That "can't do" spirit: why owning your own business is no longer a recipe for independence - Cover Story

When Charlie Bacall arrives at his office in the morning, he is very careful about where he hangs up his coat. Very careful. Not because his boss is looking over his shoulder; he's the boss. Not because his secretary is a neatness maniac; she isn't. He is careful because if he hangs his coat next to his lab coat, agents of the federal government can close his office down. Charlie Bacall is a doctor. His practice is regulated by the government.

Invasive government regulation is a direct consequence of the notion that government knows best and that social and economic goals can be achieved by bureaucratic fiat. That notion took hold during the super-normal economic growth of the 1960s which coincided with the acceptance, among Democrats, of an economic theory known as Keynesianism. This theory argued that government could manage the economy to produce strong and consistent growth. Thus, when strong growth actually occurred, people were convinced (mistakenly) that it was due to Keynesian economic management. Indeed, the coincidence was so compelling that by the early 1970s even Republicans had become true believers. And the delusion that government was the Superman of Good Outcomes spilled over into microeconomic and social issues.

The drive to regulate began slowly in the 1960s, raced along during the 1970s, held its own during the 1980s, and accelerated in the early 1990s. So far, the Republican Congress has done little to slow it. The result of 30-plus years of bureaucrats with the power to direct events has been the near suffocation of everyday activity for many businesspeople, especially those with small firms.

If that sounds too dire to you, then you are part of the lucky portion of the population who is insulated from this daily intrusion. Your direct brushes with the government are probably confined to specific and discrete events - paying taxes, being licensed to drive a car, or getting a call for jury duty. And although it's hard to think of an industry or profession in which government regulation is absent, the experience for some is more intense than for others. If you work for a big employer, for example, the chances are that your job has little to do with government regulation - that is usually the province of specialized employees in the company - but if you work for yourself, the government is in your face. The extent of the damage becomes clear when the direct impact of regulation is examined. So here are some real stories of what happens when the government mucks about in the way we do business.

First, I've chosen two doctors. Charles J. Bacall and Roy Levit are small businesspeople who bear the brunt of the good ideas gone bad embedded in government regulation - cost, daily frustration, and demoralization. I've known Dr. Bacall for many years because I am one of his patients. I know him to be a dedicated physician and not particularly a whiner or a complainer. I don't know Dr. Levit, but he is respected, successful, and was amenable to an interview. Like many doctors, neither is interested in or knowledgeable about business practices or management.

Bacall, 45 years old, became a doctor for predictable reasons: He had an aptitude for science and, preferring people to lab work, chose to be a physician rather than a researcher. But he had other reasons as well. As the child of a poor immigrant family, his father told him more than once: Be your own boss. He says: "My getting a medical education was a way of developing independence in the system, a way of assuring me middle class status." Did he think it was also a way of getting rich? "On no, when I was training in the 1970s, I thought if I could make $50,000 a year it would be the best thing that ever happened to me."

Bacall graduated with an M.D. in 1975 from New York Medical College. When I interviewed him, he was an assistant professor of obstetrics, gynecology, and reproductive sciences at Mount Sinai Hospital in New York City, with an appointment at the Mount Sinai School of Medicine. His practice, which he shares with four other doctors, employs three medical assistants, two office managers, and three medical receptionists.

One of his office managers, Linda Wilhelmy, describes her work as "a ton of paper work and millions of phone calls." She handles patient billing, disability forms, operating-room bookings, blood donations, and off-site appointments for consultations. She works from 8:15 a.m. to 6:00 p.m., eating lunch at her desk. That's her job and she likes it, feeling she gets double satisfaction from helping the doctors and their patients.

Bacall's practice is, for New York City, a fairly old-fashioned one. He doesn't, as many of his colleagues do, demand payment for surgery in advance. "We operate on a handshake. If patients can't pay, we assume they are telling the truth." And if they don't pay? "As long as they send some regular, small payment as a gesture of goodwill, we let it go." He doesn't take credit cards. "It doesn't seem professional," he says.

Three years ago, Bacall's office spent $30,000 for a computerized billing system. This concession to modern medical practice was late in coming but finally necessary because to bill the old way meant longer waits from insurance companies and the federal government for reimbursement.

It is clear that the office is set up as a business out of necessity and not as a primary object. "There's a fine line between medicine and business. We can't make it feel like a business to patients, but still we want to get paid," says Wilhelmy.

While Bacall doesn't take Medicaid patients at his office, he does treat them through his hospital as an attending doctor two days a month and on-call one or two nights a month. The hospital bills Medicaid in his name but keeps the money.

As for Medicare patients, given the nature of his practice, he has a relatively large share. Many are patients who started coming to the office in the 1940s. Although the doctors who treated them are now retired, Bacall keeps them on because he likes them and views them as a legacy of the founders of the practice. (They are called the "fountain pen ladies" because their early record entries are written in fountain pen.)

On a 24-patient day, five will be obstetrics, 19 will be gynecological - of whom four are fountain pen ladies. When Bacall started practicing medicine, Medicare reimbursement rates were comparable to costs. Now, they cover 80 percent of "allowable charges." Bacall charges, on average, $140 for a routine check-up; Medicare allows $47.63. He figures that he loses money on every Medicare patient. Not just on the dollar rate, but the time spent. While he could be spending an average of 15 minutes with a private patient, Medicare patients take about twice that long - both to undress and dress and because they have multiple complaints. "Their visit is a very important part of their day, their week," says Bacall, "so they can't be rushed and I don't want to rush them."

There is of course no way to see Medicare patients at a reasonable rate - even if they are rich and wish to reimburse him privately. "If I know they are over 65, I can only charge them the Medicare rates and these rates are capped. No reasonable fee-for-service is allowed. The wisest business decision I could make would be to stop taking Medicare patients," says Bacall. Many of his colleagues already have.

But that's hardly Bacall's biggest headache. Of the migraine variety, there are two. The first is the Clinical Laboratory Improvements Amendments of 1988, which covers in-office testing. Now obviously, as both Bacall and Wilhelmy agree, in-office tests should be performed under certain standards and by qualified people. But, they argue, although CLIA standards may have started as a good idea, they quickly have become unnecessarily nit-picky.

For example, CLIA directs that only doctors may peer into a microscope - no matter that medical assistants have been trained to do so. About 90 percent of complaints can be diagnosed under a microscope, an inexpensive and quick procedure. But if doctors don't have the time, the microscope is either bypassed, resulting in a higher percentage of incorrect decisions, or the slides are sent out to a lab, which costs five to ten times more than in-office tests and takes several days.

Ditto for in-office blood testing. It's an easy procedure, and the machines that perform the tests are very accurate, but since CLIA requires two controls to be run once a day on each item - hemoglobin and cholesterol in this case - blood testing has become expensive and time-consuming. Bacall has compromised by limiting the days on which his office does blood tests.

CLIA also requires an enormous amount of paperwork. Everything must be logged. For instance, the temperature of the refrigerator and freezer must be monitored and recorded every day, as must a list of patients having tests performed, and a list of all control seras and their expiration dates. The office must also have a cleaning schedule for the lab, notes on how problems are taken care of, and a typed procedures manual stating how tests are to be performed - the manufacturers' manuals are not enough.

Bacall's office was checked by a CLIA agent last July, at the doctor's expense. The three-hour visit of one agent cost the office $1,000, payable to the federal government. If the agent had found anything out of line, they would have been fined in addition to the inspection fee.

The net result is that an increasing portion of Wilhelmy's salary and office budget is spent on satisfying the demands of government surveillance and a decreasing number of tests are performed in-office because they are no longer economically viable. Even after cutting back on in-office testing, Wilhelmy figures that following CLIA requirements takes a half hour of her day, every day.

A second migraine comes from regulations by the Occupational Safety and Health Administration. They are initially felt by Wilhelmy, who says it takes weeks of research to figure out just what OSHA wants when it issues guidelines. The last big issuance required, among other things, that the office purchase a bunch of signs to alert people that smoking, eating, or drinking were not allowed in the lab area; that it buy special cleaning substances to mop up spills; that it designate a separate space as an "eye wash station," in case anybody gets something in his or her eye during a procedure; and that it purchase separate refrigerators for certain items, clearly marked "BIOHAZARD: No food or drink in this refrigerator." Anything that might be touched by a doctor when examining a patient must be wrapped in plastic, including the examining light, which is sheathed in a sort of condom that must be changed after every patient.

Beyond the frustration and expense of having the government micromanage his office practices, Bacall resents having his treatment decisions second-guessed. "There is a layer, often a large bureaucracy - a government agency or some insurance company - interposed between me and my patient. I have to justify the treatment I know is right. I spend a lot of unreimbursed time on the phone calling and arguing with these gatekeepers."

The basic story is the same for Dr. Levit: government regulation constitutes a daily frustration and intrusion in the way he practices medicine. Levit, 53, is an ophthalmologist specializing in retinal surgery. He got his degree at the University of Texas and began private practice in 1975 in El Paso, Texas. He works with two other doctors. The office employs 14 people; six devote all their time to the business side of things - an office manager, three clerks to handle insurance and collections, a receptionist, and a transcriber (because all chart notes are dictated). Levit spends, on average, an hour a day with the office manager.

Like Bacall, he's had to computerize his billing system - at a cost of $40,000 over the past five years - but he still waits, and waits, for reimbursement. "One of the reasons we computerized was to speed reimbursement, but now that the majority of physicians file electronically, the government has extended payment time to pre-computer levels by rejecting valid claims over and over again," says Levit.

Levit sees on average 30 patients a day. Five to seven of them are new, the rest are there for follow-up treatments. He sees both Medicare and Medicaid patients. He says that everybody is treated the same medically, but the demands imposed by government insurance mean patients are dealt with differently: "For example, Medicaid will only pay for one test per visit, so if we want to be reimbursed, we have to make the patients come in three or four times just to perform the minimum number of necessary tests," he says. That is, if the patient lives nearby; for those beyond 150 miles, Levit just does all the tests in one visit - and loses his reimbursement.

Levit's main regulatory nightmare is the Americans with Disabilities Act, especially since many syndromes involve both eye and ear impairment. (See "Unreasonable Accommodation," August/September 1995.) Before the ADA, he felt able to communicate with hearing-impaired people by gestures or through writing. Now he must pay $50 an hour for a professional signer to accompany them. In the case of Medicaid, which reimburses $8.00 for the entire office visit, he is out $42 right off the bat. He reckons that this requirement costs him $200 to $300 a month. (He lucked out on another ADA requirement, however. The arms on his six examining chairs can be removed, so he didn't have to replace them - at $5,000 a pop - to accommodate the grossly overweight.)

Now all these niggles, taken separately, don't sound like such a big deal. And maybe they're not. And maybe they aren't such a big deal when taken all together. Certainly both Bacall and Levit earn very good livings despite the regulatory overload and the reimbursement shortfalls. And certainly both know doctors who actually make the system work for them - a polite way of saying that some of their colleagues are making out like bandits.

But the effect of all the niggles goes well beyond time and cost and paperwork. A bigger burden hits job satisfaction. Although Bacall is responding rationally to increasing regulation - by cutting back on procedures, hiring two full-time office managers to handle the paperwork and regulatory requirements, and battling the gatekeepers - these responses limit the way he practices medicine. And leave him demoralized. "Part of me likes what I am doing," says Bacall. "It's hard to see myself doing anything different. But I am 45 years old and I feel like a dinosaur. I'm on the top of the list of being extinct."

Levit echoes this sentiment. He says that until six years ago, he never considered patients from a financial point of view and that it's hard to accept the new realities: "Younger doctors won't have as much difficulty adjusting to increased regulation and thinking about remuneration, but I feel outmoded in a way - abused may be a better term - it's hard to learn new habits."

On the other hand, Levit is also more defiant. "Nobody is going to force me out of private practice. I like helping people with vision problems. I want to continue doing it," he says. "I'm going to pay close attention to the rules and learn to work within the system." Does he feel diminished by playing the game? "Of course I do," he snorts.

Bacall says that when his colleagues get together now, the talk focuses on discontents and often runs to retirement - remember, these are people in their 40s - but they feel boxed in. They can't retire gracefully, cutting back their patient load, because the fixed costs of running an office are so high - computers, regulatory compliance, malpractice insurance, and so forth. Bacall, who says he works, on average, 70 hours a week, feels he can't wind down his practice. "I have three children. So far not one of them wants to go into medicine and I'm not unhappy about that. In the last 20 years, there have been so many changes, there isn't the same level of career satisfaction," he says.

Granted, medical doctors are probably feeling unusually touchy these days and not all their complaints are with the government. Some are just reacting negatively to market forces that are reducing their fees and asking them to account for their services. But listen to two other people in what are more traditionally considered small businesses. Again, both are successful and not prone to pessimism and complaint. And, as with most small businesspeople, they are risk-takers who have built a business from the bottom up.

Charlie Palmer has just the kind of history that people are referring to when they talk about the United States as the land of opportunity, and he is just the kind of person that people admire when they talk about the rewards of hard work and talent. Palmer is the owner of one of New York City's best and most fashionable restaurants. He is also a chef with a reputation for innovative American cuisine. And he did it all himself.

Palmer was born in a small town in New York State called Smyrna. During summers and after school he worked in various restaurants, starting as - what else? - a dishwasher. He liked the work just fine, but didn't consider cooking as a career; he thought he would play pro football. (He's a big, fierce-looking guy, at 6 foot 3 inches, 250 pounds.) He didn't actually decide to be a chef until he graduated from high school. He then spent two years at the Culinary Institute in Hyde Park, New York, and came straight to New York City. He rented an apartment in Hell's Kitchen for $50 a month and had his car stolen.

Palmer spent the next several years working at some of New York City's nicer restaurants - like Cote Basque, where he began as a butcher. He also had a bunch of second jobs - like making pastry at La Petite Marmite. By working two jobs, 16 hours a day, he gradually expanded his expertise. And he came to realize that the restaurant business was "strictly a business - the more you put into it, the more you get out of it."

When Palmer finally made his first trip to France, he went right to its gastronomical center, Lyons, and worked in a very famous three-star restaurant. He spent every cent he earned eating at good restaurants. "In France, I really realized what was going on - there, they live for food."

Back in New York City, there was no stopping him. After four years as head chef at The River Cafe, another important restaurant, he was confident that he could be successful as both a businessman and a chef. So, in 1988, along with two partners (whom he later bought out), Palmer started Aureole.

In a city where the experience of eating is as important as eating itself, restaurants are "designed" by professionals. Not for Palmer. "I wanted to choose the way it looked," he says. He chose the neighborhood (Upper East Side), the building (a brownstone), the ambiance (low-key), the place settings (simple), and the flower arrangements (spectacular). "I did sheetwork, I sanded floors, hey! I even did woodwork."

The restaurant, which seats 90-100 people, is open for lunch five days a week, dinner six days. It ain't cheap. The fixed price lunch is $32; dinner is $59. Palmer employs 68 people, including 21 cooks, maitres d'hotels, waiters, cashiers, bartenders, and bookkeepers. Some of them are part-time.

Palmer gives new meaning to the term "hands on," saying: "I am the manager and chef - and dishwasher when somebody doesn't show up." And he is also in the restaurant whenever food is served, taking vacations only when it is closed. During the first two years, Palmer worked from 7 a.m. to 1 a.m.

On the day I visited him, he was wrestling with "just another hassle" over a recently purchased creamery in Peekskill, New York. Palmer figured that since this country makes so much dairy produce, it shouldn't be all that difficult to make the best quality butter, cream, and cheese.

The creamery applied to the U.S. Department of Agriculture for all the necessary approvals, got most of them, and then started marketing its cream, butter, chocolate butter, and four types of cheeses to restaurants and specialty food stores. The cream is called "clabberd cream" - an old-fashioned term used by farmers. Three months after the creamery started distribution, the USDA decided to withhold its regulatory approval of the labeling, saying that the word "clabberd" implies the cream was made "in a home."

Palmer was trying to decide what to do, and he was vastly good humored about it. Perhaps that's because that was just the problem du jour - he has been hassled by government regulations from the start. Consider Palmer's most exasperating brush with government regulation: Several years ago, as he tells it, a guy came into the restaurant at 9 p.m., which was right in the middle of dinner service, and flashed a badge from the Environmental Protection Agency. He told Palmer that he would have to shut down his kitchen exhaust system because there was a complaint that its noise level was above the EPA standard. The restaurant was full.

Palmer explained that if he shut off the exhaust system while making 100 dinners, the temperature would rise so fast that the fire extinguishing system - 38 jets which spew white fire retardant all over the kitchen - would be set off. The EPA agent said, "Shut it down or I'll arrest you," and called the police. Palmer shut it down, the heat in the kitchen skyrocketed, and the fire extinguishing system went off and ruined everything in the kitchen.

The cops arrived before Palmer could punch the guy out. Instead, he went from table to table, apologizing and explaining that there would be no dinner that night.

Palmer lost $10,000 in dinners, was fined $1,750 for a noise violation, spent $26,000 to correct the violation, and paid about $60,000 in legal fees. He also endured two visits a week from the EPA for the next six months.

What does he make of this experience? Palmer's response is put mildly but his message is discouraging. "Regulations don't promote small business growth. They don't help small business to prosper." Is he happy? "It's better than working for someone else," he says.

And finally there is James Spradley Jr., 39 years old. He looks like the Brooks Brothers notion of a corporate lawyer - sandy hair, square jaw, and glinty eyes. And he does business like a corporate lawyer, hiding a crafty intelligence under a seamless layer of good manners. But he's not a lawyer. Never even thought about it. Spradley runs a candy company in Nashville, Tennessee.

Spradley, who got an M.B.A. from the University of Chicago, always wanted to manage a business. Two years after he graduated, he got his wish when he persuaded his father, a retired businessman, to come in with him and buy the Standard Candy Company. The company wasn't exactly hot. It had sales of $2.5 million from a handful of products, notably something called a Goo-Goo Cluster - a roundish bar of peanuts, marshmallow, caramel, and milk chocolate.

That was in 1982. With very little capital but through what Spradley calls "enormous amounts of energy," the company expanded its products (introducing the Goo Goo Supreme, a cluster made with pecans instead of peanuts), increased its production, and enlarged its scope. In 1985, Spradley bought another not-so-hot company called Stuckey's - a firm making candy for about 100 roadside shops, mostly in the South, with sales of about $7 million.

When I spoke with him, the combined operations were selling about $35 million annually. Spradley is, obviously, a success. But has his dream come true? Is Spradley managing? "When I graduated from business school, I thought managing a company meant I'd be out selling, doing capital analysis on the purchase of new equipment, managing employees, and developing marketing plans. Instead, half my time is paperwork," he says. While he doesn't blame that directly on government-generated tasks ("I can ask someone else to do it...") he says that regulatory considerations are creeping into every decision he makes.

The firm has to make sure employees are legal. Although he is forbidden to ask potential employees questions based on race, country of origin, or sex, he then has to file papers on all applicants on their race, sex, and national origin. "We are not supposed to ask, but we are supposed to know," Spradley shrugs. Standard is occasionally asked to collect money from an employee by the courts - garnishments for child support, alimony, or payments to a bankruptcy trustee. Failure to handle this paperwork correctly could result in the company being held liable for the entire amount owed by the employee.

As a food manufacturer, the government agency that Spradley mostly deals with is the Food and Drug Administration. He says, "The FDA is not in our face - it just sneaks up and makes us do something we hadn't planned on and costs a lot."

For instance? Nutritional labeling. In 1992, the FDA mandated that by 1994 all processed foods carry labels describing nutritional value, thus making Standard Candy's packaging obsolete. The company needed new artwork, new printing plates, and a nutritional analysis of its products. Spradley estimates the cost of re-tooling, depending on the product, at $4,000 to $10,000 - for a total of over $150,000. It also meant that $250,000 worth of old packaging held in inventory was unusable for sales in the United States.

There are also the seemingly endless small irritations. "The FDA is constantly outlawing something so we are constantly having to change ingredients," Spradley says. For example, rules regulating Red Dye #2 have changed three times in six years.

A second, more indirect, source of frustration comes from the U.S. Department of Agriculture. Two major ingredients in Spradley s manufacturing process - peanuts and sugar - are highly regulated by the government. Both must be purchased domestically for domestically marketed products. Fine, except domestic peanuts, some of which are grown under a quota system in which the government guarantees purchase, cost two times more than non-quota peanuts. Ditto for sugar, where the world price is two-thirds of the U.S. price.

Those two artificially high prices, taken together, mean that it costs Standard 15 percent more for raw materials for the U.S. market than it does for exports to Mexico and Europe where non-quota peanuts and non-U.S. sugar are used. "We pass the increased cost on to our customers," says Spradley, "but the whole exercise is exasperating and requires a significant amount of record keeping."

And then there is just the plain old exasperation over good-hearted government regulations that can have hard-hearted impact. Under the Americans with Disabilities Act, Standard's plants are required to lower the curbs to accommodate people in wheelchairs. Fine. But as Spradley points out, "This is a good thing for people in wheelchairs, but it is heck on blind people who trip when they can't find a raised curb."

Spradley displays a characteristic businessperson's split personality. On the one hand he feels that increasing government interference in the marketplace will "soon make the United States as unproductive as France or Germany," but about his own business, he is optimistic. He has two daughters. He hopes that someday both will run the Standard Candy Co.

All four of these businesspeople are coping, to be sure. Each understands that the goals of many regulations are desirable - whether they are to set high standards, ensure safe conditions, enhance the quality of life, or provide equal opportunity. Unfortunately, however, in trying to achieve those goals, regulation has proved ham-handed and heavy-footed.

Indeed, government regulation is invidious: It dampens productivity, saps innovation, damages business investment, creates uncertainty, costs a lot of money, promotes frustration, supports two insufferable groups - lawyers and bureaucrats - and drives otherwise sensible people mad.

Unfortunately, despite the 1994 congressional election, where the single, overwhelming result of exit polls demonstrated that voters are fed up with big, expensive, and intrusive government, congressional will has been weak. For example, a House bill to require that new federal regulations costing more than $25 million be submitted to cost-benefit analysis faltered when the Senate failed to pass its own version.

And that leaves us all holding the bag.

Susan Lee (sclee12@aol.com) is an economist. This article is adapted from her book, Hands Off: Why the Government is a Menace to Economic Health. Copyright [C] by Susan Lee. To be published in April by Simon & Schuster.

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