The 1975 antitrust decision that gave you physician-owned hospitals.

On May 15, a 25-year-old woman named Hilary Carpenter had an operation at the Colorado Orthopaedic and Surgical Hospital in Denver to replace a shunt valve in her brain. After the surgery, Carpenter experienced a severe headache and nausea. After consulting with a physician on duty, a registered nurse at the hospital administered Demerol, but the dosage was wrong, and Carpenter's heart stopped. In a scene that state investigators later described as "chaotic," hospital staff was unable to locate quickly the equipment needed to revive Carpenter. According to the investigators, there were only a few people on hand that day to deal with the crisis, and those present lacked training to handle such emergencies. Eventually the staff did something you wouldn't normally expect a hospital to do: They called 911. A paramedic team took Carpenter to a different hospital, where she died.

A July 17 news story about this incident in the Denver Post prompted an immediate outcry from Sens. Max Baucus of Montana and Chuck Grassley of Iowa, Democratic chairman and ranking Republican member of the finance committee, then as now struggling to craft a bipartisan health reform bill. The occasion for their outrage was that the Colorado Orthopaedic and Surgical Hospital is one of about 230 hospitals in the United States that are owned by doctors, nearly all of them so-called "specialty hospitals" that steer clear of the seriously ill or uninsured. "Sen. Baucus and I have worked for years now to address the concerns that come with physician-owned hospitals," Grassley said, "including inherent conflicts of interests for physician-owners and, more importantly, patient safety. I remain concerned about the ability of these facilities to address emergency situations." The senators have written into their still-incomplete reform bill that any new doctor-owned hospitals will be barred from participating in Medicare and that existing doctor-owned hospitals must increase safety precautions. The House bill (which has finally won support from Blue Dog Democrats with what appear to be minor concessions) contains a similar provision.

Doctor-owned hospitals are the most conspicuous manifestation of a culture of entrepreneurship that's gone a long way toward creating today's health care crisis. Although traditional economic theory holds that competition drives prices down, in medicine competition had tended to drive prices up as doctors explored new avenues for profit, most typically through fee-for-service overuse of expensive technologies and procedures. It's easy to shrug at such things and say, "That's capitalism." But, in fact, market-driven medicine didn't exist a generation ago, because the American Medical Association didn't allow it. "I saw it happen before my own eyes," says Dr. Arnold Relman, 86, emeritus professor at Harvard Medical School and former editor of the New England Journal of Medicine. Relman has written extensively (most recently in the New York Review of Books) about what he terms "the medical-industrial complex." Much of the blame for its creation, Relman believes, lies with the Supreme Court's 1975 decision in Goldfarb v. Virginia State Bar.

Goldfarb doesn't get a lot of attention from the health-reform crowd, partly because (as its name suggests) it was a case involving lawyers, not doctors, and partly because it extended the reach of antitrust law, something usually favored by the same sort of Democrats who want to make health insurance universal.

Lewis H. Goldfarb was a homebuyer in Fairfax County, Va., who got mad when he couldn't find a title-search lawyer willing to charge less than 1 percent of the purchase price, the minimum recommended by the county's bar association and enforced by the state bar. Goldfarb maintained that the bar's imposition of a minimum fee constituted price fixing and violated the Sherman Antitrust Act. The Supreme Court agreed, and in a unanimous opinion (minus Justice Lewis Powell, who recused himself), Chief Justice Warren Burger concluded that law and other "learned professions" participated in "trade or commerce" as defined by the Sherman Act and therefore could not engage in "anticompetitive conduct."

Nowhere in the opinion did the words medicine or doctor appear, but the implications for health care were immediately obvious. Prior to Goldfarb, Relman explains, any notion that doctors or hospitals might seek to maximize profits was deemed a violation of professional ethics. AMA guidelines forbade doctors to advertise, to sell drugs, or to own a financial interest in any lab or machinery they used to perform tests. Medical doctors' sole source of income in the health arena was supposed to be the care of patients (or supervising the care of patients). "For the most part," Relman says, "those guidelines were followed."

After Goldfarb, the AMA's lawyers warned that such prohibitions risked being struck down in court as anti-competitive. So the AMA altered its message. Doctors could now have other sources of health care-related income, provided these money-making activities weren't harmful to patients and that patients knew about them. In 1982, the Supreme Court followed up on Goldfarb by striking down not a minimum fee but a maximum fee imposed by Arizona's Maricopa County Medical Society. Federal regulations were imposed to ban a few particularly egregious types of physician self-dealing.