82 FR 57830 - Extra-Schedular Evaluations for Individual Disabilities

DEPARTMENT OF VETERANS AFFAIRS

Federal Register Volume 82, Issue 235 (December 8, 2017)

The Department of Veterans Affairs (VA) amends its adjudication regulation pertaining to extra-schedular consideration of a service-connected disability in exceptional compensation cases. This rule clarifies that an extra-schedular evaluation is to be applied to an individual service-connected disability when the disability is so exceptional or unusual that it makes application of the regular rating schedule impractical. An extra-schedular evaluation may not be based on the combined effect of more than one service-connected disability. For the reasons set forth in the proposed rule and in this final rule, VA is adopting the proposed rule as final, with two changes, as explained below.

[Federal Register Volume 82, Number 235 (Friday, December 8, 2017)]
[Rules and Regulations]
[Pages 57830-57835]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-26523]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 3

RIN 2900-AP48


Extra-Schedular Evaluations for Individual Disabilities

AGENCY: Department of Veterans Affairs.

ACTION: Final rule.

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SUMMARY: The Department of Veterans Affairs (VA) amends its 
adjudication regulation pertaining to extra-schedular consideration of 
a service-connected disability in exceptional compensation cases. This 
rule clarifies that an extra-schedular evaluation is to be applied to 
an individual service-connected disability when the disability is so 
exceptional or unusual that it makes application of the regular rating 
schedule impractical. An extra-schedular evaluation may not be based on 
the combined effect of more than one service-connected disability. For 
the reasons set forth in the proposed rule and in this final rule, VA 
is adopting the proposed rule as final, with two changes, as explained 
below.

DATES: 
    Effective Date: This rule is effective January 8, 2018.
    Applicability Date: The provisions of this final rule shall apply 
to all applications for benefits that are received by VA on or after 
January 8, 2018 or that are pending before VA, the United States Court 
of Appeals for Veterans Claims, or the United States Court of Appeals 
for the Federal Circuit (Federal Circuit) on January 8, 2018.

FOR FURTHER INFORMATION CONTACT: Nora Jimison, Policy Analyst, 
Regulations Staff (211D), Compensation Service, Department of Veterans 
Affairs, 810 Vermont Avenue NW., Washington, DC 20420, (202) 461-9700. 
(This is not a toll-free telephone number.)

SUPPLEMENTARY INFORMATION: On April 20, 2016, VA published in the 
Federal Register (81 FR 23228) a proposed rule to amend its regulation 
at 38 CFR 3.321(b)(1) in order to clarify its long-standing 
interpretation that the regulation provides an extra-schedular 
evaluation for a single service-connected disability, and not for the 
combined effect of two or more service-connected disabilities. Section 
501 of title 38, United States Code, provides VA with the authority to 
interpret its own regulations under its general rulemaking authority. 
Menegassi v. Shinseki, 638 F.3d 1379, 1382 (Fed. Cir. 2011). VA had 
already proposed to clarify section 3.321(b)(1) as part of a regulation 
rewrite project in 2013; however, a subsequent decision by the Federal 
Circuit held that section 3.321(b)(1) required VA to consider the 
combined effects of two or more service-connected disabilities when 
determining extra-schedular evaluations. Johnson v. McDonald, 762 F.3d 
1362, 1365-66 (Fed. Cir. 2014), rev'g 26 Vet. App. 237 (2013). This 
decision conflicts with VA's longstanding interpretation of section 
3.321(b)(1), and VA therefore decided to amend the regulation in a 
separate rulemaking to clarify its interpretation of the regulation.
    Interested persons were invited to submit comments to the proposed 
rule on or before June 20, 2016, and 11 comments were received. Those 
comments have been organized according to topic in the discussion 
below.

I. Separation of Powers

    A commenter stated that VA's rulemaking to overturn Johnson is a 
violation of the constitutional doctrines of separation of powers and 
due process. We disagree. ``A court's prior judicial construction of a 
statute trumps an agency construction . . . if the prior court decision 
holds that its construction follows from the unambiguous terms of the 
statute and thus leaves no room for agency discretion.'' National Cable 
& Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 982 
(2005). The Federal Circuit, however, held in Johnson that the language 
of prior 38 CFR 3.321(b)(1), not a statute, was ``unambiguous'' and 
``consistent with language of [38 U.S.C.] Sec.  1155 authorizing the 
regulation.'' 762 F.3d at 1365-66. Where a court decision is based on 
interpretation of an agency regulation, the agency may undertake 
rulemaking to revise the regulation to change or clarify the intended 
meaning of the regulation. See National Org.

[[Page 57831]]

Veterans' Advocates, Inc. v. Secretary of Veterans Affairs, 260 F.3d 
1365, 1374 (Fed. Cir. 2001). Section 1155 of title 38, United States 
Code, authorizes VA to ``adopt and apply a schedule of ratings of 
reductions in earning capacity from specific injuries or combination of 
injuries . . . based, as far as practicable, upon the average 
impairments of earning capacity . . . in civil occupations.'' The 
statute does not mention an extra-schedular evaluation, but rather 
leaves it to VA's discretion to determine when it is not practicable to 
assign a rating based upon loss in average earning capacity, and 38 CFR 
3.321(b)(1) explains when VA will do so. We therefore do not believe 
that amendment of the regulation violates separation of powers or due 
process.

II. Conflict With 38 U.S.C. 1155

    Four commenters stated that amended section 3.321(b)(1) contradicts 
38 U.S.C. 1155. One commenter stated that, by limiting an extra-
schedular evaluation to an individual rating, an adjudicator is barred 
from considering a veteran's average earning impairment resulting from 
a veteran's ``injuries'' and instead must look to the impairment of 
each injury. Another commenter stated that the amended rule would 
render the term ``combination of injuries'' in section 1155 
superfluous. A third commenter stated that the regulation is 
inconsistent with the plain language of the statute because it applies 
to a single disability and as a result, the rule will have no 
controlling weight. The fourth commenter stated that the regulation 
should compensate for ``average impairments of earning capacity'' as 
provided in section 1155 rather than ``actual impairment of earning 
capacity'' as provided in amended section 3.321(b)(1).
    The rule does not contradict or misinterpret 38 U.S.C. 1155. As 
explained above, section 1155 authorizes VA to ``adopt and apply a 
schedule of ratings of reductions in earning capacity from specific 
injuries or combination of injuries. The ratings shall be based, as far 
as practicable, upon the average impairments of earning capacity . . . 
in civil occupations.'' VA has specified how its rating schedule will 
be applied to determine average impairments in earning capacity due to 
combinations of injuries. Under the table in 38 CFR 4.25, the ratings 
for each disability which are based upon the average earning impairment 
are combined and a rating is assigned for the combined effect of the 
disabilities. Thus, the terms ``injuries'' and ``combination of 
injuries'' in section 1155 are not rendered superfluous as a result of 
revised section 3.321(b)(1). Further, section 1155 states that 
``ratings shall be based, as far as practicable, upon the average 
impairments of earning capacity.'' VA's rule provides for discretion in 
cases where the schedule is inadequate to compensate for average 
impairment of earning capacity. Therefore, the regulation is not 
inconsistent with the statute.
    We disagree with the comment that section 3.321(b)(1) must 
compensate for impairment of ``average earning capacity.'' Rather, as 
the commenter acknowledges, an extra-schedular evaluation is intended 
for ``the exceptional case where the schedular evaluation,'' which is 
based on average earning capacity, ``is inadequate.'' Section 1155 
states that the rating schedule is to be ``based, as far as 
practicable, upon the average impairments of earning capacity.'' By its 
terms, the statute leaves to VA's discretion situations where use of a 
schedule based on average impairments is not practical or feasible. 
Pursuant to this authority, VA has promulgated section 3.321(b)(1) 
allowing for an extra-schedular evaluation in cases in which 
application of the regular schedular standards is impractical because 
the veteran's disability is so exceptional or unusual due to such 
related factors as marked interference with employment or frequent 
periods of hospitalization. In clarifying its longstanding policy in 
the amended regulation, VA will continue to look to the evidence to 
determine whether the veteran's service-connected disability causes 
factors such as marked interference with employment or frequent periods 
of hospitalization, rather than limiting a veteran to a schedular 
rating based upon average impairment of earning capacity.
    Another commenter stated that the regulation is inconsistent with 
the congressionally mandated statutory scheme, which is pro-veteran. As 
explained above, by its terms, 38 U.S.C. 1155 leaves to VA's discretion 
situations where use of a schedule based on average impairments is not 
practicable or feasible, i.e., where applying such a schedule would not 
result in a rating reflective of the true measure of disability. 
Because 38 CFR 3.321(b)(1) allows for an extra-schedular evaluation in 
cases where the disability is ``so exceptional or unusual due to such 
related factors as marked interference with employment or frequent 
periods of hospitalization'' as to render impractical the application 
of the regular schedular standards, we believe that the rule is 
consistent with title 38, United States Code, and is pro-veteran.
    As explained in the notice of proposed rulemaking, 81 FR at 23230, 
VA has limited extra-schedular consideration to individual disabilities 
in part due to the substantial difficulty that would accompany efforts 
to apply such consideration to the combined effects of multiple 
disabilities in a logical and consistent manner. A determination as to 
whether existing rating-schedule provisions are inadequate to evaluate 
a particular claimant's disability requires comparison of the 
manifestations of the claimant's disability with the types of 
manifestations listed in the applicable rating schedule provisions. 
Ratings for combinations of disabilities are determined by application 
of a standard formula in 38 CFR 4.25, and there are thus no provisions 
in the rating schedule describing impairments that would be associated 
with a particular combination of disabilities. Accordingly, VA 
adjudicators would have no objective standard for determining whether a 
particular combined rating is adequate or inadequate. Requiring 
adjudicators to consider the adequacy of combined ratings would lead to 
inconsistent and highly subjective determinations, and would likely 
cause delays in the adjudication of claims. These effects would in some 
respects be detrimental to claimants and to the effective operation of 
VA's claims-adjudication system.

III. VA's Interpretation of Prior Version of 38 CFR 3.321(b)(1)

    One commenter disputed VA's statement in the notice of proposed 
rulemaking that the Department has long interpreted 38 CFR 3.321(b)(1) 
to provide an extra-schedular evaluation for only one service-connected 
disability. The commenter cited to the dissenting opinion in the 
Veterans Court's Johnson decision, 26 Vet. App. at 257-58, regarding 
the regulatory language over time. 81 FR 23278.
    We respectfully disagree with the analysis of VA's interpretation 
of the regulation over time. As we stated in the notice of proposed 
rulemaking, VA, since 1936, has interpreted section 3.321(b)(1) to 
provide for an extra-schedular evaluation for each service-connected 
disability for which the schedular evaluation is inadequate based upon 
the regulatory criteria. The original rule which was promulgated in 
1930, R & PR 1307(B), required that a recommendation from a field 
office alleging that the rating schedule provides inadequate or 
excessive ratings in an individual case include a statement of findings 
regarding the

[[Page 57832]]

extent to which a veteran's actual reduction in earning capacity ``is 
due to the service-connected disability.'' The regulation includes only 
the single version of the word ``disability.'' The 1936 version of the 
rule, R & PR 1142, required a submitting agency to provide a 
recommendation ``concerning service connection and evaluation of every 
disability, under . . . the applicable schedules as interpreted by the 
submitting agency.'' This sentence was deleted from the regulation in 
1954, but was incorporated in the Department of Veterans Benefits 
Veterans Administration Manual 8-5 Revised, para. 47.j. (Jan. 6, 1958), 
to provide instruction for cases referred under VA Regulation 1142. The 
word ``every'' means ``[a]ll of a whole collection or aggregate number, 
considered separately, one by one; each, considered as a unitary part 
of an aggregate number.'' Every, Ballentine's Law Dictionary (emphasis 
added). Thus, for 28 years following promulgation of R & PR 1307(B) and 
(C), the VA predecessor regulations to 38 CFR 3.321(b)(1) and the 
Manual provided for an extra-schedular evaluation based upon the 
effects of a ``disability,'' not disabilities.
    The Federal Circuit has previously recognized that VA's 
interpretation of section 3.321(b)(1) is found in the VBA Manual. Thun 
v. Shinseki, 572 F.3d 1366, 1369 (Fed. Cir. 2009). As explained above, 
the 1958 Manual M8-5 Revised, para. 47.j., instructed that every claims 
folder forwarded for extra-schedular consideration ``will include a 
definite recommendation from the submitting agency concerning 
evaluation of every disability under the schedule as interpreted by the 
submitting agency with the diagnostic code.'' In 1992, VBA revised the 
VBA Manual by adding the word ``individual'' before the word 
``disability(ies)'' in paragraph 3.09, Submission For Extra-Schedular 
Consideration. M21-1, Part VI, para. 3.09 (Mar. 17, 1992), which 
required preparation of a memorandum to be submitted to Central Office 
``whenever the schedular evaluations are considered to be inadequate 
for an individual disability(ies).'' Thus, we believe that there is 
ample support for the statement that VA has long-interpreted section 
3.321(b)(1) and its predecessors as providing for an extra-schedular 
evaluation for a single service-connected disability that was not 
adequately compensated under the rating schedule.

IV. Coverage of Single Disability Under Amended Section 3.321(b)(1)

    Two commenters pointed out that section 3.321(b)(1) is intended 
``[t]o accord justice,'' and that the proposed rule is unjust and 
inequitable because it ignores the cumulative effects of multiple 
conditions on a veteran's earning capacity. See Johnson, 762 F.3d at 
1366. Another commenter stated that proposed section 3.321(b)(1) 
ignores the fact that a veteran may have multiple service-connected 
disabilities that combine to limit the veteran's ability to work or 
that combine to generate an actual condition worse than that 
contemplated by the disability schedule.
    The commenters mistakenly assume that VA may only ``accord 
justice'' if all service-connected disabilities are considered 
collectively for deciding entitlement to an extra-schedular evaluation. 
There is no dispute that 3.321(b)(1) accords justice by authorizing 
extra-schedular ratings based upon the effect of a service-connected 
disability upon an individual veteran rather than limiting the veteran 
to a schedular rating based upon average impairment of earning 
capacity. Also, the phrase ``[t]o accord justice'' is given context in 
section 3.321(b)(1) by the sentence that precedes it: ``[r]atings shall 
be based, as far as practicable, upon the average impairments of 
earning capacity with the additional proviso that the Secretary shall 
from time to time readjust this schedule of ratings in accordance with 
experience.'' The rule thus authorizes VA to assign ratings beyond 
those provided in the schedule even in advance of any necessary 
revision to the rating schedule. Further, there is a policy reason for 
limiting an extra-schedular evaluation under section 3.321(b)(1) to a 
single service-connected disability. As explained above, VA believes 
that the rule is consistent with the regulatory scheme, under which 
there is a distinction between application of the schedular criteria 
relating to specific disabilities and the application of the formula in 
38 CFR 4.25 for combining individual disability ratings.
    A commenter inquired about whether a veteran would be entitled to 
an extra-schedular rating for each service-connected disability. A 
veteran would be entitled to an extra-schedular rating for each 
service-connected disability that satisfies the criteria in the rule, 
i.e., (1) the schedular evaluation for the disability is inadequate; 
and (2) the disability is so exceptional or unusual due to related 
factors such as marked interference with employment or frequent periods 
of hospitalization.

V. Conflict Between Amended Section 3.321(b)(1) and Other VA 
Regulations

    One commenter stated that the rule appears to conflict with 38 CFR 
3.102, which provides that VA will ``administer the law under a broad 
interpretation.'' We do not believe that there is a conflict because, 
rather than limit a veteran to a schedular rating that is 
``inadequate,'' 38 CFR 3.321(b)(1) provides for an extra-schedular 
evaluation to account for an ``exceptional or unusual disability'' 
involving ``marked interference with employment or frequent periods of 
hospitalization.''
    One commenter wrote that the rule is inconsistent with VA's 
regulatory scheme for evaluating disabilities because it considers a 
disability in a vacuum, pointing to 38 CFR 4.10 regarding functional 
impairment and 38 CFR 3.383, which pertains to special consideration if 
a veteran has suffered loss of certain paired organs or extremities as 
a result of service-connected disabilities and non-service-connected 
disabilities.
    The regulations cited by the commenter do not support the comment. 
Section 4.10 states that ``[t]he basis of disability evaluations is the 
ability of the body as a whole . . . to function under the ordinary 
conditions of daily life including employment.'' The cited statement, 
however, falls within Subpart A of the Part 4 regulations, which 
provides ``regulations prescribing the policies and procedures for 
conducting VA medical examinations,'' which are not considered a part 
of the rating schedule because ``[t]he rating schedule consists only of 
those regulations that establish disabilities and set forth the terms 
under which compensation shall be provided.'' Martinak v. Nicholson, 21 
Vet. App. 447, 451-52 (2007) (citing 38 U.S.C. 1155); Vazquez-Flores v. 
Shinseki, 580 F.3d 1270, 1280 (Fed. Cir. 2009). ``Thus, . . . the 
effects of a disability on one's daily life . . . are not relevant to a 
disability rating made by a ratings specialist.'' Vazquez-Flores, 580 
F.3d at 1280. While section 4.10 and related regulations make clear 
that fully descriptive medical examinations are needed to facilitate 
application of VA's rating schedule, they do not alter the operation of 
the rating schedule, which provides for disability ratings to be 
assigned for each separate disability under the applicable criteria of 
the rating schedule.
    Section 3.383 of title 38, Code of Federal Regulations, implements 
38 U.S.C. 1160, which provides that, in certain cases of paired organs 
or

[[Page 57833]]

extremities in which a veteran has a non-service-connected disability 
attributable to one organ or extremity and a service-connected 
disability associated with the other organ or extremity, VA must pay 
compensation as if the combination of disabilities were the result of 
service-connected disability. Thus, Congress has specified the manner 
of considering the combined effects of these disabilities. Section 
3.321(b)(1), on the other hand, fills a gap in 38 U.S.C. 1155 providing 
the Secretary with authority to address instances in which the ratings 
for individual disabilities under the schedule are not practicable or 
feasible.
    One commenter stated that VA's proposed regulation does not take 
into account veterans who do not qualify for consideration of 
entitlement to a rating of total disability based upon individual 
unemployability (TDIU) under 38 CFR 4.16(b). The commenter states that 
a veteran may be forced to drop out of the workforce and apply for TDIU 
as a result of extra-schedular evaluations based upon a single 
disability.
    Section 3.321(b)(1) addresses a different issue than section 
4.16(a) and (b) were written to address. Section 3.321(b)(1) provides 
an exception to reliance upon a particular rating contained in the 
rating schedule where the schedule is determined to be inadequate in a 
particular case and examines the rating issue from the perspective of 
the schedule in rating a veteran's disability and provides adjustments 
to the schedule based on the veteran's disability. Section 4.16, on the 
other hand, looks at the situation from the perspective of the 
unemployability of an individual veteran. Under section 4.16(a) and 
(b), the deciding official looks at the overall impairment of a veteran 
to determine whether the veteran is employable regardless of the 
particular disability rating or combination of disability ratings 
awarded. Thus, section 3.321(b)(1) focuses on the schedule's failure to 
address the effect of a veteran's particular disability and the latter 
focuses upon the veteran's overall employability. Amending section 
3.321(b)(1) based on this comment would also render section 4.16 
superfluous because section 3.321(b)(1) could be the basis for a 100 
percent extra-schedular rating which would be equivalent to a TDIU 
rating.
    Another commenter stated that the combined ratings table is 
inadequate to compensate for the vast array of potential interactions 
between multiple disabilities. The commenter disputed VA's statement in 
the notice of proposed rulemaking that there is no mechanism for 
comparing the combined effects of multiple service-connected 
disabilities with the schedular criteria and contends, citing Yancy v. 
McDonald, 27 Vet. App. 484 (2016), that the Department can evaluate the 
combined effects of multiple disabilities and then compare those 
effects to the symptoms contemplated for individual disabilities.
    The commenter misunderstands VA's statement. In Johnson, the 
Federal Circuit held that referral for an extra-schedular evaluation 
``may be based on the collective impact of the veteran's 
disabilities.'' 762 F.3d at 1365. In Yancy, 27 Vet. App. at 495, the 
Veterans Court stated that the first step when considering entitlement 
to an extra-schedular evaluation is to decide whether the schedular 
evaluations reasonably contemplate the veteran's symptomatology, 
including any symptoms resulting from the combined effects of multiple 
service-connected disabilities. However, as VA explained in the notice 
of proposed rulemaking, there are no provisions in the rating schedule 
describing impairments associated with a particular combination of 
disabilities. 81 FR 23230. VA does not merely aggregate symptoms of a 
veteran's service-connected disabilities. Rather, VA evaluates the 
combined effects of multiple service-connected disabilities by 
``consider[ing] . . . the efficiency of the individual as affected 
first by the most disabling condition, then by the less disabling 
condition, then by other less disabling conditions, if any, in the 
order of severity.'' 38 CFR 4.25. As a result, it is not possible for 
the Department to determine for purposes of 38 CFR 3.321(b)(1) whether 
the rating derived from application of section 4.25 is ``inadequate'' 
to compensate for the combined effects of these disabilities. 81 FR 
23230.
    If, in a particular case, evidence indicated that two or more 
service-connected disabilities combined to produce a symptom the 
claimant believed was not adequately addressed by the rating criteria 
for any of the individual disabilities at issue, the claimant could, 
under this rule, seek extra-schedular ratings for the individual 
conditions and VA would be required to evaluate the medical evidence in 
determining whether the rating schedule was adequate to evaluate each 
disabling condition, but would not be required to separately determine 
whether the combined rating resulting from 38 CFR 4.25 was adequate to 
evaluate the combined effects of the multiple disabilities.

VI. Decision Maker on Extra-Schedular Claims

    A commenter stated that, to the extent that extraschedular 
evaluation of the combined effect of multiple disabilities may impose 
an additional burden on the Director of the Compensation Service, the 
decision should instead be made by regional offices (RO) and the Board 
of Veterans' Appeals. We agree that the ROs should make these fact-
intensive decisions in the first instance, and we have therefore 
revised the rule by eliminating the phrase ``upon field station 
submission'' and the word ``referred.''

VII. Section 3.321(b)(1) Criteria for Extra-Schedular Evaluation

    Three commenters criticized the proposed rule on the basis that it 
does not provide guidance about how to apply the proposed rule or to 
the Board about how to review the Director's finding.
    The standards for awarding an extra-schedular award are set forth 
in section 3.321(b) and have been included in the regulation since 
1961. See 38 CFR 3.321(B) (1961). Extraschedular consideration is a 
question of fact ``assessing a veteran's unique disability picture and 
whether that picture results in an average impairment in earning 
capacity significant enough to warrant an extraschedular rating.'' 
Kuppamala v. McDonald, 27 Vet. App. 447, 454 (2015). Current VBA 
procedures require the RO to submit a memorandum to the Director that 
includes the evidence used for the review, including the medical 
evidence in detail for each service-connected disability. M21-1, Part 
III, Subpart iv, chapt. 6, Sec.  B, para. 4.d. and h. (July 25, 2017). 
The question for the VA decision maker is whether a veteran's 
disability is ``exceptional or unusual'' because the disability 
``marked[ly] interfere[s] with employment or [causes] frequent periods 
of hospitalization.'' The Board's review of the matter is de novo and 
requires consideration of all evidence and information pertaining to 
whether the degree and frequency of an individual's veteran's 
disability interferes with employment or causes frequent periods of 
hospitalization. Kuppamala, 27 Vet. App. at 458-59.
    One commenter stated that, in Kuppamala, the Secretary admitted 
that there are no manageable standards for the assignment of an 
extraschedular rating. In fact, the Secretary argued in Kuppamala 
``there are no judicially manageable standards governing the Director's 
decision as to extraschedular ratings,'' which would make it

[[Page 57834]]

impossible for the Board to review the decision. Id. at 452 (emphasis 
added). The Veterans Court concluded, however, that 38 U.S.C. 1155 and 
38 CFR 3.321(b)(1) provide a judicially manageable standard. Id. at 
454.
    Another commenter stated that VA does not explain how it is 
possible to ``'ensure fair and consistent application of rating 
standards''' given that 38 CFR 3.321(b)(1) requires an initial finding 
that the ``schedular evaluation is inadequate.'' (Quoting 81 FR 23231). 
The rating standards to which VA referred relate to a determination 
about whether a veteran is entitled to an extra-schedular evaluation, 
and as explained in the notice of proposed rulemaking, VA believes that 
the Department is able to fairly and consistently apply rating 
standards if consideration under section 3.321(b)(1) is limited to 
whether a rating for an individual disability is adequate as opposed to 
deciding whether a combined rating based upon residual work efficiency 
is adequate to rate multiple service-connected disabilities.
    One commenter stated that the definition of the term ``disability'' 
in amended section 3.321(b)(1) is unclear and that an extra-schedular 
evaluation should be available for disability arising from a common 
disease entity or etiology. The commenter states that, if a veteran has 
a knee disability that causes both limitation or motion and 
instability, both effects of the disability should be evaluated 
together for purposes of entitlement to an extra-schedular rating.
    ``Words are not pebbles in alien juxtaposition; they have only a 
communal existence; and not only does the meaning of each 
interpenetrate the other, but all in their aggregate take their purport 
from the setting in which they are used.'' Shell Oil Co. v. Iowa Dep't 
of Revenue, 488 U.S. 19, 25 n.6 (1988) (quoting Nat'l Labor Relations 
Bd. v. Federbush Co., 121 F.2d 954, 957 (2d Cir. 1941)). Section 
3.321(b)(1) states that, ``[t]o accord justice to the exceptional case 
where the schedular evaluation is inadequate to rate a single service-
connected disability,'' an extra-schedular evaluation may be approved. 
The requirement that VA consider the adequacy of the schedular 
evaluation means that the term ``single service-connected disability'' 
refers to the individual condition for which the schedular evaluation 
is inadequate, rather than the effects of a disability, each of which 
may be rated individually before receiving a combined rating.
    Another commenter stated that the rule does not define ``actual 
impairment in earning capacity'' and posed a series of questions about 
how the term will be defined, e.g., whether a veteran must show loss of 
a certain amount of income as a result of the disability, and if so, 
how much of loss must the veteran suffer; whether inability to earn a 
higher level of income will suffice; and how will actual impairment in 
earning capacity be determined if a veteran is not employed. We have 
considered these comments and agree that an extra-schedular rating 
should be commensurate with the average rather than actual impairment 
of earning capacity due exclusively to the disability and we have 
revised the rule accordingly.

VIII. Comments Beyond Scope of Rulemaking

    A commenter criticized the algorithm used to combine disabilities 
in 38 CFR 4.25. Another commenter remarked on the inadequacy of the 
rates in 38 U.S.C. 1114, but acknowledged that this comment is beyond 
the scope of the rulemaking. These comments are beyond the scope of the 
rulemaking, and we therefore make no change based on these comments.

Executive Orders 12866 and 13563

    Executive Orders 12866 and 13563 direct agencies to assess the 
costs and benefits of available regulatory alternatives and, when 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, and other advantages; distributive impacts; 
and equity). Executive Order 13563 (Improving Regulation and Regulatory 
Review) emphasizes the importance of quantifying both costs and 
benefits, reducing costs, harmonizing rules, and promoting flexibility. 
Executive Order 12866 (Regulatory Planning and Review) defines a 
``significant regulatory action,'' requiring review by the Office of 
Management and Budget (OMB), unless OMB waives such review, as ``any 
regulatory action that is likely to result in a rule that may: (1) Have 
an annual effect on the economy of $100 million or more or adversely 
affect in a material way the economy, a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local, or tribal governments or communities; (2) 
Create a serious inconsistency or otherwise interfere with an action 
taken or planned by another agency; (3) Materially alter the budgetary 
impact of entitlements, grants, user fees, or loan programs or the 
rights and obligations of recipients thereof; or (4) Raise novel legal 
or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in this Executive Order.''
    The economic, interagency, budgetary, legal, and policy 
implications of this regulatory action have been examined, and it has 
been determined not to be a significant regulatory action under 
Executive Order 12866. VA's impact analysis can be found as a 
supporting document at http://www.regulations.gov, usually within 48 
hours after the rulemaking document is published. Additionally, a copy 
of this rulemaking and its impact analysis are available on VA's Web 
site at http://www.va.gov/orpm/, by following the link for ``VA 
Regulations Published From FY 2004 Through Fiscal Year to Date.''

Regulatory Flexibility Act

    The Secretary hereby certifies that this final rule will not have a 
significant economic impact on a substantial number of small entities 
as they are defined in the Regulatory Flexibility Act (5 U.S.C. 601-
612). This final rule will directly affect only individuals and will 
not directly affect small entities. Therefore, pursuant to 5 U.S.C. 
605(b), this rulemaking is exempt from the initial and final regulatory 
flexibility analysis requirements of sections 603 and 604.

Unfunded Mandates

    The Unfunded Mandates Reform Act of 1995 requires, at 2 U.S.C. 
1532, that agencies prepare an assessment of anticipated costs and 
benefits before issuing any rule that may result in the expenditure by 
State, local, and tribal governments, in the aggregate, or by the 
private sector, of $100 million or more (adjusted annually for 
inflation) in any one year. This final rule would have no such effect 
on State, local, and tribal governments, or on the private sector.

Paperwork Reduction Act

    This final rule contains no provisions constituting a collection of 
information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3521).

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance numbers and titles for 
the programs affected by this document are 64.109, Veterans 
Compensation for Service-Connected Disability.

Signing Authority

    The Secretary of Veterans Affairs, or designee, approved this 
document and authorized the undersigned to sign and submit the document 
to the Office of the Federal Register for publication

[[Page 57835]]

electronically as an official document of the Department of Veterans 
Affairs. Gina S. Farrisee, Deputy Chief of Staff, Department of 
Veterans Affairs, approved this document on November 13, 2017, for 
publication.

List of Subjects in 38 CFR Part 3

    Administrative practice and procedure, Claims, Disability benefits, 
Veterans.

    Dated: November 13, 2017.
Jeffrey Martin,
Impact Analyst, Office of Regulation Policy & Management, Office of the 
Secretary, Department of Veterans Affairs.

    For the reasons stated in the preamble, the Department of Veterans 
Affairs amends 38 CFR part 3 as set forth below:

PART 3--ADJUDICATION

Subpart A--Pension, Compensation, and Dependency and Indemnity 
Compensation

0
1. The authority citation for part 3, subpart A continues to read as 
follows:

    Authority:  38 U.S.C. 501(a), unless otherwise noted.


0
2. Amend Sec.  3.321 by revising the heading of paragraph (b), and 
revising paragraph (b)(1), to read as follows:


Sec.  3.321  General rating considerations:

* * * * *
    (b) Extra-schedular ratings in unusual cases--(1) Disability 
compensation. Ratings shall be based, as far as practicable, upon the 
average impairments of earning capacity with the additional proviso 
that the Secretary shall from time to time readjust this schedule of 
ratings in accordance with experience. To accord justice to the 
exceptional case where the schedular evaluation is inadequate to rate a 
single service-connected disability, the Director of Compensation 
Service or his or her delegate is authorized to approve on the basis of 
the criteria set forth in this paragraph (b), an extra-schedular 
evaluation commensurate with the average impairment of earning capacity 
due exclusively to the disability. The governing norm in these 
exceptional cases is a finding by the Director of Compensation Service 
or delegatee that application of the regular schedular standards is 
impractical because the disability is so exceptional or unusual due to 
such related factors as marked interference with employment or frequent 
periods of hospitalization.
* * * * *
[FR Doc. 2017-26523 Filed 12-7-17; 8:45 am]
 BILLING CODE 8320-01-P