OMB Finalizes Changes to Regulatory Decision-Making

OMB’s Office of Information and Regulatory Affairs (OIRA) issued final guidance today that instructs federal agencies on specific analytical methods for regulatory decisions. This guidance, which contains few substantive changes from the draft version released in February, commits to put “more emphasis on cost-effectiveness analysis as well as benefit-cost analysis” than the Clinton-era guidance it replaces -- raising the bar on new health, safety and environmental protections. Specifically, the guidance:
  • Emphasizes monetization and “net benefits” decision-making. OIRA’s proposed guidance pushes for health and safety benefits to be expressed in terms of dollars and cents, so agencies can calculate and demonstrate “net benefits” (benefits minus costs). Unfortunately, benefits can be extremely difficult or even impossible to monetize, which skews cost-benefit analysis to favor inaction. The final guidance includes improved language for considering non-quantifiable factors, but OIRA’s track record leaves doubt that this will matter during implementation. For instance, EPA recently proposed a rule to protect the trillions of fish and aquatic organisms that are sucked up and killed each year by power plants, which use rivers, estuaries, and oceans to cool their systems. In performing its cost-benefit analysis, EPA did not monetize losses of invertebrate species, such as lobsters, crabs, and shrimp, as well as endangered or threatened species, nor did it consider the interrelationships of the species affected. Rather, EPA’s estimate was based exclusively on the commercial value of the fish that would have been caught had they not already been killed by power plants. This accounts for less than 20 percent of the total fish killed by cooling systems. EPA acknowledged the problems with its analysis, and used the non-monetized benefits to argue for a relatively protective standard, which it submitted to OIRA for review on September 10, 2001. During its review, however, OIRA forced EPA to adopt a less protective option that showed fewer benefits, but greater “net benefits” by EPA’s estimates (click here for an extensive discussion). This meant the qualitative benefits -- because they could not be monetized -- were essentially ignored.
  • Demands cost-effectiveness analysis for all major health and safety standards. Cost-effectiveness analysis does not monetize benefits. Rather, it looks at the ratio of costs to units of benefits (i.e., number of lives saved). The Clinton guidance allowed agencies to use cost-effectiveness analysis in place of a “net benefits” analysis if they have difficulty monetizing. The new proposed guidance, on the other hand, requires both types of analyses for all major health and safety rules. Cost-effectiveness analysis avoids some of the problems in monetizing benefits, but nonetheless, it too can lead to skewed and timid decision-making. For example, a cost-effectiveness analysis that looks at costs relative to the number of lives saved would miss a whole slew of other significant benefits, such as non-fatal disease or injury, effects on ecosystems, and equity considerations. Moreover, the least protective regulatory alternatives are frequently estimated to be the most cost-effective. This is because additional levels of protection are forecast to require increasingly demanding and more costly methods. Forcing decisions based on a cost-effectiveness test may lead an agency to inappropriately choose a less protective alternative -- because it is the most “cost-effective.” In addition, OIRA’s proposed guidance requires agencies to incorporate the concept of discounting for cost-effectiveness analysis, meaning it will appear less cost-effective to save lives in the future as opposed to right away. Again, this could mean fewer protections to prevent cancer or other diseases of old age that have a long latency period.
  • Requires additional analysis for $1 billion rules. OIRA raises the bar for rules with “economic effects that exceed more than $1 billion per year,” requiring agencies to provide “a formal probabilistic analysis of the relevant uncertainties.” OIRA does not say why it decided to propose this new, seemingly arbitrary threshold, along with this more demanding analysis of uncertainty. Instead, it seems to be pressing increasing levels of analytical rigor for its own sake. At some point the need to reach a decision and take action should take precedent, especially when lives are at stake. Such analysis could prove extremely resource intensive, causing further delays in an already ossified rulemaking process -- which OIRA’s proposal would willingly tolerate. Health and safety could suffer as a result, without any improvement in regulatory decision-making.
  • Requires discounting of lives saved in the future. “Discounting” -- already common practice in monetizing benefits -- rests on the premise that a life saved today is worth more than a life saved tomorrow. The further in the future a life is saved as a result of regulatory action today, the more it will be discounted from its “present value,” and the less likely the action will pass a cost-benefit test. This analytical and value-laden choice has significant implications for regulation aimed at preventing cancer (click here for further discussion). OIRA’s proposed guidance directs agencies to use two separate discount rates -- 7 percent and 3 percent -- in calculating the “value of a statistical life” and present the results of both. The Clinton guidance refers agencies to OMB Circular A-94, which was revised at the end of the first Bush administration and also advises a 7 percent discount rate. Perhaps the biggest difference is the current OIRA’s commitment and aggressiveness in enforcing this approach.
  • Promotes use of “life years” in evaluating fatality benefits. Agencies commonly base benefit estimates on the “value of a statistical life” (VSL), drawn from the number of lives expected to be saved by regulatory action. On top of VSL estimates, OIRA’s guidance asks agencies to consider using “value of statistical life years” (VSLY), which looks at the number of life years saved as opposed to the number of lives. This would skew against protections for the elderly, who have fewer life years remaining (click here for further discussion).
The guidance was released as part of OMB’s annual report on the costs and benefits of federal regulation (for OMB Watch’s comments on the draft report, including the cost-benefit guidance, click here and here). This report also describes the progress agencies have made in acting on regulatory recommendations submitted to OMB by outside parties as part of last year’s report. These recommendations came largely from industry groups and heavily targeted health, safety, and environmental standards. Of these recommendations, federal agencies have already acted on 96 and plan on addressing 34, according to the report.
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