DOCTORS AND HOSPITALS: AN ANTITRUST PERSPECTIVE ON TRADITIONAL RELATIONSHIPS CLARK C. HAVIGHURST* Under new pressuresf or cost containment, hospitals are increas- ingly asserting interests that conflict with those of physicians. Professor Havighursta rgues that legal rules under which practitioners have chal- lenged denials of hospital admitting privileges should be clarified in or- der that hospitals can more effectively carry out their new cost- containment and other responsibilities. He invokes antitrust law's "es- sential-facilities"d octrine to protect those abused by their competitors on a hospital staff, but he contends that, if a hospitalp articipates in deci- sionmaking as an independent actor-even though it acts in concert with its physicians-, antitrust courts should lower the level of scrutiny to a point at which most challenges can be dismissed summarily. He analo- gizes restraintsi mposed by hospitals on competition between health pro- fessionals to vertical restraints of other kinds, and draws conclusions criticalo f doctrine traditionallya pplicable to the latter. TABLE OF CONTENTS INTRODUCTION ......................................... 1072 I. INFLUENCES SHAPING THE HOSPITAL ENTERPRISE ...... 1077 A. The Expanding DecisionmakingR ole of Hospitals ....1 077 B. Appraising the Balance of Power ..................... 1082 C. The Internal Organization of Hospitals ............... 1084 II. THE HOSPITAL MEDICAL STAFF IN ANTITRUST PERSPECTIVE ........................................... 1092 III. STATUTORY AND COMMON LAW GOVERNING HOSPITAL ADMITTING PRIVILEGES-THE NEED FOR A NEW RATIONALE ............................................. 1098 * Professor of Law and Director of the Program on Legal Issues in Health Care, Duke University. An earlier, less technical version of this article was presented at the Ninth Annual Private Sector Conference, Duke University Medical Center, March 12, 1984, and is to be published with the conference proceedings in PHYSICIANS AND HOSPITALS: THE GREAT PARTNERSHIP AT A CROSSROADS (D. Yaggy & P. Hodgson eds. 1985). This version is published with the permission of the organizers of that conference. Support for the research was provided under Grant No. HS 04089 from the National Center for Health Services Research, United States Department of Health and Human Services. 1071 1072 DUKE LAW JOURNAL [Vol. 1984:1071 IV. A REFUTATION OF Two COMMON ANTITRUST FALLACIES CONCERNING HOSPITAL PRIVILEGES ......... 1101 A. The Fallacy That the Administration of Privileges Constitutes "ProfessionalS elf-Regulation" ............ 1101 B. The Fallacy That a Denial of Privileges Constitutes a "Group Boycott" or "Concerted Refusal to Deal". .... 1104 V. ANTITRUST PRINCIPLES APPLICABLE TO ADMITTING PRIVILEGES DECISIONS .................................. 1108 A. The "Essential-Facilities"D octrine ................... 1111 1. Uniqueness of the Hospital ....................... 1114 2. Competitor (i.e., Medical-Staff Control ........... 1116 3. The Tests Employed in Reviewing Medical-Staff D ecisions ........................................ 1122 B. Judicial Review of Hospital Actions .................. 1125 1. The Hospital as a Joint Venture .................. 1126 2. Legal Standardsf or Reviewing Hospital Actions ... 1131 a. Proceduralr equirements. ..................... 1132 b. A rational-basist est for substantive actions .... 1133 C. Policy Considerations. ............................... 1136 VI. ANTITRUST RULES IN ACTION-A HYPOTHETICAL CASE 1139 VII. IMPLICATIONS FOR THE JURISDICTIONAL REQUIREMENT OF AN EFFECT ON INTERSTATE COMMERCE ............. 1142 VIII. ANALOGIES TO THE LAW GOVERNING OTHER VERTICAL RESTRAINTS ............................................ 1144 A. Manufacturer/DistributoAr greements ................ 1145 B. Hospitals' Exclusive Contractsf or Physician Services .. 1148 C. Health Care Practitioners Versus Other Middlemen ... 1151 IX. CONCLUSION: A STRENGTHENED ROLE FOR HOSPITALS. 1157 INTRODUCTION The new competitive climate of the health care industry' is changing relationships between hospitals and physicians. The scramble for new business is bringing some hospitals and physicians into direct competi- I. The health care industry appears to be in the process of changing its essential character, from a stable and largely self-regulating system financed by passive third-party payers to an unruly competitive industry facing increasingly cost-conscious customers. See, e.g., SYNTHESIS OF PRI- VATE SECTOR HEALTH CARE INITIATIVES (1984) (report prepared for the Office of the Assistant Secretary for Planning and Evaluation, Department of Health and Human Services); P. STARR, THE SOCIAL TRANSFORMATION OF AMERICAN MEDICINE 439-49 (1982); J. GOLDSMITH, CAN HosPI- TALS SURVIVE?: THE NEW COMPETITIVE HEALTH CARE MARKET 13-14 (1981). The foundations for these dramatic changes were laid by new policy thinking, antitrust enforcement, and govern- ment's withdrawal from the effort to control private health care costs by regulatory means. See infra text accompanying notes 87-88. See generally A. ENTHOVEN, HEALTH PLAN: THE ONLY lPRACTI- CAL SOLUTION TO THE SOARING COST OF MEDICAL CARE, xxi-xxY (1980); C. HAVIGHURsT, DE- REGULATING THE HEALTH CARE INDUSTRY 443-50 (1982); MARKET REFORMS IN HEALTH CARE Vol. 1984:1071] DOCTORS AND HOSPITALS 1073 tion with each other in the provision of certain ambulatory care.2 Com- petitive pressures are also causing an increase in the formal integration of hospital and physician services in health maintenance organizations (HMOs)3 and in new kinds of joint venture.4 In perhaps the most impor- tant development, increasing cost-consciousness on the part of public and private purchasers of hospital services is forcing hospitals to become more cost-conscious themselves, causing them in turn to assert interests at variance with those of the physicians with whom they cooperate in providing a vast quantity of inpatient and other services. Thus, competi- (J. Meyer ed. 1983); A NEW APPROACH TO THE ECONOMICS OF HEALTH CARE (M. Olson ed. 1981); P. STARR, supra at 379-419; Market-OrientedA pproaches to Achieving Health Policy Goals, 34 VAND. L. REV. 849 (1981); The Spiraling Costs of Health Care-Rx" Competition, Bus. WK., Feb. 8, 1982, at 58. 2. Partly to increase the flow of inpatients, hospitals are integrating vertically into the provi- sion of outpatient services by opening clinics staffed by salaried doctors, thus directly competing for patients with their staff physicians. At the same time, many physicians are offering new services of a kind that have traditionally been provided by hospitals. Thus, physicians have purchased expensive diagnostic equipment for their offices, have sponsored the development of ambulatory surgical facili- ties, and have opened clinics for the treatment of minor emergencies. See, e.g., J. GOLDSMITH, supra note 1, at 25-48, 136-44, 175-77; Goldsmith, MDs and Hospitals: Conflict or Partnership?, Hose. MED. STAFF, May, 1983, at 3; Moxley & Roeder, New Opportunitiesf or Out-Of-Hospital Health Services, 310 NEW ENG. J. MED. 193, 194-95 (1984). 3. HMO arrangements with physicians vary widely. There are, however, three basic types of HMO: a "staff" model, a "group" model, and an "individual practice association" model. In the so- called staff model, the HMO employs physicians on a salaried basis; occasionally such physician/ employees have organized a labor union for purposes of collective bargaining. In the group model, the HMO entity contracts for physician services with an independent physician-sponsored entity. In the individual practice association model, the HMO contracts with independent practitioners indi- vidually or in small groups. HMO arrangements with hospitals range from directly owning the hospital, to contracting with independent hospitals, to using hospitals selected by contracting physi- cians. See generally AMERICAN MEDICAL ASSOCIATION, HEALTH MAINTENANCE ORGANIZA- TIONS (1980). Thus, integration of hospital and physician services in an HMO is always a matter of degree. 4. More recent innovations integrating hospitals and physicians include both insurer-spon- sored and provider-sponsored "preferred provider organizations" (PPOs). These arrangements may or may not incorporate both physicians and hospitals and may involve much less actual integration than is found in HMOs. See generally ATTORNEYS AND PHYSICIANS EXAMINE PREFERRED PRO- VIDER ORGANIZATIONS (J. Waxman ed. 1984); Special Report, Health Care Industry, BusinessS how Increasing Interest in PPO Concept, FED'N OF AM. HosPs. REV., July-Aug. 1982, at 12-13. In yet another recent development, many hospitals are currently exploring the possibility of entering into joint ventures with their physicians; most of the arrangements being considered would involve the creation of a single corporate entity under the joint control of a hospital and a physician group. See, e.g., Swett & Conley, Joint Ventures: The Theory and Practice,H osPs., May 1, 1984, at 95; Yanish, Hospitals Work with M.D.s to Smooth MeSH Partnerships'R ough Edges, MOD. HEALTHCARE, Feb. 15, 1984, at 58; Hospital Joins Doctors to Form Corporation, Hosts., Apr. 16, 1984, at 39. For possible legal limits on such organizational innovations, see infra note 53. Under the antitrust laws, the creation of such joint ventures must be scrutinized with care to determine whether important competition, see supra note 2, is being sacrificed. 1074 DUKE LAW JOURNAL [V/ol. 1984:1071 tion in health care, which until recently was construed by most observers to mean only the gradual spread of HMOs,5 is now making itself felt even within the traditional hospital, the main focal point of fee-for-service 6 medical practice. Hospitals, as they have evolved in the United States,7 render the vast majority of their services in conjunction with physicians who market their own services independently of the hospital. As traditionally oper- ated," the hospital allows certain of these practitioners to admit their pa- tients to its facility and to draw upon its resources and support services in order to provide treatment. The practitioners thus favored with admit- ting privileges are typically organized under the hospital's auspices into a self-governing medical staff, which is charged with performing numerous technical functions essential to the hospital's operation. Historically, this organizational model implied certain role definitions. Thus, the individ- ual physician was generally perceived to be the final arbiter of treatment decisions and was accorded a very wide range of discretion; although formally accountable to the hospital, the physician was practically 5. The cultivation of "alternative delivery systems" in the 1970's, by presuming the continued operation of a single dominant "system," implied a more limited role for competition than events are revealing. See generally Havighurst, Competition in Health Services: Overview, Issues and Answers, 34 VAND. L. REv. 1117, 1125-27 (1981); Havighurst & Hackbarth, Private Cost Containment, 300 NEW ENG. J. MED. 1298, 1298-1305 (1979); McClure, On Broadeningt he Definition ofand Remov- ing Regulatory Barrierst o a Competitive Health Care System, 3 J. HEALTH POL., POL'Y & LAW 303 (1978). 6. See generally J. GOLDSMITH, supra note 1; Armistead & Hofmann, Involving the Physician in Cost Containment, HosP. FIN. MGMT., Jan. 1981, at 52; Goldsmith, supra note 2; Holoweiko, A Doomsday Timetablefor Independent Practice, MED. ECON., June 27, 1983, at 31; Noie, Shortell, & Morrisey, A Survey of Hospital Medical Staffs, (Pts. 1 & 2), Hoses., Dec. 1, 1983, at 80, Dec. 16, 1983, at 91; Shortell, Physician Involvement in Hospital Decision Making, in THE NEW HEALTH CARE FOR PROFIT: DOCTORS AND HOSPITALS IN A COMPETITIVE ENVIRONMENT 73 (B. Gray ed. 1983) [hereinafter cited as HEALTH CARE FOR PROFIT]; Managing Tensions Between Hospitals and Physicians Called Major Challenge, Hosps., June 1, 1983, at 17. 7. See generally M. ROEMER & J. FRIEDMAN, DOCTORS IN HOSPITALS: MEDICAL STAFF ORGANIZATION AND HOSPITAL PERFORMANCE 29-43 (1971); P. STARR, supra note 1, at 145-79; HOSPITAL ORGANIZATION AND MANAGEMENT 1-108 (J. Rakich & K. Darr eds. 3d ed., 1983). 8. On hospital organization generally, see M. ROEMER & J. FRIEDMAN, supra note 7, at 83- 92; Georgopoulos & Mann, The Hospital as an Organization, in HOSPITAL ORGANIZATION AND MANAGEMENT (3d ed. 1983); Moore & Wood, Power and the HospitalE xecutive, Hose. & HEALTH SERVS. AD., Spring 1979, at 30; Prybil, The Evolution of Hospital Governance, in HEALTH MANAGE- MENT FOR TOMORROW 76 (S. Levey & T. McCarthy eds. 1980). Perhaps the most authoritative source of descriptive information on the organization of hospitals is the Joint Commission on Ac- creditation of Hospitals (JCAH), to whose standards most hospitals seek to conform. See, e.g., JOINT COMMISSION ON ACCREDITATION OF HOSPITALS, ACCREDITATION MANUAL FOR HosPI- TALS/1984 (rev. ed. 1983) [hereinafter cited as 1984 MANUAL]. See also infra notes 46-50 and accompanying text. For legal perspectives on hospital organization, see, for example, W. ISELE, THE HOSPITAL MEDICAL STAFF: ITS LEGAL RIGHTS AND RESPONSIBILITIES 26-47 (1984); R. MILLER, PROBLEMS IN HOSPITAL LAW 17-43, 115-43 (4th ed. 1983); A. SOUTHWICK, THE LAW OF HOSPITAL AND HEALTH CARE ADMINISTRATION 31-57 (1978). Vol. 1984:1071] DOCTORS AND HOSPITALS 1075 accountable only to his (ignorant) patient and his (usually tolerant) pro- fessional peers. The hospital's accepted task was not to control the phy- sician but to facilitate his mission by maintaining the necessary resources and mobilizing them in response to the physician's call.9 As a result of the broad consensus supporting the traditional organi- zational model of the hospital and the related delineation of roles, hospi- tal/physician relations were relatively untroubled for a long time.10 The harmony and stability that prevailed probably could not have been main- tained, however, if hospitals had not enjoyed a high degree of freedom from budgetary and other constraints imposed by market forces, by gov- ernment, or by any other party whose interests conflicted significantly with physician preferences.'" Because the third-party financing system that developed to pay for most hospital care reimbursed hospitals' costs and seldom challenged the bills resulting from physician treatment deci- sions, hospitals did not find it necessary to step out of the passive role assigned to them. The new tensions arising in hospital/physician rela- tionships today appear to be a direct result of a breakdown in the old "social contract" that left hospitals largely free, financially and other- wise, to do the doctors' bidding. A hospital's ability to control its costs and to compete effectively in the emerging economic environment depends to a large degree upon its ability to influence the performance and practice styles of independent practitioners. Because a hospital can significantly influence physician be- havior only by its perceived readiness to exercise its right to withhold or condition admitting privileges, 12 an increase in the number of disputes 9. Management literature frequently refers to the hospital as the physician's "workshop." An- other metaphor that forcefully conveys one view of the hospital is that of the aircraft carrier, which is portrayed by David Kinzer as obligated only to support and not to define its pilots' missions. Kinzer, The Only Team That Pilots-and Doctors-Recognize As Their Own, MOD. Hosp., May 1959, at 59; Kinzer, Physicians and Hospitals-Tensions in the Relationship, in PHYSICIANS AND HOSPITALS: THE GREAT PARTNERSHIP AT A CROSSROADS (D. Yaggy & P. Hodgson eds. 1985). Kinzer's observations were based on experiences in World War II, however. Changing technology has reduced the independence of today's fighter pilots-and today's physicians-and made possible a synergism that requires a higher degree of organizational integration and control. 10. The problems that arose were prompted mostly by changes in the tort liability of hospitals. See infra text accompanying notes 20-24. Although disputes were sometimes vigorous, they covered a very narrow range of issues compared to those that are arising today. See, e.g., COMMITTEE ON PRIVATE PRACTICE, AMA COUNCIL ON MEDICAL SERVICE, REPORT ON PHYSICIAN-HOSPITAL RELATIONS 3 (approved by American Medical Association (AMA) House of Delegates June 1974; discussing the relative authority of the governing board and the self-governing medical staff) [herein- after cited as PRIVATE PRACTICE REPORT]. For historical references, see supra note 7. 11. The nonprofit character of the great majority of major hospitals significantly reduced the likelihood of economic conflict between physicians and hospital proprietors. See infra notes 30-33 and accompanying text. 12. A hospital lacking freedom to hire and fire, to alter responsibilities, and to adjust compensa- tion on a discretionary basis is reduced to using persuasion as a managerial device. The disposition 1076 DUKE LAW JOURNAL [Vol. 1984:1071 over such privileges is likely to be a consequence of hospitals' assertion of their new competitive interests. Privileges disputes may also be manifes- tations of competition of another kind, however. As competition in- creases between physicians themselves and between physicians and other types of practitioners, the stakes both of those who possess and of those who seek admitting privileges also increase. As a result, medical staffs may attempt to deny privileges to unwanted competitors, and competi- tors excluded from a hospital may resort to the courts as a way of forcing entry. The recent apparent increase in litigation over denials or revoca- tions of admitting privileges13 may therefore reflect either the emergence of healthy competitive forces in the health care industry, or anticompeti- tive abuses by physicians, or some combination of the two. Courts may be called upon to determine which of these alternative explanations best fits a particular dispute over admitting privileges. This article, in examining the law governing the withholding of ad- mitting privileges, focuses principally on antitrust issues. It does so partly because analysis in antitrust terms best fits the industry's new cir- cumstances and can illuminate the interplay of law, health policy, and industry developments. In addition, an antitrust analysis of privileges disputes can also serve to highlight the current confusion in antitrust law as it relates to the activities of professionals, to so-called group boycotts, and to vertical restraints of trade. The analysis of the hospital/physician relationship offered herein is intended to eliminate some of the confusion surrounding each of these matters and to advance understanding not only of the operation of health care markets but also of the law's role in promoting effective competition and efficient performance in markets of all kinds. There are important lessons for antitrust law in general in this investigation of specific legal problems arising in the administration of the complex modern hospital. of staff privileges provides the hospital with virtually its only opportunity to exercise direct control over independent practitioners. See infra note 219. 13. See generally W. ISELE, supra note 8, at 67-90; Hein, Hospital Staff Privileges and the Courts: Practice and Prognosis, 34 FED'N INS. COUNS. Q., 157, 158-65 (1984); McCall, The Hospi. tal's Liabilityf or Denying, Suspending, and Granting Staff Privileges, 32 BAYLOR L. REV. 175, 175 (1980); Tabor, The Battle for Hospital Privileges, 249 J. A.M.A. 526 (1983); Barred Doctors Go Before the Bar, Med. World News, Jan. 18, 1982, at 72. These references highlight potential com- mon law and statutory, as well as antitrust, causes of action. On common law actions, see infra text accompanying notes 82-94. A list of antitrust cases filed in recent years by disappointed applicants against hospitals and medical staffs appears in Kissam, Webber, Bigus & Holzgraefe, Antitrust and Hospital Privileges: Testing the Convention Wisdom, 70 CALIF. L. REV. 595, 596 n.2 (1982) [herein- after cited as Kissam & Webber]. For later cases, see infra note 118. A study by the National Health Lawyers Association revealed that nearly half of the pending antitrust cases in the health care industry involve disputes over access to medical staff privileges. 46 ANTITRUST & TRADE REG. REP. (BNA) No. 1150, at 187 (1984). See also infra notes 18-19 and accompanying text. Vol. 1984:1071] DOCTORS AND HOSPITALS 1077 I. INFLUENCES SHAPING THE HOSPITAL ENTERPRISE Various influences have shaped and are shaping hospitals and their relationships with physicians. A discussion of these influences, in addi- tion to showing how hospital organizational and operational patterns reached the point from which new departures are now proceeding, will also suggest some of the opportunities that exist for restructuring these relationships. It will also call attention to the need for a legal environ- ment that does not foreclose or inhibit responsible adaptations that hos- pitals might make to cope with their new economic circumstances. A. The Expanding Decisionmaking Role of Hospitals. The pressures and incentives that are currently changing the envi- ronment of hospital decisionmaking are not hard to identify. First, hospi- tals have new financial problems due to changes in the ways in which they are paid. The most important development is the phase-out of ret- rospective cost reimbursement under the Medicare program and its re- placement by a policy of paying fixed "DRG" allowances-that is, prospectively determined prices based on the patient's diagnosis.'4 In 14. "DRG" stands for "diagnosis-related group." Under the new payment system, which is being phased in over a four-year period beginning in 1984, a hospital is paid a fixed amount based primarily on which of 468 DRGs the patient falls into; adjustments are made for the different costs of urban and rural hospitals, and some provision is made for "outliers"-cases involving especially high costs. See 42 U.S.C.A. § 1395ww (West 1983). The provisions of the Social Security Act that deal with prospective payment were added by the Social Security Amendments of 1983, Pub. L. No. 98-21, § 601, 97 Stat. 65, 149-63 (amending Title XVIII, § 1886 of the Social Security Act, which was added by the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, § 101(a)(1), 96 Stat. 331, 331-36). The latest regulations appear in 49 Fed. Reg. 234, 243-77 (1984) (with the regulations most relevant to prospective payment to be codified at 42 C.F.R. §§ 405.470-.477). The regulations are summarized in I MEDICARE & MEDICAID GUIDE (CCH) 1 4200-4267 (1984). The theoretical rationale for shifting to prospectively determined rates is the presumed desira- bility of the cost-containment incentives resulting from payment practices that penalize high-cost care and allow hospitals to retain as profit any savings they achieve that enable them to treat the patient for less than the fixed rate. With the possible exception of the extension of the antitrust laws to the health care sector, see infra notes 87-88 and accompanying text, the new payment policy is the most important change in federal health policy since the adoption of the Medicare and Medicaid programs. See generally A. SORKIN, HEALTH ECONOMICS: AN INTRODUCTION 94-101 (rev. 2d ed. 1984); Iglehart, Medicare Begins Prospective Payment of Hospitals, 308 NEw ENG. J. MED. 1428 (1983); Special Report, Prospective Payment: A New Directionf or Hospitals, FED'N OF AM. Hoses. REV., Mar.-Apr. 1983, at 24-64. Consideration is currently being given to including physician serv- ices within the DRG allowance, a move that would have even more profound effects on hospital/ physician relationships. See infra note 285. Whether prospective payment is a complete or final answer to Medicare's problems is doubtful, however. Not only is its arbitrariness a cause for con- cern, especially as technology changes, but it is subject to some manipulation and evasion. See, e.g., Simborg, DRG Creep: A New Hospital-AcquiredD isease, 304 NEW ENG. J. MED. 1602, 1604 (1981); Wennberg, McPherson & Caper, Will Payment Based on Diagnosis-RelatedG roups Control Hospital Costs?, 311 NEW ENG. J. MED. 295, 299 (1984). The next generation of cost containment in public programs could go in either of two directions-toward a "voucher" system, in which government 1078 DUKE LAW JOURNAL [Vol. 1984:1071 addition, however, other payers, both public and private, are beginning to negotiate with hospitals and to steer their beneficiaries toward lower- cost facilities; price competition among hospitals is thus gradually be- coming a reality.15 The result of these measures is that hospitals are be- coming more cost-conscious and are beginning to insist that physicians take account of economic realities in their use of the hospital.16 Organ- ized medical staffs increasingly perceive their own stake in the financial health of their hospitals and are beginning to assist them in their efforts to make ends meet and to compete successfully. A second factor affecting hospital/physician relationships is the re- cent growth in the supply of physicians.17 Hospitals have always needed doctors. For the first time, however, they are now able to acquire them in something other than a sellers' market, with the result that a doctor's willingness to cooperate in helping the hospital solve its cost problem is becoming a factor in the award of admitting privileges. Doctors are be- ing asked to assist in cost containment both by participating in staff com- mittee work and by modifying their styles of practice. Another aspect of the increased physician supply is the increased threat of litigation when admitting privileges are denied.18 Not only are denials more frequent, but litigation is more likely because physicians who lose privileges are apt to find it harder to establish themselves else- where. Physicians denied privileges may also have more reason than pre- viously to suspect anticompetitive motives on the part of their peers in excluding them. Finally, legal developments have expanded the availa- bility of antitrust theories that hold out the possibility of treble damages if anticompetitive motives can be proved, thus making lawsuits more in- pays a fixed amount to enable beneficiaries to join private health plans, or toward direct regulation of all hospital charges. On such regulation, see infra note 37. 15. See, e.g., Melia, Aucoin, Duhl & Kurokawa, Competition in the Health Care Marketplace: A Beginning in California, 308 NEW ENG. J. MED. 788 (1983); Tatge, Hospitals Are Selling Their Ability to Cut Big Employers' Health Costs, MOD. HEALTHCARE, July 1984, at 46; Special Report, supra note 4. 16. See, e.g., Spivey, The Relation between Hospital Management and the Medical Staff under Prospective Payment, 310 NEw ENG. J. MED. 984, 985 (1984). 17. The Graduate Medical Education National Advisory Committee (GMENAC) documented the expanding supply of physicians-due largely to federal and state government subsidization of medical education-in a study designed to evaluate warnings in the 1970s of an impending excess. UNITED STATES GRADUATE MEDICAL EDUCATION NATIONAL ADVISORY COMMITTEE, SUM- MARY REPORT TO THE SECRETARY, DEPARTMENT OF HEALTH AND HUMAN SERVICES (1980); see also Ginzberg, Brann, Hiestand & Ostow, The Expanding PhysicianS upply and Health Policy: The Clouded Outlook, 59 MILBANK MEM. FUND. Q. 508 (1981); Tarlov, Shattuck Lecture-The Increas- ing Supply of Physicians, the Changing Structure of the Health-ServicesS ystem, and the Future Prac- tice of Medicine, 308 NEW ENG. J. MED. 1235 (1983). 18. See supra note 13. Vol. 1984:1071] DOCTORS AND HOSPITALS 1079 viting.'9 Because litigation is costly even if the hospital ultimately prevails, a new seriousness surrounds decisions on staff privileges. Although these recent changes in the environment have increased the interest that hospital boards and administrators take in patient care and in the other activities of doctors in the hospital, the trend in this direction is not entirely new. A number of earlier developments had very similar effects and produced conflicts similar to, although perhaps not as intense as, those being seen today. Notable among these earlier develop- ments are the changes in tort doctrine in the 1950's and 1960's that sig- nificantly increased the exposure of hospitals to suits for personal injury.20 The first of these legal developments, the elimination of charita- ble immunity, was quickly followed by major expansions of vicarious lia- bility.21 In particular, a famous 1965 case in Illinois, Darling v. Charleston Community Memorial Hospital,22 imposed liability on a hos- pital for an injury caused by an attending physician assigned by it to duty in the emergency room.23 More surprising than the legal result in that case was the widespread reaction to it, which suggested that hospital managers had been waiting for some excuse to demand more cooperation and quality assurance from their medical staffs.24 Finally, since the Dar- ling case, a number of decisions have held hospitals liable for not screen- ing their professional staffs more carefully.25 Although the cumulative effect of these changes in tort law was a stengthening of the hospitals' stake in the quality of care provided, it is widely believed that many hos- pitals still do not take enough care to ensure that physicians using the 19. See generally Dolan & Ralston, Hospital Admitting Privileges and the Sherman Act, 18 Hous. L. REv. 707, 712-13, 724-78 (1981); Drexel, The Antitrust Implications of the Denialo f Hospi- tal Staff Privileges, 36 U. MIAMI L. REV. 207 (1982); Kissam & Webber, supra note 13. 20. See generally A. SOUTHWICK, supra note 8, at 346-423; Goldberg, The Duty of Hospitals and Hospital Medical Staffs to Regulate the Quality of Patient Care: A Legal Perspective, 14 PAC. L.J. 55 (1982) (potential hospital liability for negligent appointment of staff physicians). 21. Hospitals first became responsible for the negligence of their professional employees, see, e.g., Bing v. Thunig, 2 N.Y.2d 656, 665-67, 143 N.E.2d 3, 7-9, 163 N.Y.S.2d 3, 9-12 (1957); Bernardi v. Community Hosp. Ass'n, 166 Colo. 280, 291, 443 P.2d 708, 713 (1968); later, they became vicari- ously liable for the negligent acts of professionals who, although not technically employees, were seen by patients as agents of the hospital, see, e.g., Grewe v. Mount Clemens Gen. Hosp., 404 Mich. 240, 250-51, 273 N.W.2d 429, 433 (1978); Capan v. Divine Providence Hosp., 287 Pa. Super. 364, 368-70, 430 A.2d 647, 648-50 (1980); Adamski v. Tacoma Gen. Hosp., 20 Wash. App. 98, 112-15, 579 P.2d 970, 977-79 (1978). 22. 33 II. 2d 326, 211 N.E.2d 253 (1965), cert. denied, 383 U.S. 946 (1966). 23. Id. at 333, 211 N.E.2d at 258. 24. See generally Southwick, The Hospital as an Institution-Expanding Responsibilities Change Its Relationship With the Staff Physician, 9 CAL. W.L. REV. 429 (1973); see also W. ISELE, supra note 8, at 60-67; PRIVATE PRACTICE REPORT, supra note 10, at 16-18 (reflecting physician concerns about encroachment by hospital management on their traditional prerogatives). 25. See, e.g., Elam v. College Park Hosp., 132 Cal. App. 3d 332, 340-47, 183 Cal. Rptr. 156, 161-65 (1982), and cases cited therein. See generally A. SOUTHWICK, supra note 8, at 409-22. 1080 DUKE LAW JOURNAL [Vol. 1984:1071 facility actively police each other in the interest of the institution.26 Another earlier source of conflict between hospitals and doctors was the growth of cost-containment regulation in the 1970's. Most such reg- ulation targeted the hospital, in part because hospital care represented the "big-ticket" item in the overall health care budget, but also because the hospital offered an organizational nexus through which physicians could be pressured to change their spending habits. Certificate-of-need laws were seen both as a way of curbing the effects of unbridled nonprice competition among hospitals for the patronage of doctors and as a way of making it easier for hospital administrators to say "no" to physician de- mands for more and better facilities.27 Such laws were also conceived as a way of limiting the resources available to doctors, thus forcing them to ration care. State programs for fixing hospital rates or revenues were fa- vored for similar reasons.28 Indeed, the DRG payment system is only the latest in a series of efforts to control doctors by imposing economic constraints on hospitals.29 Over time, as these external constraints have intensified, hospitals have become less and less pliant in their dealings with physicians. Yet another development that may be changing the tone and charac- ter of hospital/physician relations is the expanding role of investor- owned hospitals.30 These institutions are generally more inclined than 26. Cf. Prybil, supra note 8, at 81 ("Many boards still shy away from active participation in decision-making that will affect the medical staff."). 27. On certificate-of-need regulation, see infra note 91. 28. On hospital rate-setting, see infra note 37. 29. On the policy of shifting the rationing burden to providers, see C. HAVIGHURST, supra note 1, at 34-38; P. JOSKOW, CONTROLLING HOSPITAL COSTS: THE ROLE OF GOVERNMENT REGULA- TION 31-39, 56-75 (1981); Harris, Regulation and Internal Control in Hospitals, 55 BULL. N.Y. ACAD. MED. 88, 96-101 (1979). 30. On the role of investor-owned hospitals, see generally Clark, Does the Nonprofit Form Fit the Hospital Industry?, 93 HARv. L. REV. 1417, 1440-47 (1980); Relman, The New Medical-Indus. trial Complex, 303 NEw ENG. J. MED. 963 (1980). The latter article triggered a national debate concerning the role of for-profit firms in the hospital and health care field. See, e.g., HEALTti CARE FOR PROFIT, supra note 6. Among the issues in this debate is the performance of for-profit hospitals in terms of cost and quality. Some evidence supports the assertion that such hospitals charge higher prices, see, e.g., Pattison & Katz, Investor-owned and Not-for-profit Hospitals: A Comparison Based on CaliforniaD ata, 309 NEw ENG. J. MED. 347, 352 (1983), but this finding is disputed and may simply reflect higher costs associated with newer facilities or higher quality, see Bromberg, The Medical-Industrial Complex: Our National Defense, 309 NEW ENG. J. MED. 1314, 1314 (1983). Another explanation might simply be the greater skill of profit-seeking hospitals in exploiting poorly designed financing mechanisms. This latter hypothesis, if valid, may be regarded more as a basis for criticizing the financing system than as grounds for regulating any particular class of providers. Indeed, much of the debate over the desirability of allowing profit-oriented firms to provide health services focuses ultimately on the question whether substantial reforms of public and private financ- ing mechanisms can and should be expected to curb the propensity of some providers-possibly somewhat more common among proprietary institutions-to overcharge or shade quality. Most of those who oppose for-profit hospitals wish to maintain, even at some cost in inefficiency, a regulated,