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

4. 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

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

21. The Changing Environment of US 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

22. 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.

23. 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.

24. Pathways to Regional/ National Health 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

25. 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?

26. Horizontal Integration of Hospitals   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

27. 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  Number of Hospital Units of Institutions (Prison Hospitals, College Infirmaries, Etc.) 23

28. Number and Types of Hospitals in the U.S.  Number of Rural Community** Hospitals 2,166 Community  Number of Urban Community** Hospitals 2,729  Number of Urban Community** Hospitals 2,729 Community  Number of Community Hospitals in a System*** 2,626 System  Number of Community Hospitals in a Network****1,393 Network

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

30. Trends in Ownership of Hospitals in the U.S.

31. Hospital Diversification: Prediction   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 Diversification: Reality   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

34. 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

35. Why Were So Many Predictions 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

36. So What Does Hospital Industry 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

37.   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

39. 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.