How regulatory ambiguity hinders innovation in healthcare

Every day, Americans benefit from consumer-friendly technology that has dramatically improved every aspect of their lives. However, these benefits lag behind in healthcare due to its particular complexities and challenges. Over the nearly 17 years of Zocdoc’s existence, we’ve seen new digital health influencers come and go. In fact, 90 percent of health tech startups have failed. In the quiet conversations of struggling digital health leaders, a high hurdle consistently arises: regulatory ambiguity.

The challenge for digital health innovators is that our nation’s health care regulations came into effect in the mid-20th century. Lawmakers never expected the Internet, much less the digital health tools that followed it. As a result, there is enough ambiguity that digital health companies – and buyers of their services – have difficulty interpreting these old regulations for their modern operations.

America’s health care laws exist for a reason: they protect patients and providers, prevent fraud, waste and abuse, ensure our nation’s money is spent efficiently, and more. Maintaining these important protective barriers is crucial. Equally important is modernizing U.S. health care regulations. We must reject the false choice between protection and innovation.

I realize that the prospect of modernizing regulations raises concerns about potential bad actors, program integrity, and more. These concerns are real and should be carefully considered. But we have to balance this risk with the risk NO act and allow the status quo to remain. The status quo leaves 73 percent of Americans saying the health care system is failing them. This is unsustainable. We must urge Congress and the administration to modernize outdated laws and regulations to enable innovation while maintaining program integrity.

Until this happens, many health technology companies will exit before they even get started when they realize that the regulatory challenges are perhaps too great. And those who are brave enough to persevere will have several bad paths ahead:

Sneak Path 1: Cut federal health care funding

The first path, the one with the least resistance, is to bypass regulatory ambiguity by discontinuing services to federally funded beneficiaries altogether. This contributes to the proliferation of digital services that only serve cash-paid or commercially insured patients. Many leaders in digital health calculate that providing services to Medicare, Medicaid or other federally funded patients is simply not worth the risk, investment or complexity. As a result, the digital divide in healthcare will widen, and tools to improve and speed up care will be available only to the haves, leaving the poor behind.

Sub Track 2: Modernizing inferior business models

The second path is to try to circumvent regulatory ambiguity by modernizing inferior business models that are unlikely to impact existing law. This is the path my company took when we started, and it almost killed us.

Due to an ambiguity in the Anti-Kickback Statute, which was first signed into law in 1972—thirty years before the debut of the consumer Internet—we were unsure whether it was permissible to charge providers for new patient reservations. The statute did not expressly permit or prohibit vendors from charging transaction fees for online marketing services such as ours. That’s why we initially charged each provider the same flat subscription fee for their presence on our marketplace. But there’s a good reason why no other consumer marketplace – like Priceline for travel, Opentable for restaurants, or Airbnb for home stays – charges all of its supply-side customers the same flat fee: the price is almost always wrong. In the case of Zocdoc, suppliers who received many bookings were paid far too little. And the long tail of suppliers who received fewer bookings were paying far too much. As a result, doctors were leaving our platform faster than we could enroll new ones.

No matter what we tried, we couldn’t overcome the inherent challenges of having the wrong business model. In 2017, we realized that the only way to save Zocdoc was to charge providers per transaction – like any other marketplace. However, due to the ambiguity of the law, we first obtained approval from regulatory authorities.

Sub-path 3: Make a speculative bet to update the regulations

This brings us to the third path: spending significant company resources working to change the law or obtaining a business license. Starting a digital health company is not for the faint of heart; you struggle with fragmentation, entrenched market operators, intermediation and many other problems. In our world, every day can seem like a fight to survive and find product-market fit.

Imagine trying to build a successful, sustainable and scalable company from scratch, and on top of that you’re trying to update something as massive as our country’s healthcare regulations. It is, at best, a multi-year journey that requires a significant amount of time, attention and investment. All of these efforts amount to a highly speculative bet with uncertain outcomes. This is a bet that most growing digital health companies simply cannot afford.

Providing 21st century care requires 21st century regulations

When I assess the state of American health care, I find that costs continue to rise, and study after study shows that there is no correlation between the rates paid and the quality of care. Americans are spending more and more out of pocket on this inefficient cycle. We have problems with medical staff shortages, problems with access and long wait times, problems with overutilization of emergency rooms, uncontrolled costs and problems with cost transparency, and the list goes on.

While the challenges facing our health care are vast and diverse, they share a common solution: technology can help improve access, cost and quality. This is the technology that can deliver the connected, accessible and affordable healthcare system we have talked about for decades but have made far too little progress on. America should be the world leader in health care. Instead, we rank last among our peers and outdated regulations hold us back.

From Silicon Valley to Washington, D.C. and everywhere in between, many great minds are working to create the health care system we all dream of. But to achieve this, Congress and the administration must modernize our health care laws while preserving their most important protections and enabling innovation to thrive.

Photo: Syolacan, Getty Images

Oliver Kharraz, MD, is the CEO and founder of Zocdoc. Oliver is the newest doctor in a 300-year-old family tradition. Over the course of his extensive career, Oliver has gained extensive experience in implementing change and building efficiency in large health care organizations using information technologies.

Prior to joining Zocdoc, Oliver was an associate director at global consulting firm McKinsey & Company. During his seven years at McKinsey & Co. Oliver has developed and implemented new patient utilization models in the national health services of many governments and major hospital networks.

In 1994, Oliver built and sold his first company, a forerunner of early Internet software. He later became a resident physician at the clinic of the Ludwig-Maximilian University in Munich, where he obtained a doctorate in medicine and a doctorate in neurology. Oliver also holds a Master’s degree in philosophy from the Jesuit Philosophical College in Munich. He is also a member of the Council on Foreign Relations.

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