Disruptive Healthcare and the Law

By Chris Sloan and Bruce Doeg

With so much focus on reducing cost and improving patient outcomes, “disruptive healthcare” has become a major topic in almost any discussion of the U.S. healthcare system. “Disruption” refers to developments that transform the market in some way, whether it is reducing complexity, lowering cost, improving outcomes, or some other improvement that requires a fundamental change to the manner in which the market currently operates.

In healthcare, disruption can be separated into two general categories – business model disruption and technology disruption. Examples of business model disruption include telemedicine and the entry of huge, non-traditional players such as Amazon and Google into healthcare delivery, pharmacies, and delivery of healthcare supplies. Examples of technology disruption include various applications of artificial intelligence, predictive data analytics, interoperability, and blockchain.

Disruption in any industry creates new and interesting regulatory problems, because, almost by definition, dramatic changes in technology and business models challenge existing laws in often unexpected ways. Laws are difficult and slow to change, so there is an inevitable delay before the law catches up to the disruptive technology. During this period of “regulatory lag,” adopters of disruptive technology must necessarily assume some regulatory risk, and, in some cases, attempt to establish useful precedent.

For an example of this, one need only refer back to the late 1990’s and early 2000’s, when internet-based technologies started to become mainstream in business. The internet raised many novel questions relating to liability, trademarks, copyrights, defamation, privacy, and many other aspects of the law. Gradually, courts began establishing precedents, and, eventually, Congress began passing laws to specifically address those new questions. Those laws continue to evolve, but, broadly speaking, the application of those laws to the internet is now relatively well-established.

Blockchain, which has a number of potentially disruptive applications in healthcare, is experiencing the same regulatory lag right now. Only in the past year or so have regulators began to issue blockchain-specific guidance, but many questions remain unanswered or untested. The same is true for artificial intelligence.

Here are some examples of legal questions currently facing disruptive healthcare initiatives. Are telemedicine providers permitted to treat patients in other states or countries? In most states, the physician is deemed to be practicing medicine at the patient’s location, which creates a significant limitation on the ability of telemedicine providers to provide efficient, timely care. Is telemedicine covered by insurance? Under Medicare, coverage is quite limited.

If a patient’s information is stored on a blockchain, who are the “business associates” for HIPAA purposes? Would each node in the system be considered a “business associate”? If so, this might limit blockchain applications involving PHI to only private blockchains. In Europe, the GDPR poses similar questions; for example, how can blockchain enable a person’s “right to be forgotten,” given the immutability of a blockchain?

Do applications using artificial intelligence constitute “medical devices”? Medical devices face a more difficult regulatory path to market. Who is liable for a misdiagnosis resulting from an AI-based decision? Do any state or federal laws governing data collection and use apply to a particular AI technology? Is it reimbursable? At what point does an AI-based technology cross the line from “useful tool” to “practicing medicine”?

In addition to the regulatory lag, disruptive healthcare efforts face an additional hurdle; the current healthcare system in the U.S. is heavily oriented around the needs of payors and large employers, as opposed to the patients. In a very real sense, the tail is wagging the dog. Furthermore, healthcare providers run on razor-thin margins, and thus in many instances cannot afford the cost of leading the disruption. Can huge non-traditional entrants like Amazon change this equation? Certainly, Amazon has disrupted other retail and consumer-facing industries, forcing incumbents either to adapt or go out of business, but does Amazon understand the unique characteristics of healthcare and the distinction between patients and customers?

There are many other questions remaining to be answered; some have likely not even been asked! The potential for these and other disruptive technologies to transform U.S. healthcare is enormous; interested parties can only wait and hope that the regulators respond quickly and pragmatically to these changes. 

Chris Sloan is a shareholder in Baker Donelson’s Nashville office. He chairs the firm’s Emerging Companies Team and focuses his practice on start-ups and other emerging businesses. Sloan also handles complex software and other IT transactions for both small and large health care companies. 

Bruce Doeg is a shareholder in Baker Donelson’s Nashville office. He concentrates his practice in the area of business law with an emphasis on rapidly changing industries, including technology and life sciences.

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