticipated to equal $851,942,000.
In FY 2003, the final appropriation was $193,350,000, $12,370,000 below the MDUFMA target. The FY 2004 appropriation was $191,144,000, $19,154,000 below the MDUFMA target. Under current law, additional funds must be appropriated in FY 2005 or FY 2006, over and above the MDU FMA targets for those years, or FDA loses its ability to collect fees on October 1, 2005.
In a letter from the Director of the Office of Management and Budget dated October 29, 2003 , the Administration has proposed that the statutory requirement to make up appropriation shortfalls for FY 2003 and FY 2004 be eliminated. The October 29, 2003, letter also assured that the President's budget request for FY 2005 and subsequent fiscal year requests will each meet the MDUFMA required level. FDA has committed to achieving the original MDUFMA performance goals with the lower amounts enacted in FYs 2003 and 2004, as long as amounts in subsequent fiscal years meet the MDUFMA required minimum. MDUFMA stakeholders were consulted during the development of this plan and were supportive of the strategy. Congressional action on this proposal is urgently required.
The second condition is that the amount of user fees collected each year must be specifically included in Appropriation Acts. The President signed the Appropriation Act (Public Law 108-199) specifying amounts collectable from fees during FY 2004 on January 23, 2004. It provided $31,654,000 to be derived from fees collected. Thus, the second c ondition was met, and fees may be collected.
The third condition is that user fees may be collected and used only in years when FDA also spends a specified minimum amount of appropriated funds for the review of device applications. The specified minimum is the amount FDA spent on the process for the review of device applications from appropriations in FY 2002, adjusted for inflation. That adjusted amount was is $122,335,751 for FY 2004. FDA's actual obligations from appropriations in FY 2004 were $123,521,871. Since this is greater than the adjusted FY 2002 amount ($122,335,751) the third condition was met.
MDUFMA also contains a provision that must be met if FDA is to be able to continue to have accredited third parties conduct device establishment inspections in FY 2005 and beyond. That condition is that FDA obligations for inspections of device establishments may not fall below the amount FDA obligated for this purpose in FY 2002, increased by 5 percent each year, for at least one of the two immediately preceding fiscal years. The amount obligated for this purpose in FY 2002 was $19,425,000. With 5 percent increases each year, the MDUFMA targets (rounded to the nearest thousand dollars) for FYs 2003 and 2004 were $20,396,000 and $21,416,000, respectively. FDA's actual obligations for conducting device establishment inspections in FY 2003 and 2004 were $22,576,000 and $21,522,000, respectively. The amounts FDA obligated for device establishment inspections in FY 2003 and FY 2004 exceed the minimum spending requirement for each of these years. Since FDA spending meets the required level for both of the two fiscal years immediately preceding FY 2005 and for one of the two fiscal years immediately preceding FY 2006, FDA has met the MDUFMA financial requirement necessary to permit the Agency to continue to allow accredited third parties to conduct some inspections in FY 2005 and in FY 2006.
Appendix A provides more detail on the calculations that show the extent to which each of these statutory conditions were met.
User Fee Revenues
MDUFMA specifies that fee revenues are to be collected only from application fees. The statute specifies annual application fee revenue total amounts and how they are adjusted each year for inflation, workload, and fee shortfalls or surpluses from previous years. FDA then establishes fees each year in an effort to assure that the total revenue collected matches the adjusted statutory total fee amount.
Under MDUFMA, any fees collected and appropriated but not spent by the end of a fiscal year continue to remain available to FDA to spend in future fiscal years. The balance carried to the next year is covered in the section on carryover balances beginning on page 7.
The following table shows user fees collected during the two fiscal years, 2003 and 2004.
|Fees Collected:||FY 2003||FY 2004||Cumulative Total|
|Total Fees Collected:||$21,596,123||$27,169,321||$48,765,444|
|Unearned Fees Included:||($13,120)||($1,499,940)||($1,513,060)|
Note that user fees collected (the first line above) are reported in the year the fee was received. However the revenues should be credited to the year the application is received — referred to as the cohort year. For example, in FY 2004, FDA may receive a fee for an application that has not been received in FY 2004. This is considered "unearned revenue" and will be attributed in the future to the year in which the fee was actually received. Totals reported for each year are net of any refunds for that year, as of September 30 th, but do not take into account any refunds that may be made after September 30 th. Information on the number of each type of fee received in FY 2004 is contained in Appendix B.
In addition to the revenue shown in the table above, a total of $171,507 is due from unpaid invoices for fees for applications that were submitted between October 1, 2002, and March 30, 2003 . These FY 2003 accounts receivable are over 120 days old, have been turned over to a collection agency, and by now are unlikely to be collected. After April 1, 2003, FDA no longer accepted applications for review unless a fee for the application had been received. Thus there are no accounts receivable for periods after FY 2003.
A summary of FY 2004 waivers, reductions, and exemptions is provided in Appendix C.
Obligation of User Fee Revenues
User fee revenues are expended only for costs necessary to support the process for the review of device applications, as defined in MDUFMA. Allowable and excludable costs for the process for the review of device applications are defined in Appendix D. In FY 2004, FDA obligated $23,875,200 from medical device user fee revenues.
|Expense Category||From Appropriations||From Fees||Total|
|Personnel Compensation and Benefits||$75,511,078||$15,671,598||$91,182,676|
|Travel and Transportation||2,559,798||263,835||2,823,633|
|Equipment and Supplies||4,486,372||841,343||5,327,715|
FDA uses data from time reporting studies to determine the percentage of time each organizational component devoted to activities that are included in the process for the review of device applications, as defined in MDUFMA. This allowed for the calculation of costs. The development of the costs associated with the process for the review of device applications is described in more detail in Appendix E. The time percentages will be recalculated regularly in future years based on the results of regularly conducted time-reporting surveys. The table below shows the FTE spent on the process for the review of device applications by major organizational component beginning in FY 2002. In FY 2004, over 65 percent of the fee revenue obligated went for salaries and benefits of employees.
|FY 2002||FY 2003||FY 2004||FY 2005|
|Center for Devices and Radiological Health (CDRH)||650||662||713||802|
|Center for Biologics Evaluation and Research (CBER)||45||59||70||81|
|Office of Regulatory Affairs (ORA)||54||59||60||64|
|Office of the Commissioner (OC)||80||77||72||102|
FTE numbers for FY 2004 and FY 2005 show CDRH, CBER, and ORA staff who have been transferred to the consolidated shared services organization in the Office of the Commissioner as if they are still in CDRH, CBER, and ORA, to make the numbers comparable to the FY 2002 and FY 2003 numbers.
As the two tables on the previous page illustrate, FDA expects to utilize over 200 more staff years in FY 2005 than in FY 2002 (1049 vs. 829), as the Agency ramps up its staffing to levels necessary to achieve the MDUFMA performance goals. In addition, CDRH used 713 FTEs in the device review process in FY 2004, 63 more than the 650 FTEs used in FY 2002. During FY 2004, CDRH also added outside expertise to the review process by expanding the Medical Device Fellowship Program by 64 fellows.
In FY 2004, CDRH also continued to fund the Institute of Medicine study on the adequacy of post-market surveillance for pediatric devices, as required by MDUFMA. CDRH also contracted with Georgetown University and Virginia Polytechnic Institute to provide continuing scientific education for its staff. Finally, to better enable reviewers and managers to monitor different types of marketing applications, such as those for combination products and pediatric indications, CDRH greatly expanded the capabilities of its tracking system. This contract is part of a larger effort to replace the paper-based, less efficient division tracking system.
In FY 2004, CBER added a module to the CBER Electronic Secure Mail system to add the capability for secure email delivery of 510k and PMA submissions and to allow for secure correspondence to be sent to and from FDA. CBER also created PDF smart form which allows for electronic submission of 510k and PMA submissions with automatic data extraction. In addition, CBER implemented new and enhanced queries to support MDUFMA needs.
Under MDUFMA, any fees appropriated and collected but not obligated by the end of a fiscal year continue to remain available to FDA in future fiscal years. These revenues are referred to as carryover balances. Operations in FY 2004 resulted in a net carryover balance of $10,052,644.
The table below captures the carryover balance at the beginning and end of each fiscal year.
|Fiscal Year||Beginning Carryover||Net Collections||Obligations||Year-End Carryover|
The balances above reflect cumulative cash at the beginning/end of each fiscal year, and net cash collected during each fiscal year. The net collection amount for FY 2004 is less than the fees collected in FY 2004, because it reflects the net of additional fees for FY 2003 collected in FY 2004, as well as refunds in FY 2004 of some fees that were collected in FY 2003.
Collection Ceilings, Shortfalls and Surpluses
Under MDUFMA, amounts below the adjusted cumulative statutory revenue amounts for previous years may be collected in future years by increasing fees using the MDUFMA compensating adjustment. Similarly, collections in excess of amounts stated in appropriations may be kept and used to reduce fees that would otherwise be assessed in a later fiscal year. The following table depicts cumulative net collections, collection ceilings, and cumulative shortfalls through the end of FY 2004.
|Fiscal Year||Cumulative Net Collections||Collection Ceiling (Adjusted Cumulative Statutory Revenue Amount)||Cumulative Shortfall||Surplus
(To be offset by reduced future collections)
The cumulative collection ceiling for FY 2004 in the table above is the FY 2003 amount of $25,125,000 plus the FY 2004 inflation adjusted amount of $28,418,789, with no compensating adjustment, for a total of $53,543,789. Cumulative fees collected through the end of FY 2004 fell short of this cumulative collection ceiling by $4,778,345, as the table above shows. When fees for FY 2005 were set on August 2, 2004 , FDA anticipated a revenue shortfall in FY 2004, but could not estimate the exact amount of the shortfall since there were still two months left in FY 2004. For that reason no compensating adjustment was applied in setting fees for FY 2005. FDA stated instead that any shortfall in FY 2004 would be measured after the end of the fiscal year, and that amount would become a compensating adjustment when fees for FY 2006 were set. The total shortfall of revenue below statutory revenue levels, adjusted, at the end of FY 2004, was $4,778,345. FDA intends to include half of this amount as a compensating adjustment when fees for FY 2006 are set and the remaining amount as a compensating adjustment when fees for FY 2007 are set.
When fees for FY 2005 were set in August 2004, FDA substantially revised the estimate of numbers of each category of fee-paying applications that would be received in FY 2005, based on experience in 2003 and 2004. This action should reduce or eliminate revenue shortfalls in FY 2005 and future years, thus eliminating the need for further compensating adjustments.
Availability of Carryover Balances
Of the total carryover balance of $10,052,644, $1,513,060 is unearned income from applications not yet received, and must be held in reserve. In addition, $1,000,000 is held in reserve for potential refunds. MDUFMA requires FDA to have at least a 3-month reserve for future operations at the end of FY 2007, when the statute sunsets. The carryover amount shown as available for allocation in the table below is enough to fund estimated FY 2005 operations for approximately 2.8 months. (FY 2005 Collection Ceiling of $32,429,908 divided by 12 yields an estimated monthly fee collection amount of $2,702,492.)
|Status of Carryover Funds||Amount|
|Reserve for Refunds of Excess Collections||$1,000,000|
|Available for Allocation in FY 2005||$7, 539,584|
TOTAL Carryover Balance
Total Costs of the Process for the Review of Device Applications
The following table presents the costs for the review of device applications for FYs 2002, 2003, and 2004 by organizational component. This presents the full cost of the process for the review of device applications, including costs paid both from appropriations and from user fee revenues. The amounts are based upon obligations recorded as of the end of each fiscal year. In the past, over 81 percent of obligated amounts are expended within one year, and 96 percent within two years. Thus, obligations represent an accurate measure of costs.
|FDA Component||FY 2002||FY 2003||FY 2004|
|Center for Devices and Radiological Health (CDRH)||$95,973,640||$111,499,009||$115,537,033|
|Center for Biologics Evaluation and Research (CBER)||$6,665,132||$10,970,557||$13,161,145|
|Field Inspection and Investigation Costs (ORA)||$6,778,594||$7,671,835||$8,027,300|
|Agency General and Administrative Costs (OC)||$10,255,659||$10,293,297||$10,671,593|
Total Process Costs
|Amount from Appropriations||$$119,673,026||$$125,597,098||$123,521,871|
|Amount from Fees||$14,837,600||$23,875,200|
The costs for all components rose in FY 2004. This increase primarily reflects enhanced spending made possible by the additional resources for device review in FY 2004 and increases in pay rates for federal employees.
The Agency General and Administrative Costs, though up slightly from FY 2002 levels, declined as a percent of total spending on the device review process. T he percent of device review process costs devoted to Agency General and Administrative costs decreased from 8.6 percent in FY 2002, to 7.3 percent in FY 2003, to 7.2 percent in 2004.
Management Challenges for FY 2005
With the passage of MDUFMA, great expectations have been created for significantly reducing the time it takes to evaluate new device applications, while maintaining rigorous standards for device safety and effectiveness. In FY 2005, FDA must substantially increase personnel to support the review of device applications, and improve the infrastructure of the device program, to assure that the MDUFMA performance goals, which become quite challenging in FY 2005 and beyond, will be met.
Congress has enacted an appropriation for FDA's device and radiological health program for FY 2005 of $215 million. This is an increase of $23.8 million over the FY 2004 appropriation for this program. This amount, and the revenue from MDUFMA user fees, will enable FDA to add the staff and infrastructure crucial to meeting the MDUFMA performance goals. The agency appreciates this substantial support for its device and radiological health program.
Without legislative amendment, the statutory provisions that permit FDA to collect and spend MDUFMA fees will expire on October 1, 2005. These legislative amendments would eliminate the requirement that shortfalls below MDUFMA appropriation triggers for FY 2003 and 2004 be made up by October 1, 2005. The Director of the Office of Management and Budget has assured, in an October 29, 2003, letter to the Speaker of the House and the President of the Senate that the Administration will request resources for FDA's device and radiological health program in FY 2005, 2006, and 2007 that will meet the levels required by MDUFMA. With that assurance, and the MDUFMA fee revenues, FDA is committed to meeting the MDUFMA performance goals.
If these legislative amendments are not enacted, FDA will no longer be able to collect or spend MDUFMA fees that would provide over $36 million for the device review program in FY 2006. This could have a drastic impact on FDA's device review process for years, even if the needed corrective amendments were passed later.
The challenge for FDA in FY 2005 is to aggressively add the additional staff and infrastructure needed to meet MDUFMA goals, in light of the possibility that the entire MDUFMA program could be terminated if essential legislative action is not taken within the next few months. The Administration is committed to making this program a success.