The End of A Shameful Regulatory Process As The Fix Is In

On October 7, the White House announced that it had concluded review of the so-called “family glitch fix” rule. As I have written numerous times, including in a comment letter to the Internal Revenue Service on the proposal, the proposed rule lacks legal basis and is poor public policy. In essence, this rule makes it easier for dependents of employees offered health insurance to obtain subsidies to purchase exchange plans even though 9 in 10 of these dependents already have health coverage. The main economic result: a large increase in federal spending so that one or two million dependents replace employer coverage with subsidized exchange coverage.

The regulatory procedure requires final rules to be cleared through a process coordinated by the White House’s Office of Information and Regulatory Affairs (OIRA). When rules go to OIRA, outside groups can request a meeting with OIRA and the rule’s primary drafters. These meetings are required under Executive Order 12866, issued by President Clinton.

As soon as the draft of the final rule was sent to OIRA for review, I requested a meeting along with my colleagues Doug Badger of The Heritage Foundation, Tom Miller of the American Enterprise Institute, and Grace-Marie Turner of the Galen Institute. Our meeting was scheduled on September 28. At the appointed time, we called, but no one from the government was on the line. After a considerable wait, I received a note that the government was having a systemwide Zoom failure and that the call had to be postponed.

I reached out to OIRA that afternoon to reschedule and was given a date of October 12. I have subsequently learned that they cited Hurricane Ian as a reason to not immediately reschedule, even though the hurricane was irrelevant to our ability to do this call.

On October 7, I received an early morning email from OIRA, stating that the government had concluded review and cancelled our meeting. Thus, the fix is in.

Despite our close study of the pertinent legal and policy issues, we were not given an opportunity to convey our concerns and raise issues for OIRA, the Office of Management and Budget (OMB), and other government experts to consider in their work on the rule. Furthermore, we correctly followed the process as we requested a meeting with OIRA as soon as the rule was submitted to them.

Here is what Tom Miller planned to say, and here is what Grace-Marie Turner planned to say. Doug Badger was going to summarize the main argument he made in his comment letter on the proposed rule. Below is an abridged version of what I had planned to say on the call.

“Let me start with my recommendation: IRS should withdraw the proposed rule because it is an impermissible reading of the statute and bad policy. While there is sometimes a gray area between creative legal interpretation and the rule of law, this proposed rule does not straddle or even approach this area.

When a president takes office, the new administration is constitutionally bound to enforce the law and ensure that Executive Branch agencies do too. Any new administration seeks to carry out its executive authority to move policy in its preferred direction.

But no amount of political pressure can ever be justification for agencies to ignore the clear statutory language and issue regulations inconsistent with the law. In fact, one of the reasons the IRS Commissioner has a five-year term is to better ensure such adherence to law and insulate it from political influence of the White House to violate the law. Taxpayers must be able to rely upon an unbiased IRS.

I worked with IRS and Treasury career officials on a host of issues during my time as a special assistant to the president for economic policy at the National Economic Council from 2017-2019. Those officials exercised diligence and professionalism. Several times, political appointees in the Trump White House expressed desire for the IRS to take administrative actions to expand consumer choice and control over their own health care finances. Despite the administration’s and the public’s strong interest in such actions, IRS officials routinely pushed back with their interpretation that the law and precedent prevented such actions. On these questions, the legal issues were much less clear than the ACA language that plainly links affordability to self-only coverage. But we respected the IRS’s historic and consistent approach to these issues. Thus, we were left to push legislative reforms rather than administrative ones.

Because of my experience, I did not expect the IRS to propose this rule despite President Biden’s executive order. I did not expect that the IRS would reopen long settled tax law and its enforcement of the Internal Revenue Code with no change in the underlying law.

If the IRS were to finalize this proposed rule, it would lack credibility to object to changes desired by future administrations—even those in direct contravention of the Internal Revenue Code. A new precedent would be established, leading future enforcement of the tax code to gyrate back and forth based on the administration in power without regard to enacted law.

Let me turn to some specific process issues.

The lack of a serious cost-benefit analysis is clearly out of compliance with OMB Circular A-4. This failure permitted the agency to inappropriately classify the rule as not significant.

The IRS’s rationale for the lack of a cost-benefit analysis does not withstand scrutiny and is inconsistent with past precedent. For example, the Treasury led the drafting of a 2019 rule to expand health reimbursement arrangements (HRAs). The HRA rule was more complicated to model than this proposed rule, but Treasury used its health insurance model to provide detailed estimates of that rule.

There are two possible explanations for the failure of a cost-benefit analysis in this case:

1) A rushed process to meet a political timeline. [Of note: in the spring, former President Obama returned to the White House for a ceremony about the ACA, during which this policy was announced.]

2) Such analysis would be harmful to the rule, demonstrating the magnitude of spending needed to only slightly reduce the number of uninsured.

A full cost-benefit analysis would reveal the proposed rule’s gross inefficiency, principally spending $45 billion over a decade to reduce the number of people without insurance by about 200,000.

The lack of a cost-benefit analysis likely also violates the Administrative Procedures Act. This failure deprived the public of an opportunity for meaningful notice and comment, demonstrates the lack of a reasoned explanation for the IRS’s about face, and underscores the arbitrariness and capriciousness of this rule.

In addition to the failure to do a legitimate impact analysis, the proposed rule—in violation of Executive Order 13132—failed to make any attempt to analyze the considerable federalism ramifications of this rule. Specifically, the rule substantially boosts state Medicaid expenditures through higher enrollment.

In addition to failing to adequately consider federalism aspects, the proposed rule failed to consider the effects on small businesses—a violation of the Regulatory Flexibility Act. This proposal impacts small businesses’ ability to offer coverage and dictates how to set the employer share of premiums for self-only and family coverage. Again, it is not accurate for Treasury and IRS to say that there are not significant effects on small employers.

Given the wide range of process, policy, and legal concerns with this regulatory action, OIRA and OMB have much work to do. At a minimum, OIRA and OMB have the responsibility to do a serious vetting of regulations and ensure that they comply with various procedures regardless of any political timetable. The political staff in the White House are undoubtedly pushing for this rule to be finalized in time for open enrollment and the midterm elections, enabling them to spin this “fix” as a win for families. Those arbitrary political timetables should not dictate whether OIRA and OMB are able do a real review of the legal, policy, and process deficiencies with this proposal, and they must insist that established procedures are followed. Thanks for permitting me the opportunity to voice these concerns.”

Unfortunately, my colleagues and I never had the opportunity to voice our concerns because the proper procedures were further abandoned in the conclusion of a shameful regulatory process. This latest abandonment of proper procedure was likely because the White House is planning a celebration of their “fix”—without concern of the consequences to the rule of law, the IRS as an institution, good policy, or a transparent regulatory process.