The Transformation of the American Hospital

1. The Transformation of the American Hospital James G. Anderson, Ph.D. Purdue University

2. From Community Institution to Business Organization • Institutions are infused with values reflecting community sentiments and goals. They also perform a variety of social functions that are viewed as important for the community. • Organizations represent rational instruments designed to achieve definite goals judged on technical criteria that can be modified or discarded.

3. Late 19th Century Hospitals • Founded as institutions • Concern for the poor • Mutual assistance • Volunteerism • Community sponsorship • Community service versus investor return

4. 20th Century Hospitals • Shift from donation of services to marketing services • Financing expansion • Profit-making activities • Competition for paying patients • Community orientation diminished • Ascendance of organizational model • Hospital mergers/closures

5. Institutions of Care (1750-1870) • MDs donated their time • Benefactors provided capital • Hospital provided care vs. cure • Rudimentary treatment available

6. Institutions of Care (1870-1919) • Shift in demand and supply • Industrialization • Immigration • Urbanization • Family fragmentation • Technology developments Antisepsis and anesthesia • Risk of deaths in hospitals declined • Middle class began paying for care

7. Institutions of Care (1870-1919) • Number of hospitals increased from 138 to 4,359 • Number of hospital beds increased from 35,604 to 421,005. • % white collar patients increased from 13% to 24%. • % paying patients increased from 14% to 38%.

8. Institutions of Care (1870-1919) • Mission changed from caring to curing. • Patients became viewed as a source of income. • Hospitals remained nonprofit and tax-exempt. • Hospitals began to serve the broader community. • Hospitals were founded by religious and ethnic groups. • Shift in control of the hospital from lay trustees to medical staff. • Majority of care shifted to private paying patients.

9. Threats to the Institution (1930-1965) Major changes: • The development of private health insurance. • Growing government involvement in financing and regulation. • Alteration in the institutional character of hospitals.

10. Private Insurance • The depression resulted in the founding of Blue Cross/Shield. They acted as third-party between patients and providers. • Insurance plans were nonprofit. • They did not interfere with clinical decisions. • Free choice of hospitals by patients. • Providers were reimbursed for charges on a fee-for-service basis. • Community-based rating was used to set insurance premiums.

11. Private Insurance • WWII wage/price controls encouraged employers to offer health insurance benefits. • The supreme court ruled that the health insurance was negotiable in collective bargaining. • The development of competition from commercial insurance forced BlueCross/Blue Shield to abandon community rating. • Insurance spurred higher utilization and cost.

12. Government Involvement Medicare/Medicaid 1965: • Increase the federal government’s role to fill gaps in private insurance. • Government provided capital for health services. • Reimbursed physicians on a fee-for-service basis. • Reimbursed hospitals on a retrospective cost- reimbursement basis. • Provided higher payments for inpatient care. • Provided incentives to expand facilities and services.

13. Effects of Government Involvement • Health care inflation. • Dependence on public funds. • Reduction in philanthropy. • Providers reduce charity care. • Regulation increased. • Hospitals expanded their managerial responsibilities and staff. • Reemergence of for-profit hospitals.

14. Institutional Crises 1965-1990 • Stagflation in the 1970s created a budget crisis. • Spending on Medicare/Medicaid increased rapidly. • Legal, budgetary, market remedies were proposed.

15. Proposed Remedies • Legal: Goldfarb vs. Virginia State Bar ruled antitrust laws apply to health care. • Budgetary: DRGs changed the way hospitals are reimbursed. • Market: HMO Act 1973 provided capital for new HMOs. • Managed care strategies by employers, Medicare, Medicaid.

16. Organizational Responses • Hospital closures. • Emphasis on commercial objectives. • Abandonment of costly services, charity care. • Early discharge of patients. • Focus on profitable services. • Corporate rationalization. • Increased competition.

17. Decline in Institutional Character • Decline in community control. • Decline in community legitimacy. • Loss of philanthropic support. • Decline in volunteerism. • Increase in unions • Providers lost initiative for assuring quality, disciplining members. • Responsibility shifted to courts and payers.

18. The Future of Hospitals • As an institution hospitals served several constituencies: (1) Local community (2) Sick poor. (3) Sponsors who donated time and money. (4) Work force drawn mainly from community. • Hospitals now focus on serving those who pay for health care. They have become organizations

19. The Future of Hospitals • As the hospital has pursued strategies to improve the operating margin/bottom line, it has lost its traditional legitimacy. • Revenue-generating strategies will not ensure the hospital’s survival in the future. • Various physician specialty groups have become less dependent upon hospitals as a site of practice. This has drawn patients away. • Hospitals have become large ICUs.

20. Reference • L.R. Burns, “The Transformation of the American Hospital: From Community Institution toward Business Enterprise”, in Comparative Social Research, C. Calhoun (ed.), Jai Press, Inc., vol. 12 (1990), pp. 77-112.