The case for regulatory reform in the business and healthcare environments.
|Abstract:||Government regulations affect corporations and consumers on a daily basis. For example, environmental and safety regulations in the workplace are administrated by the Occupational Safety and Health Administration (OSHA) under the Department of Labor. OSHA sets and enforces standards in work environment to ensure the safety and health of workers. Other regulatory agencies, such as the National Highway and Transportation Agency (NHTSA), oversee the transportation and the safety of the automobile and truck industry. The U.S. Food and Drug Administration (FDA) plays a major role in approving new drugs on the market and in monitoring drug safety, and it has the power to remove drugs from the market if they are proved to be safety and health problems to the public. However, the mere existence of these regulations often causes impediments to businesses, and the extent of their ultimate usefulness is examined and analyzed in this paper|
(Laws, regulations and rules)
Health care reform (Laws, regulations and rules)
Health care reform (Political aspects)
Occupational health and safety (Laws, regulations and rules)
Younis, Mustafa Z.
Prater, Gwendolyn S.
|Publication:||Name: Journal of Health and Human Services Administration Publisher: Southern Public Administration Education Foundation, Inc. Audience: Academic Format: Magazine/Journal Subject: Government; Health Copyright: COPYRIGHT 2009 Southern Public Administration Education Foundation, Inc. ISSN: 1079-3739|
|Issue:||Date: Winter, 2009 Source Volume: 32 Source Issue: 3|
|Topic:||Event Code: 930 Government regulation; 940 Government regulation (cont); 980 Legal issues & crime Advertising Code: 94 Legal/Government Regulation Computer Subject: Government regulation|
|Product:||Product Code: 8000500 Employee Health & Safety NAICS Code: 62 Health Care and Social Assistance|
|Geographic:||Geographic Scope: United States Geographic Code: 1USA United States|
Regulatory reform is not only a need, it is necessary! There are a great many of these restrictions, and although regulation is an important tool in handling the problems of modern industrial economy, many of these have placed heavy burdens on those subject to them. The cost of compliance with regulations has forced some businesses to close their doors and has erected a formidable barrier to entry for new firms. At the same time, some regulations conflict with others, placing citizens in a position of having to violate one or the other. In addition, the financial burden imposed by the filing of forms, the hiring of staff to complete forms, and the cost of changes in methods of operation required by some regulations have most certainly added to inflation. Finally, some regulations have been poorly developed without a careful consideration of alternative and less burdensome approaches to the problem. (U.S.97th Congress, 1982).
As early as the first part of this century, increasing concern was expressed about the role of unselected officials in the making of the laws governing private industries and society. Legislators have little time to follow the trails of expert inquiry and so we turn the whole business over to a few with broad authority to make the actual rules which control our conduct. (Hugh, 1946)
However, a range of serious problems in the federal regulatory process has become increasingly apparent in the last fifteen years. Growing public dissatisfaction with the burdens of federal regulation has forced Congress to take action. The burdensome regulations of ours are the concern of a society as much as are economic and energy problems. In fact, the three problems are interrelated.
The public support in favor of major reform of government regulation and "regulatory reform" was one of the issues of the 1980 political campaigns. For example, Ronald Reagan included regulatory reform as part of his plan for the economic recovery of the nation. President Reagan gave a speech in Youngstown, Ohio in October of 1980 (before he became President) to promote changes in government over regulations:
We must help protect the health and safety of workers and consumers, and the quality of our environment. These are areas where federal regulation is not only appropriate, but necessary. But we must recognize that many regulations impair the ability of industries to compete, reduce workers' real income, and destroy jobs. Therefore, we must have a balanced regulatory approach in which we recognize that regulations have costs as well as benefits. We must ensure that regulations are limited to those necessary to protect health, safety, and environment (President Ronald Reagan, 1981).
With the election of the Reagan Administration, the impulse for reform was translated into government policy. Regulatory reform was one of the top priorities of this administration.
The Growth of Regulation
Since 1887, when the Interstate Commerce Commission (ICC) was formed to regulate the American railroads, the government has taken an increasingly active role in regulating the economy. The last fifteen years have witnessed a rapid rise in regulatory activity. For example, in 1965, 8.3% of the gross national product was under some form of regulation. By 1975, this figure had almost tripled to 23.75% of the gross national product (President Ronald Reagan, 1981).
This recent growth of regulation is remarkable by almost any standard. Since 1824, when the first regulatory agency was established, fifty-six major agencies have been created. About 35% of those were created between 1970 and 1979. The number of full-time agency personnel has escalated from almost 28,000 in 1970 to over 87,000 in 1979, an increase of 216%.
Even with budget cuts of almost $400 million, federal expenditures for regulatory activities in the fiscal year 1982 are estimated to be 7.4 billion (President Ronald Reagan,1981). In the 1960s and 1970s, the government responded to public pressure by increasing its role in health, safety, and environmental protection and gave the agencies a broader role to control business.
The Costs of Regulation
There was a growing feeling that the public sector was not solving societal problems any better than the private sector. The public expressed concern about the expenses of government, direct as well as indirect costs. It was felt that the costs of government exceeded the benefits to society and created more new and more serious problems than they solved.
Free market economists have been in the forefront of regulatory reform proposals designed to bring these costs under control. This has been the main impetus for deregulation of the airline industry (the CAB) and in partially freeing the trucking industry from government control (ICC) (Lilley et al., 1978). The public policy debate in this area has largely been in terms of economic policy and the degree to which the nation can and should rely on market forces.
The four kinds of costs associated with government regulations are administrative costs, compliance costs, transfer costs, and inefficiency costs:
Administrative costs. Administrative costs are those which include the actual budgetary costs for operating the federal regulatory apparatus. It has been estimated that by the end of the 1987s there were more than eighty regulatory agencies and about 100,000 government workers whose operating expenditures exceeded $10.0 billion (First Chicago World Report, 1987).
Compliance costs. Compliance costs include those expenditures attributable to regulation incurred by firms affected by the regulatory process. The Business Roundtable sponsored a study that showed that forty-eight firms who responded to the study incurred incremental costs of $2,621,593,000.00 in 1977 to comply with the regulation of six federal agencies (Arthur Anderson & Co., 1979). (These agencies are the Environmental Protection Agency, the Equal Opportunity Commission, the Occupational Safety & Health Administration, the Department of Energy, and the Employee Retirement Income Security Act, and Trade Commission.) The magnitude of these costs can be measured against selected 1997 financial data for the forty-eight firms included in the study as presented in table (1).
Transfer costs. Transfer costs are those which include costs placed upon one segment of society or society as a whole for the benefit of another societal group. For example, efforts by OSHA to reduce permissible levels of conducts in workplaces will confer environmental benefits on cotton industry workers. These costs estimated at $808 million in 1976 ultimately will be paid by customers using cotton products in the form of higher prices (Kristol, 1977).
Inefficiency costs. Inefficiency costs include costs from the misallocation of resources and are a secondary effect of regulation. It is estimated that regulation of safety in the coal mines has reduced labor productivity by 50%. The nation's productivity growth was reduced by nearly 20% due to increasing environmental controls and health and safety regulations imposed on private firms (Crandell, 1979).
Large external benefits or costs. Some people think that government regulation is a necessity in a modern, complex society for those functions that cannot be adequately performed by market-oriented organizations because they involve external costs or benefits. An example of this is the disposal of chemical wastes into rivers or streams that also provide drinking water for communities causing non-market costs of living in those areas where these water resources are being polluted.
The societal response to this kind of problem, particularly during the 1960s and 1970s, has been zoning controls and environmental pollution statutes and regulations. The main purpose has been to place these external costs on the private sector organizations generating them; so, they are reflected in the market prices for their products and services.
The present public policy concern has been on whether the regulatory process has been successful in transferring these costs in an efficient and effective manner with proposals to moving from a command-and-control enforcement approach to market incentives.
Indivisible benefits. Economists call these benefits "collective goods." As soon as they are created, they benefit each person, whether he has paid for it or not, and regardless of how many others are also benefiting at the same time. Examples of these benefits are national defense, policy, fire protection, etc. Traditionally, these types of benefits have been considered a proper function of government, and reform movements have largely been designed to generate efficiencies in process.
Market deficiencies. The principle rationale for public safety intervention in private sector operations is the instabilities or deficiencies in the market system. The current debate is concerned with whether market forces are really more successful in the long run in correcting such deficiencies than is government intervention. Reform in this area has largely focused on getting the government off the backs of its citizens by eliminating agencies or severely curtailing their functions (Downs, 1967).
PROPOSALS TO IMPROVE REGULATION
The main proposals presented to improve the regulatory process or to minimize its burden are discussed below.
Procedural improvements and streamlining: These are mandated by statutes. This may offer some slight advantages. Certainly, elimination of the multiple administrative roles of legislators, enforcers, prosecutors, and judges combined into one agency would make the process more fair and, probably, more efficient, but procedural change will do little to lessen the regulatory burden.
Regulatory impact statement: This requires each agency to evaluate, before promulgating a major regulation, its costs and benefits. Some people think that this will not change anything. It is just like asking a barber if one needs a haircut. Agencies will be happy to do this since it will increase their workloads and, therefore, their need for staff and funds. Those people think that neither the agency nor the regulated industry should weigh both social and economic costs and the benefits of existing and prospective regulatory activities rather than suggest objective parties.
Sunset laws: Such laws will terminate the existence of each agency after a specific number of years unless further existence is authorized by Congress. Some people question if the federal government would have the time and resources to do this, and the agencies will direct much time and resources to preparing justification for their continued existence and will be even less concerned about results and more intent on image.
Review of agency action by Congress: Realistically, Congress is not in a position to review much regulation or to review any very carefully. Otherwise, it is the best of reforms that is now a practical possibility.
Performance standards. Performance standards are to replace structural specifications or operational requirements as the main thrust of regulatory statements. Some think that this will improve the quality of regulations and will not affect the quantity.
Economic Planning and Exhortation to Comply: This is an old approach. President Gerald Ford tried this with his "WIN" (Whip Inflation Now) campaign, and President Jimmy Carter tried it again with his wage-pricing guidelines. Some think these efforts are almost never successful, and when persuasion fails, it leads toward coercion, as demonstrated in the Carter experiment.
Compulsory disclosure and reliance on public option. This alternative has been reasonably effective in the securities field but has had little impact on the cigarette scourge. Such mixed success creates doubt as to its general applicability.
Government ownership: This follows the European model. Sometimes, the competition becomes monopolistic. Many government enterprises in our economy have already achieved varying degrees of monopoly. These include Amtrak (National Railroad Passenger Corporation, the TVA (Tennessee Valley Authority), and the CPB (Corporation for Public Broadcasting).
Deregulation and reliance on legislation: In the long run, this approach appears to be the least burdensome and most effective alternative (Loevinger, 1981).
Reform Bill of 1982 and Welfare Reform, 1997
This bill required all agencies to follow certain procedures when making policy decisions in the following main ways:
1. It increases the fairness and effectiveness of the regulatory process by requiring agencies to examine carefully the economic and non-economic effects of all major rules before their adoption.
2. Agencies are required to issue agendas of all rule-making activities and the President is required to publish a government-wide calendar of all major rule making activities in order to facilitate public participation in agency decision making and to prevent duplicative and conflicting rules.
3. The bill requires agencies to review within ten years all existing major legislation so that an agency can update or rescind such rules when it is necessary or appropriate to do so.
4. The bill standardizes the procedures followed by agencies for issuing subpoenas in adjudications.
5. It provides for a more diversified selection of members to the administrative conference of the U.S.
Cost/benefit analysis is intended to bring rationality and order to the regulation process. By quantifying benefits and costs, it is hoped that regulation which survives this economic test will be more effective and those which are not on balance cost effective and those which are not on balance cost effective will never be promulgated.
Murray Weidenbaum, a principal advocate of this analysis, states that: "The aim of requiring agencies to reform benefit-cost analysis is to make government decision-making process more effective, (sic) and to eliminate regulatory action that, on balance, generates more costs than benefits." (Weidenbaum, 1998)
Cost-benefit analysis is merely an attempt to apply the principles of welfare economics to public policy proposals. Its rationale is the concept of a potential Pareto improvement, that is, the reallocation of resources in which the gains may be distributed in a way that makes everyone in the community better off (Drummond, F. 1981).
It began in the United States in the 1930s as an administrative method owing nothing to economic theory and adapted to evaluate federal water projects (Nash, et al., 1975). However, the present purpose of this analysis has spread to encompass most areas of public sector, ranging from fuel policy and industrial projects evaluation to health and social services.
Measuring Benefits and Costs
Everyone would agree that benefits derived from public projects ought to exceed their costs. The use of an investment criterion is essential in cost-benefit analysis simply because any project incurs costs into the future and creates a time stream of benefits. These future benefits and costs might be known and measurable in the monetary system.
Extending this economic theory to the regulatory areas is fairly obvious. One common type of cost-benefit analysis attempts to measure and quantify all costs and benefits associated with a particular regulatory measure. Then total costs are compared to the total benefits. If the total benefits exceed the costs, it will be adopted. Otherwise, it will be rejected. It is rarely employed in this pure form. A second type of cost-benefit analysis is to identify costs and benefits, but not necessarily assign dollar values for all elements of the equation. This avoids many of the problems of debit/credit approach because quantification is avoided. Once all costs and benefits are identified, the decision-maker must decide, by exercising judgment, whether the proposal is worthy of adoption.
A third type of cost-benefit analysis deals with analyzing alternatives. Rather than starting with a specific proposal, the regulator compiles an array of alternative regulator alternatives for consideration. This form of analysis is called the cost-effectiveness analysis (Miller et al. 1979). With this type, costs and benefits of each alternative are identified and, to the extent possible, quantified. Then, one by one, each is considered on its merit, and the best is selected for adoption.
This type has proven particularly useful in analyzing regulating in which either the total cost to be incurred is fixed or when the desired level of protection is given. For example, if the goal of the regulator is to reduce deaths due to automobile accidents to one-half the current rate, the regulator could conjure up a whole set of possible ways to accomplish this, for example:
1. Reduce speed limits significantly;
2. Strengthen drunk driving laws;
3. Require the use of seat belts;
4. Mandate the installation of air bags;
5. Step up enforcement of current traffic laws; and
6. Subsidize mass transit transportation, etc.
This shows the alternatives that could be analyzed, and the least expensive alternative could be chosen to achieve the 50% reduction in highway deaths.
Another use of cost-effectiveness analysis occurs when total costs which are to be spent are known. The regulation is somewhat restricted by how much of society and money (regulatory budget) is to be spent (White, 1981). With this fixed amount, the regulator investigates various regulatory types in order to achieve maximum benefits in this fixed budget. For example, Congress could mandate that the National Highway Traffic Safety Administration could spend only $100 million of the GNP on reducing deaths on the highway. The agencies could analyze the benefits which are expected from various regulatory alternatives within these constraints. The one expected to provide the most benefits in total would be adopted.
These analyses required benefits to exceed costs for their adoption. However, in certain social areas, certain social benefits are desirable essentially, regardless of cost. For example, rights guaranteed by the Constitution should not be subjected to cost-benefit analysis, and viewing the guaranteed right as a regulatory goal, it could be implemented in the most cost-effective means possible. Therefore, the cost-effectiveness approach provides the analyst who does not insist on benefits exceeding costs with a means for applying quantitative methods to achieve regulatory efficiency.
Problems with Cost-Benefit Analysis
"The limitation on the usefulness of cost/benefit analysis in the context of health, safety, and environmental regulatory decision-making are so severe that they militate against its use altogether" (U.S. House of Representatives Report, 1988).
Quantifying benefits. Opponents and advocates of the cost-benefit analysis recognize the problems with this approach. The Welfare Reform Bill which was passed by Congress in 1996 and took effect in 1997 was another major legislation. Aid to Families with Dependent Children (AFDC), the reform officially called "Temporary Assistance to Needy Families (TANF) "limited the number of years an individual could receive benefits during his/her lifetime (Dye, 2005). The bill also eliminated most of the benefits available for legal immigrants, such as food stamp assistance, and other social services (Dye, 2005). Furthermore, within the scope of this reform bill, the government changed the method payment for teaching hospitals (Henderson, 2005). The reform led to the expansion of a managed healthcare system for Medicaid patients.
Regulations and Policy Making in the Health Care Sector
The federal government implements its policy by developing rules and regulations that are published in the Federal Registrar and are available to the public. The rules that are published in the Federal Registrar are laws that give federal agencies the powers to impose fines on the individuals or corporations that violate these laws (Dye, 2005).
The Food and Drug Administration (FDA) is one of the most important regulatory agencies in the country. It regulates food (food borne illness, nutrition, and dietary supplements), drugs (prescription, over-the-counter, generic), medical devices, such as (pacemakers, contact lenses, and hearing aids), and other related products which are listed at the FDA publications. The pharmaceutical industry operates in a monopolistic environment because of its control of drug development and patient rights. In this environment, the FDA plays a major role in regulating this industry for safety and for the approval of drug release to the market.
Frequently, the FDA, asks a drug maker to withdraw its product from the market as a result of clinical studies or because it proves that the drug has a harmful effect on the health of the users. Sometimes, the pharmaceutical companies volunteer to withdraw their drug(s) from the market as part of their corporate responsibility to the public. Merck pharmaceutical withdrew its drug Vioxx from the market voluntarily on September, 2004; however, the FDA advisory committee announced that it would support the return of Vioxx to the market after their review in February of 2005. In such a case, the FDA could accept or reject the advisory committee's recommendations. (FDA decision is pending as of the writing of this paper on March 9, 2005).
In certain cases, the health providers would lobby the government to soften or reverse certain regulations. The health insurance industry claimed that the government health insurance to the children (SCHIP) would crowed-out private insurance. Thorpe, 1997, argued that the Health care coverage provided to children has no effect on private insurance. In conclusion, we may conclude that regulations in the health sector improve public health and are essential for the safety of the public.
Estimates of Saving in Regulations on Administrative Costs Using a Single-Payer System
Arthur Anderson & Company. (1979, March). Cost of government regulation study for the business roundtable.
Crandall, R. (1979, January 20). Is government regulation crippling business? Saturday Review, 34.
Downs, A. (1967). Inside bureaucracy. (Boston: Little, Brown and Company).
Drummond, M. F. (1981, June). Welfare economics and cost-benefit analysis in health care. Scottish Journal of Political Economy, 28(2), 125.
Dye, T. (1978, January-February). Understanding public policy. (Prentice Hall Publishing, Inc. 11th Ed. 2005).
First Chicago World Report. (1978, January-February). The regulatory revolution, 1-5.
Henderson, J. (2005). Health economics & policy. South Western Publishing, 3rd ed.
Himmelstein, D.U., & Woolhandler, S. (1986, February13). Cost without benefit: Administrative waste in U.S. health care. The New England Journal of Medicine,.314 (7), 1441-1445.
Hughs, C. E. (1946). Quoted in Senate Comm. on the Judiciary, S. Doc. No.248, 79th Congress, 2nd Sess., p.350 (statement of Rep. Walter).
Kosters, M. H., (1979, July-August). Counting the costs. Regulation, reprinted in S. P. Sethi & C. L. Swanson, P., Private enterprise and public purpose (pp. 181-189). New York: John Wiley & Sons, 1981.
Kristol, I. (1977, January 12). The hidden costs of regulation. The Wall Street Journal, 14.
Loevinger, L. (1981, Summer). Reforming regulation: An evaluation of 10 methods. Directors and Boards, 39-41.
Lilley, III.,W., & Miller, J. C. (1978, Spring). The new social regulation. The Public Interest, No. 47, reprinted in S. P. Sethi & C. L. Swanson, Private enterprise and public purpose (pp. 143-152). New York: John Wiley & Sons, 1981).
Miller, J. C., & Yandle, B. Benefit-cost analysis of social regulation, American Enterprise Institute, 1979.
Nash, C., Pearce, D., & Stanly, J. (1975, June). An evaluation of cost-benefit analysis criteria. Scottish Journal of Political Economy, 22(2).
Regan, R. (1981, November). President Reagan's speech in Youngstown, Ohio, October 1980, quoted by the Regulatory Reform Act, S 1080, p. 8.
Regulatory Procedure Act of 1982 (97th Congress, 2nd Session). (1982, February 25). pp. 13-14.
Thorpe, K. E. (1997, April). The health care system in transition: Care, cost, and coverage. Journal of Health, Politics, Policy and Law, 22(2), 339-361.
U. S. House of Representatives, Report by the Subcommittee on Oversight and Investigations of the House Interstate and Foreign Commerce Committee, Federal Regulation, and Regulatory Reforms, U.S. Government Printing Office, Report No. 96, p. 132.
Weidenbaum, M. (1982, Fall). Weidenbaum analysis benefit-cost analysis. Across the Board, 19, 66.
White, L. J. (1981). Reforming regulation (pp.222-227). New Jersey: Englewood Cliffs.
Woolhandler, S., et al. (1991, May 2). The deteriorating administrative efficiency of the U.S. health care system. The New England Journal of Medicine, 324(18), 1253-1257.
MUSTAFA Z. YOUNIS
Jackson State University
Abu Dhabi University
United Arab Emirates
Hamdan Bin Mohamed University
Saginaw Valley State University
GWENDOLYN S. PRATER
Jackson State University
Delphin Law Office
Lake Charles, LA
Table 1 Compliance costs Item Amount Incremental Costs of Regulation (six agencies $02.6 billion Total Capital Expenditures $25.8 billion Total Research and Development Costs $06.0 billion Net Income after Taxes $16.6 billion Estimate Savings in Proposal Analysis year(s) administrative costs(billions) National health Economic and 1991 $90 total plan administrative Social Research savings scenario Institute National health Economic and 1991 $113 total plan, full savings Social Research scenario Institute Single-payer plan, Congressional 1991 $52 total CBO version Budget Office ($26.8 insurers, without patient $25.2 cost-sharing providers) Single-payer plan, General 1991 $67 total GAO version Accounting ($34 insurers, Office $33 providers) Single-payer Cost Physician for 2005 $67 total National Health ($27 insurers, Program $40 providers) Single-payer plan, Lewin-VHI 1991 $46.6 total Lewin-WHI ($22.5 insurers, version $24.3 providers) Single-payer plan, Woolhandler 1987 $83.2 total Wool-handler and and ($21.7 insurers, Himmelstein Himmelstein $61.4 version(method 1) providers) Single-payer plan, Woolhandler 1987 $69.0 Wool-handler and and ($21.7 insurers, Himmelstein Himmelstein $47.2 version(method 2) providers) * Adopted from Younis et al, "Administrative costs in the U.S. The Jackson State University Researcher, Fall, 2005
|Gale Copyright:||Copyright 2009 Gale, Cengage Learning. All rights reserved.|