The current health care regulatory system is a mess. Whatever its stated objectives, there is little evidence that it improves quality of care, provides cost-effective benefits to the public, or is a rational way of monitoring health care delivery. With the prospect of enacting significant reforms of the health insurance system and providing access for those without insurance tantalizingly close, an equally important aspect of health care delivery has been obscured. Along with overhauling the health care system, policymakers need to reconsider and reform the way health care delivery is regulated. A thorough re-evaluation of health care regulatory policy is overdue and should be viewed as a necessary complement to health insurance reform.

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The rationale for regulatory reform rests on three basic principles. First, the current system is unmanageable and duplicative, and is not serving any of the objectives it was designed to achieve. Second, health reform will founder without an adequate regulatory structure. Implementing the proposed reforms would no doubt require substantial adjustments to the current regulatory regime. Imposing yet another set of regulations on the current system will only exacerbate the existing problems. Third, health care is a rapidly changing market that requires a dynamic regulatory capability. Whatever one thinks about the current regulatory system, it is anything but dynamic.

At best, the current health care regulatory system is a fragmented, ad hoc arrangement with little structural or thematic coherence. It consists of regulations designed first for fee-for-service medicine, then managed care, and now consumer-directed health care (CDHC). The result is a muddle of confusing and inconsistent regulations that provide minimal useful guidance to health care administrators and physicians.

Not surprisingly, regulatory barriers impede health care delivery system innovations, serving neither patients nor providers. To complicate matters, most health care regulations are written in dense, impenetrable language that is susceptible to myriad interpretations and are difficult and costly to implement. The separate layers of state and federal regulations, plus the involvement of private accreditation entities and their voluntary standards, certainly add to the confusion..

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As a consequence, health care providers, already under considerable pressure to reduce costs while continuing to deliver high quality care, are forced to operate in a regulatory environment that defies comprehension. Most health care regulations are written in dense, impenetrable language that is susceptible to myriad interpretations as well as difficult and costly to implement. And the reluctance of the regulatory agencies to provide consistent opinions interpreting the regulations makes it difficult to reconcile the inconsistencies within and across regulatory areas and jurisdictions.

The paradigmatic example of why health care regulation has gone awry is the fraud and abuse regime (i.e., the combined self-referral restrictions, anti-kickback laws, and the Federal False Claims Act). As one example, public policy has strongly favored cost containment strategies in recent years. But when the market responded with gainsharing (where physicians and health systems share in cost saving efficiencies), the Office of the Inspector General (OIG) initially ruled that gainsharing violated the fraud and abuse laws. This interpretation directly conflicts with the stated goals of the Internal Revenue Service (regarding tax exemption) and the Department of Justice/Federal Trade Commission (regarding antitrust enforcement) to encourage integration and risk-sharing in arrangements between physicians and health systems.

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Although OIG has since relaxed its objections, the example demonstrates the conundrum facing physicians and their health care partners. As desirable as the goal of reducing fraud and abuse is, the current regulatory approach may have the unintended consequence of impeding market arrangements that might advance public policy goals of reducing costs and improving quality of care. Indeed, the Obama administration has announced a major crackdown on fraud and abuse in Medicare and Medicaid reimbursement. As desirable as the crackdown may be, it will not be effective without identifying and focusing on the dominant sources of fraud and abuse.

This problem is not unique to fraud and abuse concerns, but permeates the way health care is now regulated and could easily compromise the reforms contained in the health insurance reform legislation. Take just one of the proposed initiatives, accountable health care systems (ACS) as an example. In all likelihood, any ACS model will require some type of physician-health system cooperative relationship. Can this reform co-exist with a regulatory structure designed for a different era? There are reasons to be skeptical. For example, antitrust considerations and fraud and abuse restrictions alone suggest that the implementation of ACSs will be subject to significant regulatory constraints. Regulatory barriers for other initiatives, such as health insurance exchanges, are likely to impeded implementation.

Even though the country’s policy focus on reforming the health care insurance system is appropriate and necessary, transforming the regulatory system should be an integral component of the broader health reform debate. In fact, the rigidity of the current regulatory system often freezes in time current market arrangements and obstructs opportunities to improve quality of care and reduce costs. Regulatory barriers that impede legitimate business initiatives serve neither physicians nor their patients.

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