Business disruption, Christensen’s classic observation of disruptive technologies leveraged by market entrants attacking mainstream industry incumbents, has generally failed in health care. There are several reasons why innovative businesses harnessing modern technologies have found health care a difficult nut to crack. The most likely reason is that the misaligned incentives caused by third-party reimbursement discourage consumers from choosing new, lower-cost alternatives.

However, there are additional explanations. Sometimes the arcane, fragmented nature of health care proves to be a poor fit for technologies successfully implemented in other businesses. In other cases—think electronic health records—a lack of common data standards allows proprietary data formats to cause customer lock-in.

But, what is the impact of health care regulation? Beyond the traditional trope that regulation stifles innovation, how does health care regulation impact disruption? Recent developments in the markets for hearing aids suggest some answers and even a possible regulatory approach to the broader and burgeoning category of mobile health apps and wearables.

As the FDA itself recognizes, “The agency does not regulate the practice of medicine — how and which physicians can use a device.” However, FDA decision-making does determine the extent that a device is subject to regulated (including physician) distribution. Oversimplified, a product may be unregulated (not a “device”), regulated as a device but approved for over-the-counter (OTC) distribution, or regulated as a prescription-only (Rx) device.

Surprisingly few medical devices are available OTC. In particular, the FDA approves very few in vitro diagnostic products (IVDs) for OTC distribution (there are notable exceptions such as pregnancy testing kits). In a sense, therefore, the FDA preserves professional hegemony: if devices tend to do what doctors do (diagnose, treat, etc.) or are sufficiently high risk that they should only be used by professionals, then FDA regulation will consign them to distribution through professional channels.

In the hearing aids space, a 2015 letter report from the President’s Council of Advisors on Science and Technology (PCAST) described a market “characterized by high cost and low innovation,” causing under-utilization of the devices by those medically in need. The traditional problem of third party reimbursement was not to blame because Medicare does not cover hearing exams or aids (although some state Medicaid plans may provide some coverage). Concentration in the hearing aid industry seemed to be a likely explanation, except that large retailers have been able to lower prices with store brands.

For PCAST the identifiable problem was a distribution stack that resulted from regulation. FDA regulation of hearing aids as Rx medical devices funnels their distribution though state-licensed physicians or audiologists. As noted by PCAST, this leads to expensive and often unnecessary bundling of services and product. Furthermore, there is considerable vertical integration with hearing aid manufacturers owning licensed dispenser practices or otherwise impeding comparison shopping.

Interestingly, however, FDA does not treat all sound amplifiers the same. Pursuant to a 2013 guidance the agency declares that Personal Sound Amplification Products (PSAPs) are not medical devices. This is because PSAPs amplify soft sounds (rather than, say, concentrate on specific frequencies) and are not intended to “diagnose, treat, cure, or mitigate disease.” As a result, so long as PSAP manufacturers stay away from language that may indicate a contrary intent, their products are not regulated as devices and thus are not subject to the disruption-sapping regulated distribution stack.

However, “it is almost farcical to pretend that PSAPs are being used only by bird-watchers,” suggesting stealth disruption of the hearing aid market. Both the Institute of Medicine and the FDA recently held public workshops on hearing loss touching on inattentiveness by primary care physicians, lack of innovation, and available ameliorative technologies, including an examination of some of the market issues raised by PCAST.

PCAST made some cogent recommendations. Bundling should be ended, as it was for eyeglasses and contact lenses, by requiring physicians or audiologists to provide a portable copy of any prescription. The FTC should be tasked with examining the effects of state regulation on local and interstate markets through professional licensure. Most significantly, PCAST recommended that FDA should relax its control over the truthful advertising of PSAPs while also carving out an additional class of basic hearing aids (primarily designed for age-related hearing loss) that, while classified as medical devices, would be distributed OTC.

A Regulatory Model For Mobile Health Apps And Wearables That Borrows From The Sound Amplifier World

In the world of hearing aids, having three regulatory classes of devices (unregulated PSAPs, OTC medical devices, and Rx medical devices) seems like overkill. However, such a trichotomy might be an interesting way of approaching the regulation of mobile health apps and wearables. Examples of mobile health apps include allergen-predicting apps such as AllergyCast, AI-based health “assistants” such as Your.MD, and chronic disease monitors such as Diabetes+Me. Wearables include the ubiquitous FitBit activity trackers, adhesive condition monitors such as VitalConnect, and Apple’s Watch together with its associated Health app and ResearchKit and CareKit frameworks. According to sub-regulatory guidance, most mobile apps and some general wellness products would be considered devices. However, the FDA is generally electing to exercise considerable regulatory discretion.

With regard to wearables, FDA already excludes from regulation products that are “low-risk” and are aimed at improving the “general state of health” and “do not make any reference to diseases or conditions.” The FDA approach to mobile health apps is more complex. Ten app categories are identified, with regulatory discretion exercised with regard to seven categories, such as simple “trackers.” Unfortunately, the products in the unregulated categories have not distinguished themselves as particularly useful or effective. And of the regulated categories, one deserves highlighting: “Mobile apps that become a regulated medical device (software) by performing patient-specific analysis and providing patient-specific diagnosis, or treatment recommendations.” Ironically, this is the very category that could actually be useful and stimulate innovation.

Currently, such apps along with other examples of potentially disruptive upstream health care must contend with the lingering anticompetitive effects of distribution models unnecessarily anchored in professional space. Health care incumbents are losing at the app game and it may be time to give more freedom to the forces of disruption. The agency’s current guidance seems to satisfy neither proponents of regulation nor of innovation.

Indeed, even a cursory search of apps being offered in the app stores will yield plenty of diagnostic apps that are close to or over the regulatory line. Frequently, they wear this almost as a badge of pride, noting how their apps are “not intended to” diagnose or treat and are provided only for “informational and educational purposes.” The FDA lacks the bandwidth to chase down all these minnows. Yet, existing device regulation scares off responsible innovators whose products iterate rapidly and who want to avoid a regulated distribution stack.

Opening up a third category of regulated but OTC apps and wearables—akin to the category PCAST recommended in the sound amplifier universe—would allow FDA to lightly regulate the space (e.g., with warnings about the limits of non-professional diagnosis, and record-keeping requirements) and experiment with new categories for emerging products for which the traditional risk-based framework may not be a good fit. Further, if the FDA mimicked the PCAST recommendations for PSAPs and provided bright line exemption for a larger number of non-invasive but diagnostic apps and wearables it might encourage the consumer electronic industry to achieve more than just helping us to hear better.