September 27, 2013

Ready-Fire-Aim Rulemaking

Jerry Ellig

Research Professor, George Washington University Regulatory Studies Center

Jerry Ellig at The Hill.

Rome wasn’t built in a day—and it didn’t burn in a day either. But we’re seeing something close to it as “health insurance exchanges,” constructed by federal and state regulators in just two years, supplant the private health insurance markets that evolved over decades.

New federal regulations governing health insurance exchanges show all the signs of a rush job. Unfortunately, the current federal regulatory system allows agencies to impose regulations costing billions of dollars without a clear understanding of the problem the regulation is supposed to solve or without a thorough evaluation of alternative solutions. That’s like allowing doctors to write prescriptions without first diagnosing the patient’s illness.

The broadest evidence of a regulatory rush job on health care comes from the Mercatus Center’s Regulatory Report Card. The Regulatory Report Card evaluates the quality of the regulatory impact analysis federal agencies produce when they propose major regulations. A team of economics professors at universities around the country assesses how well the agency’s analysis identifies a widespread problem that a regulation might solve, considers a variety of alternative solutions, and assesses both the benefits and costs of alternative solutions.

Five major federal regulations established most of the rules for health insurance exchanges, and the highest-scoring regulation among them earns just 48 percent of the possible Report Card points—a solid “F.” The rest are worse.

Consider, for example, the regulation governing how the federal Office of Personnel Management will contract with insurers to create multi-state health plans to be offered on the insurance exchanges. Multi-state health plans could play a key role in promoting competition and portability, since insurers could draw customers from—and offer insurance in—all 50 states. For this reason, one would hope that regulators would conduct the regulatory impact analysis for this regulation with great care and consult it frequently as they wrote the regulation.

Unfortunately, this regulation has the worst regulatory impact analysis of all the regulations affecting the health care exchanges. The entire analysis of the proposed regulation fits on a single page of the Federal Register. It considers no alternatives to the proposed regulation and says nothing about how specific requirements in the regulation would create benefits or costs.

The analysis claims that the multi-state plans will increase health insurance coverage and increase enrolled individuals’ financial security, but it offers no estimate of how large these effects will be. The primary costs mentioned are administrative, but these are not estimated either. It acknowledges that some of the regulation’s biggest effects may simply be wealth transfers between different groups, but again, the sizes of these effects are not estimated.

Agencies are supposed to conduct regulatory impact analysis before they write a regulation, so the analysis can inform the agency’s decisions. In this case, the Office of Personnel Management (OPM) wrote the regulation first, then punted the job of analysis to the general public by requesting that the public supply information on benefits and costs. Small wonder that the Report Card evaluation team found no evidence that OPM used the results of the analysis to guide its decisions.

This omission occurred in spite of the fact that OPM publicly solicited input from stakeholders before it proposed the regulation. Apparently regulators neglected to ask stakeholders for information about benefits and costs the first time.

The poor quality of analysis accompanying the health insurance exchange regulations highlights a general problem with the U.S. regulatory process: “Ready-fire-aim” rulemaking. Agencies often write regulations before they do the basic homework that would help them design the best possible regulation—or even understand whether regulation is necessary in the first place.

To fix this problem, the law should require agencies to conduct regulatory impact analysis and publish the results for public comment before they write the regulation. That way, regulators would have to show that they understand the problem they’re trying to solve before they select a solution.

Americans are upset about the Affordable Care Act. They should be even more upset about a federal regulatory process that allows agencies to promulgate sweeping regulations in ignorance of key consequences.