How Regulation Kills Innovation

A guest post this morning from Greg Beato,  and our friends at Laissez Faire Books, who introduce it.

We've talked recently about  disruptive technologies, and there's a reason for that. The world you live in is very hesitant to change. It's difficult to make a significant or meaningful change. This isn't something new to modern times. Take a second to think back through history and come up with some other big game changers.

Henry Ford's assembly line that made the Model T affordable is a good one. How many cars does your family have in your driveway?

Don't forget the Wright brothers' first flight at Kitty Hawk. A trip across the Pacific used to take months. Now it takes hours.

Then there's the rise of computer giants Microsoft and Google. You're reading this via email right now, correct? Still taking photos on emulsion film, or do you take digital photos on your phone?

These ideas changed the way the world functions. The way you live your life. They ended the old business models and created something different, allowing new entrepreneurs and innovators to take that new model and create something even better.

It's the very definition of laissez faire: what happens to the world when people are left to play, tinker, have fun, and innovate a better tomorrow. We're currently living in our ancestors' imaginations, and the future consists of what we can dream up today.

But there are those who aren't too keen on this line of thinking. They're the people who have too much invested in the status quo, who want to keep things just the way they are because they're reaping the advantages. They're the people you really need to look out for. They'll stop at nothing to make sure things stay the way they've always been.

For example, the taxi companies that are so mad about ride-sharing companies like Uber and Lyft.

Or the hotel industry that thinks Airbnb threatens their high hotel rates.

Or even the Fed with Bitcoin. Imagine what the Fed thought when they found out about an anonymous currency they can't control that's actually gaining traction throughout the U.S. and the rest of the world.

Governments at all levels are more likely to side with the status quo than embrace the new technology. They have special interests they need to take care of. They don't want to rock the boat and potentially give up the power and control they've accumulated. And that's dangerous.

Because in a free market, the old guard can't so easily keep out a new idea or technology that threatens to put them out of business. They might be able to force them out of the market, but they're not strong arming-people under the cover of law. Additionally, they can't prevent you from choosing the less expensive or better-quality option. That's how a functioning free market works.

But once you get the grey ones involved (or any of their relatives at the city, or local level), things get a little hairy.

Suddenly, you're not allowed to open up shop unless you fill out the right forms and get approval from the right people. In fact, in some places, there are boards that determine whether the industry needs additional competition. And those boards... are made up of current businesses.

That's right. The people with the most incentive to keep competition out are the ones manning the gates. And the people in power actually think this is a good idea, that it actually helps consumers.

Fortunately, new technology is like gravity. When someone finds a new, better way of doing something, that force is unrelenting. Never-ending. Unstoppable. So the companies that benefited from the old way of doing things, along with their government sponsors, can fight tooth and nail to keep things the way they are... but I wouldn't put money behind them. Progress will win out.

Now, with the power of disruptive technologies in mind... let's turn to today's article. Reason's Greg Beato thinks there's another sector of the economy ripe for a new business model. Unfortunately, the guys in D.C. (as well as governments throughout the rest of the U.S.) have spent the last four years building a new (and insanely expensive) system to manage it, which will impact us even here in New Zealand.

The ACA created a massive piece of regulation that affects millions of people and businesses, raising costs for everyone involved. Now new technologies are popping up that offer better (and less expensive) ways to do what the law requires, and the U.S. government is trying to shut them down.

That’s bad for everyone.

Smart Apps vs. Obamacare

Health care costs in the U.S. have been rising so steadily for so long that containment barely seems possible. Even optimists don't dream of cutting the price tag. As its official name -- the Patient Protection and Affordable Care Act -- suggests, Obamacare aims for affordability, not radical reduction.

But at a time when we're all walking around with more computing power in our pockets than NASA used to send Apollo 11 to the moon, perhaps we should be setting our expectations higher. Is it really so hard to imagine, in 10 years or so, the advent of advertising-sponsored health care? Or at the very least, bulk-purchased cardiology readings for a Netflix-like $8.99 monthly subscription?

The device that could potentially enable such scenarios already exists. The Alivecor Heart Monitor, above, approved for over-the-counter use by the Food and Drug Administration in February 2014, is a shell that fits over iPhones and Android devices. It converts electrical impulses from a user's fingertips into ultrasound signals, which are then picked up by the phone's microphone and processed using Alivecor's app.

Users can email the single-channel electrocardiogram (ECG) produced by the Heart Monitor to their physicians, or they can pay a small fee to Alivecor directly through the app for analysis by a cardiac technician or board-certified cardiologist within 24 hours.

Currently, the heart monitor costs $199. The ECG analysis ranges from $2-12 a pop. In comparison, two researchers who published a study in the February 2014 issue of JAMA Internal Medicine queried 20 Philadelphia area hospitals about the fee they charged for an ECG-and found prices ranging from $137-1,200.

So Alivecor's fees are already quite nominal. But imagine if, say, Google or Amazon decide to incorporate such functionality more seamlessly into their devices. ECG analysis would likely be offered for free or near-free, in return for opt-in consent to share this information with advertisers and other third parties. When you have a heart attack in the future, the beta-blocker coupons will arrive faster than the ambulance.

In 1997, Harvard Business School professor Clayton Christensen introduced the concept of "disruptive innovation," the process by which a "simplifying technology" combined with a "disruptive business model" upsets established markets and radically broadens access to goods or services.

The Model T is a classic disruptive innovation. The PC is another. In a September 2013 white paper published by the Clayton Christensen Institute (CCI), Ben Wanamaker, executive director of CCI's health practice, and Devin Bean, a research associate at CCI, examine the disruptive potential of Obama’s Affordable Care Act.

In their estimation, some aspects of Obamacare encourage disruptive innovation, at least theoretically. To accommodate the millions of new consumers that the individual mandate has created, the "already burdened" health care system will potentially turn to "new care delivery models that leverage less-credentialed practitioners to deliver care for more routine health concerns."

Similarly, employers who are mandated to provide care for their employees will look for the least expensive options available, creating "opportunities for new and disruptive entrants" to offer cheaper alternatives to traditional forms of coverage from established providers.

But while Obamacare creates new health care consumers, it also dictates the kind of health care these consumers must purchase, which severely inhibits innovation. As the CCI white paper suggests, minimum "essential" benefits that can only be purchased through tightly regulated insurance exchanges "put a floor on the low end of coverage."

Because of these policies, Obamacare simultaneously "overshoots the needs of many customers while preventing innovation that could fundamentally lower the cost of care by requiring that insurance plans mimic the legacy state insurance markets."

Obamacare, in short, puts the weight of law behind the status quo. To illustrate this fact, Wanamaker and Bean offer an historical hypothetical. If Obamacare had existed in the 1940s, insurers would have had to offer sanitarium care for tuberculosis treatment, because that was the standard level of care back then.

And even when antibiotics emerged as a cheaper, more effective form of treatment, health care options that didn't include sanitariums would not have been permitted -- at least until legislators got around to removing that service from its mandated package of minimum essentials.

In addition to "lock[ing] customers into outdated, expensive treatment options," Wanamaker and Bean maintain, Obamacare-compliant health plans will, "by virtue of the benefits they cover," funnel most care into "traditional venues of care-the hospital and doctor's office." So ultimately, all the entities that have been in charge as health care costs have soared achieve further entrenchment via Obamacare. Washington loves an incumbent!

"When you are young and healthy, you may not think you need health insurance. But life is unpredictable," goes an Obamacare recruiting pitch at NYC.gov. "Health care is expensive. Making sure that you are covered is very important." Granted, even one-percenters who can afford concierge genetic sequencing can't foretell car crashes or autoerotic asphyxiation mishaps.

But new technologies are making our medical destinies far more predictable than they once were. And the high price of health care isn't nearly as predestined as the Obamacare pitch insists.

In reality, we are heading toward a world of highly distributed and comparatively cheap diagnostic tools that will allow patients to self-collect health data more assiduously than a team of ICU nurses. The Cellscope Oto (left) turns your smartphone into a digital otoscope for viewing the inside of a person's ear.

The Scanadu Scout (right) , a small, puck-shaped device scheduled to hit the consumer market in 2015 with an estimated retail price of $199, is an attempt to approximate the tricorder of Star Trek fame-a sensor-rigged device that can quickly monitor your temperature, blood oxygenation, respiratory rate, and more, then make an automated diagnosis using intelligent algorithms.

In addition, simple but ingenious innovations, such as "smart pill bottles" that track whether or not you've taken your medication, or predictive analytics programs that identify which patients are least likely to stick to drug therapy regimens and thus need more intervention from caregivers, promise to significantly improve outcomes.

Eventually, all of the data that devices like the Scanadu Scout produce will be stored, shared, and compared as never before, producing more accurate patient histories, more closely tailored diagnoses, and better predictive insights.
The transition to this new world won't always go smoothly, of course. Making powerful diagnostic tools available to people who remain completely stymied by the self-checkout line at CVS promises to be a recipe for both comedy and tragedy.

But health care is on the verge of becoming far more individualised, far more contextualized and collaborative, and most of all, far more ubiquitous. And as this happens, the Affordable Care Act will start to look more and more anachronistic, a 20th-century solution imposing itself onto a rapidly shifting set of 21st-century conditions.

Indeed, imagine if, in the late 1990s, the federal government decided to ensure our right to affordable music by making every American purchase a monthly subscription to the Columbia House Music Club or Tower Records. That would have been great for the Columbia House Music Club, Tower Records, and, say, Sisqo, but would it have been great, in the long run, for the American people?

If you want to pay hundreds of dollars for a traditional ECG, many health care providers will accommodate your desires. But as the Alivecor Heart Monitor suggests, cheaper alternatives exist.

Obamacare doesn't prohibit consumers from pursuing these new cheap alternatives. Nor does it prohibit companies from offering products and services that could radically reduce prices. But unfortunately it will be a long time before you can expect an iPhone a day to keep doctors and insurance agents completely at bay.

As long as those $2 ECGs from Alivecor can detect a pulse, you're going to have to keep paying substantial premiums to Aetna or Blue Cross each month. Essentially, Obamacare establishes an obsolescing way of doing business as a pre-existing condition.

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Greg Beato is a contributing editor for Reason magazine. He has written for dozens of publications, including SPIN, Wired, Business 2.0, and the San Francisco Chronicle.
This article originally appeared here on Reason.com. It has post has been reposted here from Laissez Faire Books.