Untangling innovation, regulation and competition in healthcare

Legacy companies can't rely on regulation to protect them from competitive innovation.

I was out of town the other week and got into a cab at my hotel, heading to see a client. The cab was in OK condition, and the driver seemed pleasant enough. But after we pulled onto the expressway, the ride took an interesting turn. As we cruised at 60 miles per hour, the driver reached for a bundle of papers on his dashboard and proceeded to complete his paperwork, apparently even doing calculations, looking up just frequently enough to avoid a major accident. As I stepped out of the cab, I thought, "This is why Uber will thrive."

The Uber app connects riders to drivers using smartphone GPS and text messaging. The transaction is cashless, and feedback about drivers is encouraged. As Uber enters new markets, however, it is meeting resistance from regulators and legacy transportation companies. In Chicago, Uber found that its cars — Priuses and Camrys — had been removed from the list of permitted livery vehicles. That action was the result of a call from a traditional livery company to the city's Department of Business Affairs and Consumer Protection. A city spokesman, who acknowledged being alerted by the legacy company, explained, "Our livery vehicles are intended to be large or luxury size vehicles."

In New York, Attorney General Eric T. Schneiderman is challenging Airbnb, a peer network for room rentals. According to AG Schneiderman, Airbnb is providing short-term apartment rentals, which is illegal in New York. "We're just looking…to enforce New York law," Mr. Scheiderman said, "and also, frankly, to protect our hospitality industry that goes through a lot of trouble to have great hotels, to protect tourists, to provide services, and to protect the people in our residential housing." A long-time hospitality-industry consultant points out that "a less-than-level playing field has given this crowdsourced hospitality model a number of structural advantages over traditional hotels."

Resistance to innovative businesses often intertwines regulatory concern and pushback from legacy interests. [tweet this]

In the face of this resistance, Uber, Airbnb and other innovators have turned to the public for support. Having generated good will from a business model that emphasizes choice, convenience, quality and price, these companies are using petitions throughout the country to fight legislation perceived to limit consumer options.

This dynamic is equally apparent among healthcare innovators. Theranos is poised to shake up the traditional laboratory business with a lab test process that is less painful, more convenient, and less expensive for consumers. Blood collection doesn't involve needles, and only a few drops of blood are required to perform up to 70 tests. Currently in 21 Walgreens stores, Theranos plans for its labs to be within five miles of almost every American, according to CEO Elizabeth Holmes. Theranos' prices are as low as a quarter of typical independent lab prices and a tenth of typical hospital lab prices.

Theranos has been criticized for being secretive about "how it actually does what it says it does." A consultant for leading laboratory company Quest Diagnostics is quoted as saying, "I don’t know what they're measuring, how they're measuring it, and why they think they’re measuring it."

Theranos labs are certified by CMS and licensed in most states. Although the FDA typically does not require approval for what are called laboratory-developed tests, such as those used by Theranos, the company is seeking FDA approval. However, Theranos’ Holmes says that it is not necessary to publish peer-reviewed validation studies because Theranos’ "fundamental chemical methods" don’t differ from the methods of existing tests.

Convenience clinics, located in retail pharmacies and staffed by physician extenders, have also faced regulatory hurdles and industry resistance, especially as they have moved from treatment of minor ailments to management of chronic conditions. For example, New York is formulating guidelines that would exclude chronic care management from the scope of service for convenience clinics. This approach is echoed by the American Academy of Family Physicians, which "opposes the expansion of the scope of services of retail clinics beyond minor acute illnesses and, in particular, opposes the management of chronic medical conditions in this setting."

Like their non-healthcare counterparts, healthcare innovators have turned to the public for support when confronted with regulatory hurdles. A company called Biosense made a splash with a high-profile announcement of an app that reads the results of a urinalysis. However, the next step for the company was predicted in a blog post titled "Wanted: FDA App Enforcement" on a website covering the medical device industry. Biosense received an "it has come to our attention" letter from the FDA inviting the company to explain why it should not be subject to FDA clearance. In response, Biosense turned to a crowdfunding website to seek support for its effort to win FDA approval.

Existing regulations are one dimension of the legacy market landscape. To the extent that innovative new entrants operate outside that landscape, they will also operate outside traditional regulatory categories. To the extent that they disrupt the legacy market, they will also disrupt the existing regulatory framework.

Upstart companies do not seek a level playing field for competition or regulation; they seek to define a new game. From the perspective of companies like Uber and Airbnb, that means creating new categories of regulation. "There were laws created for businesses, and there were laws for people," says Airbnb CEO Brian Chesky. "What the sharing economy did was create a third category: people as businesses."

Regulation is a necessary and important part of our social fabric. Particularly in healthcare, regulation plays a critical role in protecting public safety, improving quality and reducing health risks. Although innovative companies may work outside the existing regulatory framework for a period of time, inevitably the regulatory process will account for the new business model. However, when legacy companies use the existing regulatory process to protect cartel-like competitive conditions and extend outmoded business models, then such behavior works against the long-term economic interests of the American public.

 

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