The North Carolina General Assembly’s historic 2011 session included sweeping reforms to curtail the regulatory authority of state agencies, including the Divisions of Health Service Regulation; Environmental Health; Mental Health, Developmental Disabilities, and Substance Abuse Services; and professional licensing boards and other agencies directly affecting the operation of hospitals in our state. The new rules of the regulating game put in place by legislators will significantly impact both regulators and hospitals and other businesses that work with them. Although the details have garnered little attention to date, perhaps the most important across-the-board developments affecting regulation by North Carolina agencies are the changes to our state’s rulemaking framework that take effect October 1, 2011.
New Rulemaking Framework—Focus on Economic Impact of New Rules
As part of a bill commonly known as the Regulatory Reform Act (SL 2011-398), the General Assembly enacted new statutes and amended existing statutes to rein in the discretion of agencies to enforce existing rules and adopt new rules. A common thread interwoven throughout these changes is a heightened focus on economic impact. One of the most significant revisions is a new requirement that prohibits agencies from adopting a new rule that will have an aggregate financial impact of $500,000 or more in a 12-month period, unless the rule is required to respond to (a) a serious and unforeseen threat to public health, safety or welfare; (b) an act of the General Assembly or U.S. Congress that specifically requires the agency to adopt rules; (c) a change in federal or state budgetary policy; (d) a federal regulation; or (e) a court order. Given the relatively low economic impact threshold that will trigger these new rulemaking constraints, these limitations will likely apply to the majority of new rules of any substance. The new $500,000 economic impact floor is a substantial reduction of the $3 million level that existed under the prior law.
Additional new fiscal-related requirements for agency rulemaking include:
- A mandate that the agency consider at least two alternatives before adopting a rule with an economic impact of $500,000 or more per year and explain why those alternatives were rejected;
- A requirement that the agency proposing a rule prepare any required fiscal note for approval by the Office of State Budget and Management (OSBM);
- Provisions for increased critical review and analysis of any fiscal note prepared for a proposed rule;
- A requirement that for a proposed rule with an economic impact of $500,000 or more per year, the agency must, among other things, (a) describe the persons who would be subject to the proposed rule and the types of expenditures those persons would have to make; and (b)estimate additional costs that would result from implementation of the proposed rule, including both economic and opportunity costs; and
- Provisions to facilitate public comment and input on a fiscal note regarding the economic impact of a proposed new rule.
Other New Rulemaking Mandates
Along with these changes keyed to economic impact, the General Assembly established a slate of principles for all proposed new rules. These general rulemaking principles provide:
- An agency may adopt only those rules that are expressly authorized by federal or state law and that are necessary to serve the public interest;
- An agency must seek to reduce the burden on persons and entities that will have to comply with the rule;
- Rules must be written in a clear manner and must be reasonably necessary to implement or interpret federal or state law;
- An agency must consider the cumulative effect of all its rules related to the specific purpose for which the new rule is proposed and cannot adopt a rule that is unnecessary or redundant;
- When appropriate, rules must be based on sound and reasonable scientific, technical, economic, and other relevant information; and
- Rules must be designed to achieve the objective in a cost-effective and timely way.
The legislature’s rulemaking reforms included measures to facilitate public notice of and input regarding proposed new rules. Agencies must post proposed new rules on their websites, along with an explanation of the proposed rules and the reasons behind them, any fiscal notes or federal certifications for the proposed rules, and instructions on how and where to submit comments on the proposed rules.
Under the new rulemaking mandates, each agency must quantify the costs and benefits of a proposed regulation to the maximum extent possible. Where two or more agencies have overlapping policies and programs, the agencies are now expressly required by statute to coordinate their rule-making efforts to avoid unnecessary, unduly burdensome, or inconsistent regulations.
For any new rule that is designed to implement federal law, required for compliance with federal law, or on which the receipt of federal funds is conditioned, the agency must prepare a certification identifying the federal law and explaining why the proposed rule is required by the federal law. If the proposed rule goes beyond the requirements of federal law, this certification must explain why. The legislative changes include even stricter limitations on new environmental rules, which essentially prohibit environmental agencies from adopting regulations for the protection of the environment or natural resources that are more restrictive than any federal law or rule, unless certain specified conditions are met.
Finally, the legislature reemphasized existing North Carolina law that an agency may not enforce against a person any policy, guideline or interpretive statement that meets the definition of a rule unless it has been adopted as a rule. In other words, an agency cannot sidestep the rulemaking process by adopting a binding standard or requirement under the guise of an informal policy or interpretive statement.
Annual Review of Existing Rules
In addition to changes governing future rules, the General Assembly established a Rules Modification and Improvement Program, which will be coordinated and overseen by OSBM. Under this program, each agency must critically review its existing rules annually to identify any rules that are unnecessary, unduly burdensome, or inconsistent with the new general rulemaking principles established for future rules. The OSBM will invite public comments on existing rules, assemble and evaluate public comments received, and forward for further review to the agency at issue any comments it deems to have merit. Each agency must review the public comments and report on whether any of the public’s recommendations have merit or justify further action. Agencies must repeal any nonconforming rules identified in this review.
The General Assembly sent an unmistakable message that agencies are being reined in. Only time will tell what the actual practical and legal ramifications, costs and benefits, and efficiencies of this new rulemaking framework will be. Likewise, it remains to be seen how agencies and the OSBM will be able to carry out all of these rulemaking mandates effectively with fewer resources as a result of budget reductions. Meanwhile, hospitals and other state-regulated businesses and individuals in North Carolina have a new playbook to follow, which includes increased opportunities for commenting on existing and proposed rules and their economic impact and for understanding the agencies’ reasoning behind both existing and proposed new rules.