Did Warren Burger Create the Health Care Mess?

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

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Chief Justice Warren Burger

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.

But in general, especially after Ronald Reagan became president, there was a paradigm shift. Where once government had sought to police the health care sector mainly to protect patients, now it sought to police it mainly to protect a competitivehealth care marketplace. A thriving health care bazaar, it was assumed, would serve patients’ interests. This is the theory that bequeathed us doctor-owned hospitals, the endless churning of marginally valuable medical tests, and dermatologists’ waiting rooms where patients are bombarded with video infomercials in which their very own doctors market skin creams and facelifts. “The same investors who started Kentucky Fried Chicken,” Relman complains, “started the Hospital Corporation of America!” (The common link is Jack Massey.)

The failure of market-driven medicine was foretold by Nobel Prize-winning economist Kenneth Arrow in a 1963 paper (“Uncertainty and the Welfare Economics of Medical Care“) that is widely credited with inventing the discipline of health care economics. (In 1963, the health care sector was so sleepy financially and so dominated by nonprofit do-gooders that economists saw little reason to study it.) There were several factors making it difficult to impose a market model on medicine, Arrow wrote. Demand for services was “irregular and unpredictable,” and the buyer was physically vulnerable. Judging the value of the product (i.e., medical treatment) entailed a degree of uncertainty “perhaps more intense … than in any other important commodity,” which was compounded by the presumption of an extreme asymmetry between the doctor’s knowledge and the patient’s. Complicating matters even further, the patient didn’t pay; his insurance company did. The doctor “acts as a controlling agent on behalf of the insurance companies,” making sure the patient didn’t overuse his services, but only up to a point; “the physicians themselves are not under any control and it may be convenient for them or pleasing to their patients to prescribe more expensive medication, private nurses, more frequent treatments, and other marginal variations of care.”

In an online interview last week with Conor Clarke of the Atlantic, Arrow (now 87) said  that “the basic analysis hasn’t changed,” but “[s]ome specifics have changed.” Arrow explained that in his 1963 paper he emphasized that market forces were supplemented by

professional commitments to provide a service, to engage in services that aren’t self-serving. Standards of caring decided by non-economic actors. And one problem we have now is an erosion of professional standards. In a way there is more emphasis on markets and self-aggrandizement in the context of health care, and that has led to some of the problems we have today.

I’m no economist, but what I think Arrow is saying here is that health care today conforms a little better to standard economic theory than it did in 1963, but that the invisible hand’s gain has been medicine’s loss. Goldfarb isn’t the only reason for the change, but it’s a major one.

Relman believes that the health reform bill, if it passes, won’t do much to solve the problem, because it does almost nothing to inhibit medical entrepreneurship. “The idea that health care is a legitimate arena for investment is monstrous,” Relman says. “Things are going to have to get a lot worse and the costs are going to have to become absolutely intolerable, and then people will finally begin to realize that the system we have doesn’t work right.” Part of that change, Relman says, should come from the Supreme Court. If Congress outlawed for-profit medicine, perhaps “the Supreme Court would be willing to take another look at this.” The Supreme Court? Where the Chicago school is king? Relman’s answer skirts thrillingly close to violating the Hippocratic oath. “Where there’s death, my friend, there’s always hope.”

[Update, July 30: In today’s New York Times, Kevin Sack and David Herszenhorn report on  an energetic lobbying effort by the doctor-owned Doctors Hospital at Renaissance in Edinburg, Texas, that helps explain why existing doctor-owned hospitals (as opposed to future ones) would be permitted to continue participating in Medicare under the House and Senate bills. Suffice it to say that traditional market economics, while not easily applied to health care (a point explored further by Alec MacGillis in today’s Washington Post), apply all too well to the legislative process. The Doctors Hospital at Renaissance is not a specialty hospital, but it was criticized for wasteful spending in Atul Gawande’s much-cited New Yorker piece about excessive Medicare spending in McAllen, Texas, which is next door to Edinburg. (“[I]t has a reputation,” Gawande wrote, “for aggressively recruiting high-volume physicians to become investors and send patients there. Physicians who do so receive not only their fee for whatever service they provide but also a percentage of the hospital’s profits from the tests, surgery, or other care patients are given.”) Overall, the Washington Post (citing figures  from the Center For Responsive Politics) reports that the health care sector is spending close to $1.5 million a day to influence health reform.]