    [Analytical Perspectives]
    [Ranking Regulatory Investments in Public Health]
    [24. Ranking Regulatory Investments in Public Health]
    [From the U.S. Government Publishing Office, www.gpo.gov]

    [[Page 417]]

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                 RANKING REGULATORY INVESTMENTS IN PUBLIC HEALTH

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    [[Page 419]]

            24.  RANKING REGULATORY INVESTMENTS IN PUBLIC HEALTH \1\
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      \1\This chapter is prepared pursuant to Section 624 of the Treasury
    and General Government Appropriations Act, 2001, also known as the
    ``Regulatory Right to Know Act,'' Public Law 106-554 (Dec. 21, 2000).
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      An essential role of government is to protect citizens from risks to
    human health, safety and the environment. Since the nation does not
    possess enough resources to eliminate all risks, an important
    performance goal for government is to deploy risk-management resources
    in a way that achieves the greatest public health improvement for the
    resources available--that is the most ``cost-effective'' allocation of
    risk-management resources. In this chapter, we demonstrate how cost-
    effectiveness ratios can be used to compare the payoffs from different
    regulatory investments in public health. We also discuss the promise and
    limitations of the use of cost-effectiveness analysis to inform
    decisions at regulatory agencies.

           Using Cost-Effectiveness Ratios to Construct League Tables

      A widely used tool for ranking purposes is the ``league table,'' first
    used by the English to rank their soccer teams by point standings and
    later to rank their schools by student achievement scores. More
    recently, league tables have been used to rank programs, technologies,
    regulations and therapies aimed at saving lives and improving public
    health. There is a significant academic literature on the use of league
    tables in public health that began in the 1960s and continues to grow.
    OMB believes that government and the public can benefit from the
    insights generated by league tables.
      The OMB first published a league table with the Budget in 1992. In
    this table, 50 risk-reducing regulations were ranked using cost per life
    saved as the measure of investment performance. The information in that
    table was based on analyses by Federal agencies and others in the 1970s
    and 1980s. The monetary resources required to save one ``statistical''
    life ranged from several hundred thousand dollars to billions of
    dollars.
      In Table 24-1 below, OMB presents a league table of 10 risk-reducing
    regulations based on information developed by three Federal agencies
    (DOT, OSHA, and EPA) in the 1995 to 2000 period. Our purpose in
    presenting this table is to illustrate how cost-effectiveness analysis
    of public health has changed over the last decade and what technical and
    policy issues are raised by presentation of league tables. \2\
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      \2\ The technical details that support the information presented in
    Table 24-1, including ratios based on a ``lives saved'' metric, can be
    found at www.whitehouse.gov/omb under regulatory policy or upon request.
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                                                                   Table 24-1.  COST PER LIFE-YEAR SAVED FOR TEN SELECTED REGULATIONS

    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                         Cost per life-year saved
                               Regulation                                Health or Safety                Net Costs ($2001)                   Life-years saved                     ($2001)
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Petroleum Refining NESHAP (EPA).................................  Health                  <0                                      <10 per year                    <0
    Powered Industrial Truck Operating Training (OSHA)..............  Safety                  <0                                      146 per year                    <0
    Head Impact Protection (DOT)....................................  Safety                  $390 to $516 million per year           8,360 to 10,007 per year        $50,00 to $53,000
    Reflective Devices for Heavy Trucks (DOT).......................  Safety                  $65 million (PV)                        946 (PV)                        $69,000
    Child Restraints (DOT)..........................................  Safety                  $54 to $112 million per year            370 to 515 per year             $105,000 to $331,000
    Rail Roadway Workers (DOT) a....................................  Safety                  $227 million (PV)                       434 (PV)                        $523,000
    Interim Enhanced Surface Water Treatment (EPA) b................  Health                  <0 to $95 million per year              140 to 640 per year             <0 to $679,000
    NOx SIP Call (EPA) c............................................  Health                  $1265 million in 2007                   1590 to 3390 per year           $373,000 to $714,000
    Methylene Chloride (OSHA) d.....................................  Health                  $112 million per year                   96 per year                     $1.16 million
    Stage I Disinfection By-Products (EPA) e........................  Health                  <0 to $764 million per year             0 to 5130 per year              <0 to infinite
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Note: Net costs were calculated by subtracting from compliance costs an estimate of any non-fatality benefits such as a reduction in injuries or morbidity. PV = Present Value.

    a The estimate does not include possible increased capacity of rail lines and improved worker morale.

    b The estimate doe not include reduced risks from the pathogens (in addition to cryptosporidiosis) and avoided costs of averting behavior from a well-publicized outbreak.

    c The estimate does not include a variety of potential benefit categories including possible reductions in ozone-related mortality, acute and chronic respiratory damage, nitrogen deposition in
      estuarine and coastal waters, damage to ecosystems and vegetation.

    d The estimate does not include a variety of potential adverse health effects including: cancers resulting from dermal contact, central nervous system effects, and eye, nose, etc. irritation.

    e The estimate does not include possible reductions in colon and rectal cancer and possible reductions in adverse reproductive and developmental effects.

    [[Page 420]]

      These ten rules, which are a non-random sample of risk-related
    rulemakings, were selected because the regulatory analyses provided
    sufficient information to prepare a cost-effectiveness ratio. Many
    agency rules, even those with a primary purpose of protecting public
    health, do not provide adequate information to construct a cost-
    effectiveness ratio. The estimates presented in the table are based on
    data and estimates provided by the agencies. Where the agencies did not
    provide estimates of life-years saved, we calculated life-years using
    standard assumptions about age and life expectancies. Each of the ten
    rules was reviewed by OMB under Executive Order 12866; five address
    health issues and five address safety issues.
      Interestingly, the tendency for safety rules to be more cost-effective
    than health rules (see Table 24-1) is consistent with the insights from
    the early league tables published more than a decade ago. The table also
    illustrates a finding not evident from the earlier league tables. The
    range of cost-effectiveness estimates for specific rules varies
    substantially. For example, the cost per life-year saved for EPA's
    disinfection by-products rule ranges from less than zero to infinite.
    The table suggests that we need to do a better job at both refining
    estimates of the cost-effectiveness of regulatory proposals and setting
    priorities for the use of the nation's limited resources to protect
    citizens from health, safety, and environmental risks.\3\
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      \3\ OMB set forth its program to improve regulatory outcomes in Making
    Sense of Regulation: 2001 Report to Congress on the Costs and Benefits
    of Regulations and Unfunded Mandates on State, Local, and Tribal
    Entities (OMB 2001) available on our website at www.whitehouse.gov/obm/
    inforeg/costbenefitreport.pdf or upon request.
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                         Which Rules Should Be Compared?

      In constructing a league table, many issues arise about which rules to
    include. League tables are most useful if based on information about
    potential or proposed rules, since the decision makers can consider
    reallocating resources to those rulemaking opportunities that rank the
    highest in cost-effectiveness. The challenge is ensuring that league
    tables are generated early enough in the decision making process to
    inform regulatory priorities.
      When league tables include only recently adopted (final) rules, the
    utility for policy makers is reduced. Once the agency has adopted a
    rule, it is difficult to reverse course based on a ranking reported in a
    league table. Moreover, it may be infeasible for an agency to adopt
    ``more'' of a final rule that ranks highly in a league table.
    Nonetheless, league tables of adopted rules can provide insight into
    their relative payoffs, which can provide a rough perspective to
    evaluate future rules.
      An intra-agency league table compares only those rules within the
    jurisdiction of a particular agency. This type of table is appropriate
    in certain budgetary contexts where only matters in the jurisdiction of
    a specific agency are subject to comparison, ranking, and decision
    making. An inter-agency league table, such as Table 24-1, is more useful
    for synoptic purposes or for decision making by governmental entities
    with inter-agency responsibility (e.g., appropriations committees and
    OMB).

                        Identifying a Performance Measure

      Early league tables in the public health field used the number of
    lives saved (premature deaths averted) as the metric of effectiveness.
    This metric has been criticized on the grounds that lives are never
    really saved, only extended. The expected number of life-years saved was
    developed as an alternative and continues to be used in the academic
    literature. ``Life-years'' gives relatively more credit to rules that
    reduce mortality rates early in the lifespan and less weight to rules
    that reduce mortality rates late in the lifespan. Although it is
    sometimes argued that ``life-years'' discriminates against the elderly,
    there are strong arguments that ``life-years'' is a better measure than
    ``lives'' of the effectiveness of regulatory alternatives.

                         Which Costs Should be Counted?

      If one were only concerned about impacts on the Federal budget, then
    the only regulatory costs that would be counted would be those incurred
    (or saved) by a Federal agency. To reflect the full effect of a
    regulation, all costs to society--whether Federal, State, or private
    costs--should be counted when cost-effectiveness ratios are computed.
    This ``societal perspective'' on cost estimation is already embraced in
    OMB guidance and is widely practiced by Federal agencies and academic
    analysts.
      Rulemakings may also yield cost savings (e.g., energy savings
    associated with using new technologies). It is generally accepted that
    the numerator in the cost-effectiveness ratio presented in a league
    table should be based on net costs, defined as the total cost incurred
    in meeting the requirements minus any cost savings. Similarly, the
    denominator of the ratio should reflect net life-years saved if the rule
    has both beneficial and adverse impacts on public health, such as the
    side effects of a vaccine.

      Should Future Costs and Health Effectiveness be Discounted to Their
                                 Present Value?

      Analysts generally agree that future costs and health effects should
    be discounted at the same rate, but there is a range of opinion about
    the appropriate rate of discount (e.g., 3 to 7 percent). If future
    health savings were discounted at a lower rate than future costs, then
    it can be shown that it always makes sense to delay adoption of a cost-
    effective rule. We have generally used 7 percent in our calculations,
    but following EPA's practice we have used a 5 percent discount rate in
    calculating life-years for EPA rules.

                          Limitations of League Tables

      Generally, league tables are most helpful for comparing a set of
    government actions with the same primary outcome (e.g., a reduction in
    premature mortality risk or acres of wetlands saved). Where an action
    yields a variety of beneficial outcomes, the comparison be

    [[Page 421]]

    comes more problematic because these multiple benefits all need to be
    considered. Where the agency analysis provides a monetary estimate for
    these other benefit categories, we have subtracted the value of these
    benefits from the aggregate cost estimate to yield a net cost estimate.
    In some cases, the resulting net cost estimate for the rule is
    negative--that is, the other (non-mortality) benefits exceed the cost of
    the rule. Where the agency analysis fails to provide estimates for key
    benefit categories, the cost-effectiveness ratio may be overstated
    substantially, and thus, the regulatory action may be a more attractive
    candidate than suggested by the league table. For rules that have
    significant ecological as well as public health benefits, it is not
    clear how to construct a league table. Ecological benefits deserve
    serious consideration, but it is infeasible to express them in the same
    units as public health benefits. Finally, in some cases, the mortality
    reduction benefits may be largely ancillary to the overall effect of the
    rule, and the opportunity for realizing cost-effective improvements in
    risk reduction may be limited because the risk reduction gains are
    relatively small.
      One of the most common ancillary benefits of lifesaving rules is a
    reduction in morbidity--i.e., the number of cases of nonfatal illness or
    injury. To account for such benefits, OMB is considering the use of new
    effectiveness measures that combine information on mortality and
    morbidity. Two such measures are already in widespread use in the
    academic literature. The ``quality-adjusted life-year'' (QALY) measure
    rates each year of life on a 0 to 1.0 scale based on an expert panel or
    patient assessment of the quality of life associated with different
    health states. The QALY measure is widely used in the medical literature
    in both the USA and Europe and has recently been recommended for use by
    an expert panel assembled by the U.S. Department of Health and Human
    Services. A close cousin to the QALY, the disability-adjusted life-year
    (DALY) measure, is widely used in the developing world and has been
    promoted by the World Health Organization and the World Bank. While the
    QALY measure values equally all healthy years of life, the DALY measure
    gives the greatest weight to healthy life-years in the prime of life,
    since these years--whether through work or child rearing--make a major
    contribution to societal production.
      Strictly speaking, ranking regulatory investments based on cost-
    effectiveness ratios focuses on economic efficiency. Decision makers may
    desire (or be required) to consider other values as well (e.g., various
    notions of fairness and equity). There is no accepted approach to
    incorporating equity considerations into a league table. However, there
    is broad consensus that a qualitative description of equity and fairness
    concerns should be presented to regulators in a rulemaking process and
    such considerations are clearly authorized for consideration under E.O.
    12866.

        Taking Steps Toward Cost-Effectiveness in the Regulatory Process

      OMB is in the process of taking modest steps toward greater use of
    cost-effectiveness and league tables in decision making. First, OMB has
    issued government-wide guidelines on information quality that will
    promote greater transparency and consistency in agency analyses of
    health and safety risks. The development of league tables as an
    analytical construct depends on achieving a degree of analytical
    consistency across agency evaluation of health and safety risks. Second,
    OMB has committed to update periodically its guidelines for regulatory
    analysis, which are used when OMB reviews agency rulemakings. OMB
    intends to use guideline revision as a vehicle to consider the analytic
    measures of effectiveness and performance used by agencies and the
    informational burdens associated with moving toward greater analytic
    consistency in agency practices. This multi-year process will involve
    analysts from multiple agencies and will include opportunities for
    public comment and peer review.
      While this approach has been more fully developed in the public health
    and medical literature, it can be applied to other types of programs.
    One of the key challenges in extending this analysis into other areas,
    of course, is developing a suitable measure of the effectiveness of
    disparate programs directed toward enhancing other aspects of the
    nation's welfare (e.g., recreational opportunities). OMB encourages
    agencies to develop objective measures of program effectiveness that can
    facilitate cost-effectiveness analysis.