Cost Recovery in Discipline Matters: Philosophies & Approaches

1. 2007 Annual Conference Cost Recovery in Discipline Matters: Philosophies & Approaches Moderator: Lori Long

2. 2007 Annual Conference Concepts & Philosophies Bruce G. Matthews, P.Eng. Professional Engineers Ontario

3. Overview • Cost awards vs. fines • Types of costs • Punishment versus indemnification • Philosophies and frameworks • Six cost award philosophies • Look to your enabling legislation Council on Licensure, Enforcement and Regulation

4. Cost Awards versus Fines • Governing legislation / regulations / rules will determine if fines and/or cost awards can be imposed • Fines typically seen as a sanction • Fines paid to the general treasury • Cost awards typically seen as indemnification • Cost awards paid to the College / Board Council on Licensure, Enforcement and Regulation

5. Types of Costs • Types of costs to be recovered • Legal counsel – prosecution / defence / ILC • Witness expenses (travel) • Expert witnesses (report preparation, testimony, travel) • Investigation costs (staff) • Discipline Panel costs (travel, stipend) • Facilities costs • Etc. Council on Licensure, Enforcement and Regulation

6. Punishment versus Indemnification • Cost awards should not be used as a punishment (i.e., general or specific deterrent) • Fines can serve as a deterrent • Cost awards should be viewed as providing a level of indemnification • Extent of cost award is a function of the philosophy followed by the College / Board Council on Licensure, Enforcement and Regulation

7. Philosophies • Loser Pays • Cost of Doing Business • Extreme Circumstances • Proportionate to Outcome • Discipline Panel Discretion • “User Pays” Council on Licensure, Enforcement and Regulation

8. Loser Pays • The “losing” side pays the costs of the “winning” side • Simple and straightforward • Risk of large cost award may affect the parties’ approach to the proceedings • Significant issues re: fairness Council on Licensure, Enforcement and Regulation

9. Cost of Doing Business • Each side pays its own costs regardless of the outcome (i.e., no cost awards) • Simple and straightforward • Allows parties to focus on issues • Favours parties with deeper pockets Council on Licensure, Enforcement and Regulation

10. Extreme Circumstances • Costs awarded only in situation where a party has acted unreasonably and delayed or extended the proceedings • Requires subjective assessment • Requires submissions by the parties • Provides incentive to meet deadlines and “play by the rules” Council on Licensure, Enforcement and Regulation

11. Proportionate to Outcome • Cost award is a function of the level of “success” of each party • Fairer in view of “partial win” by either party • Requires subjective assessment • Requires submissions by the parties Council on Licensure, Enforcement and Regulation

12. Discipline Panel Discretion • Amount and rationale for a cost award is at the complete discretion of the Discipline Panel • Parties make submissions / argument with respect to costs • Risk of inconsistent awards / rationale • Risk of prior decisions on cost being seen as precedent Council on Licensure, Enforcement and Regulation

13. User Pays • …which is the subject of the next speaker, Diane Kiesling… Council on Licensure, Enforcement and Regulation

14. A Final Note… • It is possible to blend elements of these individual philosophies to create an approach to cost awards that acknowledges local differences and constraints • Consistency is key Council on Licensure, Enforcement and Regulation

15. Speaker Contact Information Bruce G. Matthews, P.Eng. Manager, Complaints & Discipline Professional Engineers Ontario 25 Sheppard Avenue West, Suite 1000 Toronto, Ontario M2N 6S9 T: 416-840-1076 F: 416-224-9974 E: bmatthews@peo.on.ca Council on Licensure, Enforcement and Regulation

16. 2007 Annual Conference “User Pays - A Philosophyfor Cost Recovery” Diane K. Kiesling, Asst. General Counsel Florida Department of Health

17. Authority for Cost Recovery • No matter what the cost recovery scheme, there must be legislative authority if there is to be any cost recovery • Cost recovery is indemnification, not a penalty • User pays, not loser pays, is one cost recovery philosophy that is widely embraced by regulatory agencies Council on Licensure, Enforcement and Regulation

18. Uttility Rate Structure Analogies • Total Cost Pricing means total cost for the services is recovered from the users through some combination of base rates and consumption or user fees. • Total Cost Pricing or Full Cost Pricing fits well with the philosophy as User Pays in the context of disciplinary proceedings. Council on Licensure, Enforcement and Regulation

19. Total Costs • Total Cost of Service includes salaries, infrastructure, benefits, utilities, administrative time, and support staff • Total Cost of Service is recovered, in the utility setting, through base rates and consumption rates Council on Licensure, Enforcement and Regulation

20. Rates • Base Rate is the rate each customer pays no matter what he or she uses and it represents the customer’s proportionate share of total costs and a basic consumption allocation (analogous to fees). • Consumption or user rate is for consumption over the base allowed consumption included in the base rate (analogous to excess expenditures required by disciplinary proceeding). Council on Licensure, Enforcement and Regulation

21. User Pays Philosophy • Multidisciplinary regulatory agency – Issues • How is each Board financed? • How does each Board account for costs? • Must each Board operate in the black? • Are cross-subsidies between Boards prohibited? • Are deficits subsidized by other fees? Council on Licensure, Enforcement and Regulation

22. Multidisciplinary regulatory agency cont. • Multidisciplinary regulatory agency – Opportunities • To share staff, information technology and infrastructure • To achieve economies of scale thereby reducing expenditures • Consistency of certain policy decisions Council on Licensure, Enforcement and Regulation

23. Cost Recovery Dilemma • Multidisciplinary regulatory agency dilemma when the cost of operation and disciplinary proceedings exceed the fees the Board collects • If cost of discipline forces expenditures above fees collected, Board has two choices – • Increase fees or levy a special assessment • Assess costs of disciplinary proceeding Council on Licensure, Enforcement and Regulation

24. User Pays for All Agencies • Except for issues of cross subsidies between Boards and the loss of some opportunities for economies of scale, the philosophy of user pays applies favorably no matter what type of licensure regulatory agency Council on Licensure, Enforcement and Regulation

25. What are Costs? • Are costs static or dynamic? • Must be dynamic if they are going to approximate the actual costs of investigation and prosecution of the case. • Why? Simply, the expenditures for things that make up the costs of investigation and prosecution of a case change over time and must be correctly reflected using generally accepted accounting principles. Council on Licensure, Enforcement and Regulation

26. What are Costs cont. • Costs are generally calculated by plugging the identified expenditures into a formula or methodology that assigns a specific value of costs to the time of the people who do the designated work. • Requires the workers to account for time spent on each case with particularity • Accountability and transparency Council on Licensure, Enforcement and Regulation

27. Why Assess Costs to the User? • Sends better price signals to the users • Promotes equity • Reduces subsidies Council on Licensure, Enforcement and Regulation

28. Send Better Price Signals • Without full cost pricing, user lacks a rational economic signal to guide decision making. • Under recovery of true costs may lead to over consumption. No recovery is guaranteed to do so. • Better balancing signal vs. chilling effect. Council on Licensure, Enforcement and Regulation

29. Balance Against Chilling Effect • Any chilling effect is balanced against appropriate price signals to make reasonable decisions, conserve costs where possible, use time and expenses wisely, all as a hedge against the possibility that a cost assessment will be entered. Council on Licensure, Enforcement and Regulation

30. Promote Equity • Equity among licensees • Fees should cover the costs of professional regulation; and • The investigation of complaints that are not found to warrant further action. • All licensees have an interest in overall regulation, reputation and integrity of profession • Exonerated licensee Council on Licensure, Enforcement and Regulation

31. Subsidies • Who is subsidized and who pays subsidies? • There are some disciplinary systems that are 100% subsidized from fees and/or some general revenue • There are some that are partially subsidized from the same sources • No cost recovery system is completely free of subsidies. Every subsidy has winners and losers. Council on Licensure, Enforcement and Regulation

32. Promte Equity cont. • Equity among all beneficiaries • Suitable pricing ensures that the costs of various services are equitably borne by the beneficiaries of the services. • Fees should not finance a disciplinary case for a licensee who has run afoul of practice standards. The user or beneficiary should pay those costs. • Makes users (abusers) more accountable to all other licensees. Council on Licensure, Enforcement and Regulation

33. Distributional Consequences of Subsidies • Perpetuate dependence • Both reward and perpetuate inefficiency • Reduce incentives for cost control • Require outside resources Council on Licensure, Enforcement and Regulation

34. Subsidies Perpetuate Dependence • Subsidies provide no incentive to alter consumption or use patterns • Depend on existing systems in decision making Council on Licensure, Enforcement and Regulation

35. Subsidies Reward and Perpetuate Dependence • Lack of the threat of cost recovery order provides no impetus to make reasonable decisions, conserve costs where possible, or use time or expenses wisely. • Whether a subsidy is viewed as a reward or a perpetuation of dependence is a function of which side of the expenditure you are on. Council on Licensure, Enforcement and Regulation

36. Subsidies Reduce Incentives for Cost Control • Subsidies remove incentives for cost control from both sides of the disciplinary case. • The agency knows that it has no accountability, therefore no cost control incentive. • The licensee in the disciplinary case knows that no cost recovery order is possible, so has no incentive to conserve costs. Council on Licensure, Enforcement and Regulation

37. Subsidies Rely on Outside Funding • If the cost of a disciplinary case is not borne primarily by the licensee who caused the case, then the costs must be subsidized by outside resources, either fees or general revenue (taxes) or special assessments if there is a budget shortfall. • If there is inadequate cost recovery, and inadequate subsidization, quality must go down. Council on Licensure, Enforcement and Regulation

38. What Does User Pays Mean for the Agency • Change the accounting system • Legislative changes • Accountability and transparency • Need for more efficiency and economies of scale • Increase in revenues to the Board • Greater incentives for cost control Council on Licensure, Enforcement and Regulation

39. What does User Pays Mean to Licensee? • Change Perspective • Increase efficiency • Change decision making paradigm • Consider costs and cost control when weighing strategy and risk. Council on Licensure, Enforcement and Regulation

40. Need for Research • No research has been done to determine if the benefits of subsidies outweigh the drawbacks in this setting, but philosophically, based on utility regulatory research, the answer should be Yes. Council on Licensure, Enforcement and Regulation

41. How much does the User Pay? • User Pays is a philosophy of full cost recovery, not marginal cost recovery • If the user used all or part of the disciplinary proceedings and did not prevail on all of the issues, the agency expended all of the resources on the case and should recover all those expenditures. Council on Licensure, Enforcement and Regulation

42. Reducing Costs? • If legislative authority gives the Board the discretion to assess less than all the costs, then it may do so, but it is not a court of equity. • The exercise of discretion can be based on any reasonable evidence before the board. Council on Licensure, Enforcement and Regulation

43. Splitting Costs? • If the Board has discretion, then it can also split costs, but not because there is any “entitlement” to a reduction based on some prorated formula of counts won or lost. • Strong argument against discretionary prorating is that it is a slippery slope- based on counts or seriousness of counts or some combination or ability to pay. Council on Licensure, Enforcement and Regulation

44. Ability to Pay • Ability to pay should not be a consideration in assessing costs. • Reducing cost assessment compromises appropriate price signals. Council on Licensure, Enforcement and Regulation

45. Subsidy for Needy Licensees • If subsidy is required for a needy licensee to pay cost recovery assessment • Payment on terms • Suspend some portion of assessment for social equity and need, after assessment • Why? • Sends price signal independent of ability to pay rather than resource prices below cost. Council on Licensure, Enforcement and Regulation

46. Proportionate Cost of User Pays • User Pays is proportionally more costly to some consumers than others based on income. • Society favors subsidies to ensure all citizens have access, then subsidies untied to use may be needed in some instances. That is policy decision. Council on Licensure, Enforcement and Regulation

47. Practical Standpoint • Ability to pay costs is a function of potential costs and income. That explains why the number of cases that are litigated is so much higher in the professions with traditionally higher incomes. Council on Licensure, Enforcement and Regulation

48. What to do if the User Can’t Pay • Civil Judgment • Enforcement of Final Order and more discipline • Extended payment plan Council on Licensure, Enforcement and Regulation

49. User Pays is Just One Philosophy • Need an open and participatory process and dialogue without an agenda among states to help examine and establish a greater consistency in philosophical approaches to cost recovery, encourage efficiency, accountability, and transparency to the maximum extent possible for the benefit of all licensees. Council on Licensure, Enforcement and Regulation

50. Speaker Contact Information • Diane K. Kiesling Assistant General Counsel Florida Department of Health Prosecution Services Unit 4052 Bald Cypress Way, Bin #C-65 Tallahassee, FL 32399-3265 T: (850) 245-4640 Ext. 8127 F: (850) 245-2480 Council on Licensure, Enforcement and Regulation