Government By Waiver: The Breakdown Of Public Administration
by Richard Epstien
The past year has marked the passage of the two most massive legislative reforms in the history of American politics: ObamaCare for health care and Dodd-Frank for the financial sector. Their size and complexity dwarf those of any New Deal legislation.
These new laws require a stunning acceleration of the longstanding practice of relying on delegated authority to implement statutory commands. According to its New Deal champions, this welcome division of authority could cure the manifold defects of a market economy by combining the best of democratic politics with the best of administrative expertise. Under the new division of labor, the political branches of government set the broad direction of legislative reform, and then trust skilled administrative agencies to turn general directives into specific commands.
The sheer magnitude of the new legislative ventures has thrown this model–which, in truth, has never worked well–into disarray. Rulemaking is no small operation. Typically, an agency has to gather enough information to take an intelligent stab at issuing reasonable rules. It must therefore try to bring itself up to speed by a cumbersome, multistage process for gathering and synthesizing the needed information from hundreds, if not thousands, of separate sources.
Stripped to its essentials, the relevant agency decides what it needs to know to formulate a set of intelligent rules. It must then conduct extensive surveys of the relevant stakeholders–industry and consumer groups, for starters–to obtain needed data. Next it formulates and publishes preliminary rules and regulations. These in turn are bombarded by comments from literally hundreds of separate groups, each with its own agenda. Once the agency issues its final rules, they may well be challenged in court on a variety of statutory and constitutional grounds.
This complex administrative process only has a fighting chance of generating sensible rules with a statute that embodies some workable principles in the first place. Here is one typical instance of how the process has gotten gummed up under ObamaCare. As a matter of grand legislative policy, ObamaCare decreed that firms would be required to knock out wasteful administrative costs by attaining favorable “medical loss ratios,” which in turn require them to slash their administrative expenses for individual and group health care plans to between, say, 15% and 20% of total costs. The numbers are often little more than half of the current expense ratios for various kinds of plans.
The statutory commands all rest on the grand assumption that these administrative costs are a form of disguised waste that mere competitive market forces could not eliminate. But the claim is a delusion. No one has any clear idea what counts an “administrative cost” for statutory purposes, which itself leads to all sorts of jockeying and lobbying for strategic advantage inside the administrative process–which just raises those administrative costs even more.
Since the politicos miscalculated the regulatory burdens, they have to brace for the real possibility that some health care plans will collapse under the strain. Starting in late September, reality hit home when McDonald’s announced that it would have cut out its “mini-med” program for about 30,000 of its low-paid workers. It insisted that it could not meet the statutory requirements for the simple reason that high employee turnover raises administrative costs.
Rather than face this public relations disaster, Kathleen Sebelius, the Secretary of Health and Human Services, granted a one-year waiver from the requirements of the program. That particular result does not stand alone. Since that time fresh waivers have been routinely dispensed by the Department of Health and Human Services to many other organizations, including many powerful unions. At least one million workers are now out from under ObamaCare, with more to come.
The process vividly shows how unrealistic expectations can undermine the rule of law. Waivers are by definition an exercise of administrative discretion that benefits the party who receives its special dispensation. Yet nothing in ObamaCare explains who should receive these waivers or why.
The dangers from this uncertainty are enormous. Make no mistake about it, a waiver gives the favored organization a competitive advantage over its rivals. But it is not only one applicant that pulls out all the stops. Its competitors often follow suit while simultaneously trying to block the waiver for the original applicant. Administrative expertise quickly takes a back seat to old-fashioned political muscle and intrigue.
What’s more, waivers are typically only for short periods–say one year. They are often given on condition that the firm take steps to bring itself into compliance during waiver period. But what happens if the firm requests a renewal? Is it issued on the ground that no amount of ingenuity could have brought the firm into compliance? Or is it denied in order to make sure that the overarching statutory command is not nullified by endless short-term compromises?
What matters systematically is not the outcome of any particular case but rather the long-term toll that extensive rulemaking exacts from the administrative process. The safeguards of the rule of law are always undermined by fierce short-term pressures on administrative agencies.
Economically, the high fixed costs of administrative compliance drive small firms to seek takeover by powerful larger firms whose deeper purses and better political contacts help them weather the storm. The palpable irony is that the same health care experts who once touted ObamaCare now fear that the new combinations will make health care more monopolistic, raising prices while cutting costs. But no one can expect private firms to stand still in the face of those mortal threats. Better a concentrated industry than a decimated one.
Squads of health care experts and political pundits envisioned a Pax Obama for heath care once the political hubbub quieted down. It won’t happen. Without major steps to overhaul or repeal ObamaCare, government by waiver will become standard operating procedure to the detriment of us all.
by Richard Epstien
The past year has marked the passage of the two most massive legislative reforms in the history of American politics: ObamaCare for health care and Dodd-Frank for the financial sector. Their size and complexity dwarf those of any New Deal legislation.
These new laws require a stunning acceleration of the longstanding practice of relying on delegated authority to implement statutory commands. According to its New Deal champions, this welcome division of authority could cure the manifold defects of a market economy by combining the best of democratic politics with the best of administrative expertise. Under the new division of labor, the political branches of government set the broad direction of legislative reform, and then trust skilled administrative agencies to turn general directives into specific commands.
The sheer magnitude of the new legislative ventures has thrown this model–which, in truth, has never worked well–into disarray. Rulemaking is no small operation. Typically, an agency has to gather enough information to take an intelligent stab at issuing reasonable rules. It must therefore try to bring itself up to speed by a cumbersome, multistage process for gathering and synthesizing the needed information from hundreds, if not thousands, of separate sources.
Stripped to its essentials, the relevant agency decides what it needs to know to formulate a set of intelligent rules. It must then conduct extensive surveys of the relevant stakeholders–industry and consumer groups, for starters–to obtain needed data. Next it formulates and publishes preliminary rules and regulations. These in turn are bombarded by comments from literally hundreds of separate groups, each with its own agenda. Once the agency issues its final rules, they may well be challenged in court on a variety of statutory and constitutional grounds.
This complex administrative process only has a fighting chance of generating sensible rules with a statute that embodies some workable principles in the first place. Here is one typical instance of how the process has gotten gummed up under ObamaCare. As a matter of grand legislative policy, ObamaCare decreed that firms would be required to knock out wasteful administrative costs by attaining favorable “medical loss ratios,” which in turn require them to slash their administrative expenses for individual and group health care plans to between, say, 15% and 20% of total costs. The numbers are often little more than half of the current expense ratios for various kinds of plans.
The statutory commands all rest on the grand assumption that these administrative costs are a form of disguised waste that mere competitive market forces could not eliminate. But the claim is a delusion. No one has any clear idea what counts an “administrative cost” for statutory purposes, which itself leads to all sorts of jockeying and lobbying for strategic advantage inside the administrative process–which just raises those administrative costs even more.
Since the politicos miscalculated the regulatory burdens, they have to brace for the real possibility that some health care plans will collapse under the strain. Starting in late September, reality hit home when McDonald’s announced that it would have cut out its “mini-med” program for about 30,000 of its low-paid workers. It insisted that it could not meet the statutory requirements for the simple reason that high employee turnover raises administrative costs.
Rather than face this public relations disaster, Kathleen Sebelius, the Secretary of Health and Human Services, granted a one-year waiver from the requirements of the program. That particular result does not stand alone. Since that time fresh waivers have been routinely dispensed by the Department of Health and Human Services to many other organizations, including many powerful unions. At least one million workers are now out from under ObamaCare, with more to come.
The process vividly shows how unrealistic expectations can undermine the rule of law. Waivers are by definition an exercise of administrative discretion that benefits the party who receives its special dispensation. Yet nothing in ObamaCare explains who should receive these waivers or why.
The dangers from this uncertainty are enormous. Make no mistake about it, a waiver gives the favored organization a competitive advantage over its rivals. But it is not only one applicant that pulls out all the stops. Its competitors often follow suit while simultaneously trying to block the waiver for the original applicant. Administrative expertise quickly takes a back seat to old-fashioned political muscle and intrigue.
What’s more, waivers are typically only for short periods–say one year. They are often given on condition that the firm take steps to bring itself into compliance during waiver period. But what happens if the firm requests a renewal? Is it issued on the ground that no amount of ingenuity could have brought the firm into compliance? Or is it denied in order to make sure that the overarching statutory command is not nullified by endless short-term compromises?
What matters systematically is not the outcome of any particular case but rather the long-term toll that extensive rulemaking exacts from the administrative process. The safeguards of the rule of law are always undermined by fierce short-term pressures on administrative agencies.
Economically, the high fixed costs of administrative compliance drive small firms to seek takeover by powerful larger firms whose deeper purses and better political contacts help them weather the storm. The palpable irony is that the same health care experts who once touted ObamaCare now fear that the new combinations will make health care more monopolistic, raising prices while cutting costs. But no one can expect private firms to stand still in the face of those mortal threats. Better a concentrated industry than a decimated one.
Squads of health care experts and political pundits envisioned a Pax Obama for heath care once the political hubbub quieted down. It won’t happen. Without major steps to overhaul or repeal ObamaCare, government by waiver will become standard operating procedure to the detriment of us all.