Businesses Are Often Their Own Worst Enemies Yet Wonder Why They Are Regulated

I am more than willing to defend government regulation of business, but I do so only because the alternative is worse.  That is, it would be great to live in a world in which regulation were entirely unnecessary.  After all, regulating businesses' activities is neither fun nor easy.  It requires setting up processes that are fair and thorough, promulgating rules that are informed by expertise (which is often expensive to acquire and apply), and it creates an adversarial relationship that is obviously worse than an atmosphere of cooperation and positive back-and-forth communication -- or what is sometimes called enlightened self-interest.

This is necessary to state up front because the people who think of themselves as "pro-business" -- but who are in fact ultimately bad for business -- have conjured up a story in which governments are positively eager to impose rules on businesses, apparently due to some combination of spite and jealousy.  They ask truly weird rhetorical questions such as, "If you're so smart, why aren't you rich?" which apparently is meant to imply that regulators are not even competent to do what they do.  The fact is, however, that there is more than enough to worry about in the world, and having even one less thing on the list (either because a problem has been resolved or because it never arose in the first place) would be welcome news even to the most devoted fan of the Administrative Procedure Act.

So the answer to the question, "Why are there regulations?" has to be, "Because businesses caused problems and refused repeated requests to fix them without necessitating a government response."  I was reminded of this truism by a somewhat random set of examples of predatory business practices that have recently floated to the surface of the news -- that is, in those increasingly rare moments when the news is not completely dominated by Donald Trump.

Consider health care in the United States.  Long before President Obama signed the Affordable Care Act in 2010, people had become infuriated by the abusive and greedy behavior of medical care providers and especially health insurers.  In 1997's "As Good as It Gets," for example, Helen Hunt's character has this exchange with a doctor played by the late, great Harold Ramis: 

Dr. Martin Bettes : [looks up] No standard scratch test, they poke him with a needle...?  

Carol Connelly : No. I asked, they said it wasn't covered under my plan and that it wasn't necessary anyways. Why, should they have?  

Dr. Martin Bettes : Well...  

Carol Connelly : [beat] Fucking HMO bastard pieces of shit!  

Beverly Connelly : Carol!  

Carol Connelly : I'm sorry.  

Dr. Martin Bettes : It's okay. Actually, I think that's their technical name. 

Audiences loved that moment, and why not?  During my judicial clerkship a few years later, one of the largest parts of the federal appellate docket involved case after case in which health insurers had been "creatively" redefining the concept of preexisting conditions and finding other ways to deny coverage to sick people, in some cases directly causing people to die of illnesses that were treatable and should have been covered.

Even so, the health insurance complex did everything that it could to stop the ACA, just as it had used the infamous, smarmy, and dishonest "Harry and Louise" public relations campaign to sink a regulatory proposal during the Clinton Administration.  The sleazy imaginary duo was even brought back in 2008, and although a bill did ultimately pass, the process was extraordinarily difficult, the final insult being the Administration's abandonment of the so-called public option.

And what happened after the ACA took effect?  It became increasingly popular, so much so that one might think that the regulated actors had found a way to come to terms with the limitations imposed by the (relatively unambitious) law.  As it turns out, however, the financial incentives have simply been too tempting.  Last week, for example, Elisabeth Rosenthal published an op-ed in The Washington Post, explaining that the provisions in the ACA that were supposed to encourage preventive medicine by making things like annual physical exams and mammograms cost-free to patients have become the clip joints of the 21st century.

Rosenthal begins her piece with an anecdote about a woman who was charged $236 for a supposedly free mammogram.  Why?  "The unsatisfying explanation: The mammogram itself was covered, per the ACA’s rules, but the fee for the equipment and the facility was not."  Rosenthal then makes this observation:

The ACA’s designers might have assumed that they had spelled out with sufficient clarity that millions of Americans would no longer have to pay for certain types of preventive care, including mammograms, colonoscopies and recommended vaccines, in addition to doctor visits to screen for disease. But the law’s authors didn’t reckon with America’s ever-creative medical billing juggernaut.

Over the past several years, the medical industry has eroded the ACA’s guarantees, finding ways to bill patients in gray zones of the law. Patients going in for preventive care, expecting that it will be fully covered by insurance, are being blindsided by bills, big and small.

"Gray zones."  To put it in the Helen Hunt character's vernacular: If businesses want to avoid being regulated with increasingly exacting rules, the bastards should stop doing this fucking shit.  A large part of the problem is that insurers are repeat players that can choose not even to pretend to follow the law, agreeing to "correct" overcharges only after a fight, knowing that some meaningful number of patients will never try or will soon give up.  Rosenthal's protagonist, for example, caved and paid the $236 after having successfully challenged a $1000 "mistaken" charge the prior year.

Rosenthal adds: "Though these patient bills defy common sense, room for creative exploitation has been provided by the complex regulatory language surrounding the ACA," and concludes: "Perhaps most disturbing: These unexpected bills might discourage people from seeking preventive screenings that could be lifesaving, which is why the ACA deemed them 'essential health benefits' that should be free."

And this is an old game of cat and mouse, with the regulated industry lobbying to weaken enforcement and funding for the regulators.  Worse, this leads to spillover problems in other areas of people's lives.  A medical doctor with an often useful YouTube channel who goes by Doctor Mike, for example, recently published a video in which he exposed the scammy "wellness industry," focusing on Gwyneth Paltrow's Goop nonsense.

That largely unregulated world of modern snake-oil salespeople was somehow able to sell just shy of $130 billion of goods last year, and it is projected to reach $400 billion by 2030, a rate of growth that is honestly breathtaking.  Interestingly, Doctor Mike offered this observation: "And honestly, I think it's my fault.  Well, not my fault, but modern medicine's fault.  Truly, our health care system has provided us with nothing short of a garbage experience.  We have shrinking appointment times, burned-out physicians, and corrupt insurance plans that leave people wanting an alternative to 'regular medicine.'"  And as he points out, the products and practices that people are turning to have all kinds of negative effects, including causing people to delay getting effective treatment -- if it is even available, of course -- until it is too late.

So the cycle will begin again, with calls for regulation of this new industry that only exists because we have regulated (and funded) traditional health care so poorly, to be followed by half-baked and ineffective compromises that create more gray zones to exploit.  That is, it is not merely that the traditional health care industry is big and entrenched that makes it necessary to regulate it.  Even nascent businesses quickly become scams without adequate regulation.

Is it only health care-related businesses that follow this pattern?  After all, because medical problems are so utterly mysterious to most of us, we are putty in the hands of providers.  This makes it all but impossible to imagine that patients can effectively take on two of the key aspects of being a "smart consumer": (1) being informed and thus skeptical, and (2) engaging in comparison shopping -- most importantly, being able to walk away from a deal.  In theory, I suppose, people are supposed to say something like this: "I guess I won't have that strangely discolored patch of skin on my arm looked at, because the available options are too expensive."  Do they do that?  Would you?

But even if one believes that the usual market mechanisms that drive the supposed magic of the Invisible Hand are missing when it comes to medical care, surely it would be less necessary to regulate other types of businesses.  Right?  Again, we should want the answer to be yes.  When a new type of business begins, the common response is to do nothing and hope for the best.  Perhaps a bit of advanced legal planning should be more common, but that might be too much to hope for.

And it is not just a matter of a bunch of wackos like Paltrow who stumble upon an opportunity to hoodwink people for fun and profit.  Large companies are always looking to branch out, and hedge funds are always looking to bring their death grip to new industries.  There thus does not need to be even a lag or a learning curve before things get out of hand.

We thus find that the marijuana industry, which is not even legal yet in many parts of the country, is already being dominated not by startups but by Trulieve and Amazon, the former of which controls fully half of the market.  These are companies that are already very effective at finding ways around regulations, and in a new industry they can effectively prevent regulations from being created in the first place.  No surprise, then, that those two monoliths are pouring money into fights against antitrust enforcement and workplace protections for employees.

And this brings us back to one of my favorite (or least favorite, I suppose) stories of "the market" doing its thing: single-family housing.  In December 2021, I revisited that topic about which I had written extensively a decade prior.  In the aftermath of the Great Recession, which was caused in large part by the bursting of a housing bubble, large numbers of suburban houses sat empty.  It made no sense, I thought (and wrote ... frequently), that profit-seeking mortgage companies would foreclose on properties and evict the former owners, because that left money on the proverbial table.

Maybe the problem is that it is impossible to have functioning housing markets?  The obvious analogy is to rental apartments.  Some landlords are legendarily awful, especially in poorer areas, but we have decades of experience with smoothly functioning rental markets in major cities in the US and around the world.  If the companies that foreclosed on what had been owner-occupied houses were to decide either to become rental management companies or to sell their stock of homes to other companies that are willing to provide that key service to willing renters, that sounded like a classic win-win.

Even at the time, I wrote that a reasonably adequate regulatory regime would be necessary, so I was hardly a trusting naif.  As I wrote in 2021, however, even my minimal hope for a decent regulatory minimum had been exposed as being hopelessly naive.  The title of that column was, after all, "Vulture Capitalism Comes to Your Cul-de-Sac."  Interestingly, that issue came up again a few months ago, raised by -- of all people -- Robert F. Kennedy, Jr.

Yes, RFK Jr.'s dangerous and delusional presidential campaign is not only about vaccine denial.  Ever the opportunistic, inconsistent loon, that candidate decided to start ranting about large companies' predatory behavior in the now-enormous world of rental houses.  I was concerned to find myself apparently on the same side as the errant Kennedy.  Being who he is, however, he could not keep his story straight, so much so that even Glenn Kessler, the fact-checker for The Post who by no means bats 1.000, had fun taking Kennedy down.

Kennedy does makes it easy, presenting everything in his usual conspiratorial terms and getting basic facts wrong.  Per Kessler's piece, Kennedy said this in a campaign speech last August: "There’s three companies. BlackRock, Vanguard and State Street. Those three companies, which all own each other, so it’s really one huge behemoth, also own 88 percent of the S&P 500. Now they have a new target, which is to gain ownership of all of the single-family residences in this country."  Kessler patiently runs through all of the ways in which Kennedy's specific claims -- and broader insinuations -- are wrong, which is a public service.

So it turns out that Kennedy's rants about predatory capitalists are wrong in almost every respect, but that does not mean that there are not genuine reasons to worry about what is happening.  I cannot improve on what I wrote in 2021 about the poorly regulated new world of corporate-run house rentals:

And sure enough, the investors who could make an honest buck from renting out houses cannot hold themselves back.  They exploit people's weaknesses in all of the familiar ways, from tacking on fees wherever they can, failing to tell customers about legal protections, and so on.  Again, the new ownership companies are able to hire competent lawyers to profit from economies of scale, but then those same lawyers figure out how to use contracts of adhesion and all of the other old tricks to bleed customers dry. ...

This, then, is merely another of many examples that make it clear that "letting the market solve the problem" is an empty dodge.  Even someone like me, who thinks that home ownership should be discouraged, would never say that we can simply expect private investors to treat people decently.  They will treat people -- especially when the product is one's residence, where there are significant barriers and costs militating against "taking my business elsewhere" -- exactly as well or as poorly as the law (as written and enforced) allows.
 Why do we regulate?  Not because we want to, but because we have to.