How Regulatory Ambiguity is Impeding Healthcare Innovation


Every day, Americans benefit from consumer-friendly technology that has radically improved every aspect of their lives. But these benefits have lagged in healthcare due to its distinct complexities and challenges. In Zocdoc’s nearly 17 years, we have seen waves of digital health entrants come and go. In fact, 90 percent of health-tech startups have gone bust. In hushed conversations among struggling digital health leaders, a high hurdle comes up time and again: regulatory ambiguity. 

The challenge for digital health innovators is that our nation’s healthcare regulations were signed into law in the mid-20th century. Legislators never anticipated the Internet, much less the digital health tools that followed. As a result there is sufficient ambiguity, and digital health companies — and the buyers of their services — struggle to interpret these vintage regulations for their modern operations. 

Now, America’s healthcare regulations exist for good reasons: they protect patients and providers, they prevent fraud, waste, and abuse, they ensure our nation’s dollars are being spent efficiently, and more. It is critical to preserve these important guardrails. It is equally critical that we modernize America’s healthcare laws. We must reject the false choice between protection and innovation. 

I recognize that the prospect of modernizing regulations elicits concerns about potential bad actors, program integrity, and more. Those concerns are real and critical to thoughtfully consider. But we must balance these risks with the risk of not acting and letting the status quo persist. The status quo is what leads 73 percent of Americans to say the healthcare system is failing them. This is not tenable. We must urge Congress and the Administration to modernize outmoded laws and regulations to enable innovation, while preserving program integrity.

Until that happens, many health tech companies will quit before they even start upon realizing that the regulatory challenges are perhaps too great. And those brave enough to persist will have a handful of subpar paths forward:

Subpar path 1: Cut out federal healthcare dollars

The first path, the one of least resistance, is to sidestep the regulatory ambiguity by not serving federally funded beneficiaries at all. This contributes to the proliferation of digital services that only serve cash pay or commercially insured patients. Many digital health leaders make the calculation that it is simply not worth the risk, investment, or complexity to serve Medicare, Medicaid or other federally funded patients. As a result, the digital divide in healthcare will grow wider, and tools that streamline and accelerate care will only be available for the haves, stranding the have-nots. 

Subpar path 2: Retro-fit inferior business models

A second path is to attempt to work around the regulatory ambiguity by retro-fitting inferior business models that have a low likelihood of implicating existing law. This is the path my company took when we first started out, and it nearly killed us. 

Due to the ambiguity in the Anti-Kickback Statute, which was first  signed into law in 1972 — thirty years before the consumer Internet debuted — we were unclear on whether charging providers for new patient bookings was permissible. The statute did not expressly permit or prohibit charging providers a transaction fee for Internet-based marketing services like ours. And so we initially charged every provider the same flat subscription fee to be listed on our marketplace. But there is a good reason 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. For Zocdoc, providers who received a lot of bookings were paying far too little. And the long tail of providers who received fewer bookings were paying far too much. As a result, doctors were leaving our platform faster than we could sign new ones up. 

No matter what we tried, we couldn’t overcome the inherent challenges of the wrong business model. By 2017, we realized that the only way to save Zocdoc was to charge providers per transaction — like every other marketplace. But due to the law’s ambiguity, we first secured permission from regulators to do so. 

Subpar path 3: Make a speculative bet to update laws  

This brings us to the third path: spending significant company resources working to change the laws or seeking permission to operate. Starting a company in digital health is not for the faint of heart; you contend with fragmentation, entrenched incumbents, intermediation, and much more. In our world, every day can feel like a struggle to survive and find product-market fit. 

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

21st century care delivery requires 21st century regulations 

When I assess the state of America’s healthcare, I find that costs continue to rise while study after study shows there is no correlation between rates paid and quality of care. Americans are spending more and more out-of-pocket on this inefficient cycle. We have healthcare workforce shortage issues, access and long wait-time issues, emergency room overutilization issues, runaway costs and cost transparency issues, and the list goes on.

While our healthcare challenges are vast and varied, they share an underlying solution: it is technology that can help unlock improvements to access, cost and quality. It is technology that can deliver the connected, accessible, affordable healthcare system we’ve talked about for decades, but have made far too little progress on. America should be a global leader in healthcare. Instead, we rank last among our peers, and outmoded regulations are holding us back. 

From Silicon Valley to D.C. and everywhere in between, there are many great minds working to create the healthcare system of which we all dream. But to realize it, Congress and the Administration must modernize our healthcare regulations while preserving their critical protections, and allow innovation to thrive.

Photo: Syolacan, Getty Images

Oliver Kharraz, MD, is CEO and founder of Zocdoc. Oliver is the most recent doctor in a 300-year family tradition. Over the course of his wide-ranging career, Oliver has accrued comprehensive experience effecting change and building efficiency in large scale healthcare organizations using information technology.

Prior to Zocdoc, Oliver was an Associate Principal at the global management consulting firm McKinsey & Company. During his seven-year tenure at McKinsey & Co., Oliver developed and implemented new patient utilization models for the national health services of a number of governments and major hospital chains.

In 1994, Oliver built and sold his first business – a forerunner of early internet software. He later became a resident doctor at the clinic of Ludwig Maximilian University in Munich, where he earned an MD and a Doctorate in Neuroscience. Oliver also has a Masters Degree in Philosophy from the Jesuit College of Philosophy in Munich. He is also a member of the Council on Foreign Relations.

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