Entrepreneurs who are eager to transform health care by bringing efficiency to a complex system, soon discover that their efforts are often hamstrung by burdensome government regulations and guild mentality. They have to devote precious capital to comply with rules, or find elaborate ways to get around them. “It’s the second most regulated sector after the nuclear power industry,” says Leslie Michelson, founder and CEO of Private Health Management, which assembles specialists and treatment plans tailored to patient needs. “We had to redefine our service offerings to conform to these limitations.”
Michelson has seen the industry from many facets—as special assistant to the general counsel of the Department of Health and Human Services under President Jimmy Carter, and as founder of disease management and clinical trial management companies. He also headed Michael Milken’s Prostate Cancer Foundation. Echoing many entrepreneurs, he says that rapidly evolving technology and new business models are tripping over federal and state regulations that made sense when they were established decades ago, but in many cases need to be revised or simplified.
HIPAA, FEE-SPLITTING AND OTHER FORBIDDEN STUFF
Rules range from the 1996 Health Insurance Portability and Accountability Act (HIPAA) which can be a major source of confusion on privacy and security issues, to the 1989 Stark Law which regulates doctor referrals, to the Corporate Practice of Medicine laws which prohibit businesses from employing physicians, and forbid doctors from splitting fees with non-doctors. Laws on the practice of medicine also vary from state to state.
“I find that very frustrating about health care,” says Samer Hamadeh, previously a tech entrepreneur. In 2010, Hamadeh founded Zeel which facilitates booking with alternative medicine practitioners, such as chiropractors and acupuncturists. He still had to comply with HIPAA privacy rules, and make booking appointments secure by providing only first names and last initials, for example. Hamadeh wanted to pay primary care doctors a small fee for referring his service to patients, but discovered it could be construed as fee-splitting. “What’s wrong with some sort of referral?” asks Hamadeh. Fair question.
Phronesis Health, a fledgling clinical decision-support start-up, estimates it needs at least $100,000, just to comply with HIPAA security rules. Co-founder Jamey Heit says that includes secure hosting, consulting and legal expertise in health IT. “Falling on the wrong side of the HIPAA line could potentially be a fatal flaw,” says Heit, who needs to raise that money before he can sell his product.
“State by state regulations is the one that really kills me,” says Jordan Michaels, founder of start-up Ringadoc, which connects patients by phone to a doctor anywhere, as long as the doctor is anywhere in the state in which the patient is physically present. Every state requires its own license to practice, even though doctors trained in New York have essentially the same training as their colleagues in California. “As we embrace technology, the confinement to geographical location becomes more blurred,” says Michaels. Not to states like Oklahoma, where telehealth is downright forbidden.
To avoid running afoul of regulations that prohibit businesses from employing physicians, some health care start-ups spend time and money crafting a solution in the form of a doctor-owned entity which serves as a billing conduit to the start-up.
TURF WARS
Despite the looming shortage of primary care physicians, a slew of rules that vary from state to state govern physician supervision of nurses who can in many cases step in to fill the need, especially in retail clinics. Regulations can require the on-site presence of doctors, limit the number of sites they supervise, and the scope of services the clinic offers, which increase their operating costs, when their goal is to provide basic tests at lower prices. Although regulations haven’t prevented the growth of retail clinics, they have complicated it. The American Medical Association made it clear to insurance companies that it discourages the use of retail clinics.
Nothing stands in the way of lower health care costs than the lack of pricing information for medical procedures. Hospitals and payers have kept those under wraps, as they negotiate reimbursement deals. Patients are unaware that the cost of a cholesterol test, for example, varies widely in the same city, preventing them from making the appropriate purchasing decision. Start-ups such as Castlight Health and Change Healthcare have developed algorithms that allow employees of self-insured companies to compare costs, but they have to carefully navigate between powerful stakeholders to extract claims data. This month, coalitions representing businesses and consumers called on payers and health care providers to make prices available, which should ratchet up the pressure.
“It’s a weird dynamic when technology is changing rapidly, but everything is stuck thirty years ago,” says Michelson. “All participants need to adjust their mindset to innovation.”
