Mr. SKELTON. Will you please submit the rest to our counsel, and what you have please submit immediately.

[Information requested follows:]

COST OF WORK ON THE JANUARY 6, 1976 REGULATIONS REGARDING FOOD LABELING AND LABEL DECLARATION OF INGREDIENT REQUIREMENTS

The total cost of work on these regulations to date is approximately $37,000. There were no travel expenses or consultant fees involved in the promulgation of these regulations.

SMALL BUSINESS IMPACT STUDY

The Food and Drug Administration, operating under guidelines based on Executive Orders No. 11821 and 11949, OMB Circular A-107, and DHEW guidelines, assesses the economic impact of Agency-initiated legislative proposals and Agency proposed regulations. The original Executive Order (No. 11821) was effective November 27, 1974. Executive agencies are not required to review for economic impact regulations and legislation proposed prior to this date.

There are six criterion and their thresholds that are used in assessing the economic impact of proposed regulations or legislation. If any of the thresholds are exceeded, then the proposed regulation or legislation is said to have a major economic impact, and this necessitates the preparation of an inflation Impact Statement. This statement considers benefits, costs, and alternative actions. One of the criteria is "substantial changes in the competitive structure of an industry with value of shipments exceeding $100 million annually." It is at this point in the economic impact assessment process that the effect of an action on small businesses is taken into account. However, since the food labeling proposal which affects bakery products as well as other foods, to which you referred, was published prior to Executive Order No. 11821, no economic impact assessment of this proposed action was done. Nevertheless, this is not to say that Executive Order No. 11518 was not fulfilled. This order does not require the formal documentation that is required by Executive Order 11821 and the ensuing OMB Circular No. A-107. For example, see Section 2 of Executive Order No. 11518. Attached is a copy of the current FDA guidelines for the preparation of inflation impact assessments and analyses.

INFLATION IMPACT GUIDELINES

[Memorandum]

To: Bureau Directors; Director, NCTR.

From: Assistant Commissioner for Planning and Evaluation (HFP-1), Department of Health, Education, and Welfare, Public Health Service, Food and Drug Administration.

Date: June 16, 1976.

Subject: Revised Inflation Impact Guidelines.

On April 8, 1976, the Department of Health, Education, and Welfare issued final inflation impact guidelines as approved by the Office of Management and Budget. In line with this event, the attached guidelines immediately replace the interim guidelines issued on December 17, 1975. However, Tab B of the interim guidelines should be retained as it provides examples of inflation assessments (IIA's) and copies of Executive Order No. 11821 and OMB Circular No. A–107. The enclosed guidelines are essentially the same as the previous guidelines except for the following differences, which primarily deal with the inflation impact criteria:

The cost criterion has been modified by adding the caveat that the per unit cost or price increase must be one percent or more. This is in addition to the previous requirement of a total impact on industry, government, and consumers exceeding $100 million in any one year or an impact on any one industry exceeding $80 million in any one year.

The productivity criterion has been tied more closely to the cost criterion. The new threshold for the productivity criterion is productivity decreases which require cost increases for industry, government and consumers which exceed $100 million in any one year in order to offset them and therefore maintain productivity. For example, the productivity threshold would be exceeded by a regulation

requiring a net addition of over 10,000 employees in public and private sectors to sustain current levels of production if these employees had an average salary of $10,000 (likewise 5,000 employees at an average salary of $20,000 etc.). The threshold in the previous (interim) guidelines was a net increase of 10,000 employees in public and private sectors in order to offset productivity decreases.

The supply criterion has been made more specific. It now reads that there is a shortage if there is a decrease of 3 percent or more in the supply of important services and/or materials provided that the change exceed $100 million (or 10,000 people) in any year, and provided that the change cannot be achieved without substantial disruption of services to consumers.

A new criterion has been added which deals with employment. Since the threshold is a decrease of approximately 90,000 workers, this criterion is not likely to be of importance for any regulations promulgated by FDA.

Finally, an opinion has been issued by General Counsel that a Notice of Opportunity for Hearing proposing the withdrawal of approved new human drug or new animal drug applications that will result in a change in regulations requires inflation impact review. These notices must contain the appropriate disclaimer if it has been determined that the action will not cause a major inflation impact, or the certification and summary of the inflation impact statement if it has been determined that the action will cause a major inflation impact. This opinion is a formalization of a policy which is already being followed, and, therefore, no increase in workload is expected to result.

GERALD L. BARKDOLL.

Enclosures.

INFLATION IMPACT GUIDELINES

Requirements for guidelines.-FDA is required to consider the inflation impact of its initiated legislative proposals and major rules and regulations. This requirement is founded on Executive Order 11821 of November 27, 1974, which ordered all executive branch agencies to consider the inflation impact of such actions.

OMB, on January 28, 1975, issued Circular No. A-107 which stated (1) that each of the agencies was to develop criteria for identifying initiatives which could have a major inflation impact and (2) that the areas of inflation impact of concern were: costs and prices of goods and services, competition, productivity, supplies of important materials, employment and energy consumption.

HEW, as the agency responding to OMB, on April 1, 1975, issued interim guidelines for conducting inflation impact review. Then, on April 8, 1976, the Department issued final guidelines as approved by OMB. These final Department guidelines emphasize, as did the interim guidelines, that the requirement for evaluating inflation impact is for information only. The review is not a clearance process and the documentation requirements are solely to ensure that the possible mitigation of inflation impact has been considered. The interim Department guidelines provided the framework within which FDA issued initial guidelines on May 15, 1975. Modifications of the interim guidelines by the Department as well as experience gained by FDA in the inflation impact review process led to the need for developing and issuing revised Agency guidelines on December 17, 1975. The Agency guidelines herein are a consequence of the issuance of final guidelines by the Department.

Overview of guidelines.-The purposes of issuing these guidelines are to explain the process for internal FDA use in complying with this Agency's responsibilities for inflation impact review of proposed regulations, and to clarify the working relationships of the Bureaus and various units in the Office of the Commissioner in this process. Guidelines for proposed legislation are issued separately. The inflation impact review process is diagrammed in Exhibit 1 and explained in detail in the following sections of these guidelines. The process is briefly summarized in the following paragraph.

All agency regulations and proposed rulemakings subject to Executive Order 11821 are required to be assessed for possible inflation impact prior to publication in the Federal Register. Criteria developed by HEW are used in the assessment to determine whether or not the proposed action has a major inflation impact. If the proposed action is estimated to not cause a major inflation impact, then the rationale for that determination is formalized in written Inflation Im

1 For ease of discussion, the word "Bureaus", when used herein, includes Bureaus and NCTR.

26-915 O 78-3

pact Assessment (IIA) which is referenced in the preamble to the proposal and made publicly available through the Hearing Clerk's office. If the proposed action is estimated to cause a major inflation impact then: the Department must be notified; an Inflation Impact Statement (IIS) including cost/benefit analyses of alternatives must be prepared; a certification of impact is included in the Federal Register notice with the proposal; the IIS is made publicly available through the Hearing Clerk's office; and both a summary of the IIS and a copy of the proposal is sent to the Council on Wage and Price Stability (CWPS) for information. During the comment period and prior to publication of a final order a determination is made as to whether to revise, amend, or leave unchanged the IIA or IIS.

This memorandum is organized to present these guidelines as clearly and completely as possible. The main body describes the process for reviewing inflation impact within FDA procedurally and organizationally, and defines the various responsibilities in the review. Tab A, A Guide for Assessing Inflation Impact, offers a number of "rules of thumb" for early identification of those proposals which could have a major inflation impact. Tab B defines and illustrates the format to be used in preparing Inflation Impact Assessments and Tab C contains the final guidelines issued by HEW on April 8, 1976.

Identifying actions requiring inflation impact assessments (IIA's) or statements (IIS's).-All regulatory actions of the Agency published in the Federal Register do not require inflation impact review. This section of the guidelines speaks to the definition of which actions are included for review and for those reviewed actions which are major and which are not.

Identify Items with Purview of Inflation Impact Review.-Executive Order 11821 and OMB Circular A-107 speak exclusively to proposed Agency initiatives as being evaluated for inflation impact. Consequently, many actions taken by the Agency, even where they may appear in the Federal Register, do not require inflation impact review. These excluded items include:

Emergency actions pertaining to public health or safety (e.g., a recall). Budgetary proposals, internal administrative actions, individual grant or contract awards, or individual enforcement actions pursuant to existing regulations.

Legislative proposals not initiated by HEW (e.g., the Medical Device bill). Technical changes and updating of regulations not involving substantive changes in requirements, and revocation of obsolete regulations. (For example, a proposal to delete a regulation may be published concurrently with a notice of opportunity for a hearing on withdrawal of a new animal drug application. Revocation of the regulation is merely to remove a regulation which will become obsolete when the application is withdrawn. In addition, occasionally existing regulations are revised to ease requirements to the affected industry through the proposal route.)

Changes in regulations which do not go through a "proposal" phase. (For example, New Animal Drug Applications, where approved, constitute changes in regulations where the change has not been proposed through the Federal Register. Such actions are entirely excluded from inflation impact review. Likewise, action taken on a petition which has not been published as a proposal in the Federal Register does not need to be reviewed for inflation impact.)

All proposals published prior to November 27, 1974, the date of the Executive Order. The Executive Order is not retroactive, and speaks only to proposals, so this exemption applies also to Final Orders where the proposal was published prior to November 27, 1974.

The above exclusions are of a general nature and apply to the Agency as a whole. Individual Bureaus may have unique actions which do not easily fit these general categories, and are not normally considered to be true proposed regulations. Such actions may qualify as exclusions and the Bureau may contact OPE for advice. The General Counsel will be contacted in the more difficult cases where a determination of exclusion cannot readily be made.

2

There is a large group of item specifically included in inflation impact review. These include proposed regulations and proposed legislation initiated by the Agency, petitions submitted to the Agency, and every Notice of Opportunity for

2 Guidelines covering legislative proposals are published separately.

3 The General Counsel is preparing a notice which will require most sponsors of voluntarily submitted petitions to submit data for use in inflation impact review. This action would not absolve the Agency from considering inflation impact, but would shift the burden of data collection to outside parties.

Hearing proposing withdrawal of an approved new human drug or new animal drug applications that will result in a change in regulations. The latter is true even though the proposed Agency action in the Notice is not one that may be modified subsequently by comments received from the public but is determined by statutory requirements. The reasoning behind this is covered below under the discussion of inflation impact statements (IIS's). The remainder of this paper concerns only proposed regulations except for this discussion of a Notice of Opportunity for Hearing in the context of an IIS for the withdrawal of a new drug or new animal drug application.

Apply Inflation Impact Criteria.-The assessment of inflation impact should be completed by the time a first draft of a proposal is available. The Bureau initiating the proposal should apply the inflation impact criteria (defined below) to determine if the proposal would cause a major inflation impact. It is desirable to take this step relatively early in a proposal's development to identify and consider less costly alternatives, if necessary, and to minimize the risk of delay in the proposal's publication due to the requirement for a determination of inflation impact. This is particularly important for any proposal with a potential major inflation impact, because experience has shown that the underlying analysis may be quite time consuming.

The criteria to be used in inflation impact review appear below. Should any one of these criteria be met the impact is major and an IIS would be required. The definition of an industry is based on the Standard Industrial Classification (S.I.C.) code at the level of the fourth digit. In Tab A. Table A-1 of Appendix A provides lists of S.I.C. code classified industries which are regulated by the Agency. The six HEW defined criteria are:

1. Cost (or price) increases to industry, government, and consumers where the total impact exceeds $100 million in any one year or the impact on any one industry equals or exceeds $80 million in any one year, provided that the per unit cost or price increase is one percent or more.

2. Decreases in productivity which lead to cost increases equivalent to those specified in the cost criterion of 1. above; these cost increases would result from additional public and private sector costs necessary to sustain current levels of production.

3. Substantial changes in the competitive structure of an industry with value of shipments exceeding $100 million annually.

4. Shortages of supply in excess of 3 percent of important services and/or materials provided that the change exceeds $100 million (or 10,000 people) in any year, provided that the change cannot be achieved without substantial disruption of services to consumers.

5. Decreases in employment in any year of one-tenth of one percent of the United States work force (one-tenth of one percent is equivalent to about 90,000 workers).

6. Increases usage or decreases availability of energy (i.e., electricity, fuel oil, gasoline, coal, or natural gas) by one-tenth of one percent or more of annual domestic usage in any year.

Tab A also provides a useful reference for readily applying criteria to proposals to approximate the magnitude of impact involved. Should the Bureau's review find that a proposal is likely to cause a major inflation impact, the Office of Planning and Evaluation should be notified immediately. (The Economic Analysis Group is the contact point.) OPE will notify appropriate elements in HEW as required of the possibility of a major inflation impact.

Preparing to publish the proposal.-A proposal cannot be cleared for publication in the Federal Register until the inflation impact review is completed and documented. Each proposal as it is sent to the Office of the Commissioner for review must be accompanied by one of two reports: an Inflation Impact Statement (IIS), where a major inflation impact has been found, or an Inflation Impact Assessment (IIA), where there is no major inflation impact. These two documents may be differentiated in several ways.

An IIS represents a thorough analysis of the precise costs and benefits which are associated with a proposal. Alternatives to the proposal must be compared with it within the framework of cost/benefit analysis. The precise form, content, and depth of each such evaluation will necessarily depend on individual circumstances OPE will provide assistance as desired by the Bureau. An IIS is viewed as a justification of the proposal in spite of its causing a major impact after feasible alternatives have been considered.

An IIA, on the other hand, is only intended to explain how the Agency determined that a proposal would not cause a major inflation impact (even though it may cause some) as defined in the various criteria. Consequently, it is basically limited to discussions of each of these criteria, and why the particular thresholds have not been met. It does not consider any benefits that may be derived from implementing the proposal.

The responsibility of preparing these reports rests with the Bureaus. OPE would welcome opportunities to assist the Bureaus as they prepare IISS and IIAS by providing technical assistance in areas of methodology, data availability and review. The OPE contact, who may be reached at 443-6252, is Gail Updegraff. The procedures to be followed when preparing an IIS or IIA are discussed briefly below (see also again Exhibit 1).

Procedures for Proposals Causing a Major Inflation Impact.-The formal procedure for handling proposals which meet one or more of the inflation impact thresholds, thereby requiring the preparation of an IIS, entails five basic steps. 1. Notify HEW: The HEW guidelines require that the Department be notified when the Agency has determined that a proposal will cause a major inflation impact. OPE will notify the Department.

2. Conduct Analysis and Prepare IIS: The Bureau and OPE (if desired by the Bureau) will undertake a cost/benefit analysis of the proposal and alternatives to it. This analysis should include a discussion of income distribution impacts for each of the inflation impact criteria whose threshold is exceeded. That is, there should be an identification of these impacts by appropriate grouping of affected persons (income class, level of government, etc.). In addition, even though an action is required by law and therefore involves no exercise of discretion (e.g., the banning of DES under the Delaney Amendment), a major impact may justify a proposal to eliminate or modify the law. If a decision is made to prepare such a proposal, then the IIS should be completed in time to accompany the proposal without delaying the action. A report, the IIS, shall be prepared.

3. Proposal Submission: The Bureau's transmission to the Office of the Commissioner of a proposal causing a major inflation impact shall include a certification, a summary of the IIS in the preamble, and a copy of the IIS. The Action Memorandum shall state that a major inflation impact would be caused, and reference the summary of the IIS in the preamble.

The certification shall read, "It is hereby certified that the economic and inflation effects of this proposal have been carefully evaluated in accordance with Executive Order No. 11821." The Federal Register of October 20, 1975, stated the requirement that this statement shall appear in the proposal directly above the signature of the authorizing official.

The preamble and Action Memorandum shall include a summary of the IIS directly following the discussion of environmental impact. The introduction to the summary shall say, "The Commissioner has carefully considered the inflation impact of the proposed regulation, and a major inflation impact has been found, as defined in Executive Order 11821, OMB Circular A-107, and guidelines issued by the Department of Health, Education, and Welfare. Copies of the Inflation Impact Statement are on file with the Hearing Clerk, Food and Drug Administration." Following this statement will be a synopsis of conclusions from the IIS, much like the executive summaries of many reports.

The Bureau shall include a copy of the IIS with the proposal.

4. Place IIS on file with Hearing Clerk. The Bureau shall incorporate in the IIS revisions made during review by the Office of the Commissioner and forward the final IIS to the Hearing Clerk.

5. Send a Summary of IIS and Proposal to CWPS: OPE will send copies of the IIS Summary and proposed regulation to the Council on Wage and Price Stability, as required by OMB Circular A-107.

Procedure for Proposals Not Causing a Major Inflation Impact. The procedure to be followed for proposals not causing a major inflation impact and which therefore only require IIAs is comprised of three basic steps, discussed below. 1. Prepare IIA: Each proposal is assessed against the six threshold criteria. The results are documented as an IIA (see Tab B for format). However, there is an option the Bureaus may wish to pursue which could alleviate some of the burden of IIA preparation and at the same time, in the opinion of General Counsel keep the Agency fully responsive to the requirements expressed in the Executive Order. Bureaus may identify categories of proposed regulations which, by their very nature, could not have inflationary consequences. Here, the Bureau may prepare a "blanket" IIA describing why actions of this type would have no infla