Health department officials have run legal checks to see whether EU law would prevent them from converting the new NHS foundation hospitals into companies.
The fact that the inquiry was made will exacerbate concerns on the Labour left that Tony Blair's zeal for reform could lead to the break up of the NHS.
Legal advisers at the Department of Trade and Industry, who received the inquiry, said there is no EU law which would prevent St Thomas' Hospital, for example, from being incorporated as the St Thomas' Hospital Foundation Company.
More than 100 Labour MPs havedeclared their opposition to foundation hospitals. They say it would create a "two-tier"NHS.
Their suspicions have been heightened by draft legislation circulating in Whitehall with the ominous-sounding title of the Health and Social Care (Foundation Companies) Bill.
The Health Secretary, Alan Milburn, has now ordered it to be changed to the more innocent-sounding Community Health Care Bill.
A spokesman for Mr Milburn said: "We have talked about the idea of public interest companies, because there will have to be some sort of legal basis for these foundation hospitals.
"What they will not be is profit-making companies, or shareholder-led companies. That was never the case."
Tony Blair and Mr Milburn see it as making the NHS more efficient. The hospitals will have greater freedom to run their financial affairs – being allowed to borrow money from private sources. But critics saythey wouldcherry-pick patients to generate extra cash. One way would be to take on extra private patients, but Mr Milburn said legislation will set a legal limit.
Another way would be to concentrate on patients who can be treated and discharged quickly, and refusing to accept chronically or terminally ill patients. There are also concerns that commercial pressures might motivate hospitals to discharge patients too quickly.
The former health secretary, Frank Dobson, has warned that the Government is now treading the same path as the Conservatives when they created an "internal market" in the NHS 15 years ago, a reform which Labour reversed.
He said: "They really haven't listened to any of the objections, the fundamental objection being that it introduces competition, and we know how harmful competition was last time."
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