United States: Recent Changes to Executive Order 12866 Increases OMB Oversight Of Agency Guidance Documents And Regulatory Activities

On January 18, 2007, President Bush issued changes to an executive order that will enhance White House Office of Management and Budget ("OMB") review over federal agency rules and policy statements. Specifically, the new amendments to a 1993 Executive Order 12866 (the "Executive Order") on Regulatory Planning and Review will subject federal agencies, including the Centers for Medicare & Medicaid Services ("CMS") and the U.S. Food and Drug Administration ("FDA"), to additional requirements prior to drafting and issuing regulations and guidance documents.¹ The new amendments give OMB authority to review and oversee agencies’ development, issuance, and use of guidance documents as part of its general authority to oversee and coordinate regulatory policy through its Office of Information and Regulatory Affairs ("OIRA").² Pursuant to this new authority, OMB published a Final Bulletin for Agency Good Guidance Practices ("GGPs"), which explains the definitions of "guidance documents," "significant guidance documents," and "economically significant guidance documents," and sets forth suggested practices for agencies to develop and publish such documents.³

Given CMS’s and the FDA’s routine use of subregulatory guidance documents, the new requirements could have a far-reaching impact on how these agencies implement health care policy. The amendments also may increase the industry’s ability to monitor and provide input on certain CMS guidance.

The Executive Order was issued in 1993 by President Clinton to promote an efficient and uniform federal regulatory process.⁴ Among other things, it requires agencies to conform to specified "Principles of Regulation."⁵ Essentially, this consists of conducting certain analyses, making certain findings, and considering certain outcomes in connection with their regulatory activities. Agencies are instructed to identify regulatory policies and plans with which their regulatory activities will conform, conduct a cost/benefit analysis for all regulatory activities, and designate a Regulatory Policy Officer to oversee the administrative regulatory process.⁶

The Executive Order also requires agencies to involve OIRA in any "significant regulatory actions." This generally entails notice to OIRA of the proposed substantive content, an explanation of the cost/benefit justifications for the proposal, a description of the policy reason(s) for the proposal, and a rationale for why the proposal is preferable to other reasonable alternatives.⁷

"Significant regulatory actions" are defined in the Executive Order as any regulatory action that will likely result in a regulation that may:

• Have an annual effect on the economy of over $100 million;

• Adversely and materially effect the economy, a sector thereof, or some other economic or social condition—for example, productivity, competition, jobs, the environment, public health/safety, or state/local governments or communities;

• Create a serious inconsistency or otherwise interfere with another agency’s role or actions, either taken or planned;

• Materially alter either the budgetary impact, or the rights and obligations of recipients, of entitlements, grants, user fees, or loan programs; or

• Raise novel legal or policy issues.⁸

Under the original Executive Order, significant regulatory actions subject to OIRA review only included actions that were related to the promulgation of regulations.

The January 18, 2007 amendments to the Executive Order establish four significant changes: (1) they subject agency guidance documents to additional OMB/OIRA review, similar to the review required for agency regulatory actions; (2) in addition to the analyses, findings, and considerations already required for agency regulatory actions, they require agencies to conduct a "specific market failure" analysis; (3) they require the Regulatory Policy Officer within each agency responsible for overseeing the administrative regulatory process to be a Presidential Appointee; and (4) they instruct agencies to identify the combined aggregate costs and benefits of all planned regulations for the year in their annual Regulatory Plans.

The Executive Order now authorizes OIRA to review agency guidance documents in addition to regulations, to ensure that they are consistent with law, the President’s priorities, other agencies’ activities, and the principles of regulation described generally in the order.⁹ Further, for "significant" guidance documents, agencies must involve OIRA by providing advance notice of the proposed guidance and, upon request, a draft of the substantive content and an explanation of both the need for guidance and how the proposed guidance will meet the need.¹⁰

The Executive Order defines "guidance document" as "an agency statement of general applicability and future effect, other than a regulatory action, that sets forth a policy on a statutory, regulatory, or technical issue or an interpretation of a statutory or regulatory issue."¹¹ Similar to a "significant regulatory action," a significant guidance document is defined as a guidance document that is "disseminated to regulated entities or the general public" and "may reasonably be anticipated to" result in any of the same outcomes—i.e.,, an annual effect on the economy of over $100 million; an adverse and material effect on the economy, an industry sector, or some other economic or social condition; interference with another agency’s role or action; raise novel legal or policy issues; etc.¹² Specifically excluded from the definition of "significant guidance documents" are the following:

• Those that are issued in accordance with the formal rulemaking provisions of the Administrative Procedure Act ("APA");¹³

• Those that pertain to agency organization, management, or personnel matters; and

• Any other category of guidance documents that are exempted by the Administrator of OIRA.¹⁴

OMB has further explained the definitions of "guidance documents" and "significant guidance documents" in a notice it published in the Federal Register on January 25, 2007. ¹⁵ This notice provides examples of agency documents that do and do not fall within such categories.¹⁶ OMB states that "[g]uidance documents are considered ‘significant’ when they have a broad and substantial impact on regulated entities, the public or other Federal agencies" and that "documents that . . . describe the agency’s day-to-day business . . . might be of interest to the public, [but] do not fall within the definition of significant guidance documents . . . ."¹⁷

In addition, OMB further distinguishes between "significant guidance documents" and "economically significant guidance documents"¹⁸ and the GGPs require a certain level of public participation for developing the latter.¹⁹ However, Agencies can request an exemption from this requirement for economically significant guidance on the grounds that public participation would not be "feasible or appropriate."²⁰

CMS issues a variety of documents on a frequent basis. Given the purposes of Transmittals, Manuals, Rulings, and Coverage Guidance as described below, these documents likely constitute "statement[s]of general applicability and future effect" and thus amount to guidance documents as defined in the Executive Order.

• Transmittals. The purpose of Transmittals is to communicate new or changed policies or procedures that will be incorporated into the CMS Manuals.²¹

• Manuals. The purpose of CMS Manuals is to describe program issuances, day-to-day operating instructions, policies, and procedures used to administer CMS programs based on statutes, regulations, guidelines, models, and directives.

• Rulings. Rulings are decisions of CMS’s Administrator that, according to CMS, "provide clarification and interpretation of complex or ambiguous provisions of the law or regulations relating to Medicare, Medicaid, Utilization and Quality Control Peer Review, private health insurance, and related matters." CMS has declared that its Rulings are binding on all CMS components, Medicare contractors, the Provider Reimbursement Review Board, the Medicare Geographic Classification Review Board, and Administrative Law Judges who hear Medicare appeals.

• Coverage Guidance. CMS also publishes the factors that it considers in deciding whether an item or service is "reasonable and necessary" in the form of Medicare Coverage Guidance Documents.²² Through these documents, CMS intends to provide the public with "detailed information on the National Coverage Determination ("NCD") process and related evaluation and decision-making factors."

The FDA similarly relies on guidance documents to describe its interpretation of, or policy on, regulatory issues. Currently, FDA’s Annual Comprehensive List of Guidance Documents that are in use amounts to almost 90 pages.²³

Whether such documents will be subject to OIRA review and/or the OIRA GGPs depends on whether they are determined to be significant or economically significant based on their content. The Executive Order, as amended, will require both CMS and the FDA to conduct an economic-impact analysis for all guidance in order to determine which are significant, and, to the extent necessary, notify OIRA of any proposed significant guidance unless an exemption is granted by the OIRA Administrator.

In terms of complying with the OMB GGPs, CMS has already implemented GGP-type procedures for Coverage Guidance by providing for public notice, ongoing review of existing guidance, and a certain level of public participation in the process.²⁴ Similarly, the FDA already has GGPs in place which classify its guidance documents into two different levels depending on their significance and establishes consistent procedures for developing all guidance.²⁵ Accordingly, the level of industry participation in developing these types of guidance documents is already settled and is unlikely to change in a significant way as a result of the Executive Order amendments. However, CMS may be required to develop its other types of guidance documents in accordance with GGPs going forward, providing an increased opportunity for industry input.

The Executive Order now establishes a new "Principle of Regulation" to which agencies should adhere. Prior to the change, agencies were instructed to "identify the problem that it intends to address (including, where applicable, the failures of private markets or public institutions that warrant new agency action) as well as assess the significance of that problem."²⁶ As amended, this principle now instructs agencies to "identify in writing the specific market failure (such as externalities, market power, lack of information) or other specific problem that it intends to address (including, where applicable, the failures of public institutions) that warrant new agency action . . . to enable assessment of whether any new regulation is warranted."²⁷

The Executive Order now requires agencies to designate a Presidential Appointee to serve as the Regulatory Policy Officer.²⁸ Prior to this change, although agencies were required to have a Regulatory Policy Officer, there was no requirement that this Officer be a Presidential Appointee.

Further, the Executive Order now requires agencies to estimate and identify the combined aggregate costs and benefits of its planned regulations on an annual basis.²⁹ Prior to this change, agencies were only instructed to include in their Regulatory Plans "a summary of each planned significant regulatory action including, to the extent possible . . . preliminary estimates of the anticipated costs and benefits."³⁰

The recent changes to Executive Order 12866 on Regulatory Planning and Review are designed to address concerns about the costs to the public of poorly designed and/or misused guidance documents and to promote more informed, transparent, and fair guidance practices. Further, they respond to the ongoing criticism of agency guidance documents that, in effect, establish new substantive policy without subjecting them to public notice and comment as required by the APA. Whether the changes will achieve these goals will depend on how and to what extent federal agencies such as CMS and the FDA consider their guidance documents to be subject to the new requirements. If broadly interpreted, they are likely to have far-reaching impact on how an agency conducts business. Although the additional requirements are sure to result in delay, they may also increase the affected industries’ ability to monitor and provide input on certain agency guidance. However, we believe it is more likely that agencies will adopt a narrower interpretation of the Executive Order changes in order to limit the number of guidance documents subject to OMB review and public comment.

This article is presented for informational purposes only and is not intended to constitute legal advice.