But what happens to the government agency that regulates the buggy-whip manufacturers? Obviously, the forces of innovation and competition cannot force it to change.  So, it struggles to fit square innovative pegs into round bureaucratic holes.

I might be overstating things here, but that's they way I see the California Department of Managed Health Care's attempts to regulate so-called "balanced billing" by hospitals and ER docs to patients enrolled in health plans that are not "in network".  I last wrote about DMHC's initiative when it closed comments on its proposed regulation last month, and I proposed binding arbitration as a better solution than regulation.

The new regulation, which prevents balanced billing, is now closed for comment but not yet promulgated.  Nevertheless, DMHC has decided to charge one hospital chain with violating the rules.  Prime Healthcare Services, Inc., a for-profit chain of hospitals, appears to have a business model that consists of cancelling network contracts with health plans, attracting patients to its ERs, admitting them, and then billing full charges to the health plans, as well as patients if the health plans don't pay what's demanded (Daniel Costello, "Hospital group rejects system and cashes in," Los Angeles Times, July 8, 2007).

According to my sources in the health plans, Prime Healthcare specializes in unscheduled surgeries, taking advantage of vague regulatory language to admit patients from the ER, keep them as inpatients as long as it can (without informing the health plans), and executing expensive procedures.

According to current regulatory language (California Code of Regulations §1300.71-1300.71.4), this vagueness revolves around the terms "stabilization" (of the patient having an emergency) and "usual and customary charges" (of the hospitals and doctors).

I have no doubt that this is a problem that needs to be resolved.  However, I also doubt that DMHC is the one to solve it.  First, DMHC does not regulate hospitals.  They're licensed by the Department of Public Health; inspected by the Office of Statewide Health Planning and Development; and rated by the private, non-profit CalHospitalCompare.org.

So, how can DMHC charge a hospital with violating regulations? Indeed, until now, the DMHC has served providers' interests by helping them get paid by recalcitrant health plans.

Even worse, DMHC is unwilling to shake up hospitals' pricing by creating more transparency and consumer direction.  According to its Director, quoted in the Los Angeles Times, "patients shoudn't be brought into the middle of billing disputes, period."

On the contrary, Madame Director, patients have to be in the middle of billing disputes.  After all, it's their money.