Health Care as a (Big) Business: The Antitrust Response

When Kenneth Arrow wrote about American health care in 1963, its age of arguable innocence was about to end. Two years later, the federal government undertook, in the Medicare and Medicaid programs, to pour virtually unlimited public resources into financing a broad entitlement to private health care for the elderly and the poor. This infusion started a process that soon transformed the substantially charitable, ostensibly noncommercial enterprise that Arrow observed into a controversial growth industry.

By putting third-party financing behind a multitude of patients who had previously been, if not charity cases, at least highly cost-conscious consumers of health services, Medicare and Medicaid made the professional practice of medicine lucrative in ways it had never been before. Public financing also made health care attractive to private capital and entrepreneurs--including many physicians who suddenly saw new business as well as professional opportunities for profit. Although Congress certainly did not intend its largesse to change the culture of American medicine, the entitlements it created made it increasingly difficult to maintain that (as Arrow had at least implied) health care is a noncommercial activity carried on above the morals of the marketplace and appropriately sheltered both from its temptations and from the competition that induces producers in other markets to serve consumers' interests. Whatever the soundness of Arrow's overall assessment of the health care sector circa 1963, ¹ U.S. health care is today a huge and dynamic industry, driven for better or for worse by competitive forces that were largely inoperative in the system when Arrow observed it. This article observes how antitrust law, America's unique response to the problem of "big business," was eventually brought to bear on health care, in large part as a consequence of its rapid growth and commercialization after government entered the field as a major purchaser.

Launching the Antitrust Challenge to Professionalism

Once health care became a big business in the United States, could antitrust law be far behind? Just ten years after the enactment of Medicare and Medicaid, the Supreme Court, in Goldfarb v. Virginia State Bar (421 U.S. 773 [1975]), laid to rest the idea that the so-called "learned professions" were somehow exempt from the federal antitrust laws. Even though the Sherman Act was enacted in 1890, it was not settled until the Supreme Court spoke in 1975 that sellers of professional services are engaged in "trade or commerce," restraint of which is the target of the statute's principal prohibition. The possibility that professionals might be in a different legal category than competitors of other kinds had long been entertained, however. Though supported by no definitive legal precedent, this notion rested comfortably on the widespread belief that certain callings are higher than others and on the perception, which Arrow's thinking served to reinforce, that competition does not work well when consumers cannot accurately appraise the quality of services they receive. Even so, the Sherman Act's language sweeps broadly, providing little basis for ignoring whole sectors of the economy. Moreover, the offense alleged in Goldfarb was price-fixing (by a state bar association), a hard-core antitrust offense not easily excused. The Supreme Court ruled squarely that professional groups, like other trade associations, are subject to the Sherman Act.

Although Goldfarb's rejection of the putative "learned professions" exemption was symbolically important in opening the professions to new scrutiny, the Supreme Court's decision also addressed a more mundane legal issue that was arguably of greater practical significance for the antitrust campaign in the health care sector. The Court had also to consider when professional services have enough impact on interstate commerce to come within the jurisdictional reach of federal antitrust law. On this issue, it took an expansive view. Although the holding in Goldfarb dealt only with legal services and not medical care, the...