How to “Fix” American Healthcare: Third of Three Steps: Eliminate Laws and Regulations that Enable Rent-Seeking
The third and final part of the healthcare series focuses on laws and regulations that enable rent-seeking.
This is a long newsletter, perhaps the wordiest I will write. But it is important to understand 10+ laws and regulations that have enabled rent-seeking, so we can remove or rein them in. These changes are critical to fixing US healthcare.
I have divided the laws and regulations into three buckets:
- Laws that keep the employer in the benefits business
- Restrictions on care delivery
- Restrictions on healthcare supply chains
Laws that Keep the Employer in the Benefits Business
Affordable Care Act
- In the first healthcare issue of “First Principles” (Making the Individual the Customer), I gave kudos to ACA for creating protections within individual plans. There is also a dark side to the law: Employer penalties.
- Employers with 50 or more full-time equivalent employees face two penalties:
- - An “A Penalty” of $2,970/employee/year (minus the first 30 employees) if the employer fails to provide minimum essential coverage to 95% of its employees.
- - If an employer fails to offer coverage that is affordable and provides minimum value, a full-time employee receiving subsidized coverage through the Marketplace will trigger a monthly “B Penalty” of $4,460/12/employee. (The actual law is complex. These two descriptions are accurate but incomplete. They are adequate for the objectives of this article.)
- The effect of these penalties is to force employers to either provide ESI (employer-sponsored insurance), or, in a small but growing number of cases, ICHRA funding. But employers should not buy employee benefits any more than they should buy cars and homes for employees. ICHRAs get them mostly out.
- The real solution is to remove the employer penalty.
Employer-Sponsored Insurance (ESI) Tax Inequity
- The tax code effectively threatens U.S. workers with $352 billion in additional taxes in 2022 if they do not let their employers control $1 trillion of their earnings (source: Cato Institute).
- Without ESI exclusion, US workers would have to pay $352 billion in additional taxes to the Federal government.
- The ideal solution is to eliminate ESI tax exclusion and reduce tax rates. This is unlikely. However, even if other taxes do not go down, this change will reduce our budget deficit by $350B/year, and simplify our healthcare system simpler.
Restrictions on Care Delivery
Certificates of Need
- A certificate of need (CON) is a legal document that is required to construct a new healthcare facility. To obtain a CON, developers of healthcare facilities must apply to the local governmental authorities by making the case for why the community in question would benefit from that new development. CONs are required in 35 U.S. states and Washington, D.C.
- These “competitors’ vetoes,” as they are aptly known in the industry, are an abomination. They have increased healthcare costs by eliminating competitors. No other industry has a law that is as shamelessly anti-competition as this one.
- CONs need to be eliminated. Let the market determine healthcare supply.
Non-Compete Agreements
- Non-competes are a problem in every industry. I have written about them in other articles. They have an especially damaging impact in healthcare, because of the licensed nature of many clinicians, and workforce shortages among nurses and primary care physicians. Non-competes should be illegal.
State-Specific Clinician Licensure
- Although Federal standards govern medical training and testing, each state has its own licensing board, and doctors must procure a license for every state in which they practice medicine (with some limited exceptions for physicians from bordering states, for consultations, and during emergencies).
- States impose a patchwork of requirements for acquiring and maintaining licenses. These requirements are varied and burdensome and deter doctors from obtaining the licenses required to practice across state lines. For example, in all states, applicants must show proof of graduation from an accredited medical school and completion at least one year of a residency program, provide information about malpractice suits, and pay a fee to the state for initial licensure (usually several hundred dollars) and for license renewal (which in some states must be done annually).
- Not only does this system impose direct costs on physicians who must decipher and comply with multiple states’ licensure requirements, but it also creates substantial indirect costs for both physicians and patients by preventing some physicians from practicing in those locations where they would be most productive and where the need for providers is greatest.
- Telemedicine is a vivid example of an innovative care delivery modality that ran into state licensure laws. Many of these requirements were suppressed/not enforced during Covid. State Boards are again asserting state licensure requirements.
- For some professions and state groups, there are “license compacts” (reciprocal licensing). While this is a good move, we should not need it at all. State licenses are like state currencies—a significant albatross around our economy.
- The Federal government should tie CMS funding to minimum requirements for state clinician licensure (i.e., licensing quality and rigor), and then every state’s license should be valid in every other state. Over time, we should extend this approach to Canada, Mexico, etc.
Corporate Practice of Medicine (CPOM)
- 31 states follow CPOM. The fundamental idea is that a business corporation may not practice medicine or employ physicians or other clinical personnel to provide professional medical services. In these states, licensed health professionals may provide medical services only through a professional corporation (PC) owned by professionals licensed in that state.
- The management services organization (MSO) has emerged as a business vehicle that permits unlicensed persons to provide services to physicians and their professional medical corporations. In its simplest form, an MSO provides basic practice support services to physicians and professional medical corporations via a contractual relationship, commonly known as a management services agreement. These services frequently include activities such as billing and collection, administrative support in certain areas, and electronic data interchange (e.g., electronic billing).
- In my career, I have worked with the PC/MSO charade several times. It is a colossal waste of time and money and is completely unnecessary. We should remove CPOM.
Malpractice Laws
- Malpractice laws serve a useful purpose: To punish companies that hurt people’s health or safety. However, in healthcare, they have metastasized into an extortion racket. Prosecutors shop for specific districts where juries are likely to punish “outside” companies, partly because the local economy does not have any large company. Most of the awards go to lawyers, not to victims. The amounts are frequently egregious.
- We need common-sense guardrails to reduce frivolous lawsuits as well as egregious awards.
Restrictions on Healthcare Supply Chains
Restrictions on Importing Prescription Drugs
- Imports of prescription drugs are banned from most countries. In rare instances, imports from Canada are allowed after several certifications.
- Prices of patented drugs are almost 70% lower in Canada than in the US! The difference with other countries is even more stark.
- Not only is this restriction—in the name of “patient safety”—a massive tax on us Americans, but it is also, prima facie, a trade restriction. Other countries—not as “smart” as us—have gone along with the bald-faced lie that banning the import of highly-lucrative products is consistent with free trade. Pretty soon, they will catch on; it is a matter of time.
- This restriction needs to go.
Patents
- Patents have been useful in incentivizing inventions. However, their current form—20 years of monopoly—is two centuries behind the times.
- At a minimum, the period should be reduced to 10 years. The economy today is many times faster than when the US Constitution was written, and the term was set to 20 years.
- This change will save hundreds of billions of dollars in pharma and device costs per year.
State-Specific Managed Care Licensure
- Managed care (commonly called “health insurance”) should be a national market. There should be no state-specific licensure.
A Law We Need Strengthened: Individuals’ Ownership of Healthcare Data
- In the middle of all the laws and regulation that we should remove or rein in, there is one that needs more teeth: The individual’s ownership of data about their own body, health, and healthcare.
- The medical-industrial complex has consistently opposed or sabotaged efforts to enable individuals to get their health data.
- CMS has finally shown some spine in enabling this function. I am cautiously optimistic.
- In this context, it is important to mention that “gag clauses” should be illegal. These clauses prohibit plans and issuers from disclosing the cost or quality of care information or data to participants, beneficiaries, or to plan sponsors (employers, labor unions, etc.).
- The fact that managed care organizations have quietly signed gag clauses for decades shows that the so-called “tension” between managed care organizations and clinicians is a shadow fight; both parties unite to keep the individual and the employer in the dark.
- Recently, plan sponsors have started to assert their need as fiduciaries to access this data. This is a positive development.
There you have it: A comprehensive look at the laws and regulations that enable rent-seeking, and what we should do with them.
I welcome your thoughts and suggestions about this issue, as well as on the broader topic of US healthcare.
