The document discusses the history and development of hospitals in the United States. It describes how hospitals transformed from basic facilities focused on germ theory and advances in technology and urbanization, to modern institutions influenced by the Flexner Report, government programs like Medicare/Medicaid, and managed care. This led to consolidation through mergers and the rise of large multi-hospital systems seeking economies of scale and efficiencies.

1. The Hospital Industry

2. The Flexnor Report
• The publication of the Flexnor Report in 1910
served as a catalyst for general reform in
healthcare delivery
• This report was a critical review of medical
education in the United States
• The response of the medical establishment led
to changes in the accreditation processes of
medical schools and an improvement in the
quality of medical care

3. A Brief History of American
Hospitals
• Three important factors served to transform
hospitals into the modern medical institutions
they have become today: the germ theory of
disease, advances in medical technology, an
increased urbanization
– The development of the germ theory of
disease, first articulated by Louis Pasteur in
1870, revolutionized the treatment of diseases
– Now, hospital technology—especially
advances in surgical and diagnostic imaging
—provided physicians with the tools that
would revolutionize medical intervention
– Urbanization, also played an important role in
the centralization of medical facilities

4. A Brief History of American
Hospitals
• When hospitals were financed through
taxation and philanthropy, patient fees
were only of minor importance
–As middle-class use of hospital services
increased, changes in financing were
inevitable
• What has become to be known as the
modern hospital began to emerge in the
twentieth century

5. A Brief History of American
Hospitals, continued.
• 1900–1915: The Flexnor Report (1910) served as a pointed
condemnation of medical education. In its wake, bogus
medical schools were closed, standards became more
stringent, and the goal of scientific medicine was employed
• 1920s: Continued reforms were aimed at driving
incompetent physicians out of the profession
• 1930s: The reliance on patient fees caused severe financial
problems for hospitals during the Great Depression
– The introduction of private health insurance during the
decade would transform medical care financing.
– The decade also saw a revolution in pharmaceuticals
• 1940s: Wartime demands resulted in a sharp increase in
the number of physicians and nurses in training
– The passage of the Hill-Burton Act in 1946 dedicated the
government to replacing the aging hospital infrastructure

6. A Brief History of American
Hospitals, continued.
• 1950s: Vaccines against polio and rubella marked the
true beginning of high technology medicine
– These developments, combined with the widespread
use of antibiotics, helped change the image of
medicine
– Advances in medical research tools highlighted the
decade
– 1960s: Congress created Medicare and Medicaid,
making the federal government the major purchaser
of healthcare services
– The decade also witnessed the beginnings of the
investor-owned, for-profit hospital system

7. A Brief History of American
Hospitals, continued.
• 1970s: Explosive growth typified the medical care
system
– New hospitals and clinics, medical school
admissions, foreign-educated doctors, open heart
surgery, transplants, and helicopter ambulances were
widespread
– The intensity of medical interventions also increased
dramatically
• Intensive care units (ICUs) became widely used
• Trauma centers were established in most areas
– All the developments of the 1970s shared one thing in
common: they were all expensive

8. A Brief History of American
Hospitals, continued.
• 1980s: By 1982, healthcare expenditures exceeded 10
percent of gross domestic product for the first time
– Medicare initiated a new hospital reimbursement
method based on the diagnosis, rather than the
services performed
• 1990s: Managed care has been the dominant factor
affecting medical care delivery during this decade
– Hospitals are no longer the revenue generators they
once were, but instead they have become cost
centers
– Horizontal integration—characterized by hospital
mergers and consolidations—transformed an industry
once highly fragmented with many stand-alone
facilities, into one where multihospital systems are
common

9. The U.S. Institutional Setting
• Hospital Classification
– Hospitals are classified according to the length of
stay, the major type of service delivered, and the type
of ownership
• Community Hospitals
– Under the current classification method adopted in
1972, a community hospital is defined as a short-stay
hospital, providing not only general services, but also
specialty care, including obstetrics and gynecology;
eye, ear, nose and throat; and rehabilitation and
orthopedic services
– More than 85 percent of all nonfederal hospitals are
classified as community hospitals.

10. The U.S. Institutional Setting
• Teaching Hospitals
– About 20 percent of all hospitals in the United
States have an affiliation with one or more of the
nation’s 125 medical schools and sponsor at least
one residency training program
– More than 400 hospitals belong to the Council of
Teaching Hospitals of the Association of
American Medical Colleges
– Most of the teaching hospitals are located in
major metropolitan areas with populations in
excess of one million

11. The U.S. Institutional Setting
• Hospital Spending
– Most hospital spending is by third party payers.
Government sources pay more than 60 percent of
all spending, with Medicare and Medicaid
providing approximately three-fourths of that
amount. Private insurance pays about 30 percent
– Because Medicare and Medicaid costs comprise
such a large percentage of the total hospital bill,
government reimbursement rules play a big role
in determining the financial stability of the hospital
sector.

12. The role of the Not-For-Profit
Organization in the Hospital Industry
• The Not-For-Profit Organizational Form
– A not-for-profit hospital does not have
shareholders in the typical sense of the term
• Equity capital does not come from the sale of
stock, but from donations
• Nature of Competition in the Not-For-Profit
Sector
– The popularity of the not-for-profit organizational
form in the hospital industry may seem a bit odd
given the dominance of the for-profit firm in the
rest of the United States economy

13. The role of the Not-For-Profit
Organization in the Hospital Industry
– A second argument is based on the notion
that profit-maximizing hospitals will not
undertake any activity where the marginal
revenue is less than the marginal costs
• Many argue that even with the preponderance of
not-for-profits in the industry, the profit-
maximizing objective is a reasonable operating
assumption
– Decision making in a not-for-profit hospital
resembles decision making in a for-profit
hospital

14. The Tend Toward Multihospital
Systems
• The Theory of Consolidation
– Mergers, acquisitions, and other forms of
consolidation occur in the hospital industry for
the same reasons that they occur in any other
industry
– Firms are said to experience economies of
scale when the long run average costs fall as
the size of the operation expands
• If economies of scale are to result in
improved efficiency, a number of technical
advantages must be realized because of
increased size

15. The Tend Toward Multihospital
Systems
• The Empirical Evidence on Consolidation
– Most of the empirical research on the growth of
hospital systems and efficiency is based on data from
a time period when cost-plus reimbursements were
the standard practice
– As hospital reimbursement shifted from retrospective
to prospective payment beginning in the mid 1980s,
the efficiencies of the multihospital system have
become more evident
– Dranove and Shanley (1995) focus on the marketing
strategy used by hospital claims to promote brand
name identity

16. The Tend Toward Multihospital
Systems
• This strategy, similar to the one used by
international franchises in the fast food industry,
has as its goal to create a perception of
standardized quality in the minds of potential
customers
– Mobley (1997) examines the differences in merger
activity between for-profit and not-for-profit hospitals
• Her findings indicate that for-profits and not-for-
profits seem to have different motives for
consolidating to compete in these market areas
• Consolidation activity presents a challenge to antitrust
policy
– If consolidation leads to efficiency gains, then patients
could benefit from higher quality care at lower prices

17. Summary
• Hospital care tends to be the most expensive
aspect of healthcare delivery
• Dominated by the private not-for-profit hospital,
the industry is responsible for more than one-
third of all healthcare spending
• The changes that began in the 1980s pushed
hospitals to become competitive and profit
oriented
– This corporate mentality has led to extensive
local marketing, leveraging debt, multihospital
chains, and administrators earning salaries
rivaling corporate executives