Private Ordering in the Market for Professional Services
57 Pages Posted: 19 Feb 2014 Last revised: 8 May 2014
Date Written: April 2014
Freedom of contract is significantly restricted in the market for professional services. Under the so-called “corporate practice doctrine,” professionals such as doctors and lawyers are prohibited from practicing within corporate entities, and laypeople are likewise prohibited from investing in professional service firms. Defenders of this prohibition argue that it can be justified as a means of protecting professional independence and thereby increasing the quality of care. In fact, however, the available evidence suggests that investment restrictions are counterproductive to their stated goal. In practice, these restrictions raise costs and reduce access without measurably improving the quality of service at all.
This Article examines why, in spite of significant criticism, the doctrine remains alive in the twenty-first century in both medicine and law, preventing the professions from reaping the benefits of outside investment. Legislative solutions have largely failed; U.S. jurisdictions universally prohibit corporate practice in the legal field, and a significant (and resurging) minority of states continues to apply corporate practice restrictions in medicine. In both fields, the possibility of reaching a political solution is hindered by protectionist impulses.
This Article therefore proposes a challenge to the doctrine on constitutional grounds. The constitutional case in favor of private ordering is not an easy one to make: current constitutional doctrine defers heavily to state choices in the economic sphere, even when those choices lack any empirical evidence of rationality. Nevertheless, there has been an effort in recent years to move toward a more evidence-based version of rational basis review in economic cases. In addition, the Supreme Court’s recent jurisprudence on commercial speech buttresses the case for permitting external investment. In a pair of recent decisions, the Court has demonstrated an increased focus on the public’s interest in obtaining free and unfettered information. The corporate practice doctrine therefore presents an excellent test case for a more robust review of professional regulation, whether under a rational basis standard or under a more heightened level of scrutiny.
Keywords: Corporate Practice Doctrine, Professional Service Firms, Investments, Independence, Quality of Service
JEL Classification: K23
Suggested Citation: Suggested Citation