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

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.

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

20 th 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

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

Institutions of Care ( ) 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

Institutions of Care ( ) 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%.

Institutions of Care ( ) 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.

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

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.

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.

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.

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.

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

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.

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.

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.

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

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.

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