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

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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.

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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.

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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.

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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.

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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 governments 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.

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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.

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Institutional Crises 1965-1990

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

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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.

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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.

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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.

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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

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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
  hospitals 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.

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Number and Types of Hospitals in the U.S.

• Total Number of All U.S. Registered Hospitals
  5,764
• Number of U.S. Community Hospitals 4,895
  
• Number of Nongovernment Not-for-Profit Community
  Hospitals 2,984
• Number of Investor-Owned (For-Profit) Community
  Hospitals 790
• Number of State and Local Government Community
  Hospitals 1,121

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The Changing Environment ofUS Hospitals

• Hospital industry of 1980s
• largely autonomous
• worried about government regulation and rate
  setting
• Hospital industry of 1990s
• losing power to managed care
• facing public and private payment constraints
• Hospital industry of 2000s
• largely consolidated but bifurcated some doing
• exceedingly well and others not

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Looking Back to 1980s What We Thought Would
Happen Paul Starr in The Social Transformation
of American Medicine (1982) described the future
of the hospital industry.
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Looking Back to 1980s WhatWe Thought Would
Happen

• Paul Starr in The Social Transformation of
  American Medicine (1982) described the future of
  the hospital industry.

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Pathways to Regional/ NationalHealth Care
Conglomerates

• Changes in hospital ownership to for-profit
• Horizontal integration through the development
• of multi-hospital systems
• Diversification and corporate restructuring
  into
• poly-corporate enterprises
• Vertical integration into HMOs
• Increased industry concentration of ownership
• and control
• Source

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Key Questions

• What came to pass and what did not in
• Starr predictions for hospital industry?
• What does this mean for the hospital
• industry and markets today?
• How has this affected hospital financial
• circumstances?

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Horizontal Integration ofHospitals

• Hospitals are increasingly part of
  multihospital
• arrangements
• 30.8 were in systems in 1979
• 53.6 were in systems in 2001 with an
• additional 12.7 in looser health networks
• However, systems are still predominantly
• non-profit and are local in focus

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Number and Types of Hospitals in the U.S.

• Number of Federal Government Hospitals 239
• Number of Nonfederal Psychiatric Hospitals 477
  
• Number of Nonfederal Long Term Care Hospitals 130
  
• Number of Hospital Units of Institutions (Prison
  Hospitals, College Infirmaries, Etc.) 23  

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Number and Types of Hospitals in the U.S.

• Number of Rural Community Hospitals 2,166
• Number of Urban Community Hospitals 2,729  
• Number of Community Hospitals in a System
  2,626
• Number of Community Hospitals in a
  Network1,393

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Hospital Beds, Admissions and Expenses

• Total Staffed Beds in All U.S. Registered
  Hospitals 965,256
• Staffed Beds in Community Hospitals 813,307
• Total Admissions in All U.S. Registered
  Hospitals 36,610,535
• Admissions in Community Hospitals 34,782,742
• Total Expenses for All U.S. Registered Hospitals
  498,103,754,000
• Expenses for Community Hospitals
  450,124,257,000  

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Trends in Ownership of Hospitals in the U.S.
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Hospital DiversificationPrediction

• Many predicted hospitals would get involved
• with several different health and non-health
• related ventures
• outpatient services such as dialysis
• nursing homes, retirement centers
• retail pharmacies
• durable medical equipment distributors
• hearing aid and eyeglass stores
• managing leasing medical office space
• management consulting services
• real estate management

32
Hospital DiversificationReality

• Hospitals experimented but increasingly
• focused on services closely tied to traditional
• inpatient/outpatient care
• Hospitals added and dropped services largely
• depending on reimbursement opportunities
• Hospital strategy currently focuses on being a
• technology leader in a market not being a
• diversified corporation
• Vertical

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Concentration of Ownershipand Control

• Prediction Multi-hospital systems would
• centralize not only ownership but control
• Starr believed that shift in locus of control
  would
• occur as national/regional systems formed
• Reality Research indicates
• most systems are local not regional or national
• about 70 of systems delegate certain
  authorities to
• affiliated hospitals
• substantial variability exists in mixture of
• centralized/decentralized control

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Why Were So ManyPredictions Wrong?

• Assumed pressures on hospitals would be
• unrelenting and uni-directional
• Did not consider increased ability of hospitals
  to
• fend off pressures as they consolidated
• Did not recognize extent of organizational
• inertia
• Did not recognize the importance of local
• connections
• Did not realize the resilience of non-profit
  form
• even in face of financial distress

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So What Does HospitalIndustry Look Like Now?

• Many hospitals are consolidated in local health
• systems or networks
• Systems and networks vary markedly in degree
• of centralized control
• at one extreme, parent organization establishes
  all
• policy and makes all key decisions
• at other extreme, system/network is basically a
• shell, perhaps centralized administrative
  functions
• and centralized capital financing
• A large minority of hospitals not involved,
  either
• by choice or because undesirable

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• Concentration of Ownership
• and Control
• Prediction Multi-hospital systems would
• centralize not only ownership but control
• Starr believed that shift in locus of control
  would
• occur as national/regional systems formed
• Reality Research indicates
• most systems are local not regional or national
• about 70 of systems delegate certain
  authorities to
• affiliated hospitals
• substantial variability exists in mixture of
• centralized/decentralized control

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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.