For Bureaucracy, Big Is Beautiful
It is a cocktail party cliché to criticize American healthcare. It is a soft target. But it is a dynamic part of the economy. It can showcase trends that are affecting the broader whole. One of these is the remarkable consolidation that’s taking place in the space. Specifically, private physician practices are under pressure, according to the American Medical Association.
“The association’s biennial Physician Practice Benchmark Survey found that in 2022 46.7% of doctors worked in wholly-owned physician practices, down from 49% in 2020 and 60% in 2012, the first year of the survey.”
Where are they going? They’re going to hospitals.
“Conversely 31.3% of doctors worked in practices that were wholly or partially hospital-owned, up from 30.5% in 2020 and 23.4% in 2012. The percentage of doctors employed directly by hospitals or working as contractors rose to 9.6% from 9.3% in 2020 and 5.6% in 2012.”
Marcus Welby is retired, apparently.
What’s behind this move?
“Respondents cited the ability to negotiate higher payments as the biggest reason for joining a hospital with 79.5% calling it ‘important’ or ‘very important.’ That was followed by the need to better manage payers’ regulatory and administrative requirements (71.4%) and wanting to get better access to costly resources (69%).”
On the payment front, one big culprit was the federal government.
“Reimbursement rates from Medicare have not kept pace with higher operational costs. In fact, Medicare payments to doctors have declined more than 25% in the past two decades, after taking inflation into account … In some medical specialties, the situation is even more dire. Payments for critical oncology services provided by community practices lag inflation by at least 28% according to a recent analysis from the Community Oncology Alliance and Avalere Health.
“Medicare reimbursements for other health care entities has risen steadily over that same period. Payment for inpatient and outpatient hospital services as well as skilled nursing has outpaced inflation since 2001.”
Of course, the Pandemic and its aftermath have not helped.
“’In my opinion, the pandemic radically changed how physicians managed their practice because of the demands placed upon them by telemedicine, increased overhead costs, decreased reimbursement, and lack of staffing,’ said Jason S. Greis, JD, a partner with the law firm of Benesch, Friedlander, Copland & Aronoff LLP in Chicago, Illinois, where he is part of the firm’s Health Care & Life Sciences Practice Group. ‘Due to frustration, many physicians have accelerated the movement from privatized medicine to corporatized medicine backed by private equity and large hospital and health system acquirors.’”
This is an important point. The rise in regulation has moved physician practices from an entrepreneurial privately controlled activity to a corporatist one.
It’s not just medicine. It spans many industries. Big Tobacco benefits from the protection racket that is the MSA signed with the states. The auto industry benefits from the protection of light truck sales. Sarbanes-Oxley is a burden on smaller business. The list goes on.
This is ostensibly one of the reasons behind the rise of so-called “hipster antitrust:” the perceived need to counter the dangerous accumulation of economic, social, and political power by large corporations.
The conventional wisdom is that big business opposes regulation and that such activity acts to restrain them. The truth is more nuanced. Big business, recognizing that there will be regulation, acts to shape it in their favor. Expensive compliance works in their favor to worsen conditions small businesses face, for example.
“What regulation does is favour both the incumbents in any activity and also large companies in anything at all. For what worries business is not whether they’re allowed to do something or not: but that other people will find a better way of doing it and thus compete. More regulations means that fewer upstarts can enter the market and any that do are hobbled by that regulation. The more regulation the more the current large companies can continue to be capitalist without having to worry about their practices being tempered by that market competition.”
The game plan for large business is simple. Get big and then close the door behind you so that you can sit fat and happy under the umbrella of government protection from competition.
Isn’t that what’s happening with AI regulation given the explosion in GenAI technologies? Andrew Ng from Stanford, one of the leaders in the field, seems to think so.
“It’s also a mistake to set reporting requirements based on a computation threshold for model training. This will stifle open source and innovation: (i) Today’s supercomputer is tomorrow’s pocket watch. So as AI progresses, more players – including small companies without the compliance capabilities of big tech – will run into this threshold. (ii) Over time, governments’ reporting requirements tend to become more burdensome. (Ask yourself: has the tax code become more, or less, complicated over time?)”
As they say: “Regulation favors the incumbent.”
The article goes on to list the different ways in which regulation tilts the table.
· Compliance: requiring companies to meet certain standards or other reporting obligations acts as a barrier to entry
· Cost: bigger businesses can amortize the costs of compliance over a larger base than smaller competitors, given that costs of compliance are often independent of firm size
· Scale: bigger businesses can afford this amortization even more easily in a category in which there are economies of scale combining with protected growth
· Lobbying: bigger companies have a greater ability to nudge policymakers in their favor
· Similarity: bigger companies are themselves more bureaucratic and have greater familiarity with the regulator’s bureaucratic practices
Game recognizes game.
Regulation stifles volatility. That might be its principal aim. In doing so, the shakeups from competitive disruption become less likely. This might be the ultimate protection for the incumbent. But the barriers to competition that regulation put into place and the way in which the big influence the development and application of policy reinforce the power of incumbency. For the regulator, Big Is Beautiful.
The behavior of OpenAI in lobbying for regulation of artificial intelligence is a case study in how to exploit this phenomenon. Step 1: develop a powerful new technology away from meaningful public scrutiny. Step 2: take a leading marketing role upon its completion and invent a new sector. Step 3: bray for massive regulation immediately citing unprovable and nebulous claims of general AI being an existential-level event “when” it occurs.