In the United States, new patients wait an average of 26 days to see a doctor.
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All government regulations face a deep problem: by their very nature, regulations attempt to stop people from acting in their own self-interest. They either stop people from doing things they want to do, or force them to do things they don't want to do.
How will the private sector respond to regulation?
In a simple society where people are not very creative, you might be able to choose a set of rules and regulations that works reasonably well over the long term. But in a complex system with highly entrepreneurial people, you will soon see unanticipated private sector activity that partially undermines the original purpose of the regulation, and over time, you would expect it to be further undermined. If the regulation never changes, eventually the private sector may innovate to circumvent it altogether.
For example, entrepreneurs faced with highly inefficient and bureaucratic taxi regulations eventually circumvented the entire system and created Uber. Entrepreneurs faced with bureaucratic hotel and lodging regulations created Airbnb. Faced with an inefficient and bureaucratic post office, we created FedEx and then email.
Medical Regulation
The same thing is happening in healthcare. In the US, demand outstrips supply, and healthcare services are so heavily regulated that new patients wait an average of 26 days to see a doctor. MinuteClinic found a way around those barriers, and there are now about 2,000 nurse-staffed walk-in clinics in the US. Along the way, innovators have had to fight lawsuits brought by regulators and medical groups. Rx.com began competing with local pharmacies online, thereby circumventing the bureaucratic trinity of drug companies, pharmacies, and pharmacy benefit managers (PBMs). Mark Cuban is doing much the same thing with Cost Plus Drugs.
In a typical hospital surgery, patients expect health benefits and doctors earn revenue from the procedure. In contrast, insurance companies have a financial interest in avoiding the cost of unnecessary surgery. Resolving these conflicts is time-consuming and expensive. Medici, a health management company in Austin, Texas, found a better solution. The company offers patients second opinions from a roster of experts at top academic medical centers around the country. With a second opinion, patients avoid surgery about 30 percent of the time.
Another way insurance companies (including Medicare and Medicaid) control costs is by requiring prior authorization for certain procedures and then denying the request if there is any doubt about their appropriateness. Patients and doctors can appeal the denial, but it takes a lot of the doctor's time and requires citing medical journal studies to support the request.
Nearly half of the doctors surveyed by the AMA said they didn't appeal claim denials, at least in part, because they didn't have the time or resources to go through a lengthy appeals process. But some doctors have found a new tool: artificial intelligence (AI) programs that complete appeals for them. One bariatric physician in Oklahoma said AI has helped his small practice go from barely appealing insurance denials to sending out 10 to 20 appeals a week.
In fee-for-service care, doctors have a financial interest in only doing the tasks for which they are charged. Generally, doctors don't get paid to keep diabetic patients healthy. If patients get worse, doctors actually make more money because they have more fee-for-service work to do.
One way to get around these unfair incentives is to use concierge doctors (doctors who are paid by patients outside of a third-party payment system). Originally designed for the wealthy, this type of service has become affordable for the general public. Direct primary care (DPC) doctors provide all primary care to patients 24/7/365 for a very reasonable monthly fee. Along the way, DPC doctors have had to weather hostile regulators and threatening lawsuits.
In business for more than 20 years, Teledoc provides phone consultations to more than 90 million people worldwide. It wasn't easy; the Texas Medical Association went to court and tried to put the company out of business. Teledoc overcame that challenge, but it still has to deal with another costly regulation: when a traveling patient calls to fill a prescription, the doctor who answers the phone must be in the same state as the patient calling.
In summary, thanks to entrepreneurs circumventing burdensome regulations, people can now buy cheaper medicines online, get same-day primary care from a qualified nurse at a local drug store, get a prescription filled by simply calling a doctor they've never met before, get 24/7 consultations from DPC doctors without having to go to the emergency room, and while most patients can't get treatment from doctors in other states, some patients can get second opinions from doctors in any state, and some patients are using AI to help them overcome costly obstacles created by prior authorization requirements.
Perverse incentives
However, one thing that makes healthcare different from typical regulated industries is that all of the major players in the healthcare system (patients, providers, and insurers) face perverse incentives, so much entrepreneurial activity ends up raising costs and lowering quality across the system.
Patients have an interest in over-consuming because someone else is paying for it. When doctors are paid on a fee-for-service basis, their interest is to over-provide, because the more they do, the more they get paid. When doctors are paid a flat rate, they have an interest in providing less care. When premiums are unrelated to expected care, insurance companies have an interest in under-providing for sick people and even over-providing for healthy people.
These competing interests are well known, of course. That's why the system is so heavily regulated. In fact, almost all medical regulation is designed to discourage such self-interested behavior in some way. But no one in the system, including the regulators themselves, has a self-interest in making sure the system works the way most people want it to. So regulation often makes things worse.
Lessons Learned
1. In all industries, regulations designed to achieve social objectives will provoke private sector reactions that undermine the objective of the regulation, and over time entrepreneurs may find ways to circumvent the regulation altogether.
2. For industrial regulation to have any reasonable chance of success, it must be continually updated to maintain its social objectives and in response to private sector actors who find ways to undermine and circumvent regulations.
3. One of the reasons we have deregulated many industries (aviation, trucking, banking, oil and gas, etc.) is because imperfect markets often achieve social goals better than trying to achieve them through imperfect regulation. (The invisible hand does not work in the government sector.)
4. The way health care is delivered in this country creates improper incentives for all key players, and many of the health care regulations are designed to prevent people from acting on those incentives.
5. Entrepreneurial actions designed to circumvent medical regulations often improved patients' conditions, but they could also make them worse.
I will expand on these lessons in my next column.
