Cost recovery and the future of the medical device regulation program in Canada.

It is a perennial problem that some government programs seemingly have an abundance of financial capacity while others seem chronically under-funded. Over the years, legislators, ministers, and other government officials have tried a variety of methods to address under-funding. One such method was announced by the Treasury Board on April 16,1997--the cost recovery policy--which established a framework of fees for activities such as food inspection, agricultural services, and certification of drugs. (1)

Among the Departments instituting user fees was Health Canada, which collects fees from the industries it regulates (e.g., pharmaceutical and medical device manufacturers) to offset the cost of services provided by Health Canada (HC) (e.g., reviewing applications for new drugs and devices). In the case of HC and other regulatory authorities, the user fees have become a vital source of revenue, upon which program operations rely. This is certainly the case with the Medical Devices Bureau (MDB) within the Therapeutic Products Directorate of the Health Products and Food Branch.

According to a 2006 Auditor General's report (2) user fees are one of four sources of funding for Health Canada's programs. The primary source is "core funding", i.e., direct appropriations, which requires parliamentary approval. A second source (also requiring parliamentary approval) is funding for "special initiatives" (specific activities the relevant department would otherwise be unable to undertake absent the additional funding). In addition to the user fees, the final source of funding comes from internal departmental reallocations of funds from one program to another. (3) (Obviously, this is also a potential way for programs to lose funding, as well, which the MDB has experienced. (4)) This article will focus on user fees as a way to finance the medical device program and the impact they may increasingly have on the process of regulating medical devices in Canada.

Background and Issues

Before getting into the user fees specific to the medical devices program, it is worthwhile to briefly examine the government's stated rationale for instituting user fees in general. As described in a Treasury Board of Canada background document, there are essentially two arguments for charging user fees for government services: economic arguments and political/managerial arguments. (5) The economic arguments state that user fees promote economic efficiency in the expenditure of public funds by "providing information to public sector suppliers on how much clients are actually willing to pay for particular services...." (6) The political/managerial argument claims that user fees promote government accountability (particularly if they incorporate service standards and penalties for nonperformance). The applicability of both rationales can be questioned, especially in the context of medical device regulation, although the political/managerial argument is probably stronger.

The potentially more controversial aspect of user fees, generally, and their applicability to medical device regulation comes from the original policy document on cost recovery when describing the criteria for setting fees. (7) This policy objective has not changed with subsequent policy documents on the topic.

  It is government policy to implement user charges for services that
  provide identifiable recipients with direct benefits beyond those
  received by the general public, unless overriding policy objectives
  would be compromised ... (8)

Examples offered from the cost recovery document of the appropriate application of federal user charges include: national park entrance, race track supervision, grain inspection, fishing licenses, broadcasting licenses, specific statistical services, aircraft landing, terminal rentals and concessions, passports, scientific services (mapping, remote sensing), small business loan administration, import/export permits, and publications. (9)

It is arguable whether the review of medical device license applications should be considered an appropriate source of user fees, especially when looking at the other examples in the listing. It is certainly not the case the device manufacturers are the only beneficiaries of license approvals. The public also benefits. Indeed, medical devices (and pharmaceutical drugs, biologics, and arguably natural health products) are part of the Canadian public health care system--the very system that will likely be paying for the devices that Health Canada approves (e.g., artificial knees and hips). Granted that the device manufacturers are aiming to make a profit on their devices--still, since they have a direct impact on public health, it seems to go against the "grain" of the rationales that the Treasury Board set out for imposing fees in the first place. As a recent New York Times editorial observed about the increasing reliance of user fees paid by medical device and pharmaceutical drug companies in the US:

  This is a dangerous dependency for an agency that regulates such a
  critical part of the nation's health care system. It's as if the
  nuclear utilities paid for oversight by the Nuclear Regulatory
  Commission. The potential for abuse in such a chummy atmosphere is
  clearly there. (10)

User Fees in Practice in Canada's Medical Device Program

User fees were introduced into the medical devices licensing process with the issuance of the Medical Devices Fees Regulations on January 1, 1996, (11) and further, under the authority of the Department of Health Act, Section 8(1) (12) and the Financial Administration Act. (13) These fees were further developed within the Treasury Board Policy, Cost Recovery and Charging Policy, (14) and more recently on the 2004 User Fees Act (15) and the Treasury Board's 2004 Policy on Service Standards for External Fees. (16) According to these 2004 policies, fees are to be based on service standards that are calculated by each department. (17) The most recent policy for Health Canada on cost recovery and user fees was released in March 2007. (18)

With respect to the Medical Devices Bureau and the medical device regulatory process, fees are charged for medical devices license application evaluation and for making significant amendments to already granted device licenses. (19) In March 2007, Health Canada released a consultation document that discusses the cost recovery framework. (20) That document lays out the specific fee and service standard proposals (21) for various activities associated with medical devices, pharmaceuticals, biologics, and natural health products. The framework "covers regulatory responsibilities in the area of market approval, facility inspections and investigations, and post-market monitoring of market products." (22) Essentially, the fees "guarantee" a certain level of service from Health Canada--for instance, specifying the target number of days in which HC will process different types of applications. If the targets are not met, i.e., if "performance" does not meet the established standard, the entity being charged the user fee will get future fees reduced by a corresponding amount. This reduction forms the basis for accountability at Health Canada for the review process.

But what does this imply about who the main "client base" for Health Canada's medical device program is? The fact that performance standards for Health Canada have been established, with penalties for nonperformance, the payment of which go to the device manufacturers certainly seems to imply that the "stakeholders" are the manufacturers. Nowhere does the consuming public of these medical devices seem to get factored into the "stakeholder" equation; ditto the medicare system of health care provision.

Another lesser-mentioned aspect of establishing performance standards with associated penalties for nonperformance is that they implicitly prioritize quantity over quality. Being able to hire more staff at Health Canada (who are paid through the fees collected) means that more applications can be processed in a shorter time than they could with fewer employees. But it may often be the case that quality must be sacrificed to quantity. Quantity is easily measured--quality is not. If a reviewer is closing in on the target review time, it is not unreasonable to think that she might be pressured to complete the review as quickly as possible, to avoid the prospect of losing fees (and funding for reviewers). Note that this is not to suggest that this has ever happened--but only that these pressures are built into the system.

The US

It is on the quantity/quality question that one can start to draw comparisons with the way medical devices are approved for sale in the US. The Food and Drug Administration's (FDA) Center for Devices and Radiological Health (CDRH) is responsible for the approval of medical devices in the US. The main rationale in the US for implementing user fees is to supplement appropriations. Fees were first put in place by the Medical Device User Fee and Modernization Act of 2002 (23) (MDUFMA). Indeed, in its "Frequently Asked Questions" webpage, the FDA states that "MDUFMA recognizes that 'the public health will be better served' by providing additional funds to FDA for 'the process for the review of devices'...." (24) Congress itself acknowledged as much in the report on the legislation that MDUFMA was enacted "in order to provide the Food and Drug Administration (FDA) with the resources necessary to better review medical devices ..." (25) (The US rationale for instituting user fees seemingly undermines the Canadian economic argument for fees.) The law was recently reauthorized (26) (it expired on Sept 30, 2007), along with the law governing user fees for pharmaceutical drugs. Many internal problems with resource allocation in the CDRH and consequent problems with timely application reviews led to the enactment of MDUFMA. Unfortunately, MDUFMA did not help in the short run, since the numbers of applications and the number of fee waivers and reductions were not predictable from year to year. It exposed FDA to unstable and unpredictable funding levels. Congress passed the Medical Device User Fee Stabilization Act of 2005 to alleviate this problem.

In the US, fees account for a smaller proportion of the medical device program operating budgets than they do in Canada. For instance, in the US, according to the 2007 HHS Budget in Brief, (27) user fees accounted for only 16% of the operating budget for the medical device program. In Canada, that figure is close to 60%. (28) (For the pharmaceutical drug program, the US will have recovered 60% of its programmatic costs through fees in 2007. (29) That figure is comparable with Canada. (30)) As in Canada, user fees are also tied to service/performance standards, measured largely by the amount of time allotted to review different applications.

There have been harsh criticisms lobbed at the FDA over user fees. While the pharmaceutical drug program gets the lion's share of the criticism, some is also reserved for the medical devices program. Many of the criticisms revolve around the service standards, and the fear that the quantity of review time is more important than the quality of the actual review. One person characterized the proposed new version of MDUFMA (referred to as "MDUFMA II") and its service standard this way:

  A quick review with inadequate safeguards harms patients. It also
  harms companies, pressuring each into developing and marketing their
  own "new" products so that they can compete--even if their old
  products work wonderfully and need no improvement.

  MDUFMA II has performance goals for speed, but none for public health.
  Public health performance goals are urgently needed. (31)

Others argue that the FDA's medical device program should be fully funded by direct Congressional appropriations, and should not rely at all on user fees. The main reason they make this argument is because of the potential appearance (if not more) of a conflict of interest. The US drug approval process is likely more vulnerable to this argument, since a much larger proportion of its operating budget relies on fees. Indeed, as mentioned above, over half the FDA drug budget comes from the industry it regulates. (32) In one study, the reliance on user fees and their attendant performance standards (which may be too quick) in the drug approval process have been tied to an increase in later withdrawals, warning, and other regulatory actions. (33) In 2002, the Government Accountability Office (then known as the General Accounting Office) reported that "FDA data found that a higher percentage of drugs has been withdrawn from the market for safety-related reasons since PDUFA's [the Prescription Drug User Fee Act] enactment than prior to the law's enactment ..." (34) Others have disputed those (or similar) findings.

In 2006, a survey was conducted by the Union of Concerned Scientists (UCS) of FDA staff about the state of science at the FDA. (35) Several of the 997 FDA scientists/physicians who responded to the survey (of 5,918 polled) also provided written responses to some of the questions, a few of which had to do with their opinions of user fees and the impact they have had on the medical device review process. Among the comments made by the scientists concerning industry influence over the regulatory process were:

* "MDUFMA [Medical Devices User Fee Act] mandates are unachievable if public health & science are to be considered."

* "Having industry pay our way through fees is a mistake. If fees are charged, they should go to the general FDA fund, not directly to the regulators office fund."

* "I never got an email telling me to look out for patient welfare, just industry."

* "Full-funding of all review activities without reliance on user fees paid by industry."

* "Management allows a sacrifice of review quality for timelines. Far more interested in the clock than making sure an adequate review is done. User fees have greatly influenced this position." (36)

Many of these comments may also apply to the Canadian medical device program, and to an even greater extent than they do in the US, especially when one considers how much larger a proportion of the Canadian program is financed by user fees than is the US program.

The Final Analysis

Whether or not there are actual conflicts of interest that occur from the fact that a regulated industry is paying the federal government the fees associated with its regulation, it certainly makes the regulators vulnerable to that criticism. It is unquestionably the case that many employees of Health Canada's medical device program owe their employment to the fees paid to the program by the industry they oversee. What is less clear is whether that fact alone makes those employees more susceptible to criticism or public scrutiny.

Health Canada has plans to extend fees to post-market surveillance activities--i.e., charging fees to conduct inspections and post-market surveillance. (37) In the US, under MDUFMA, direct funds were separately authorized for that purpose, although the prior Congresses didn't actually appropriate money for them. (38) It seems then that the entire product life cycle of the Canadian medical device program will be subject to user fees, from the review and approval of device licenses to post-market surveillance and inspections. It may also be subject to suspicion by the public, particularly if devices are subsequently recalled for safety concerns. The safest way to ensure that devices, drugs, biologics, and natural health products are provided with the quality reviews that the Canadian public deserves is to fully fund each activity with core funding. It will cost the federal government more money, but the gains in public confidence and public health are surely worth the price.

Sheri Alpert is a Research Associate, working on issues in neuroethics at Dalhousie University, Halifax, Nova Scotia. Email: [e-mail].

1. Treasury Board of Canada, Cost Recovery-Archived (Ottawa: Treasury Board of Canada Secretariat, 1996), online: Treasury Board of Canada <http://www.tbs-sct.gc.ca/pubs_pol/opepubs/tb_h/feeinfoe.asp>.

2. Auditor General of Canada, Health Canada--Allocating Funds to Regulatory Programs--Health Canada (Ottawa: Auditor General, 2006), online: Office of the Auditor General of Canada <http://www.oag-bvg.gc.ca/domino/reports.nsf/html/20061108ce.html/$file/20061108ce.pdf> [AG Report].

3. Ibid. at 4.

4, In 2003-04, $4.2 million was reallocated from the Medical Devices Program--this amount represented nearly one-third of their total program budget. In 2004-05, $1.3 million was reallocated from their budget, or roughly 10% of the total budget. At the same time, $3.4 million and $4.0 million were added to the program's 2003-04 and 2004-05 budgets (respectively) for special initiatives (possibly to help eliminate backlogs in application review). Ibid. at 11.

5. Treasury Board of Canada, User Charging in the Federal Government--A Background Document (Ottawa: Treasury Board of Canada Secretariat, 1997), online: <http://www.tbs-sct.gc.ca/Pubs_pol/opepubs/TB_H/ucfgl_e.asp>

6. Ibid.

7. Treasury Board of Canada, Cost Recovery and Charging Policy--Archived Version of 1997 (Ottawa: Treasury Board of Canada Secretariat, 1997) online: <http://www.tbs-sct.gc.ca/archives/opepubs/tb_h/crp_e.asp>.

8. Ibid.

9. Ibid.

10. "Reforming the F.D.A.," Editorial, The New York Times (May 3, 2007).

11. Health Canada, Guidance Document on Cost Recovery: Fees in Respect of Medical Devices Regulations (Ottawa: Health Canada, 1998), online: http://hc-sc.gc.ca/dhp-mps/alt_formats/hpfb-dgpsa/pdf/md-im/guidedoc_feesmd_docorient_fraisim_e.pdf> at 3.

12. Department of Health Act, 1996, c.8 s. 8(1).

13. Financial Administration Act, R.S., 1985, c. F-11.

14. Supra note 7.

15. User Fees Act, 2004, c. 6.

16. Treasury Board of Canada Secretariat, Policy on Service Standards for External Fees (Ottawa: Treasury Board of Canada Secretariat, 2004), online: http://www.tbs-<sct.gc.ca/pubs_pol/opepubs/TB_H/CRP_e.asp>.

17. According to the Service Standards policy backgrounder (ibid.), at 47 Canadian Government departments and agencies, "there are currently about 400 fee-charging programs in place, and thousands of different user fees are applied." Fees contribute approximately $4 billion annually.

18. Health Canada, External Charging Policy (Ottawa: Health Canada, 2007), online: <http://www.hc-sc.gc.ca/ahc-asc/pubs/extern-charg-frais/ecp-pfue_e.html>.

19. Health Canada Health Products and Food Branch, Cost Recovery Framework: Consultation Document (Ottawa: Health Canada, 2007), online: <http://www.hc-sc.gc.ca/dhp-mps/alt_formats/hpfb-dgpsa/pdf/consultation/hpfb-dgpsa_co-reco_e.pdf>

20. Ibid.

21. Note that this consultation document contains a new fee schedule that more accurately reflects the actual costs associated with the services for which charges are levied.

22. Ibid. at 3.

23. Medical Device User Fee and Modernization Act of 2002 (MDUFMA), Pub. L. 107-250, Oct. 26, 2002, 116 Stat. 1588. 21 USC 379j.

24. US Food and Drug Administration, "The Medical Device User Fee and Modernization Act of 2002--'FAQs', "Why has Congress authorized user fees"? (Washington, DC: FDA, 2003), online: <http://www.fda.gov/cdrh/mdufma/faqs.html#3>.

25. Medical Device User Fee and Modernization Act of 2002, Report 107-728 (October 7, 2002), at 21.

26. Food and Drug Administration Amendments Act of 2007, Public law 110-85, 121 Stat. 823.

27. Department of Health and Human Services, Budget in Brief: Fiscal Year 2007 (Washington, DC: US Department of Health and Human Services, 2006), online: <http://www.hhs.gov/budget/07budget/2007BudgetInBrief.pdf> at 16.

28. Health Canada Health Products and Food Branch, Cost Recovery Framework: Official Notice of Fee Proposal for Human Drugs and Medical Devices (Ottawa: Health Canada, 2007), online <http://www.hc-sc.gc.ca/dhp-mps/alt_formats/hpfb-dgpsa/pdf/finance/off_notice_e.pdf> at 28.

29. Supra note 27.

30. Supra note 28.

31. Diana Zuckerman, Testimony before the Subcommittee on Health, House Committee on Energy and Commerce; Hearing on the Reauthorization of the Medical Device User Fee and Modernization Act (Washington, DC: May 16, 2007).

32. William Vaughan, Testimony before the Health, House Committee on Energy and Commerce; Hearing on the Reauthorization of the Prescription Drug User Fee Act (Washington, DC: April 17, 2007).

33. Daniel Carpenter et al, Deadline Effects in Regulatory Drug Review: A Methodological and Empirical Analysis (March 2007), online: <http://defendingscience.org/newsroom/upload/Carpenter_FDA_Deadlines.pdf>.

34. US General Accounting Office, Effect of User Fees on Drug Approval Times, Withdrawls, and Other Agency Activities [GAO-02-958] (Washington, DC; US General Accounting Office, September 2002), online: <http://www.gao.gov/new.items/d02958.pdf>.

35. Union of Concerned Scientists, Summary of the FDA Scientist Survey (Washington, DC; Union of Concerned Scientists, 2006), online: <http://www.ucsusa.org/scientific_integrity/interference/fda-scientists-survey-summary.html>.

36. Union of Concerned Scientists, UCS Food and Drug Administration Survey Selected Excerpts from Essay Responses (Washington, DC: Union of Concerned Scientists, 2006), online: <http://www.ucsusa.org/assets/documents/scientific_integrity/Final-Essay-Summary.pdf> at 7-8.

37. Health Canada Health Products and Food Branch, Cost Recovery Framework: International Comparison of Fees and Service Standards for Medical Devices (Ottawa; Health Canada, August 2007), online: <http://www.hc-sc.gc.ca/dhp-mps/alt_formats/hpfb-dgpsa/pdf/pubs/2007-crf-crc-md-im_e.pdf> at 10.

38. On September 19, 2007, Congress reauthorized the user fee programs (supra note 26). TITLE II--Medical Device User Fee Amendments of 2007 of Public Law 110-85, [section]215 specifies the additional amounts to be authorized and appropriated for upcoming medical device post-market review activities.