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TV regulation in the age of digital downloads

June 30, 2015, 8:00 AM

Television viewing must now be added to the long list of activities the Internet has changed. The time when audiences across the country simultaneously experienced a televised event—such as the Beatles on The Ed Sullivan Show or the finale of M*A*S*H— is almost entirely over. Today, such event viewing typically is limited to annual pageants like the Super Bowl.

The living room flat screen is now just one of a variety of ways to watch what we still call “television.” On-demand episodic series and digitally distributed movies can be streamed via the Internet anytime and anywhere on a smartphone or tablet, or simply downloaded for later viewing.

The rationale for broadcast regulation long has been based on scarcity. Simple physics limited the amount of spectrum available for television and radio broadcast. In passing the Communications Act of 1934, which created the Federal Communications Commission, the government maintained that limited spectrum justified broadcast regulation in the public interest.

The Internet has obliterated scarcity. Today’s video on-demand platforms allow anyone to produce and distribute content. That’s why extending the FCC’s broadcast authority to Internet television should be considered carefully. Old rationales for regulation no longer apply and may be obsolete. If imposed on new models of video entertainment and information, they likely would be counterproductive to the growth and expansion of these new platforms.

The nearly century-old broadcast model—in which a radio or television station dictated a programming schedule around which listeners and viewers planned their evenings—is dying. It is being replaced by an unprecedented set of choices and methods consumers have when it comes to accessing their favorite programming. According to a June 2015 projection by investment banking firm FBR Capital Markets, if it continues its current rate of growth, top video streaming service Netflix within a year will surpass all of the four major broadcast networks – ABC, CBS, NBC and Fox – in the size of its 24-hour audience in the United States.

Terms like “binge viewing” and “spoiler alert” have become part of the modern vocabulary. The programming grid found online and in daily newspapers serves today less as a calendar and more as a download menu for a digital video recorder.

The trend has not escaped notice of the Federal Communications Commission. The FCC has suggested extending its regulatory reach to companies that distribute video entertainment over the Internet, or “over the top” (OTT), independent of local broadcast stations and local cable franchises. These companies could include Netflix, Hulu and Amazon, which to varying degrees, offer viewers a selection of movies and television shows for monthly “all-you-can-view” subscription rates. They also will include forthcoming services like Apple TV, which will introduce a level of content aggregation. This September, Apple plans to begin offering 25 broadcast and cable channels via the Web, simulcasting the same content at the same time it is transmitted by conventional networks.

In addition, the TV and cable networks themselves have begun to make programming available over the Internet in real-time. Of these entries, ESPN was considered the most significant, because it brought live sports, traditionally thought to be among cable companies’ biggest competitive advantages, to OTT.

Meanwhile, Google’s YouTube not only offers free content to viewers, but an extremely cost-effective platform for independent content producers, who can create YouTube channels to grow their viewer base. Most YouTube downloads are free, as the platform is built to monetize advertising, but Google has begun to experiment with subscription models, as well.

This paper will look at the how the OTT trend is changing television viewership; how it brings competition in the form of choice and value differentiation; and how it serves as an example of a market-engineered response to changing customer tomer demands. It will recommend that, rather than rush to expand regulatory definitions, the FCC go slow, allowing consumer decision-making to direct the evolution of OTT providers and services. In fact, as alternative methods in program distribution challenge broadcast and cable, it may instead be time to scale back the FCC’s regulatory role, especially in such areas as:

  1. Retransmission, must-carry and other programming requirements;
  2. Resolution of content provider/content distributor disputes;
  3. Content regulation; and
  4. Regulatory fees.

Letter to D.C. Council on e-cigarette taxes

June 30, 2015, 7:30 AM

My name is Dr. Edward Anselm and I am a senior fellow with the R Street Institute, a D.C.-based free-market think tank that takes a pragmatic approach to public policy. I also serve as medical director for Health Republic Insurance of New Jersey (HRINJ) and am an assistant professor of medicine at the Mount Sinai School of Medicine. I have a 30-year history of tobacco-control advocacy and running smoking-cessation programs.

The D.C. Council currently is considering a proposal that would increase significantly taxes on e-cigarettes. I urge you and your colleagues to look at all available information before making your decision on this important measure.

Electronic cigarettes, also known as electronic nicotine-delivery systems (ENDS), do not contain tobacco. They provide nicotine to users who are unable or unwilling to quit smoking cigarettes, in much the same way as pharmaceutical nicotine gums, patches, lozenges and inhalers. As such, I believe they should be taxed at the same rate as these other over-the-counter nicotine-delivery products, and not at the much higher rate proposed by the council.

There are more than 77,000 adult smokers in the District of Columbia, accounting for roughly 16 percent of the adult population. As many as half of these smokers use electronic cigarettes. Communities considered “marginalized” – such as the poor, high school dropouts and the LGBT community – tend to have higher rates of smoking. Tobacco use among people with mental illness is double that of the general population, which makes sense, as nicotine is both an antidepressant and a stimulant. Taxes on e-cigarettes are thus regressive.

There is no evidence to support claims by some tobacco-control advocates that e-cigarettes are as dangerous as, or more dangerous than, tobacco cigarettes. It’s also untrue that their benefits are unproven or that they have been shown to recruit teens to a lifetime of nicotine addiction.

ENDS provide a safer alternative, allowing smokers to obtain nicotine with a far lower risk of death and disease. The three studies published thus far on the role of ENDS in smoking cessation, summarized in a recent Cochrane Review, all show positive results. Even those smokers the studies examined who did not quit were shown, on balance, to reduce their consumption of regular cigarettes. This is consistent with a recent Reuters survey showing the majority of e-cigarette users are dual users.

Some also allege e-cigarettes attract teens to nicotine addiction. But we now have substantial evidence, even without legally imposed restrictions on marketing, that this is not the case. Use by teen nonsmokers is almost all single experimentation or occasional social use, often with zero-nicotine e-cigarettes.

Taxing e-cigarettes as if they were tobacco cigarettes will not benefit public health. All it will do is protect both tobacco cigarettes and makers of pharmaceutical nicotine products from competition from these remarkably safe alternatives. Taxing e-cigarettes the same as tobacco cigarettes will send the message to smokers that they might as well keep smoking.

California committee stands up to the fourth branch of government

June 30, 2015, 7:00 AM

Like other myths and fairy-tales meant to conceal and excite, California’s school children are taught to believe that there are three branches of government. In fact, there clearly are four.

Though a putative part of the executive branch, agencies are the constituent parts in an administrative state that constitutes a de facto fourth branch of government, with quasi-judicial, executive, and legislative powers that they exercise with great autonomy. Keeping this fourth branch of government in check is an effort that the Legislature increasingly is willing to defer.

That made it something of a surprise when members of the Assembly Insurance Committee recently called the California Department of Insurance to task for an obscure proposed regulatory action. In a June 8 letter from Chairman Tom Daly, D-Anaheim, the committee expressed concerns about Insurance Commissioner Dave Jones’ decision to pursue policy changes that would limit the availability of auto insurance discounts.

Specifically, committee members urged the commissioner to abandon his attempt to deprive Californians of so-called “affinity group” discounts. The letter makes it known they feel the department lacks legal authority to undertake the change and that it would not be in the best interests of their diverse constituents.

The concern is warranted. The CDI’s course of action is inexplicable, in light of its claim to be defending the public’s interest. What’s particularly encouraging about the committee’s letter is that it demonstrates interest not only in the agency’s operational and legislative activity, but also its regulatory activity. Effective governmental oversight demands attention to both.

While it’s yet to be seen whether the CDI will heed the committee’s advice, the panel’s willingness to go on record with its concerns should counsel caution. The quasi-legislative power that department wields is not exercised in a vacuum.

The power of the fourth branch of government can be intimidating, both to citizens and to legislators. But questioning agencies’ purported expertise is vital to ensure the actual will of the people, and not simply that of agency staff, is ensconced in law. Californians have every reason to hope that Daly’s letter is a sign of more oversight to come.

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Supreme Court missed opportunity to clarify copyright law in API case

June 29, 2015, 3:13 PM

WASHINGTON (June 29, 2015) – The U.S. Supreme Court’s decision earlier today not to hear arguments in Google Inc. v. Oracle America Inc. represents a missed opportunity to clarify copyright law, according the R Street Institute.

“The Supreme Court has taken the wrong path today in denying certiorari in the Oracle case, which centers on whether application programming interfaces (APIs) should be protectable as copyrighted works under the Copyright Act,” said Mike Godwin, R Street’s general counsel and director of innovation policy. “While the Federal Circuit held that APIs can be copyrightable, we have taken the opposite view: that APIs are more like functional descriptions, like the recipe for your favorite dish, than they are the kind of creative expression that copyright law is designed to protect.”

The case has been remanded to the district court, which will determine whether “fair use” or other defenses may apply in favor in Google’s favor, Godwin said.

“It’s the nature of such legal defenses that, even if Google wins those arguments, the resulting decisions may not provide the kind of broad clarity we would hope to see in copyright cases involving primarily functional or specifications-oriented aspects of programming code,” he added. “In the long term, we hope the federal courts, perhaps with the help of Congress, strike a balance in favor of more specific, creativity-oriented copyright protection.”

R Street praises Supreme Court for affirming cost-benefit analysis in rulemaking

June 29, 2015, 3:12 PM

WASHINGTON (June 29, 2015) – The R Street Institute welcomed today’s U.S. Supreme Court decision affirming the requirement that federal agencies consider costs before determining whether a rule is worthwhile.

In Michigan v. EPA, the court ruled that the Environmental Protection Agency unreasonably interpreted the Clean Air Act when it decided to set limits on power plants’ toxic pollutant emissions without first considering the costs to industry.

“We are pleased the Supreme Court clearly believes agencies are responsible for determining how a rule would impact the economy before determining that the rule is worthwhile,” said Catrina Rorke, director of energy policy and senior fellow of the R Street Institute. “In a situation like this, markets matter, too. If the costs are exorbitant and the benefits small, we should clearly consider whether a course of action is appropriate.”

The court found the EPA did not weigh the likely costs in its initial determination of whether to move forward with the rule. Only after the rule was crafted did the EPA examine costs, which amounted to $9.6 billion annually for coal-power generators.

Previous data compiled by the American Action Forum showed that utilities planned to close at least 24 coal-fired power plants as a result of the rule, amounting to 12.6 gigawatts of generation capacity and nearly 2,000 lost jobs.  The Supreme Court ruled that it was neither rational nor appropriate to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits.


SCOTUS sides against EPA and environmentalists

June 29, 2015, 9:20 AM

From Red Millennial:

In 2012, there was a significant backlash from a group of Latino Democrats in the California Assembly, who were worried that California’s Cap-and-Trade law would hurt poor and middle-class Hispanics. Democrat Henry Perea proposed Assembly Bill 69, which would establish a three-year suspension on the cap-and-trade program’s requirement to buy permits for transportation fuels.

Nikki Haley signs bill legalizing TNCs in South Carolina

June 29, 2015, 8:00 AM

While the country was focused this past week on the flag that flies above the South Carolina statehouse, important work was being done inside its doors.

In a major victory for ridesharing, Gov. Nikki Haley has signed a bill creating a permanent regulatory framework for transportation network companies, with real solutions to ensure public safety while at the same time promoting free markets. The measure, H. 3525, also overrides a more restrictive ordinance regulating TNCs in the City of Charleston.

It marks quite a turnaround from five months ago, when the state Public Service Commission issued a cease-and-desist order (rescinded after just two weeks) that Uber must stop operating within the state. It’s a turnaround even from earlier this month, when an earlier version of the bill failed in the state House of Representatives by a 23-81 vote. Uber has been operating on a temporary license that was set to expire June 30, had Haley not signed the bill.

With the deal, TNC frameworks have now passed in nearly two dozen states, marking another sign that we’re finally moving past the debate over whether or not these companies are safe for consumers and fair for drivers. The regulations passed in South Carolina take measures to ensure the companies are safe, while allowing drivers to decide for themselves whether or not the platforms are fair.

The new law requires that drivers must have primary insurance coverage, on their own or through the TNC, that acknowledges they are covered as a TNC driver. The insurance must provide at least $50,000 of per-person liability, $100,000 of per-incident liability and $50,000 of property damage coverage. Drivers also must obtain background checks, cannot be registered sex offenders or can’t have intoxicated driving convictions within the past ten years.

There are other requirements that don’t exactly appear necessary from a safety and consumer protection perspective, but ultimately proved crucial to getting a compromise bill passed. For instance, drivers must display a removable indicator on their car that they are a TNC operator and vehicles must pass a 19-point safety inspection. The bill also requires TNCs to apply for permits with the state’s Office of Regulatory Staff and drivers who have loans on their cars must tell the loan-holding entity they drive for a TNC.

It’s not perfect, but the good news is that TNC drivers now have a green light in South Carolina.

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Email privacy bill could move by August recess

June 29, 2015, 7:00 AM

With its passage of the USA FREEDOM Act earlier this month, Congress declared a commitment to restore privacy protections that many feel have been violated. But civil libertarians and technology companies recognize there remain a number of other significant challenges to citizens’ Fourth Amendment protections and at the top of nearly everyone’s list is email privacy reform.

Last Congress, Reps. Kevin Yoder, R-Kan., and Jared Polis D-Colo., introduced H.R. 1852, the Email Privacy Act. The authors recruited 272 cosponsors but ultimately was unable to secure a floor vote in the U.S. House.

Undeterred, the bipartisan duo earlier this year introduced the Email Privacy Act. This time around, H.R. 699 has already received a flood of support from members of Congress. With 284 co-sponsors, it already has support of the majority of the House, and is the most-supported bill not yet receive a hearing, much less a vote.

The Email Privacy Act would update the Electronic Communication Privacy Act of 1986 to require government agents obtain a warrant before accessing the content of private emails, texts or other digital correspondence. It essentially would treat all emails, regardless how old, with the same privacy protections currently granted to physical letters in a person’s cabinet.

Emails and other forms of electronic communication are currently protected under ECPA, but it has not been updated since 1986. Though it was remarkably forward-looking for its time, technology has advanced dramatically and ECPA has been outpaced. The law allows digital communications to be searched and seized without a warrant if they are more than 180 days old. Over the years, courts have issued inconsistent interpretations of the law, creating uncertainty for service providers, law-enforcement agencies and for the hundreds of millions of Americans who use the Internet in their personal and professional lives.

There’s really only been one significant hang-up with the Email Privacy Act. Civil regulators like the Securities and Exchange Commission insist they need the authority demand the contents of electronic communications without a warrant. SEC Chairwoman Mary Jo White has expressed that requiring warrants to obtain emails could impede financial-fraud investigations.

These concerns apparently have some sympathy in the Senate, where a companion bill by Sens. Mike Lee, R-Utah, and Patrick Leahy, D-Vt., also is awaiting action. In many respects, civil agencies and law enforcement are working against civil libertarians in ways similar to when security hawks lined up against privacy advocates in the USA FREEDOM Act debate.

But after a long wait, the landscape might be changing. The House Judiciary Committee recently convened a “listening session” to allow members of Congress to present ideas related to criminal-justice reform. Rep. Yoder took the opportunity to explain that, if Congress was interested in criminal justice reform, they should look at the disparity in Fourth Amendment treatment of paper versus digital correspondence. Others on the committee appeared sympathetic to his arguments, which makes sense, when you consider that 23 of the panel’s 39 members already are cosponsors of the bill.

In a National Journal article last week, Yoder detailed ongoing discussions with House Judiciary Chairman Bob Goodlatte, R-Va., (not a cosponsor), who described ECPA reform as being “on his to-do list” as well as noting that there may be “some potential modifications to the end product.”

It is possible email privacy is next on the “to-do list.” There has been chatter on the Hill that the legislation could receive committee and House floor action in July, with Politico Morning Tech reporting Friday:

The House Judiciary Committee is planning to mark up a bill to update the nation’s email privacy law before the August recess, according to sources on and off Capitol Hill.

The panel hasn’t picked a specific date for the vote, but the plan is to mark up a measure from Reps. Kevin Yoder and Jared Polis that modernizes the decades-old Electronic Communications Privacy Act, the sources said.

Over the next few weeks, we’ll see whether a clean version of the bill will move forward or whether it will be weakened with carve-outs for the SEC or other federal departments.

From my vantage point, Republican leadership would be wise to note that the 284 cosponsors endorsed a strong bill with no indication they would tolerate a weakened product. Passing the Email Privacy Act would restore confidence and security to Americans, while providing clarity to tech businesses trying to develop innovative new services and compete in a global marketplace.

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The inside of John Roberts’s head

June 26, 2015, 6:58 PM

From The Economist:

R.J. Lehmann, a senior fellow at R Street, a free-market think tank, sees a big smaller-government upside to Mr Roberts’ Obamacare ruling. “Roberts has just opened a huge new avenue for challenges to administrative rulemaking”, Mr Lehmann writes. “From labour laws to environmental standards—not to mentions reams and reams of tax rulings—there’s no shortage of federal rules” now open to challenge. Indeed, conservatives and libertarians may soon happily come to rely on the Obamacare ruling in their quest to rein in an unruly executive bureaucracy. If they do so, they’ll be conceding, at least implicitly, the model of the division of powers Mr Roberts has so cagily persuaded the court’s liberals to sign on to. But this model is manifestly one of the legislature’s rule-making supremacy, and the court’s secondary, interpretive authority. Congress legislates. The executive gets to decide what ambiguous legislation means only if the decision doesn’t have important economic or political consequences, or if congress has granted that authority. Otherwise, it is up the court to settle what the law says.

‘Disloyal competition’ — here and abroad

June 26, 2015, 3:20 PM

Commuters on their way to Paris’ major airports and train stations were disrupted this week by the presence of a rolling blockade. Taxi drivers, under pressure from competition presented by the emergence of transportation network companies like Uber, obstructed crucial thoroughfares to draw attention to their plight.

Among the most bizarre aspects of this truly bizarre episode is the personage who first broke the story – former Hole lead singer and Kurt Cobain widow Courtney Love:

they’ve ambushed our car and are holding our driver hostage. they’re beating the cars with metal bats. this is France?? I’m safer in Baghdad

— Courtney Love Cobain (@Courtney) June 25, 2015

As of Friday evening, Paris remained in a state of total lockdown. But even when police do finally clear the streets, the French notion of concurrence déloyale – translated directly as “disloyal competition” – likely will take more time to correct.

The political rhetoric surrounding the demonstration makes that clear. Lydia Guirous, representative of France’s center-right Parti républicain, characterized Uber’s presence in the market as “wild competition” and called for a quick solution to “unfair competition.”

France’s unfair competition law is broad in comparison to its U.S. equivalent. The result of France’s permissive approach is predictable enough. Competing firms abuse the cause of action with an eye toward hobbling their competition.

The distinction between the U.S. and French approach is, at bottom, that the French law is predicated on a broad definitions of harm (including “imitation” and “parasitism”) whereas the U.S. law is predicated upon specific deceptive business practices (like misrepresentation or false advertising). Thus, in the United States, taxi complaints about unfair competition would not be fit for legal recourse. Instead, such concerns are relegated to the realm of public policy.

While these kinds of high-profile displays of competitive resistance are not common here, they certainly do occur. Be it in the courts, in the legislatures or the on digital highways, nontraditional venues are ignored at a firm’s peril. In the realm of technology, this is particularly true.

On flimsy pretexts, firms can establish virtual roadblocks that effectively deny their rivals the ability to compete. Recently, this occurred when the payroll processing giant ADP chose to deny a new player in the benefits market, Zenefits, ordinary and vital access to its customers on the basis of publicly unsubstantiated security concerns.

While that conflict has subsequently turned into something of a “he said; she said” affair, if ADP is acting in an anti-competitive manner, as Zenefits’ alleges, to protect their own forthcoming benefits platform, the fact pattern raises a broader question about the nature of competition in new fields.

When taxis obstruct streets, it is easy enough to correct. When digital roads are blocked to subvert competition, who does one call? At the moment, the only option is to call a lawyer.

It is clear that using market position to work in an anti-competitive manner is far easier in a non-corporeal space than it is on city streets. As a remedy, for the sake of preserving market flexibility, there is a need to undertake fact-intensive analyses on an accelerated basis to peer beyond pretext when one firm subverts another in a structural way. Doing so in a manner that avoids the pitfalls we see in France will be tricky.

To be sure, U.S. law does not yet have an answer to this question.

While different market actors should not be subject to different legal standards, lawmakers need to be cognizant that incumbent market actors already enjoy plenty of advantages. There is no need for them to also reserve an ability to literally shut-down traffic. When they do so, when outright and structural alienation occurs, savvy regulators should cast a suspicious eye.

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John Roberts and the long con

June 26, 2015, 11:46 AM

Conservatives and libertarians aren’t very happy with John Roberts right now, and for good reason. For the second time, the Bush-appointed chief justice has handed down a decision that preserved Obamacare, that ultimate bête noire of the right.

I’m no fan of Obamacare, mostly because I’ve always failed to see how you can solve what largely are problems in insufficient competition among and supply of health-care services by legally mandating more demand. But there are subtler aspects to both of the Roberts decisions that many on the right are missing, and for which they may actually find themselves thankful in the long run.

I’m not here speaking primarily of the political ramifications, though there is, of course, that as well. Obamacare was just past the trough of its popularity when the 2012 NFIB v. Sebelius decision came down, and it’s feasible that, at the time, the American public would have digested a contrary ruling fairly well. But had the court’s most recent ruling this week in King v. Burwell gone the other way, the fallout would have been disastrous for the 37 Republican governors who would be forced to choose either to commit suicide with their base by agreeing to create a state health-insurance exchange, or else face the consequences with the broader electorate that would come with ripping away the subsidies that millions of voters need to buy coverage.

But those sorts of considerations are obvious and, at this point, fairly well-covered ground. What I’m talking about instead are the long-term legal consequences of Roberts’ two decisions. There is a way to see both as part of what amounts to a “long con,” a kind of 11-dimensional chess, in which he agrees to give away a near-term policy outcome in exchange for ripping apart 100 years of liberal jurisprudence on the administrative state.

In the NFIB decision, Roberts infamously joined the court’s other conservatives in finding that Congress did not have authority under the Commerce Clause to compel citizens to purchase health insurance. Roberts instead wrote his own decision (joined, ultimately, by the liberal wing of the court) upholding the law as constitutional under Congress’ taxing authority. The assessments that those who fail to buy coverage would have to pay were not (as the plain language of the statute described them) legal “penalties,” but rather a tax on the status of being uninsured.

This was an unexpected decision, not only because it required some remarkable linguistic contortions to reach, but because that was never an argument the administration had put forth as central to their defense (and in earlier cases in the lower courts, had explicitly rejected). In the immediate aftermath of the decision, it made little difference to conservatives how Roberts had arrived at his ruling. If anything, the fact that he recognized the Commerce Clause justification as invalid, but upheld the law nonetheless, was seen as just another sign of his duplicity.

But was it really? It’s important to remember that the decision came in the context of a nearly century-long streak of mostly bad decisions on the nature and meaning of the Commerce Clause. Initially granting Congress authority “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes,” the clause has been so expanded that it now essentially grants Congress authority to regulate any action, anywhere. In 2005’s Gonzales v. Raich, the court found that Congress’ authority over “interstate commerce” applied even when the activity in question (the growing of marijuana for personal consumption by a patient with a valid doctor’s prescription) involved no commerce at all and was limited solely to a single state (California) where the behavior in question was completely legal.

Thus, if nothing else, NFIB set some limits on what the Commerce Clause means, even if that limit is nothing more than: “Congress cannot induce commerce for the sake of regulating it.” Within a year of its filing, the decision already had been cited in a number of challenges to federal statutes, including the Sex Offender Registration and Notification Act and the so-called “assault weapons” ban. One should expect many more in the years ahead.

The Burwell decision is arguably even more sneakily subversive. For most legal observers, it was obvious a decision in favor of the administration almost certainly would rely on the doctrine of “Chevron deference.” First elucidated in the landmark 1984 case Chevron U.S.A. v. Natural Resources Defense Council, the principle holds that, when an executive branch agency is required to interpret statutory language whose meaning is ambiguous, courts should defer to that interpretation unless it is shown to be unreasonable.

This seemingly dry principle sets a very high bar for those who would seek to challenge administrative rulemaking. Its application frequently has meant that, even where courts concede that it is obvious a bit of language has another, more natural meaning than the one promulgated by a federal agency, so long as the agency’s interpretation is a feasible one, it must stand.

If Chevron deference is applied in the Burwell case, it’s a slam dunk for the administration. The initial petition was dismissed at the District Court level, where it was ruled unambiguous that the Affordable Care Act made federal subsidies available through the Federal Exchange. The Fourth U.S. Circuit Court of Appeals conceded that the language was ambiguous but, applying Chevron, deferred to the IRS’ interpretation of the statute.

Though Roberts’ decision ends up with the same result as those earlier rulings, he got there a very different way. Notably, he found that Chevron deference would not apply in this case:

The tax credits are one of the Act’s key reforms and whether they are available on Federal Exchanges is a question of deep ‘economic and political significance'; had Congress wished to assign that question to an agency, it surely would have done so ex­pressly. And it is especially unlikely that Congress would have dele­gated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort.

The bit about carving out questions of “economic and political significance” is a pre-existing limitation on Chevron, but the verbiage concerning the IRS’ lack of “expertise” in this policy area is new, and potentially significant. Implied is that, had Congress intended such a big question to be decided by an executive branch agency, it would have explicitly chosen one with experience in the subject matter, such as the Department of Health and Human Services.

This is clearly an attempt by Roberts to rein in executive agencies’ reliance on Chevron to reach whatever finding happens to be most convenient to them. In a nutshell, Roberts didn’t say: “We should grant the IRS deference to decide what the law says.” Rather, what he said was: “WE, the Supreme Court, decide what the law says, and it so happens it says what the IRS said it says.”

It may seem small consolation to Obamacare haters, but there’s actually a big difference between those two findings, albeit one that largely will be missed by nonlawyers. Roberts has just opened a huge new avenue for challenges to administrative rulemaking, particularly where a plaintiff can demonstrate the unlikelihood that Congress would have delegated a particular decision to the specific agency that ultimately made it. From labor laws to environmental standards — not to mention reams and reams of tax rulings — there’s no shortage of federal rules that potentially could fit the bill.

I know it’s hard to believe now, but the day may come when those on the right will thank John Roberts for what he has set in motion.

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Obamacare’s CO-OPs proving to be one big money pit

June 26, 2015, 9:00 AM

In the wake of the Supreme Court’s ruling upholding the IRS’ decision to provide health insurance subsidies through the federal exchanges, it’s important to analyze whether these subsidies are actually sustainable. When spent on the cooperative nonprofit insurers created by the Affordable Care Act, they are not.

In many states, those receiving subsidies for purchasing insurance on state exchanges may get coverage from Consumer Oriented and Operated Plans (CO-OPs). CO-OPs were set up as a sort of half-hearted replacement for the “public option” that many on the left insisted be included in Obamacare. The rationale was that, by creating nonprofit insurers to compete at the state level with Blue Cross and Blue Shield plans (some of whom have shed their nonprofit status in recent years), the cost of insurance would fall.

However, a new study by the Galen Institute’s Grace-Marie Turner and American Enterprise Institute’s Thomas P. Miller shows that CO-OP prices are rising fast and billions in taxpayer dollars have been wasted.

CO-OPs are nonprofit mutual insurers owned by their policyholders. CO-OP executives aim to balance premiums collected with losses paid, without having to return any profits to investors. They only sell their products on state or federal exchanges, meaning they are more likely to provide options to uninsured and more costly patients.

The Patient Protection and Affordable Care Act set up a $6 billion fund for CO-OPs to use toward startup costs and to make it through tough times. Thus far, $2.4 billion of that has been either granted or loaned. Among the somewhat unusual rules the CO-OPs must abide are regulations preventing any government, insurance company or insurance association employees from serving on any of their boards of directors.

Turner and Miller find that when CO-OPs entered a market, they tended to offer premiums well below the market price, hoping to attract customers. Iowa’s CoOportunity Health offered its platinum plan 7 percent lower than the average silver plan, 24 percent lower than the average gold plan and 41 percent lower than the only other platinum plan; CoOportunity gained 10 times more consumers than forecast.

In Tennessee, Community Health Alliance plans were 10 to 25 percent below commercial prices, allowing them to obtain 23 percent of the market in just two years. In Colorado, HealthOp offered the lowest-priced plans across the state and, by the end of the 2015 enrollment period, had racked up 40 percent of the exchange market.

What happend when a government-backed nonprofit charged priced well-below market indicators? The answer comes from a study conducted by Scott Harrington of the University of Pennsylvania’s Leonard David Institute of Health Economics:

The ratios to premiums of medical claims, claim adjustment expenses and general expenses for CO-Ops combined for the first three quarters of 2014 were 91.7 percent, 3.8 percent, and 21.3 percent, respectively, producing a total ratio of costs to premiums of 116.8 percent.

In other words, for every $100 CO-Ops collected in premiums, they paid out $117. In Kentucky, Health Cooperative posted a loss ratio of 158 percent in 2014. That means for every dollar collected the group spent $1.58, and that’s not even including expenses. Remember, a good portion of the money collected in premiums comes from the federal subsidies that were just upheld by the Supreme Court.

These groups have responded by raising rates. CHA asked Tennessee regulators to approve a 32.6 percent increase in premiums. In Kentucky, rates will increase either 20 percent or 25 percent, according to the federal exchange website.

Rate increases indicate that these nonprofits are making a turn in the direction of more sensible pricing, but in order to propel themselves, they are asking for bailouts. CO-OPs are seeking to tap Obamacare’s risk adjustment, reinsurance and risk corridors to make up for their losses.

Risk adjustment demands that insurance groups enrolling high-risk patients receive compensation from plans with relatively low-risk enrollees. Iowa’s CoOportunity Health reported $168 million in losses over the last 13 months of its operation, before it was liquidated in February. The burden for paying these loses falls on the Nebraska and Iowa Life and Health Guaranty Association, funded by the group of surviving insurers in the state. Clearly, a liquidated CoOpportunity probably will never pay back its full $145 million in federal loans

Obamacare also required each state to establish a transitional government-backed reinsurance program to provide compensation to insurers when a catastrophic illness or accident occurs. All health insurers have reinsurance coverage in exchange for a prescribed reinsurance fee, but CO-OPs are more likely to have patients requiring reinsurance.

Risk corridors allows the government to offset high losses by providing solvency funds. For the CO-OPs, these funds are supposed to come from profits earned by other CO-OPs. The problem is that, of the 23 CO-Ops, only one (Maine Community Health Options) was profitable in 2014. In total, the CO-OPs reported $613.9 million of underwriting losses.

HealthOp has been given $72 million in startup and solvency loans. New York’s Health Republic Insurance has received $90 million in federal solvency funds. On Nov. 10, 2014, the Kentucky Health Co-op received $65 million in solvency funds to expand its operation to West Virginia. The expansion has been delayed until 2016 and the money, it appears, has been spent to pay losses in Kentucky. The group also expects $257 million from competitors and reinsurance to make up for 2014 and 2015 losses.

Another key problem is that, in offering premiums well-below the market rate, the CO-OPs forced profitable insurers to take on more risk and lower premiums to remain competitive. So not only will the profitable and private companies be forced to bail out the CO-OPs, they have also taken on more risk than they are accustomed to. In the long run, rates for citizens buying both on and off state and federal exchanges will increase to pay for current losses.

In Vermont, the state’s insurance commissioner saw the problem coming and denied Vermont Health CO-OP a license. However, the $33 million in loans that the federal government granted the nonprofit has not been returned to the U.S. Treasury. Even when bad behavior was prevented by a smart commissioner, taxpayers have been robbed.

CO-OPs have swallowed large amounts of money as medicine for a disease with no cure. Congress should stop throwing good money after the bad.

This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.

Avoiding protectionist reinsurance tax key to ensuring low-cost insurance

June 26, 2015, 8:06 AM

As proposals are floated both in Congress and in the White House’s budget plan to change the tax treatment of reinsurance purchased by U.S. insurers from offshore affiliates, R Street hosted a Capitol Hill panel discussion June 18 that looked at the significant negative market impacts such a change would have. The panel — “Ensuring Low-Cost Insurance: Reinsurance & International Tax Reform” — was moderated by R Street Outreach Director Lori Sanders and  featured legendary supply-side economist Art Laffer, the Tax Foundation’s Alan Cole, Mayer Brown’s Timothy Keeler and former U.S. Rep. Tom Feeney, R-Fla.

You can watch the full video below.

This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.

Interpreting the law in 2015

June 26, 2015, 8:00 AM

Almost any high school textbook on U.S. government will tell you Congress makes the laws, the president approves the laws and the Supreme Court interprets the laws. Based on yesterday’s 6-3 decision in favor of the Affordable Care Act in King v. Burwell, it might be time to rewrite those textbooks.

Chief Justice Roberts had the political left jumping for joy yesterday as he delivered the opinion of the court. The opinion further established how the court must respect the legislature and provide a fair reading of the law in the context of its legislative plan. Claiming to be carrying forward the legislative plan of Congress, the court declared that the Affordable Care Act intended for tax credits to be offered through federal health-care exchanges, despite the law’s language limiting such subsidies to exchanges “established by the state.”

While both sides of the political aisle can agree on respecting Congress and its intentions, there is a clear distinction between making laws and mending laws. In King v. Burwell, the political agenda of saving the Affordable Care Act seemingly superseded a clear, literal interpretation of the text.

Two-thirds of the Supreme Court chose to ignore that language. They used judicial abdication to their advantage, broadened the meaning of the text, and appeased the leviathan state. In his dissent, Justice Antonin Scalia responded to the majority’s interpretation of the statute, stating”

Words no longer have meaning if an Exchange that is not established by a State is ‘established by the State.’

Regardless of the intent of Congress or its unintentional so-called “drafting error,” the Supreme Court has no obligation to bend down to Congress, and no power to rescue it from perceived errors. The court has one job, and that is to interpret the law.

The Supreme Court will be praised by some for preventing 6.4 million from losing health-care subsidies in 34 states, yet few will recall the millionswho lost their previous health insurance because of the ACA. Nor will they mention the rising insurance premiums for healthy Americans, or the emerging evidence of the overall decline in access to and the overall quality of medical care in the United States.

By using judicial abdication to alter the reading of the text of the Affordable Care Act, the court has set precedent for future decisions, allowing for much more than just “interpreting” the law.

This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.

Members and staff may use official resources to participate in open source projects, procure and publish open source software

June 25, 2015, 4:21 PM

WASHINGTON (June 25, 2015) — The OpenGov Foundation, the Sunlight Foundation and the Congressional Data Coalition (CDC) today announced that members, committees and staff within the U.S. House are now able to use official resources to procure open-source software, to fully participate in open-source software communities and to contribute software code developed with taxpayer dollars back to the public under an open-source license.

Until now, significant uncertainty surrounded whether or not open-source software, communications and code contributions are permitted within the U.S. Congress.  That lack of clarity continues within the U.S. Senate. However, it has been determined that, in general, members and staff in the U.S. House, when conducting official business, now have a choice between using proprietary and closed technology and open-source solutions that are restriction-free, reusable and frequently more cost-effective.

While generally approved open-source software is new to the U.S. House, it is not new to the federal government.  In September 2012, the Obama administration entered the open-source world by joining Github, declaring that:

We believe in using and contributing back to open-source software as a way of making it easier for the government to share data, improve tools and services, and return value to taxpayers. – WhiteHouse.gov/Developers

Within Congress, understanding of and support for open-source software has recently spiked.  Over the coming weeks, Rep. Blake Farenthold, R-Texas and Rep. Jared Polis, D-Colo., plan to launch a House Open Source Caucus.  In May 2015, Rep. Gerry Connolly, D-Va., submitted feedback on proposed procurement reform legislation via Github.  On June 5, 2015, Republican Conference Chair Rep. Cathy McMorris Rodgers outlined her vision for a modern, efficient and effective Congress that is able to:

[C]reate an open-source solution for constituent communications that anyone could add on to.  I would love to see a system that is open-source, with real time analytics, with social media and text messaging integrated in from the beginning.

In October 2014, the OpenGov Foundation, Sunlight Foundation and CDC jointly called for rules changes that would permit the use and publication of open-source software by House offices.  Moving forward, we will continue to work with members of Congress, staff, legislative support agencies and all stakeholders to continue these efforts to create a more efficient, effective and open U.S. Congress.


“Adding open source options to the Congressional tech toolkit is a major step toward creating a 21st century legislature,” said Seamus Kraft, executive director of The OpenGov Foundation.  “In the face of shrinking budgets and growing workloads, governments across America are increasingly turning to open-source solutions to help them serve better while spending less.  #Hack4Congress showed us all that the open-source community is ready to do its part to help those working to innovate Congress from the inside.  While much work needs to be done before members and staff can fully tap into the power of open source, we are excited to continue supporting those efforts however we can.”

“Purchasing only proprietary and closed technology leads to cost overruns on quickly outdated technologies,” said Rep. Mark Takano, D-Calif.  “Adding open-source software to our list of options will save money and allow Congress to build and improve on what already works, rather than constantly playing catch-up. Our constituents rightly expect more from us.”

“Open-source software presents so many exciting opportunities for members of Congress to more effectively represent and interact with their constituents,” said Rep. Jared Polis (D-CO). “By taking advantage of the newest technology and collaborating with the open-source community, we can improve everything from the accessibility of congressional websites to the efficiency of business on the House floor. Personally, I can’t wait to begin integrating open-source technology into my office’s daily operations.”

“I’m glad that the House of Representatives has finally opened the door to open-source software,” said Rep. Blake Farenthold, R-Texas.  “For over a decade, Individual coders and businesses around the country have been working with open-source software because of cost savings, productivity gains and the ability to modify the code to meet specialized needs. It’s past time that taxpayers see the same benefits. I applaud The OpenGov Foundation, the Sunlight Foundation and the Congressional Data Coalition for their efforts to make this happen, and I look forward to working through the Open Source Caucus to help educate my colleagues on how open-source software can benefit their offices and constituents.”

“We now have clear guidance on the use of open-source software in the House of Representatives,” said Rep. Darrell Issa, R-Calif.  “Members of Congress and the open-source community can work collaboratively to improve online access to the Congress and bring the institution more in line with other flexible, modern organizations that use open-source solutions to realize cost-savings and greater efficiency.”

“For far too long, the halls of Congress have been closed to open source,” said Rep. Seth Moulton, D-Mass.  “That changes today, and our office plans to embrace the open-source community on a range of projects that will enhance our constituents’ experience with our office and their government.”

“Open-source software is an important way to increase congressional transparency and accountability while furthering government efficiency, and we applaud the House of Representatives for its efforts to build a 21st century legislature” said Daniel Schuman, co-founder of the Congressional Data Coalition.

“This is an important step that will enable the House to adapt more quickly to changes in technology,” said Sean Vitka, federal policy manager at the Sunlight Foundation. “Allowing Congress to use open source tools will improve transparency and communication between government and the people.”

“Adoption of open-source software by the House of Representatives will be a force multiplier for the taxpayer dollar, allowing information technology systems to be built once and more easily shared between members’ offices,” said Ben Balter, Government Evangelist at Github. “In doing so, the House joins the hundreds of government organizations around the world that participate in the open-source community each day to deliver services more efficiently, more transparently, and in collaboration with the citizens they represent.”

“I’m so pleased the House has taken this critical step forward in allowing Members and staff to take advantage of the rich, productive—and, most of all, transparent—resources of open-source software,” said Mike Godwin, director of innovation policy at the R Street Institute.  We’ve known for many years that the open-source approach can be a powerful engine for technological advance, economic growth and the creation of new, powerful initiatives ranging from the Open Knowledge Foundation and Creative Commons to Linux and Wikipedia. I’m excited that the House is now empowered to take greater advantage of the fruits of open-source development.”

R Street welcomes bipartisan bills to encourage private flood insurance

June 25, 2015, 2:49 PM

WASHINGTON (June 25, 2015) — The R Street Institute welcomed today’s introduction of bipartisan legislation streamlining the process for private companies to begin offering, and states to begin regulating, flood insurance coverage options outside of the National Flood Insurance Program.

Introduced by Reps. Dennis Ross, R-Fla., and Patrick Murphy, D-Fla., and Sens. Dean Heller, R-Nev., and Jon Tester, D-Mont., H.R. 2901 and S. 1679, the Flood Insurance Market Parity and Modernization Act, would broaden which privately underwritten flood insurance policies may be used to satisfy federal lending requirements.

“Congress made clear in the 2012 flood insurance reform bill that banks and other lending institutions should accept privately underwritten flood insurance on the same terms as coverage written by the National Flood Insurance Program,” R Street Senior Fellow R.J. Lehmann said. “This legislation will aid banking regulators in determining what sorts of coverage should qualify, relying largely on the states, who already take the lead in regulating the business of insurance.”

Under terms of the bill, any company admitted to write policies in a given state, or surplus lines writer not disqualified by that state, could offer the coverage.

Some states have already begun leading the charge of modernizing the flood insurance market. Florida, West Virginia, Connecticut, Pennsylvania and Massachusetts have all created frameworks for state regulators to oversee flood insurance offerings by admitted market companies.

“The private market for flood insurance remains small, but a growing number of insurers and reinsurers have expressed interest in offering more flexible products to consumers,” Lehmann said. “If we are ever to unwind the deeply indebted and unsustainable NFIP, it’s crucial to take these kinds of steps to encourage a vibrant market of private capital to handle this risk in the years ahead.”


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