The Yale Law Journal Online has published a response to Benjamin Ewing and Douglas Kysar’s article Prods and Pleas: Limited Government in an Era of Unlimited Harm, which appeared in the November 2011 issue of YLJ. In Beware of Prods and Pleas: A Defense of the Conventional Views on Tort and Administrative Law in the Context of Global Warming, Richard Epstein argues Ewing and Kysar’s “prods and pleas” will not solve the issue of global warming. Because global warming is a worldwide phenomenon, “the traditional allocation of responsibility between private rights of action (for large concentrated harms) and direct government administrative action (for diffuse harms) remains the proper approach.” Epstein suggests that the Supreme Court made the correct decision in American Electric Power Co. v. Connecticut and adds [...]]]>

The Yale Law Journal Online has published a response to Benjamin Ewing and Douglas Kysar’s article Prods and Pleas: Limited Government in an Era of Unlimited Harm, which appeared in the November 2011 issue of YLJ. In Beware of Prods and Pleas: A Defense of the Conventional Views on Tort and Administrative Law in the Context of Global Warming, Richard Epstein argues Ewing and Kysar’s “prods and pleas” will not solve the issue of global warming. Because global warming is a worldwide phenomenon, “the traditional allocation of responsibility between private rights of action (for large concentrated harms) and direct government administrative action (for diffuse harms) remains the proper approach.” Epstein suggests that the Supreme Court made the correct decision in American Electric Power Co. v. Connecticut and adds that the powers given to the Environmental Protection Agency displace private rights of action under both federal and state law.

Preferred citation: Richard A. Epstein, Beware of Prods and Pleas: A Defense of the Conventional Views on Tort and Administrative Law in the Context of Global Warming, 121 YALE L.J. ONLINE 317 (2011), http://yalelawjournal.org/2011/12/06/epstein.html.

How should citizens in a republic bound by the rule of law regard the pretextual use of law by state officials?  If the United States Supreme Court is any indicator of the answer in our own republic, we are pretty ambivalent about pretext. 

Sometimes we don’t care very much.  In its most well-known case on the subject, Whren v. United States (1996), the Court upheld the pretextual use of the traffic code (which was prolix enough to be violated sooner or later by just about any car on the road).  Whren’s car was stopped by a vice squad cop who had a hunch (but not probable cause to believe) that Whren had drugs in his [...]]]>

Justice Scalia, author of Whren v. United States and Ashcroft v. al-Kidd (used with permission, www.courtartist.com)

How should citizens in a republic bound by the rule of law regard the pretextual use of law by state officials?  If the United States Supreme Court is any indicator of the answer in our own republic, we are pretty ambivalent about pretext. 

Sometimes we don’t care very much.  In its most well-known case on the subject, Whren v. United States (1996), the Court upheld the pretextual use of the traffic code (which was prolix enough to be violated sooner or later by just about any car on the road).  Whren’s car was stopped by a vice squad cop who had a hunch (but not probable cause to believe) that Whren had drugs in his car.  One lesson of this case is that you should always signal before making a turn.  Justice Scalia, writing for a unanimous Court, had another one: the police are free to do “under the guise of enforcing the traffic code what they would like to do for different reasons.”  In other words, a green light to pretextual traffic stops.

Sometimes, we care a great deal.  In Kelo v. City of New London (2005), the Supreme Court categorically rejected the idea that government officials may “be allowed to take property under the mere pretext of a public purpose, when [their] actual purpose was to bestow a private benefit.”  Likewise, interpreting Title VII in their concurrence in Ricci v. DeStefano (2009) (which concerned a city fire department), Justices Alito, Scalia, and Thomas highlighted the subjective component of liability in a civil suit for employment discrimination in a disparate-treatment case: the employer is liable if its facially legitimate reason for a decision turns out to be “just a pretext for discrimination.”  Justice Frankfurter long ago chastised the Court for sustaining a law “because Congress wrapped the legislation in the verbal cellophane of a revenue measure.”  The concept of limited and enumerated powers seems to suggest a general disapproval of pretext.

Does repeated pretextualism — whether one is making or enforcing the law — weaken the rule of law?  When tempted to use a law for an unintended purpose, how should the “good” official (read the adjective however you like) distinguish an innovative use from a destructive one?  My own motivation for this research stems from concern that using law to achieve an objective that the law was clearly unintended to achieve might do something destructive to the rule of law itself.  Maybe it does some harm to the official who wields power in that pretextual way, too, an official who may be the worst-placed government agent to exercise the sort of discretion that creative administration of the law demands.  Pretextualism may be habit-forming and, like cigarettes, unhealthy.

After the break, I’ll share my working definition of pretext and two cases separated by more than fifty years, but adopting the same pretextual technique to evade restrictions on government action.  One involves a Soviet spy whose case troubled the Supreme Court so much that the Court heard oral argument twice.  Surprisingly, that case foretold and influenced the “easy” Whren case.  The other involves a former college football player caught up in the current “War on Terror.”  That case, Ashcroft v. al-Kidd, was decided in May, also referencing Whren, but this time without such unanimity and with a lot more unease about pretext.

By pretext, I mean the use of legal authority for a purpose clearly and substantially different than the original reason for which the power was granted.  Pretextual use of laws will often be covert or unacknowledged.  That is, officials may feign to exercise their authority under the law’s original purpose or seek refuge in a double purpose.  But I do not mean to include the lawful use of subterfuge or deceit (such as when police conduct a sting or lie to a suspect during consensual questioning).  Those tactics may raise serious issues, but not pretext as I define it.  Nor do I mean to include prosecution for a lesser offense, such as convicting Al Capone for tax evasion.  Officials certainly wished they had the evidence to convict Capone of much more, but their tax prosecution was squarely within the intended use of that provision of the criminal code.  Michael Whren was never tried for violating the traffic code; it was a means to a different end that was used to avoid the Fourth Amendment’s restriction of the police.  Capone was indicted, tried, and convicted, for doing precisely what the law forbid.  Eliot Ness and his Untouchables didn’t use this law to evade some other restriction on their conduct.  The prosecution was the point.

Abel v. United States (1960)

KGB Colonel Rudolf Ivanovich Abel

Consider the case of Rudolf Abel, the master KGB spy whose seizure, conviction, and exchange for U-2 pilot Francis Gary Powers I examine in a recent article.  Abel’s arrest was a classic instance of pretext.  The Fourth Amendment required FBI agents to obtain a warrant before they could seize Abel and search his room.  My research into the case convinced me that a warrant could have been obtained had one been sought.  But the men who pushed into Abel’s room early one morning, warrantless, knew that an arrest warrant carried undesirable consequences.  Such an arrest would lead to an arraignment in open court, the appointment of counsel, and all the attendant publicity such a hearing would entail.  That would ruin any hope of turning Abel into a double agent in an existential fight against the Soviet Union.

When Colonel Abel was rousted from his bed, he was therefore awakened on a pretext.  The FBI asked the INS to seize Abel under the pretext of enforcing the country’s immigration regulations while the FBI directed the operation from the doorway.  At the time, the INS could seize Abel without a warrant, acting only on the basis of an internal departmental order. 

The tale then takes a turn that might seem to have come from today’s headlines.  Abel was secretly flown from New York to McAllen, Texas, where he was interrogated without a lawyer and kept virtually incommunicado for almost seven weeks.  Following this unsuccessful effort to break him, the Justice Department then used the evidence obtained during their raid to convict him of espionage.  The use of this immigration authority for the unintended purpose of counterespionage neatly skirted the constitutional protection against unreasonable searches and seizures, not to mention official disappearances.  On a purely formalistic level, the officials complied with the requirements of this immigration law.  On another level, the pretextual use of this statute produced results hard to justify as lawful.  When his lawyer argued pretext in an effort to exclude the (damning) evidence, the Supreme Court sustained his conviction.  The vote was close, 5-4, and Justice Douglas mockingly noted the real reason why a warrant was never sought for this arrest: “If the FBI agents had gone to a magistrate, any search warrant issued would by terms of the Fourth Amendment have to ‘particularly’ describe ‘the place to be searched’ and the ‘things to be seized.’  How much more convenient it is for the police to find a way around those specific requirements of the Fourth Amendment!  What a hindrance it is to work laboriously through constitutional procedures!  How much easier to go to another official in the same department!  The administrative officer can give a warrant good for unlimited search.  No more showing of probable cause to a magistrate!  No more limitations on what may be searched and when!”

Ashcroft v. Abdullah al-Kidd (2011)

Former Attorney General John Ashcroft

Fast foward fifty years.  Abdullah al-Kidd (a U.S. citizen and former University of Idaho football star) was cooperating with the FBI in a counterterrorism investigation.  The FBI alleged (how truthfully is sharply disputed) that al-Kidd was about to flee the country.  A criminal warrant for his arrest could not be sought because there was no probable cause to believe that al-Kidd had broken any law.  So the FBI obtained a material witness warrant, which may be had from a judge on grounds substantially easier to meet.  The material witness statute, 18 U.S.C. § 3144, was originally intended to secure “the testimony of a person [that] is material in a criminal proceeding” when it is impracticable to do so by other means, such as a subpoena or deposition.

Al-Kidd alleged that he was then held for sixteen days in high-security prisons in three states, housed with convicted criminals, subjected to frequent strip-searches, routinely shackled, and forced to sleep without clothes when he was not kept awake by bright lights in his cell.  He was interrogated without counsel.  He was then subject to severe restraints on his travel for fifteen more months. 

Al-Kidd claimed that the material witness statute was used pretextually, to interrogate him as a suspect in his own right, not as a witness to someone else’s wrongdoing.  His lawyers observed that his arrest was mentioned in congressional testimony by FBI Director Robert Mueller as an example of success in the Government’s counterrorism operations ( a strange statement if made about a witness, but not if made about a suspect).  In any event, al-Kidd was never called to testify at the trial, which ended in an acquittal on some counts and a hung jury on others.  So the Government never used the testimony that it claimed was material enough to justify his lengthy detention. 

Al-Kidd filed a Bivens action, alleging that his arrest was part of a nationwide policy to use the material witness statute pretextually.  When Acting Solicitor General Neal Katyal began his argument for the United States last March, he started as you would expect a defense of pretextualism under the favorable Whren precedent to start: “This lawsuit seeks personal money damages against a former Attorney General of the United States for doing his job, allegedly with an improper motive …”  It was the right rhetorical focus.  Justice Scalia, delivering the opinion of the Court, noted that the Whren opinion “swept broadly to reject inquiries into motive generally” and “only an undiscerning reader” would disagree.  On the strength of the Whren analysis, the Court held that the material witness warrant “cannot be challenged as unconstitutional on the basis of allegations that the arresting authority had an improper motive.” 

But it turns out that the case wasn’t quite as easy for the Supreme Court to decide as Whren had been fifteen years earlier.  The opinion was announced on the last day in May, with concurring opinions by Justices Kennedy, Ginsburg, and Sotomayor (Justice Kagan took no part in the case).  Although no one dissented, the latter two opinions concurred only in the judgment reversing and remanding the lower court decision that had allowed the action to proceed.  Justice Kennedy (who, like Justice Ginsburg, had joined the Whren opinion) had more trouble.  He insisted that the opinion he joined left “unresolved whether the Government’s use of the Material Witness Statute in this case was lawful.”  Justice Ginsburg seemed to wonder, given al-Kidd’s allegations, whether the material witness warrant had been validly obtained in the first place.  In addition, Justice Ginsburg wondered at the alleged conditions of his confinement, especially since he was “[o]stensibly held only to secure his testimony[.]“  And Justice Sotomayor, also questioning the validity of the warrant, refused to join the majority’s opinion because “it unnecessarily resolves a difficult and novel question” of constitutional law.  For the newest justice participating in the case (and the one with far and away the most prosecutorial experience), ”[w]hether the Fourth Amendment permits the pretextual use of a material witness warrant for preventive detention of an individual whom the Government has no intention of using at trial is, in my view, a closer qusetion than the majority’s opinion suggests.”

Contemporary legal thinking is in the thrall of a cult of flexibility. We obsess about avoiding decisions without all possible relevant information while ignoring the costs of postponing decisions until that information becomes available. We valorize procrastination and condemn investments of decisional resources in early decisions.

Both public and private law should be understood as a productive activity converting information, norms, and decisional and enforcement capacity into outputs of social value. Optimal timing depends on changes in these inputs’ scarcity and in the value of the decision they produce. Our legal culture tends to overestmate the value of [...]]]> Cornell Law Review just published Professor David Super’s article Against Flexibility, a forceful and engrossing indictment of flexibility and legal procrastination at its core.  Here is the abstract:

Contemporary legal thinking is in the thrall of a cult of flexibility. We obsess about avoiding decisions without all possible relevant information while ignoring the costs of postponing decisions until that information becomes available. We valorize procrastination and condemn investments of decisional resources in early decisions.

Both public and private law should be understood as a productive activity converting information, norms, and decisional and enforcement capacity into outputs of social value. Optimal timing depends on changes in these inputs’ scarcity and in the value of the decision they produce. Our legal culture tends to overestmate the value of information that may become available in the future while discounting declines over time in decisional resources and the utility of decisions. Even where postponing some decisions is necessary, a sophisticated appreciation of discretion’s components often exposes aspects of decisions that can and should be made earlier.

Disaster response illustrates the folly of legal procrastination as it shrinks the supply of decisional resources while increasing the demand for them. After Hurricane Katrina, programs built around flexibility failed badly through a combination of late and defective decisions. By contrast, those that appreciated the scarcity of decisional resources and had developed detailed regulatory templates in advance provided quick and effective relief. 

The mistake is found in section 1401 of the ACA, which creates a new section 36B of the IRC. Two subsections of 36B ((b)(2)(A) and (c)(2)(A)(i)) suggest that premium tax credit eligibility under the ACA depends on the applicant being enrolled in a qualified health plan “through an Exchange [...]]]> A few days ago, Timothy Jost offered insights on the Fourth Circuit’s jurisdictional rulings on constitutional challenges to the Affordable Care Act. (That post was part of a terrific series he has done for the Health Affairs Blog.) Today, Jost offers a fascinating perspective on “an ACA drafting error that would seem to deprive millions of uninsured Americans of tax credits to purchase health insurance and invalidate regulations recently proposed by HHS and the Treasury Department:”

The mistake is found in section 1401 of the ACA, which creates a new section 36B of the IRC. Two subsections of 36B ((b)(2)(A) and (c)(2)(A)(i)) suggest that premium tax credit eligibility under the ACA depends on the applicant being enrolled in a qualified health plan “through an Exchange established by the State under section 1311.” This would in turn suggest that individuals enrolled in a qualified health plan through a federal exchange established under section 1321(c) would not be eligible for premium tax credits, contrary to the recent proposed regulations.

That this is a drafting error is obvious to anyone who understands the ACA. Section 1311 of the ACA requests the states to establish American Health Benefit Exchanges and sets out the duties of the exchanges. Section 1321 of the ACA, however, provides that if a state elects not to establish and exchange or fails to do so, HHS must “establish and operate” an exchange in such a state and “take such actions as are necessary to implement” the other requirements of title I of the ACA, which includes section 1401. There is no coherent policy reason why Congress would have refused premium tax credits to the citizens of states that ended up with a federal exchange. None of the CBO reports scoring the ACA suggest that premium tax credits would only be available though 1311 state exchanges and not through 1321 federal exchanges. It is, finally, highly unlikely that the House, whose bill included only a federal exchange, would have approved a bill that only provided tax credits through state exchanges but not through the federal exchange.

For the full argument, check out his post at the Health Reform Watch blog.

Data-matching programs frequently misidentify individuals because they use crude algorithms that cannot distinguish between similar names.  Sometimes, this accords with policy.  Better to have more false positives when it comes to finding terrorists, than more false negatives.  Other times, it’s a problem that humans resolve before anyone gets hurt.  Yet, time and again, human operators fall down on [...]]]> As my work on Technological Due Process explored, government increasingly uses automated systems to help human administrators make decisions about people’s important rights.  Sometimes, the computers make the decisions with varying degrees of oversight.  Government decision-making systems include data-matching programs, which compare two or more databases with an algorithmic set of rules that determine the likelihood that two sets of personal identifying information represent the same individual.

Data-matching programs frequently misidentify individuals because they use crude algorithms that cannot distinguish between similar names.  Sometimes, this accords with policy.  Better to have more false positives when it comes to finding terrorists, than more false negatives.  Other times, it’s a problem that humans resolve before anyone gets hurt.  Yet, time and again, human operators fall down on the job.

Here’s a recent example.  An anti-terrorism facial recognition system scans databases of state driver’s license images to prevent terrorism, reduce fraud, and improve the accuracy of identification documents issued by states.  Massachusetts started using the software after receiving a $1.5 million grant from the U.S. Department of Homeland Security.  On March 22, Massachusetts resident John Gass received a letter from the state motor vehicles registry informing him that he had to cease driving because his license had been revoked.  From various news reports, it seems that the letter did not tell Mr. Glass why he lost his license.  It was only after various calls and a hearing with motor vehicle officials that he learned that the system identified his license as evidence of potential fraud.  The system flagged Glass because he looked like another driver, not because his image was used to create a fake identity.  The motor vehicles registry reinstated his license after ten days of wrangling “to prove he is who he says he is.”  Not surprisingly, Gass is not alone.  The system picked out more than 1,000 cases last year that resulted in investigations, and some were guilty of nothing more than looking like someone else.Another disturbing fact: neither the motor vehicle registry nor the state police keep tabs on the number of people wrongly identified by the system.  Now, this is what I call a “mixed system,” one that combines human decision making with automation.  The software identifies matches of license pictures that have a high score of being the same person.  Registry analysts review the licenses and check biographical information, criminal records, and driving histories to rule out cases with legitimate explanations.  But as if often the case, the analyst in Gass’s case signed off on the match, revoking his license.  At the hearing, Gass showed the hearing officer his birth certificate and Social Security card as proof of his identity, but the officer insisted that he provide documents with his current address.  His lawyers faxed the document two days later.  On April 14, Gass got word that he was cleared to drive, more than twenty days after he received the revocation notice.

This case is not an outlier.  Human oversight of Government 2.0 decision-making routinely fails.  The cognitive system’s engineering literature has found that human beings view automated systems as error-resistant.  Operators of decision-making systems tend to trust their answers.  As a result, human operators are less likely to credit information contradicting the computer’s findings.  Studies show that human beings rely on automated decisions even when they suspect malfunction.  The impulse to follow a computer’s recommendation flows from automation bias–the use of automation as a heuristic replacement for vigilant information seeking and processing.  Automation bias effectively turns a computer program’s suggested answer into a trusted final decision.  Thus, the practical distinction between fully automated systems and mixed ones should not be overstated.

The system offended basic norms of due process.  The notice failed to inform Gass of the basis of the registry’s revocation decision.  It did not seem “reasonably calculated” to inform him of the government’s claims.  Automation bias might have been at the root of the initial failure to catch the problem and the demand for more proof at the hearing, even though Gass provided his SSN card and birth certificate.  To protect individual rights, we need adequate notice and safeguards against automation bias that impact hearings.  Moreover, this particular system exemplifies the kind of mission creep that the anti-terrorism label entails.  Frank Pasquale and I have written about it in our forthcoming article in Hastings Law Journal–Frank’s important book Black Box Society will extend those concerns to secret rankings by corporations that have a profound impact on our lives.

H/T: Ryan Calo

Since AIG executives are afraid to speak out, disclosure of this un-American provision was left to Maurice (“Hank”) Greenberg, former chair and until 2008 the largest shareholder of AIG. He disclosed it yesterday on CNBC.

This is yet another example of the dubious tactics used in Sept. 2008 by Hank Paulson and Tim Geithner when they wrested control of AIG for the U.S. government. Besides having scant legal authority for [...]]]> Top business executives in the United States regularly contact Members of Congress to lobby on legislation and other matters of public policy. But since the September 2008 government takeover of AIG, executives of that company have been forbidden to do so, unless they first get the Treasury Department’s permission, and the Treasury Department refuses to grant it.

Since AIG executives are afraid to speak out, disclosure of this un-American provision was left to Maurice (“Hank”) Greenberg, former chair and until 2008 the largest shareholder of AIG. He disclosed it yesterday on CNBC.

This is yet another example of the dubious tactics used in Sept. 2008 by Hank Paulson and Tim Geithner when they wrested control of AIG for the U.S. government. Besides having scant legal authority for their takeover actions, the successive Treasury Secretaries tried to keep from the public how the government funds injected into AIG did not support it or its shareholders or employees but were funneled as a backdoor bailout of Goldman Sachs and other Wall Street firms.

It is thus par for the course—but equally outrageous—that we now learn that when Paulson and Geithner imposed this straightjacket on AIG, they also made the company (a) adopt a policy suspending all lobbying and then (b) sign a loan agreement prohibiting it from changing that policy without Treasury’s consent—which apparently may be withheld for any reason or no reason.

Mr. Greenberg, who had run AIG for 40 years and lost his personal fortune of $2 billion to the government takeover by Paulson and Geithner, said of this gag order on MNBC yesterday: “It’s incredible. It’s hard for me to believe it happens in America, where you first impose terms on the company by making them a bridge loan, at usurious rates, and then say to the company you can’t lobby any member of Congress to bring about any kind of change whatsoever.”  (MNBC Interview, at about 3:50 / 8:26.)

The audacity of Treasury’s original inclusion of these provisions may only be outmatched by its current strict interpretation and stubborn stance. I understand that the Treasury has told AIG’s management that the lobbying policy (excerpted below) prohibits AIG from talking to Members of Congress regarding the terms of the government’s AIG  bailout. Apparently the Treasury contends that any such discussions would be lobbying for legislation!

Heated discussions between AIG management and Treasury are ongoing. If this upsets you, call your Member of Congress!

__________

AIG Lobbying Policy: ”All federal lobbying activities by AIG or its representatives related to advocacy on legislation, as well as political contributions on behalf of AIG, and including the operation of AIG’s political action committee, are suspended.”

 Section 6.04(e) of the Treasury-AIG Recapitalization Agreement: ”Restrictions on Lobbying.  AIG shall continue to maintain and implement its comprehensive written policy on lobbying, governmental ethics and political activity and distribute such policy to all AIG employees and lobbying firms involved in any such activity. Any material amendments to such policy shall require the prior written consent of the UST and any material deviations from such policy, whether in contravention thereof or pursuant to waivers provided for thereunder, shall promptly be reported to the UST. . . .”

The Administration has not backed away from its predecessor’s aggressive use of the state secrets privilege.  According to Steven Aftergood, “there is a great deal of [...]]]> The media often assesses governmental transparency issue by issue.  The Obama Administration gets an annual rating for its performance on FOIA compliance.  It receives press for its invocation on the state secrets privilege.  And so on.  But it may be worth taking stock of the total picture.  From the state secrets privilege to the proposed SHIELD Act and FOIA, the Obama Administration seems in pursuit of black box government much like its predecessor.  On reflection, the Administration’s call for a more transparent government in January 2009 seems a mismatch with its actions.  In this way, theory and practice don’t coincide.

The Administration has not backed away from its predecessor’s aggressive use of the state secrets privilege.  According to Steven Aftergood, “there is a great deal of continuity between the Bush and Obama administrations . . . . there is no case where the Obama administration has rescinded a claim of state secrets privilege that was advanced by the Bush [administration].”  The U.S. government has recently invoked the state secrets privilege in instances that appear designed to hide government screw ups rather than to protect national security.  For instance, the government hopes to block evidence in a case against a contractor who duped the government into spending millions on allegedly fake counterterrorism technology.  It has invoked the privilege to block a personal injury lawsuit by a CIA employee who alleged that environmental contamination in his home made his family sick. In a case inherited from the Bush administration, Obama’s Justice Department has continued to argue that classified records of eavesdropping on an Islamic charity were state secrets.  Two wiretapped lawyers were awarded $20,400 each, a ruling that last week the Obama administration indicated it would appeal.  ACLU Executive Director Anthony Romero laments that although the President promised to reform abuses of the state secrets privilege as a candidate, he has reneged on that promise as the President.

The Obama Administration has devoted significant energy to punishing whistle blowers.  As Politico reporter Josh Gerstein explains, the Administration is “pursuing an unexpectedly aggressive legal offensive against federal workers who leak secret information to expose wrongdoing, highlight national security threats or pursue a personal agenda.”  Since President Barack Obama took office, prosecutors have filed criminal charges in five cases involving unauthorized distribution of classified national security information to the media and is now considering prosecuting WikiLeaks founder Julian Assange.  The U.S. government, by contrast, only brought three such cases in the preceding 40 years.  Moreover, in response to the Wikileaks disclosures, the Administration has gotten behind the proposed SHIELD Act, which would amend Section 798 of the Espionage Act of 1917.  The amendment would expand the kinds of information covered by the Espionage Act and enables the U.S. government to prosecute private citizens who have not worked for the government or signed a security agreement.

In a recent post, I underscored that FOIA compliance continues to disappoint.  The National Security Archive recently issued its report “Glass Half Full: 2011 Knight Open Government Survey Finds Freedom of Information Change But Many Agencies Lag in Following Obama’s Openness Order.”Although the group found some progress (49 agencies took concrete action in light of the March 2010 White House memorandum instructing agencies to update all FOIA material and assess whether their FOIA resources were adequate), its results were decidedly mixed.  Only 24 agencies actually updated their FOIA training materials, only 13 agencies followed its mandate, and 41 of the agencies remained inert. Of those 41 agencies, 17 could not provide concrete records showing that they had followed the memo’s instructions; two agencies withheld documents by incorrectly citing FOIA exemptions; 17 agencies were still working on the request after more than 100 business days (in violation of FOIA); and four agencies never acknowledged the team’s requests despite numerous calls and faxes. Ancient requests, as old as 18 years, “still languish in the system.” As the team reports, twelve agencies have outstanding FOIA requests older than six years.” Eric Newton, an advisor to the Knight Foundation, remarked that “at this rate, the President’s first term in office may be over by the time federal agencies do what he asked them to do on his first day in office.”  At a hearing before the House Committee on Oversight and Government Reform, FOIA expert Daniel Metcalfe expressed his disappointment by the “surprising slowness and incompleteness of the Obama Administration’s new FOIA policy implementation.” Metcalfe lamented the administration’s “do as I say, not as I do mentality,” as evinced by the performance of its lead agency, the Department of Justice, whose FOIA backlog is worse than it was a year ago.

Viewed together with my co-blogger Frank Pasquale’s insights on fusion centers (see our forthcoming article) and his important forthcoming book on The Black Box Society, the Obama Administration, issue for issue, seems to support black box government, not a transparent one.

Recent revelations in Japan suggest just how important an understanding of accounting may be.

In a post in late March, I related that many Japanese were willing to give the benefit of the doubt to TEPCO, the operator of the damaged Fukushima Dai-Ichi nuclear plant, in the days following the March 11 earthquake and tsunami. The most common excuse in the language, “Shikata ga nai” (“It can’t be helped”), struck most people as apposite, given the historical rarity of 9.0 earthquakes and 15-meter killer waves.

By now, the situation has almost been integrated into the everyday, at least for those of us far from the reactor. People speculate whether the government nuclear agency’s lead spokesperson is wearing a wig, and a cable news channel has a [...]]]>

Recent revelations in Japan suggest just how important an understanding of accounting may be.

In a post in late March, I related that many Japanese were willing to give the benefit of the doubt to TEPCO, the operator of the damaged Fukushima Dai-Ichi nuclear plant, in the days following the March 11 earthquake and tsunami. The most common excuse in the language, “Shikata ga nai” (“It can’t be helped”), struck most people as apposite, given the historical rarity of 9.0 earthquakes and 15-meter killer waves.

By now, the situation has almost been integrated into the everyday, at least for those of us far from the reactor. People speculate whether the government nuclear agency’s lead spokesperson is wearing a wig, and a cable news channel has a daily segment, “Kyou no genpatsu kiiwaado” – “Today’s nuke reactor keyword”. Any goodwill toward TEPCO has long since evaporated, thanks to its management’s sloth in apologizing, its spokespersons’ frequent misstatements and evasions in daily press conferences, and sympathy for the thousands displaced from the evacuation zone, their livelihoods derailed (and their pets and livestock reluctantly left behind to starve, an aspect of the story that has mobilized many activists here). But it turns out that even the initial goodwill was probably misplaced.

Last week, word came out that when Fukushima Dai-Ichi was being planned in the 1960s, it was originally proposed to be sited 35 meters above sea level. However, TEPCO reckoned that this would result in unduly high recurring costs during the lifetime of the plant. In particular, it would increase the expense of pulling sea water up to the plant for use as a coolant, and would increase the cost and complexity of conveying fuel, equipment and other items to and from the small seaside port built to service the plant.

TEPCO’s planning whizzes hit on the idea of digging away 25 meters of soil – possibly a bigger up-front fixed expense, but many decades’ worth of reduced recurring expense. Only “possibly”, because the plant’s foundation had to be anchored to bedrock, so the dig made this simpler, too. Those top 25 meters were mudstone and clay, which was felt not to be so stable in a quake if the plant were built on top of it. The story quotes Masatoshi Toyoda, then a TEPCO VP for planning and now age 87, as saying it seemed a matter of “cost efficiency”. He also suggests that there may have been a way to have built much of the plant within the mudstone layer, so that it could have been safe against both earthquake and tsunami. But, he admits sorrowfully, tsunami risk wasn’t considered at all.

The decision to dig left the facility at a 10-meter elevation. In 2011, it was hit by a 15-meter tsunami. The rest is history.

Reaction so far has been muted. The announcement of this 40-year-old bit of history came in the middle of this year’s 10-day “Golden Week” period of national holidays, when fewer people than usual are paying attention to the news. Even more artfully, it was released on a “press holiday,” May 5, which meant that no newspapers were published the next day. It seems to have been carried by very few major media outlets – to my knowledge, only TV Asahi and the Tokyo Shimbun website. (You can find a rather daffy machine translation of the Tokyo Shimbun story into English here, but running the Japanese version yourself through Babel Fish will give you a more coherent read.). Both the English-language Daily Yomiuri and its parent, the conservative and influential Yomiuri Shimbun, entirely omitted to mention it when they resumed publishing. You won’t find it in this week’s edition of Nikkei Weekly, either. If my mother-in-law hadn’t been watching the morning show on TV Asahi that morning and complained about it over lunch, I might never have heard about it.

TV Asahi contrasted Fukushima Dai-ichi with another nuclear plant more than 100 kilometers north, within the city of Onagawa, Miyagi Prefecture. At that location, the tsunami reached only 13 meters. The difference is a big one, since the Onagawa plant, run by Tohoku Electric, is situated 15 meters above sea level. According to media reports, it was slightly damaged by the quake per se, but shut down safely. (My wife and I attempted to drive to this plant the next day – its PR center is easy to find on most local road maps – but were prevented by police from getting onto the mountain road that leads to it. What we discovered after our forced U-turn was unforgettable and harrowing; I’ll describe that in a future post.)

In a related development, Prime Minister Kan earned rare praise last week when he ordered the closing of the Hamaoka nuclear power plant, because of its location on a major geological fault. Except that, despite what editors around the world wrote in their headlines, he didn’t order, exactly – he doesn’t have the legal authority to do so. Asked, was more like it.

The plant is located not far from Mount Fuji in Shizuoka Prefecture, west of Tokyo — and considerably closer to Tokyo’s 30 million residents than Fukushima is. It’s run by Chubu Electric Power Co., a/k/a ChuDen, whose board of directors was unable to decide at a meeting Saturday whether to grant the Prime Minister’s request. That there is an estimated 87% likelihood of an 8.0 or greater earthquake near the fault within the next 30 years apparently weighed less in their esteem than the loss of around ¥8.3 billion (roughly, $104 million) that was projected to result from a shut-down — though in a move that would make any American PR flack proud, jobs were also gravely mentioned. ChuDen’s board scheduled another meeting for Monday afternoon, leaving the nation to wonder whether the directors would kindly acquiesce. Eventually, they did.

Tokyo has already begun to sweat under what looks to be an early tsuyu – the hot, muggy, rainy season that makes US East Coast summers seem mild. We’re also being told to expect a repeat of last summer, which set the historical record for number of consecutive days above 30°C (86°F). (This is to some extent self-inflicted: not just global warming, but a heat-island effect made worse by the pell-mell construction of high-rise towers near the Shinagawa harbor-front, cutting off breezes from much of the city.) Thanks to the Fukushima situation, available power this summer is expected to fall at least 20% below usual demand. Businesses all over town have voluntarily dimmed their lights, turned off their escalators and set their air conditioning to 27°C (a bit more than 80°F) – including in crowded rush-hour subways and at the gym where I (occasionally) work out.

Should we also have to sweat out the decisions of boards of private companies on matters of public safety? The Tokyo region’s current predicament suggests that a world with insufficient power to regulate business is much closer to an inferno than to a paradise.

Picture credit: Tokyo Shimbun.

For years, the National Highway Traffic Safety Administration has declined to post on its Web site reports from automakers about problems with their cars and about specialized warranty extensions that could save consumers large sums on repairs. . . . The technical service bulletins . . . provide information on unusual problems with vehicles . . . . Special service campaigns are a form of technical service bulletin that often tell dealers of warranty extensions for particular repairs. “Many manufacturers have asserted that technical service bulletin information is copyrighted and will not waive those copyrights,” [said] an agency spokeswoman . . . [...]]]> Two items of note on this topic recently. First, the NYT reports on NHTSA’s lazy approach to IP overreach by automakers:

For years, the National Highway Traffic Safety Administration has declined to post on its Web site reports from automakers about problems with their cars and about specialized warranty extensions that could save consumers large sums on repairs. . . . The technical service bulletins . . . provide information on unusual problems with vehicles . . . . Special service campaigns are a form of technical service bulletin that often tell dealers of warranty extensions for particular repairs. “Many manufacturers have asserted that technical service bulletin information is copyrighted and will not waive those copyrights,” [said] an agency spokeswoman . . . . “N.H.T.S.A. has a legal obligation to abide by copyright law.”

NHTSA could easily excerpt the gist of bulletins as fair use. Or it could communicate facts in them without using any of the actual language or diagrams they contain. Anyone who has taken a week of copyright knows about the idea/expression or fact/expression dichotomy. But copyfraud obfuscates this obvious workaround.

Second, ongoing legal battles over Toyota’s sudden acceleration incidents may lead to “security measures typically reserved for classified government secrets:”

The fight centers on access to Toyota’s source code, the software that controls sophisticated engine management and other electronics in its vehicles. Plaintiffs’ attorneys believe the code might contain evidence that could bolster their cases. The Japanese auto maker has been fighting to restrict access to the software, saying it needs to protect what it calls the “crown jewel” of its global enterprise.

Toyota said the attorneys should only be allowed to view parts of the code in a highly secure room, the likes of which is used by members of Congress or in trials against terrorists and spies for viewing classified information.

As I note in the piece, this kind of “qualified transparency” will become more and more common in tech disputes. Debates about “channeling” innovation protection (to patent or trade secret law) will increasingly need to take into account how patent law’s disclosure function could help more people understand potentially dangerous products.

Technological Due [...]]]> In Technological Due Process, 85 Wash. U. L. Rev. 1249 (2008), I explored the promise and perils of the increasing automation of administrative decision-making.  The automated administrative state took root after the convergence of a number of trends — the budget shortfalls of the 1990s, the falling costs and increased performance of information systems, and the emergence of the Internet.  Government officials saw computerized automation as an efficient way to reduce operating costs: Automated systems meant less paperwork and fewer staff.  Today, all states now automate a significant portion of the administration of their public benefit programs.  More than fifty federal agencies execute policy with data-matching and data-mining programs.  As a result, agencies increasingly use information systems to make decisions about important individual rights.

Technological Due Process identified three central problems with administrative automated systems.  First, when programmers translate policy into code, they inevitably distort it, thus embedding incorrect policy into systems.  Second, data matching programs misidentify individuals because they use crude algorithms that cannot distinguish between similar names.  Last, automated systems often have problems providing notice to individuals, often because they lack audit trails that capture why government agencies take particular action.

Colorado’s automated public benefits system, known as CBMS, served as an important case study for my work.  Responses to open-sunshine requests revealed that from September 2004 to April 2007, programmers embedded over 900 incorrect rules regarding Medicaid, food stamps, and other public benefits into CBMS.  As a result, CBMS terminated Medicaid benefits of patients with breast cancer based on income and asset limits unauthorized by federal or state law.  It denied food stamps to individuals with prior drug convictions in violation of Colorado law.  And it demanded that eligibility workers ask applicants if they were “beggars,” even though neither federal law nor state law required an answer to that question for the provision of public benefits.  Moreover, because CBMS lacked audit trails, individuals often received wholly deficient notice when the system cut or terminated their benefits.  At times, individuals received no notice.

The past four years has seen little progress.  Although state officials in 2009 thought that entering into a $48.6 million, four-year contract with Deloitte Consulting would help fix these problems, matters have arguably gotten worse.  CBMS, for instance, has delayed processing applications for benefits in 70% of cases (in violation of federal law).  It continues to terminate individuals’ public benefits without notice.  (One case led to the death of a nine-year old boy after a pharmacy would not fill his asthma prescription despite proof that his family qualified for Medicaid help).  Business school professor Don McCubbrey, who I interviewed for Tech Due Process, recently explained to the Denver Post that the recent failures cannot be due to the thousands of new Medicaid and other benefit applications from the recession.  In his view, a “system that large should be able to scale.”  According to Ed Kahn of the Colorado Center on Law and Policy, the system hasn’t just failed to fulfill its federal and state requirements but has “regressed.” Notice, too, continues to be a problem, undermining individuals’ ability to complain, let alone have a meaningful hearing in the face of termination.

The hallmarks of CBMS administration are incompetence and, seemingly, interest group capture.  As the Denver Post reports, it is not clear whether private contractors employed by the state face any contract sanctions as a result of the ongoing performance problems.  Ed Kahn explains that “neither the old contract with EDS nor the new one with Deloitte allow for sanctions.”  Although the state’s Office of Information Technology insisted that there are performance measures in the contract with Deloitte, Colorado has not tried to assess any penalties on Deloitte.  This week, I will be talking about these sorts of problems at Berkeley Law’s Technology and Regulation symposium (spearheaded by Professor Kenneth Bamberger and Professor Deidre Mulligan, who bring a wealth of scholarship and insight to the issue).  Hopefully, I can learn about other more effective uses of technology in government administration.

So let’s try out something on the nondelegation doctrine.  Most people don’t know that the first major controversy where this argument was made involved the Second Bank of the United States.  Consider these portions of Andrew Jackson’s Veto of the Bank:

“The Government is the only ‘proper’ judge where its agents should reside and keep their offices, because it best knows where their presence will be ‘necessary.’ It can not, therefore, be ‘necessary’ or ‘proper’ to authorize the bank to locate branches where it pleases to perform the public service, without consulting [...]]]> I’m going to observe a “no individual mandate” posting policy for a while. That issue has been flogged to death and there’ll really be nothing new to say until the circuit courts issue their opinions.

So let’s try out something on the nondelegation doctrine.  Most people don’t know that the first major controversy where this argument was made involved the Second Bank of the United States.  Consider these portions of Andrew Jackson’s Veto of the Bank:

“The Government is the only ‘proper’ judge where its agents should reside and keep their offices, because it best knows where their presence will be ‘necessary.’ It can not, therefore, be ‘necessary’ or ‘proper’ to authorize the bank to locate branches where it pleases to perform the public service, without consulting the Government, and contrary to its will. . . . The power which this act gives to establish two branches in any State, without the injunction or request of the Government and for other than public purposes, is not ‘necessary’ to the due execution of the powers delegated to Congress.”

“It is maintained by some that the bank is a means of executing the constitutional power ‘to coin money and regulate the value thereof.’ Congress have established a mint to coin money and passed laws to regulate the value thereof. . . . But if they have other power to regulate the currency, it was conferred to be exercised by themselves, and not to be transferred to a corporation. If the bank be established for that purpose, with a charter unalterable without its consent, Congress have parted with their power for a term of years, during which the Constitution is a dead letter. It is neither necessary nor proper to transfer its legislative power to such a bank, and therefore unconstitutional.”

Both of these passages (especially the latter one) make a nondelegation claim. Indeed, a similar point was advanced by the lawyers for Maryland in McCulloch, but Chief Justice Marshall ignored the issue in his opinion.

But even disclosure charts run up against the slipperiness of language. Pollitz noted that for some plans, a “deductible” was not really a deductible; you could easily spend much more out-of-pocket on health care than the stated “deductible level” before coverage kicked in.

How can an individual make an informed choice when words lose their meaning in a tangle of qualifications and conditions? At [...]]]> I was recently listening to Health Affairs’s “Newsmaker Breakfast with Karen Pollitz.” She gave a fascinating presentation on the challenges she faces as she develops HealthCare.Gov as a portal for information about health insurance. As I noted a few years ago, health insurers can easily mislead consumers about the nature of their coverage, and disclosure charts can be very helpful.

But even disclosure charts run up against the slipperiness of language. Pollitz noted that for some plans, a “deductible” was not really a deductible; you could easily spend much more out-of-pocket on health care than the stated “deductible level” before coverage kicked in.

How can an individual make an informed choice when words lose their meaning in a tangle of qualifications and conditions? At what point does a deductible cease being a deductible? While this might seem like a relatively technical question of insurance regulation, it is reflects a more general information-gathering problem that will confront regulators in coming years. Scientists could only predict and control aspects of the natural world when they could be named and classified. Any successful regime of healthcare reform will depend, at a bare minimum, on a flexible yet standardized classification system that can map what health insurers are doing. Like Linnaeus patiently organizing a welter of living forms, regulators will need to taxonomize pullulating permutations of insurer practices.

The Rise of Health Care’s Middlemen

The United States leads the world in payments to private insurance providers. The industry has extraordinary power over access to health care. In 2010, long-standing dissatisfaction with the sector culminated in the Patient Protection and Affordable Care Act (ACA). Congress rejected changes like a public option in healthcare, in favor of a complex and reticulated statutory scheme to better regulate insurers. There have not been dramatic changes in the way that health insurance companies are run, and their stock prices tended to rise as reform became more certain.

The ACA has set in motion dozens of regulatory proceedings. The government also allocated $20 billion toward equipping all medical offices with electronic health records in the 2009 stimulus bill, the American Reinvestment and Recovery Act. Health regulators must now try to catch up with technologically advanced intermediaries in insurance and IT fields.

Immediately after the ACA passed, naysayers on both left and right complained that divisions like OCCIO were unprepared for their new regulatory roles. Perhaps the most compelling case for repealing the ACA is a belief that regulatory agencies will inevitably be captured, or overwhelmed with information from far far better funded attorneys and lobbyists representing insurance and IT firms.*

Nevertheless, the ACA has catalyzed one very important process: the development of an infrastructure of monitoring and reporting that will be necessary for any future informed regulation. It’s shocking to consider how inadequate past reviews were here. As of 1997, the “US Department of Labor had resources to review each employer-sponsored group health plan under its jurisdiction once every 300 years.” The Bush years did not significantly address that shortage. Moreover, “state insurance department staff levels declined 11% in 2007 while premium volume increased 12%.” The personnel simply haven’t been around.

Starting essentially from scratch, Pollitz and her fellow regulators are engaging in a painstaking rebuilding of the foundations necessary for substantial regulation. Having long neglected even to closely monitor the sharp practices of health insurers, federal regulators are now beginning new programs of surveillance.**

Insurance Reporting and Classification

Reporting requirements may not seem like a notable accomplishment. Nevertheless, the trend toward monitoring the products and services offered by insurance companies is an important step toward accountability. HHS needs to impose some order, some translatable logic, on fields that have threatened to become enormously parasitic and unproductive by or masking the true nature of their commitments.

Consider the practical illegibility of the average insurance plan. A vanishingly small number of subscribers actually read such plans. A plan may have complex cost-sharing requirements that vary among in-network and out-of-network primary care doctors, specialists, surgeons, hospitals, and procedures. While a “great risk shift” makes consumers all the more responsible for their choices in health care, it’s hard to imagine anyone accurately mapping the true fiscal consequences of given disease episodes in an aggressively complex plan.

By setting “a minimum level of health benefits, called the essential health benefits, that must be offered by certain health plans.” As Jessica Mantel explains, the term “‘essential health benefits package’ means coverage that not only provides for the essential health benefits defined by the secretary, but also limits cost-sharing for coverage of the essential health benefits in accordance with the parameters specified in the statute.” The Cancer Action Network has applauded the ACA for promoting “more standardization in the scope and value of private health insurance coverage available.”

Similarly, setting a “medical loss ratio” involves a careful delineation of insurer payments and functions that actually contribute to care. As Tim Jost explained in Health Affairs:

Medical loss ratios have long been of interest primarily to investors. An insurer that could achieve a low MLR by holding down expenditures on health care for its enrollees was a good investment. . . . On November 22, 2010, the Department of Health and Human Services released its interim final rule implementing the requirements of the new section 2718 of the Public Health Services Act (added by section 10101 of the Affordable Care Act), entitled, “Bringing Down the Cost of Health Care Coverage.” This provision is usually referred to as the “medical loss ratio” (or MLR) requirement . . .

Section 2718 requires health insurers (including grandfathered but not self-insured plans) to report to HHS each year, the percentage of their premium revenue that the insurer spends on 1) clinical services for enrollees, 2) “activities that improve health care quality,” and 3) all other non-claims costs, excluding federal and state taxes and licensing or regulatory fees. . . .

Jost describes in details how the classification works, and how it is designed to encourage more responsible insurer behavior.

Setting a Standard for Electronic Medical Records

Electronic health records systems will also need to develop shared data management standards. EMR vendors long argued that they needed flexibility to innovate in order to best reflect doctors’ practices and improve the capture of medical information. However, there is a tension between untrammeled innovation by vendors at any given time and later, predictable needs of patients, doctors, insurers, and hospitals to compare their records and to transport information from one filing system to another.

One system may be able to understand “C,” “cgh,” or “koff” as “cough,” and may well code it in any way it chooses. But to integrate and to port data, all systems need to be able to translate a symptom into a commonly recognized code. Health care providers can only avoid getting “locked into” a system if they can transport their records from one vendor to another. Patients awant their providers to seamlessly integrate records.

HHS rulemaking has lain a groundwork for this type of common language of medical recordkeeping. As Sharona Hoffman and Andy Podgurski explain,

To address this problem, it is necessary for all vendors to support what we will call a “common exchange representation” (“CER”) for EHRs. A CER is an artificial language for representing the information in EHRs, which has well defined syntax and semantics and is capable of unambiguously representing the information in any EHR from a typical EHR system. EHRs using the CER should be readily transmittable between EHR systems of different vendors. The CER should make it easy for vendors of EHR systems to implement a mechanism for translating accurately and efficiently between the CER and the system’s internal EHR format.

There are also important opportunities for standardization in the security field:

As is true for a common exchange format, standardized security policies and mechanisms are unlikely to be adopted by vendors and providers without a regulatory mandate. In order to facilitate compliance and provide vendors with clear guidance, the regulatory mandate might incorporate, by explicit reference, some established and emerging security standards, such as the Internet Engineering Task Force’s Transport Layer Security (“TLS”) standard or its Public-Key Infrastructure (X.509) standard.

The discussion can quickly become technical, and it is difficult to explore all the ins and outs of the process. But the underlying purpose is clear: to develop some standard forms of interacting in a realm where “spontaneous order” is unlikely to arise and “network power” could lead to lock-in.

Of course, there are important differences between the EHR and health insurance landscapes. Symptoms refer to conditions that are, by and large, objective. (One can even imagine ubiquitous video cameras and sensors creating something like a complete patient record (or medical life log) for patients who consent to that type of monitoring.) Insurance contracts, by contrast, do not have the same “ontological firmness.” They must contemplate vague and open-ended spells of illness.

Nevertheless, a process similar to common exchange representation is now going on in the consumer affairs office of HHS. As the Office of Consumer Information and Insurance Oversight lays ground rules for ACA implementation, it must decide on some basic questions: what counts as insurance? What is a deductible? The ultimate goal is to require insurers to convey with far more precision what services they truly cover. The health insurance and health IT landscapes will only become governable when practices are nameable, classifiable, and comparable.

*The latter point does appear to be valid with respect to the public record now being compiled in dozens of rulemaking processes. In rule after rule, industry comments overwhelmingly dominate public interest or academic contributions. It’s sad to think that groups like Campaign for America’s Future, or labor unions, having spent so much time getting the ACA passed, are now ceding much of the regulatory field to insurers. On the other hand, given the Administration’s recent regulatory direction, and McSurance waivers, who knows whether good comments would have an impact.

**For more on the importance of ongoing surveillance in complex business environments, see Larry Cata Backer on SarBox, and the last part of my earlier post on high finance.

Image Credit: Charles Linnè, A General System of Nature, Vol. V. London: Printed for Lackington, Allen & Co., 1806.

Lyndsey Layton’s article on salmonella-tainted eggs offers an excellent case study of the toxic consequences of deregulatory ideology and a broken “cost-benefit analysis” apparatus. Layton describes years of controversy over bad eggs, which appeared to finally resolve in the late 1990s as the most responsible egg producers realized the terrible reputational consequences they were suffering because of their wild west competitors:

In the spring of 2000, a deal [...]]]> Remember the massive 500 million egg recall back in August? At least 2,000 people reported illness from the eggs; countless others may have mistakenly blamed their misery on some other source of food poisoning. We are now beginning to understand how regulatory pathologies beyond the usual capture story allowed this entirely preventable outbreak of salmonella.

Lyndsey Layton’s article on salmonella-tainted eggs offers an excellent case study of the toxic consequences of deregulatory ideology and a broken “cost-benefit analysis” apparatus. Layton describes years of controversy over bad eggs, which appeared to finally resolve in the late 1990s as the most responsible egg producers realized the terrible reputational consequences they were suffering because of their wild west competitors:

In the spring of 2000, a deal was struck. The egg industry agreed that the federal government would for the first time set rules for egg farms. At a private meeting on the eighth floor of a sleek office building overlooking Washington’s Union Station, Klippen, representing the egg farmers, shook hands with Richard Wood of Farm Animals Care Trust, who was negotiating on behalf of consumer groups. The regulators looked on, approvingly.

“This is how government and industry are supposed to work together,” Judy Riggins, a policymaker at the USDA, whispered to Klippen. And then, nothing. For the next nine years, the government failed to deliver the rules.

Old battles between the USDA and FDA explain some of the lethargy. But I found most remarkable this intervention from the OMB, whose Office of Information and Regulatory Affairs performs cost-benefit analysis on proposed regulations:

It took the FDA until 2004 to get proposed rules through the Department of Health and Human Services and to the Office of Management and Budget, which has final say over new regulations. . . .The FDA thought it had a compelling case. The rules would cost farmers $82 million a year but could save $1.4 billion in medical costs and lost productivity by preventing 79,000 illnesses and 30 deaths a year. Still, OMB “didn’t think there were enough bodies in the street,” Hubbard said. . . . Howard Maguire, who was the egg industry’s main lobbyist in 2008, said OMB had pushed FDA officials to take the proposal off the table.

This sad story is one more confirmation of the Center for Progressive Reform’s bleak characterization of OIRA from 2009:

In the recent past, OIRA has been a place where regulations to protect health, safety and the environment go to die, or at the very least be weakened. It has served as a forum of last resort for special interests. Regulated industries unable to convince Congress not to pass laws protecting health, safety and the environment, and unable to persuade regulatory agencies to go easy on them while drafting regulations pursuant to those laws, have often taken their case to OIRA, where they have met with considerable success, particularly during the Bush years.

As Director of OIRA, [Cass Sunstein now] leads an agency staff that has met routinely with special interests, sometimes exceeding the agency’s mandate to do so. Research from the Center for Progressive Reform, released on the day of Sunstein’s confirmation, demonstrates that this practice continued during the early months of the Obama Administration, before Sunstein was confirmed. In a blog post reacting to Sunstein’s confirmation, CPR Member Scholar Rena Steinzor highlighted the concerns raised by OIRA’s tilt toward industry — at least so far as its OIRA meeting schedule suggests.

Though I agree with CPR’s assessment, the egg story does show a positive role for industry: the leading egg producers actually did want to create some sort of standard to deter worst practices. The standard probably would have been better if there were more balanced involvement in its formulation, but at least the industry acceded to some rules. . . . only to be foiled by ideologues at OMB. How many outbreaks will have to occur, how many hundreds of millions of dollars wasted, before their viewpoint is discredited?

Image Credit: Sakurako Kitsa.

Elliott Fisher, director of the Center for Health Policy Research at Dartmouth Medical School, describes the “three key attributes” of ACOs: “organized care, performance measurement, and payment reform.” Fisher has argued that insurers are not well-positioned to improve the quality of health care because [...]]]> Critics of the ACA have frequently complained that the legislation does not do enough to improve quality or to cut costs. However, the Act did create incentives for new alliances of hospitals and doctors, known as “Accountable Care Organizations.” Now provider lobbies are demanding some pretty dramatic changes to health care regulation in order to implement ACOs. In this post, I want to explain what ACOs are, and why they challenge traditional health care regulatory models.

What’s an ACO?

Elliott Fisher, director of the Center for Health Policy Research at Dartmouth Medical School, describes the “three key attributes” of ACOs: “organized care, performance measurement, and payment reform.” Fisher has argued that insurers are not well-positioned to improve the quality of health care because they “have largely focused on negotiating favorable prices within relatively open networks of providers” instead of trying to improve the health care their members received. (Private insurers have little incentive to keep current subscribers healthy over the long term, since at least half of subscribers on average churn into different plans within three years of signing up with a given plan.) He believes that a “virtual network” of physicians could do a better job, if they teamed up with hospitals. ACO refers to this legal alliance, which would be entitled to receive payments in exchange for cutting costs or improving quality.

In an ACO, an “extended hospital medical staff” (or “a hospital-associated multi-specialty group practice”) can join forces with a hospital and agree to be compensated via a lump sum payment. If the group manages to keep overall costs beneath the lump sum payment, it can share the gains among its members. Each part of the team also has an incentive to work together to keep those they care for healthy. In an ideal world, the ACO responds to the concerns about fragmentation discussed in last month’s symposium on the volume edited by Einer Elhauge recently released by Oxford University Press.

ACO Skeptics

But there are skeptics. Jeff Fisher worries about shadowy new pressures on providers that patients won’t be aware of:

Consumers would not be aware that they were being treated by ACOs. Rather, they would be “attributed” to them: virtual patients of virtual organizations. Aggregate health spending for attributed patients would be tracked, and increases in that spending would be capped using a form of “shadow capitation.” ACOs that lived within the caps would get their fees increased. Those that overspent would see their fees reduced or frozen.

Gail Wilensky believes that hospitals may dominate ACOs, predicting that “if they are the only entities receiving the payment, it will have a bad imbalance between groups of physicians and the hospitals.”

Robert Pear has also reported that a “frenzy of mergers involving hospitals, clinics and doctor groups eager to share costs and savings” worries consumer advocates and antitrust scholars.

“In an environment where health care providers are financially rewarded for keeping costs down,” [a lawyer for the Consortium for Citizens with Disabilities] said, “anyone who has a disability or a chronic condition, anyone who requires specialized or complex care, needs to worry about getting access to appropriate technology, medical devices and rehabilitation. You don’t want to save money on the backs of people with disabilities and chronic conditions.”

“The new law is already encouraging a wave of mergers, joint ventures and alliances in the health care industry,” said Prof. Thomas L. Greaney, an expert on health and antitrust law at St. Louis University. “The risk that dominant providers and dominant insurers may exercise their market power, individually or jointly, has never been greater.” Lobbyists and industry groups are bearing down on the Federal Trade Commission and the Justice Department, which enforce the antitrust laws, and the inspector general’s office at the Department of Health and Human Services, which ferrets out Medicare fraud.

Those agencies are writing regulations to govern . . . accountable care organizations. They face a delicate task: balancing the potential benefits of clinical cooperation with the need to enforce fraud, abuse and antitrust laws. . . . [According to one insurer strategist,] “In some markets, the dominant hospital is like the sun at the center of the solar system. It owns physician groups, surgery centers, labs and pharmacies. Accountable care organizations bring more planets into the system and strengthen the bonds between them, making the whole entity more powerful, with a commensurate ability to raise prices.”

Why do ACOs implicate fraud, abuse and antitrust laws? At a recent government workshop on ACOs, participants addressed “circumstances under which collaboration among independent health care providers in an ACO permits ACO providers to engage in joint price negotiations with private payers without running the risk of engaging in illegal price fixing under the antitrust laws.” HHS also explored “the different ways in which the Secretary may exercise waiver authority or create new exceptions and safe-harbors related to the physician self-referral law, the Anti-kickback statute and the CMP law in order to encourage the creation and development of ACOs.” The AMA has pushed for “explicit exceptions to the antitrust laws” for participating doctors. And, as Pear reports, the president of the Federation of American Hospitals says “the fraud and abuse laws should be waived altogether.”

Evolving Fraud, Abuse, and Antitrust Laws

What is one to make of all this? Many health law scholars have been skeptical of fraud and abuse laws for some time. For a taste of the scholarship, consider this excerpt from Mark A. Hall’s 1988 article in the Journal of Health Politics, Policy, & Law:

Someone uninitiated to the intricacies of health care financing would find it startling to learn that it is potentially a felony punishable by five years imprisonment for a rural hospital to recruit a badly needed specialist to the community, for a doctor to discount his services by waiving insurance deductibles and coinsurance, or for a health care institution to pay its doctors a bonus as a reward for efficient practice. A case can be made that each of these activities falls within the literal terms of the broadly worded Medicare and Medicaid referral fee statute. Enticing a physician to join the medical staff necessarily involves implicit or explicit incentives to refer the physician’s patients to that hospital. Price discounts can be characterized as payments to refer one’s patients to one’s self for treatment. And efficiency bonuses can induce doctors to admit patients to a particular hospital or encourage them to direct patients to a particular insurance plan.

Because these and other absurd applications of the referral fee concept are within a plausible reading of the federal referral fee statute, the statute has been a constant thorn in the side of the health care industry since the 1977 enactment of its current form. However, some relief is now in sight. The Department of Health and Human Services (DHHS) has issued a series of ‘‘safe harbor’’ regulations specifying payment practices that are deemed legal despite their potential referral incentive.

Over the past 20 years, regulation of fraud and abuse has waxed and waned. In 1996, James F. Blumstein concluded that “the modern American healthcare industry is akin to a speakeasy—conduct that is illegal is rampant and countenanced by law enforcement officials because the law is so out of sync with the conventional norms and realities of the marketplace.” Nevertheless, as Joan Krause has shown, there are important public purposes behind these laws, and it’s troubling to see a hospital leader simply advocate for them to be swept away tout court in the case of ACO’s.

Antitrust issues are also complex here, and perhaps help demonstrate the wisdom of delaying the implementation of at least this part of the ACA for a few years. As Tim Greaney has demonstrated time and again, providers have had little to fear from antitrust laws over the past decade. His 2007 article on physician cartels memorably summarizes the situation for doctors:

For over thirty years the United States Department of Justice and Federal Trade Commission (“Agencies”) have confronted bands of businessmen who have steadfastly refused to pay attention to legal precedent, repeated governmental pronouncements, and administrative sanctions imposed on their colleagues. The conduct revealed in these cases evidences a willingness to blatantly disregard the law by repeatedly undertaking arrangements already deemed illegal by the enforcers or by concocting schemes that raise untested but dubious justifications.

[T]hese cases involve physicians, some grouped in associations numbering in the thousands and almost always proceeding with the advice of business consultants and counsel. The conduct challenged by the government involves the formation of loosely-structured organizations, ranging from Independent Practice Associations to Preferred Provider Organizations (PPO) to other kinds of loose “networks” that collectively bargain with employers or managed care organizations for provider contracts.

It’s hard to read Greaney’s work on the topic without concluding that a toxic mix of “doctrinal shortcomings, political pressures, and institutional constraints” have severely compromised antitrust enforcement already. Greaney’s 2004 article on antitrust in health care, Chicago’s Procrustean Bed, also suggests that health care antitrust has, for years, been biased “strongly [in] favor defendants” due to the persistent failures of Chicago-inspired doctrine to reflect “market imperfections” in health care.

Reduced Regulation Should Be Conditioned on Better Calibrated Payments

One could draw two lessons from these trends. Perhaps policymakers should be cautious about granting overly broad antitrust exemptions to ACO’s in a field where competition law’s prerogatives have already been whittled away.

Or one could call health care antitrust a largely failed project, and start regulating dominant ACO’s as veritable health care utilities, as critical to regional infrastructure as roads, electricity, or water. The logic of concentration seems inevitable in the field: insurers and providers have long been in an arms race for bargaining power. Joe White has explained the dynamic:

One might wonder why consolidation among insurers [in the US over the past 20 years] did not allow them to resist the providers’ demand for increased payments. The simple answer is that there were two concentrated parts of the market and one fragmented part. The insurers had to choose between fighting a full-pitched battle with the providers or exploiting their own market power vis-à-vis the employers. Raising premiums to employers was a lot easier.

In theory, employers could have demanded restrictive networks (at lower prices). But since everyone had agreed that employees did not like restrictive networks, and providers (especially hospitals) were not willing to discount much to get into such networks, there were not many available for purchase. Individual employers could not invent such a product; they could only shop around and find the relatively best deal by customizing other contract terms, such as cost sharing. The system left substantial room for entrepreneurship, but this entrepreneurship did not serve to improve health care values.

What can be done in a health care marketplace that’s increasingly looking like the “clash of the titans?” Perhaps inspired by the utility model, Maryland has implemented a hospital payment system where “all payers—public and private—pay the same rates.” If ACO’s deliver a coup de grace to insurers’ efforts to control provider prices, it’s only fair that the same governmental authorities behind the ACO movement condition its rewards on the responsibility to provide affordable care.

Concluding Thoughts

Legal scholar Kevin Werbach once observed that the internet has been centripetal, “pull[ing] itself together as a coherent whole.” For Werbach, network formation theory both explains these centripetal tendencies, and some of “the pressures threatening to pull the Internet apart” into balkanized units. Werbach counsels that governments need to “catalyz[e] network formation, and moderat[e] the forces that push towards excessive concentration of power.” These recommendations should also govern new efforts to create “virtual networks” of care in the wake of the new health reform legislation (the ACA). Like many forms of network power, the ACO’s could quickly have negative unintended consequences if regulators fail to anticipate the ways they could be abused.

ACA stands for Affordable Care Act, not Accountable Care Organizations Above All Else. ACOs may work, but only if policymakers can replace classic instruments of health care regulation with calibrated financing decisions that reflect new industry realities.

X-Posted: HealthReformWatch.com.

This book tells the story of . . . subprime by chronicling the rise and fall of two corporate empires: Ameriquest and Lehman Brothers. . . . By the height of the nation’s mortgage boom, Orange County was home to four of the nation’s six biggest subprime lenders. Together, these four lenders—Ameriquest, Option One, Fremont Investment & Loan, and New Century—accounted for nearly a third of the subprime market. . . .

Under its pugnacious CEO, Richard Fuld, Lehman helped bankroll many of the [...]]]> Doug Henwood has a good eye for the best of recent business analysis. Henwood’s interview with Michael W. Hudson (about Hudson’s new book, “The Monster”) is a must-hear for those interested in the subprime mess. From the book website:

This book tells the story of . . . subprime by chronicling the rise and fall of two corporate empires: Ameriquest and Lehman Brothers. . . . By the height of the nation’s mortgage boom, Orange County was home to four of the nation’s six biggest subprime lenders. Together, these four lenders—Ameriquest, Option One, Fremont Investment & Loan, and New Century—accounted for nearly a third of the subprime market. . . .

Under its pugnacious CEO, Richard Fuld, Lehman helped bankroll many of the nation’s shadiest subprime lenders, including Ameriquest. “Lehman never saw a subprime lender they didn’t like,” one consumer lawyer who fought the industry’s abuses said. Lehman and other Wall Street powers provided the financial backing and sheen of respectability that transformed subprime from a tiny corner of the mortgage market into an economic behemoth capable of triggering the worst economic crisis since the Great Depression. . . .

[Helped by Lehman,] Ameriquest Mortgage unleashed an army of salespeople on America. They numbered in the thousands. They were young, hungry, and relentless in their drive to sell loans and earn big commissions. One Ameriquest manager summed things up in an e-mail to his sales force: “We are all here to make as much f****** money as possible. Bottom line. Nothing else matters.” [This activity] helped fuel the mortgage empire that in 2004 produced $1.3 billion in profits [for Ameriquest's CEO].

Two highlights of the interview stuck with me. Hudson describes how subprime boiler rooms equipped salespeople with white-out, exacto knives, and scotch tape—the better to cut out embarrassingly low income figures from applicants’ W-2s and to paste in higher figures from other W-2s that happened to be lying around. Salespeople called the room where this occurred the “art department” or “lab.”

We also learn from Hudson that at one point, Ameriquest’s CEO was worth over $3 billion, and apparently lived in “a $30 million estate.” That little data point reminded me of Matthew Yglesias’s recent reflections on some of the extraordinary wealth in our society:

[We have to wonder how many billionaires are] reckless gamblers who got lucky making bad bets [rather] than brilliant visionaries who can peer into the future and see the best ideas. In other words, if a thousand guys walk into a casino and all put $1 million down on different numbers on the roulette wheel, then the guys who win all make a second bet, someone will probably walk out of the casino with a billion dollars and an air of smug self-satisfaction.

Even as that conclusion seems ever more fitting for the finance sector (where Paul Volcker claimed the last great innovation was the ATM), an army of lobbyists amasses on Capitol Hill to les bons temps roulez. We can probably rest assured that current regulators will not openly fight states’ efforts to curb abusive lending (as many federal agencies did during the Bush era). But how many could end up in rather comfortable positions at the very firms they are now regulating?

Vol. 60, Issue 1 (October 2010)

Articles

Allan Erbsen, Impersonal Jurisdiction, 60 Emory L.J. 1 (2010)

David Zaring, A Lack of Resolution, 60 Emory L.J. 97 (2010)

Comments

Adam McDonell Moline, Nineteenth-Century Principles for Twenty-First-Century Pleading, 60 Emory L.J. 159 (2010)

Sarah Ilene Stein, Wake Up Fannie, I Think I Got Something to Say to You: Financing Community Land Trust Homebuyers Without Stripping Affordability Provisions, 60 Emory L.J. 209 (2010)

My goal here is to highlight a meta-problem in the American healthcare system that overlies many of the fragmentation issues identified in the book and in my colleagues’ blog posts so far:  structural fragmentation in the healthcare regulatory complex.  If we want a coherent system that operates coherently, we must have a simple answer to one simple question: Who’s in charge?  For healthcare, we have no answer.

The general [...]]]> First, I too will add to the chorus of thanks to Frank and Glenn for inviting me to participate.  Healthcare fragmentation is an important — and difficult — topic, and the new book, The Fragmentation of U.S. Health Care: Causes and Solutions, is an important contribution in tackling the issue.  I’m honored to be contributing to the discussion.

My goal here is to highlight a meta-problem in the American healthcare system that overlies many of the fragmentation issues identified in the book and in my colleagues’ blog posts so far:  structural fragmentation in the healthcare regulatory complex.  If we want a coherent system that operates coherently, we must have a simple answer to one simple question: Who’s in charge?  For healthcare, we have no answer.

The general problem is that the U.S. government is self-consciously layered with overlapping jurisdictions and competing regulatory bodies, intended to slow the growth of government and to check the rise of tyranny.  We’ve created a governmental system in which states compete with the national government, states compete with one another, courts compete with executive agencies, executive agencies compete with legislatures, and legislatures… are legislatures.  Some legal fields have smoothed this chaos in our regulatory structure, defining authority clearly among the competing institutions.  Healthcare?  Not so much.  I’ll list and elaborate a few discrete examples of this problem within two categories — federalism and separation of powers — but there are far too many examples to cover all of them in this short blog post.

Federalism

One cause of structural fragmentation for healthcare regulation is in the federalist division of labor for various healthcare programs.  Here, the first thought is Medicaid.  The “cooperative” federalism structure for Medicaid is not cooperative at all; it’s barely coordinated.  The federal Medicaid Act, which started out with 22 requirements for state plans to qualify for federal funding, now lists literally hundreds of such statutory requirements, not including countless others in the Federal Register.  But very few of them are enforced.  Does this structure lead to a “race to the bottom” among the states in providing public health insurance to the poor?  Maybe, maybe not.  Either way, the program is a many-headed beast that functions poorly, due in part to fragmented regualtory authority.  A retort from within healthcare might be the State Children’s Health Insurance Program (SCHIP), which is also a “cooperative” federalist program that has had greater success.  Why?  In part because it uses block grants instead of entitlement grants — fewer federal strings attached — and in part because it’s still just very small.  Another federalism problem is the problem of Healthcare’s Federalization Snowball: The federal government pays for 40% of healthcare utilization in the United States, leaving any given state with something less than a full financial incentive to curb over-utilization of healthcare.  (Fragmentation in payment systems – even if single payer isn’t a panacea, it would at least solve this problem.)  Unfortunately, PPACA failed to resolve the existing federal fragmentation and added a few more instances of it:  The Exchanges in the final bill are strange beasts for federalism; the states are required to implement their own (50 fragmented exchanges instead of 1 cohesive one), but if any state fails to implement an exchange by 2014, the national government will create one for it.  (Who’s in charge??)  PPACA requires the exchanges to include some insurance plans that are sold nation-wide and imposes new federal requirements for all private plans, taking a first step in nationalizing the private market for health insurance, but it doesn’t get us all the way there.  Instead, it adds some national oversight authority in the Department of Health and Human Services (HHS) without abolishing state authority, creating further fragmentation and jurisdictional overlap.  And let’s not forget the Employment Retirement Income Security Act (ERISA), which still preempts a lot of state authority without creating a national regulatory regime in its place and which contributes significantly to fragmentation among insurance markets (creating a unique regulatory space for employer-sponsored large-group plans).  In short, the fragmented world of healthcare regulation is further fragmented by complicated and often incoherent divisions of labor between the state and national governments.

Separation of Powers

Another important cause of structural fragmentation is in the odd divisions of labor among branches of government and even within single branches of government.  Most obviously, we’re still not sure whether we want courts or agencies to be in charge of healthcare regulation.  Medical malpractice is still primarily a matter for judicial (common law) regualtion, but CMS and private insurers (regulated by executive insurance commissioners and now exchanges) are getting more and more involved in quality control.  And the courts’ authority to review decision-making in Medicare and Medicaid is in flux as the Supreme Court grapples with the scope of Section 1983 and with the general rules for judicial deference to agency interpretations.  In short, authority has been migrating from courts to agencies (not just in healthcare), but for the moment, we’re in an uncomfortable position of “neither here nor there.”  Perhaps because of that uncomfortable position, the jurisdictional structure within the national executive is messy.  To give two examples:  (1) The Department of Labor, the Department of Health and Human Services, and the Treasury Department all have some degree of authority over Employer-Sponsored Insurance, and (2) the Food and Drug Administration and the Attorney General (not to mention the Patent and Trademark Office and CMS) have overlapping authority in regulating drugs and other controlled substances.  This is to say nothing of the multitudinous state agencies that share authority among themselves and with the national agencies in these regimes and others.  In addition to the well-known conflicts between courts and agencies, there are also conflicts between courts and legislatures, which are less frequently considered as separation of powers problems.  The general questions of statutory interpretation and judicial deference to agency delegations, however, is a separation of powers question that has been significant for healthcare regulation.

A Final Note

What are the most successful and most beloved healthcare programs in the United States?  The first answer that pops to mind is probably Medicare.  We could add to the list the Military Health System (MHS) (including VA healthcare and TRICARE for members on active duty) and the Federal Employees Health Benefits Plan (FEHBP).  What do these programs have in common, aside from being publicly funded insurance programs (which also describes the unsuccessul and unpopular Medicaid)?  I don’t want to oversell my thesis, but I find it telling that each of these programs has a single, well-defined head.  Not that they’re monolithic; Medicare contracts with private administrators to manage benefits and even to make variable local coverage determinations.  But authority over Medicare resides comfortably within HHS; authority over the MHS resides comfortably within the Department of Defense; and authority over FEHBP resides comfortably within the Office of Personnel Management. 

We need to defragment our regulatory structure.  In my opinion, that’s step one.