Topic: Regulatory Studies

Lower Courts Have to Comply with Supreme Court Orders

In the 2009 case of Ricci v. DeStefano (also known as the “New Haven firefighters case,” in which Cato filed a brief), the Supreme Court declared that an employer that did not certify race-neutral promotion-exam results could be liable to the candidates who were not promoted as a result (because those candidates would have been discriminated against based on their race, or “disparate treatment” in violation of Title VII of the Civil Rights Act). A corollary to that holding is that an employer that did certify such results would be immune from liability for any resulting racial disparities in promotion (known as “disparate-impact” claims under Title VII).

As Justice Anthony Kennedy wrote for the Court majority, “If, after it certifies the results, the City faces a disparate-impact suit, then in light of our holding today it should be clear that the City would avoid disparate-impact liability based on the strong basis in evidence that, had it not certified the results, it would have been subject to disparate–treatment liability.”

Despite this clear guidance from the Supreme Court, one of the black New Haven firefighters who did not gain promotion as a result of the test certification sued the city, alleging disparate-impact discrimination. The district court dismissed his claim but the Second Circuit inexplicably reversed that ruling and reinstated the lawsuit – considering Ricci’s corollary holding (quoted above) to be non-binding.

Cato has now filed a short brief supporting New Haven’s request that the Supreme Court review that decision – and perhaps even reverse it summarily – arguing that Title VII’s provisions are complex and onerous enough, such that employers should not be subject to liability for following court orders.

The Court will decide later this spring what to do with this case of City of New Haven v. Briscoe.

What Is Causing Drug Shortages?

A number of people have asked me what is causing the current shortages in certain types of drugs. Here’s what I’ve been able to discern so far:

In general, there are two reasons why shortages might appear in a market. The first is high fixed costs. These include regulatory costs, the costs of converting a manufacturing plant to a new use, or the costs of creating a new factory. Industries with high fixed costs will see temporary shortages after either supply shocks (e.g., a factory goes offline) or demand shocks (e.g., an increase in the population needing a drug). The price mechanism eventually resolves such shortages. The duration of the shortage is related to the size of the fixed costs.

Shortages also appear when something interferes with the price mechanism’s ability to resolve a shortage. The classic example is government price controls (i.e., a binding price ceiling). Such shortages persist as long as the price controls (e.g., rent control) remain in place and binding.

From my study of the current spate of drug shortages, the best accounting for these shortages appears in this publication by the U.S. Department of Health and Human Services: “Economic Analysis of the Causes of Drug Shortages,” Issue Brief, October 2011.

I initially suspected these drug shortages were caused by Medicare’s Part B drug-payment system. Others, including Scott Gottleib and the Wall Street Journal, have made that claim. However, this study and a lengthy discussion with the U.S. Department of Health and Human Services’ assistant secretary for planning and evaluation have persuaded me that not only is Medicare’s Part B drug-payment system not the cause, that system doesn’t even impose binding price controls. Rather, it controls the margins that physicians earn for administering a drug.  (If Medicare did impose binding price controls, would we see mark-ups of 650 percent or more for the shortage drugs?)

Rather, the shortages appear to be the result of a number of dynamics in the market for rare drugs:

  1. The first dynamic is that the small number of potential manufacturers for these drugs must decide which drugs to manufacture, and they must make those decisions in part based on what they expect the demand for the drugs will be and in part based on which drugs they expect their competitors will produce. You can imagine what happens if one or more manufacturers guess “wrong”: there will be too many firms making some drugs, and too few firms making other drugs. The latter drugs exhibit shortages.
  2. A second dynamic is the high fixed costs inherent to bringing a new pharmaceutical factory online, or from converting existing factories from producing the “wrong” drug to producing the “right” drug.
  3. A third dynamic is the price rigidity introduced by the contracts with middlemen (“group purchasing organizations”) that purchase these drugs from manufacturers and then sell them to providers. These GPOs typically negotiate long-term contracts for drugs, which can temporarily prevent the price mechanism from resolving a shortage by locking manufacturers into churning out an already over-supplied drug. If shortages occurred frequently, one would expect the manufacturers and GPOs to negotiate shorter-term contracts. As I understand these shortages, they are infrequent.
  4. All that said, no doubt some of the high fixed costs in this market are iatrogenic. There are fixed costs associated with getting FDA approval to (a) market a new/substitute drug in the same class as the shortage drug, (b) switch manufacturing capacity to a shortage drug, and (c) import a shortage drug from a new foreign manufacturer. No doubt, there should be some fixed costs—principally related to quality control—associated with each of these activities. But since the FDA implicitly values lives lost to unsafe drugs more highly than it values lives lost to “drug lag,” we can be confident that the fixed costs the FDA imposes on these activities are higher than optimal, and therefore unnecessarily lengthen the duration of such drug shortages.

This analysis suggests that, rather than impose reporting new requirements on manufacturers, Congress should reduce the fixed costs that the FDA imposes on drug manufacturers. Medicare’s Part B drug-payment system is no doubt encouraging physicians to switch to higher-margin drugs, but it doesn’t seem to be playing much of a role in these shortages.

I’d be interested to know if others think I’m missing something.

Suing the IRS for Fun and Liberty

This blogpost was coauthored by Cato legal associate Chaim Gordon.

On Tuesday, the Institute for Justice brought a lawsuit to stop recent IRS regulations that require independent tax return preparers to pay a yearly registration fee, take a competency exam, complete 15 hours of IRS-approved continuing education every year, and possibly subject themselves to mandatory fingerprinting. Our colleague Dan Mitchell observed two years ago that these regulations appear to be the result of “regulatory capture.” As the Wall Street Journal explained:

Cheering the new regulations are big tax preparers like H&R Block, who are only too happy to see the feds swoop in to put their mom-and-pop seasonal competitors out of business.

Indeed, as others have already noted, one of the architects of this licensing scheme is Mark Ernst, former CEO of H&R Block. These protectionist regulations were even cited by UBS as a reason to buy H&R Block stock, on the grounds that they will “add barriers to entry (or continuation) for small preparers.”

In defending the need for these regulations, IRS Commissioner Douglas Shulman’s most insightful explanation was that “in most states you need a license to cut someone’s hair.” This statement undoubtedly caught IJ’s attention because that “merry band of litigators” has devoted itself to fighting such senseless and corrupt regulations (including in hair salons).

But these regulations are not just misguided and corrupt.  They are, as IJ’s complaint contends, simply beyond the IRS’s regulatory authority. The IRS claims the power to regulate tax return preparers under 31 U.S.C. § 330. But that statute only authorizes the IRS to regulate “the practice of representatives of persons,” and tax return preparers do not represent persons before the IRS and do not “practice” in the sense that lawyers do when they appear before a court. Taxpayers are only “represented” when they authorize someone to act on their behalf before the IRS in an exam, controversy, or litigation setting. This is especially clear in light of the statute’s plain purpose, which is to ensure that such representatives have the “competency to advise and assist persons in presenting their cases” (emphasis added).

Moreover, under the IRS’s expansive reading of the law, which puts under the agency’s purvey “all matters” connected with a “presentation” to the IRS, anyone who advises another about the tax aspects of a particular transaction could theoretically be guilty of unauthorized practice before the IRS. Congress clearly meant no such thing. In fact, Congress specifically amended 31 U.S.C. § 330 to allow the IRS to regulate the provision of written advice that the IRS “determines as having a potential for tax avoidance or evasion.” Such additional authority would be unnecessary under the IRS’s broad reading of the original statute.

IJ had previously warned the IRS that its then-proposed regulations were unfair to mom-and-pop tax return preparers and exceeded its statutory authority, but the IRS neither altered its plan nor explained why it thinks that it has the authority to regulate tax return preparers in the first instance. Now the IRS will have to explain its power grab to a federal judge.

Watch IJ’s excellent case launch video.  IJ attorney Dan Alban explains the case in an editorial here and in an interview here.

Pool Closed Until Further Notice

Tomorrow is a deadline that looms large for worried pool operators at hotels and public recreation facilities across the country, as USA Today reports:

Hoteliers must have pool lifts to provide disabled people equal access to pools and whirlpools, or at least have a plan in place to acquire a lift. If they don’t, they face possible civil penalties of as much as $55,000.

As Conn Carroll at the Washington Examiner explains, the mandate has taken an even more irrational form than might have been expected. Because the elevator lifts are space-consuming, unsightly, potential hazards to curious children, and unlikely to be used very often, many pool operators assumed it would be enough to purchase a portable lift that could be wheeled over to poolside on user request and stored when not in use. No such luck: the Obama administration has announced that the lifts must not only be of permanent construction, but must apply to each separate “water feature”, so that a pool with adjoining spa would need two of them. “Each lift costs between $3,000 and $10,000 and installation can add $5,000 to $10,000 to the total.” Many budget hostelries are expected to simply shutter their pools until further notice rather than take the risk that entrepreneurial fast-buck artists will begin filing complaints against them for cash settlements, as in California’s notorious ADA filing mills.

I think Carroll probably goes too far when he suggests that the Obama administration made the rules unreasonable in order to give its friends in the ADA bar more litigation to file. The problem is more that this administration (and not just this one) has outsourced its thinking on the law to advocates in the legal academia-disabled rights-“public interest law” community, which tends to embrace interpretations and applications of the law geared to advance ambitious versions of social change. In the pool case, the federal appointee in charge (according to this blog post) was Samuel Bagenstos, who after his stint in the Obama Justice Department has now returned to legal academia, where he is perhaps the leading proponent of expansive ADA interpretation. (His view of abusive ADA suits – he puts the term “abusive” in quotation marks – is here.) Academia’s other best-known advocate of an expansively interpreted ADA (and a drafter of the law) is Chai Feldblum of Georgetown Law, who serves the Obama administration as head of the Equal Employment Opportunity Commission.

Don’t look to Republicans for relief on this. The Bush administrations both pere et fils were consistently wretched on it, and a large bloc of GOP members of Congress predictably joins the Democrats in opposing legislative ideas for even modest rollback of the ADA’s most extreme applications.

You Keep Using the Word ‘Affordable.’ I Do Not Think It Means What You Think It Means.

The federal government gave a $10 million “affordability” prize to a giant corporation for manufacturing a $50 lightbulb. The Washington Post:

The U.S. government last year announced a $10 million award…for any manufacturer that could create a “green” but affordable light bulb.

Energy Secretary Steven Chu said the prize would spur industry to offer the costly bulbs…at prices “affordable for American families.”…

Now the winning bulb is on the market.

The price is $50.

Retailers said the bulb, made by Philips, is likely to be too pricey to have broad appeal. Similar LED bulbs are less than half the cost.

This is the same federal government that refers to ObamaCare, which costs more than $6 trillion, as the “Affordable Care Act.”

Why Is Massachusetts Trying to Ban Truthful Information About Hedge Funds?

The Massachusetts Uniform Securities Act prohibits general solicitation and advertising by anyone offering unregistered securities, ostensibly for the purpose of furthering state and federal disclosure schemes. Yet this ban on public communications has been applied so broadly that it has undermined those purported disclosure goals.  For instance, the ban has prevented individuals who have no interest in investing in any security – such as journalists, academics, students, and others who are not wealthy or financially sophisticated – from receiving truthful, non-misleading information about hedge funds.

In Bulldog Investors v. Massachusetts, an investment company maintained an interactive website that provided information about its products. Because Bulldog was not registered in Massachusetts, however, the State filed an administrative action against the firm, demanding it take down its online content.

In response, Bulldog joined a group of other firms and individuals – including some who have no interest in investing but wish to read the website information – in a lawsuit claiming that the Massachusetts ban violates their First Amendment rights. The Supreme Judicial Court of Massachusetts upheld the ban, so the plaintiffs have asked the U.S. Supreme Court to take the case.

Cato, along with the Competitive Enterprise Institute and a group of journalists and academics, has now filed an amicus brief supporting that request and arguing that the Massachusetts law is an unconstitutional ban on free speech. We show that the state’s claim that the ban furthers a larger federal regulatory scheme ignores the judgment of many federal officials (from both parties) who have concluded that such bans undermine these goals.

The state’s alleged disclosure interest is just a pretext for coercing companies to register in Massachusetts, and is therefore an unconstitutional attempt at circumventing federal preemption. But even if the ban furthers a legitimate state interest, it is so broad that it is has substantially chilled both truthful, non-misleading commercial speech and noncommercial speech alike.

A law so repugnant to the First Amendment cannot stand.

Here Come the Disabled-Employee Quotas

I’ve got a new op-ed in the Daily Caller about one of the most significant employment-law initiatives out of Washington in years (also reported on by Melanie Trottman in today’s WSJ): the Obama administration is preparing to order federal contractors to comply with a quota (sorry, “required…hiring goal”) of disabled employees, perhaps as high as 7 percent. Businesses have flooded the Regulations.gov comments site with negative reactions to the idea, but to no seeming avail. As I explain, one of the scheme’s maddening aspects is that you’re supposed to achieve the quota even though you’re not allowed to ask employees whether or not they’re disabled:

So the rules contemplate a fan dance of “invited self-identification” in which workers are given repeated chances at successive stages of the hiring process to announce that they are disabled. Unfortunately for quota compliance, even after getting the job an employee may be too shy to offer such a self-identification, which means the employer may lose any “credit” for the hire. Perhaps equally frustrating, an employee hired with the quota in mind may turn out not to have any disability at all (“Dang it! And she looked so disabled!”).

The employment provisions of the Americans with Disabilities Act (ADA) and its associated Rehabilitation Act are already rife with absurd results. Last week, after a Colorado school bus driver who hit three middle school students turned out to have been hired though recently in rehab, a spokesman for the school district explained that the law was at work: “It is illegal under state and federal disability laws to deny employment solely on the basis of a history of treatment for alcohol or substance abuse.” Non-discrimination against school bus drivers with a taste for booze is bizarre enough, but not bizarre enough for Washington. Time for preference!