The Restructuring of the Hospital Services Industry

By Reardon, Jack; Reardon, Laurie | Journal of Economic Issues, December 1995 | Go to article overview

The Restructuring of the Hospital Services Industry

Reardon, Jack, Reardon, Laurie, Journal of Economic Issues

As policymakers debate various health care proposals, the pace of structural change among hospitals is accelerating principally via mergers and acquisitions. This paper, after documenting the reasons for structural change, will empirically investigate the current structure of the industry.

The Current Merger Movement in Historical Perspective

Prior to 1870, hospitals were nonprofit institutions serving the poor, the homeless, and the insane [Starr 1982, 144]. Medicine was practiced outside of the hospital by peripatetic physicians attending patients at their home; hospitals served those without resources to pay for the services of a physician.(1)

During the period 1870-1910, hospitals were transformed from the periphery of health care to the center [Starr 1982, 144]. Several reasons account for this transformation [Temin 1988, 80-83]. First, improvements in hospital technologies and new surgery techniques made hospital visits more palatable for patients (and less life threatening). Second, the newly developed germ theory of disease created a need for doctors to work in laboratories in order to diagnose and treat disease. Third, increased urbanization divorced medical care from the home and led to an increased demand for hospital services by the urban middle and working class.(2)

Prior to this transformation, hospitals were nonprofit, operated either by religious denominations, charitable lay boards, municipal governments, or the federal government. As new surgery techniques made surgery profitable, and as the need for physicians to establish professional control over their work environment became more pronounced, proprietary hospitals - managed and operated by physicians for a profit - began to develop [Starr 1982, 157-165]. By 1910, 56 percent of the hospitals in the United States were proprietary [Starr 1982, 219].

The proprietary hospital was small and relied exclusively on the fee-paying middle and upper classes. Over time, however, proprietary hospitals dwindled in number and importance as they were typically converted to nonprofit organizations by their owners. By 1946, only 18 percent of the total hospitals were proprietary [Starr 1982, 219].

In 1945, Congress passed the Hill-Burton Act, which provided federal funds (and matching state and local funds) for the construction of new hospitals and the repair of aging hospitals. The Hill-Burton Act was successful in increasing the number of beds per capita [Temin 1988, 90]; however, it delayed consolidation in the industry since less economical hospitals were provided funds to continue operating [Starr 1982, 351].

The passage of Medicare/Medicaid in 1965 set in motion the forces responsible for the current merger wave. Desperate to win the support of the medical establishment for the passage of Medicare/Medicaid, the federal government promised a generous Medicare reimbursement policy on the basis of cost - to be determined by the hospital - and surrendered direct control of Medicare to Blue Cross and Blue Shield [Starr 1982, 375]. In addition, the federal government allowed hospitals to be reimbursed for a reasonable rate of return on equity capital and also allowed for depreciation to be calculated on the basis of current replacement cost rather than historical cost [Stevens 1989, 296-7].

Under such generous reimbursement conditions, it became very difficult for a hospital not to make a profit [Gray 1991, 33]. To take advantage of the new profit-making opportunities, investor-owned (IO) hospitals developed. Similar to the proprietary hospital, the objective of the IO hospital is to make a profit; however, unlike the proprietary hospital, the IO is largely owned by outside investors.

During the 1970s and the early 1980s, the profits of IO hospitals were relatively high-a dollar invested in an IO returned nearly 40 percent more in earnings than the average for all other industries [Stevens 1989, 337]. High profits facilitated the attainment of both debt and equity in the financial markets at a time when philanthropy and government aid grants to hospitals were declining. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Cite this article

Cited article

Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

The Restructuring of the Hospital Services Industry


Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

    New feature

    It is estimated that 1 in 10 people have dyslexia, and in an effort to make Questia easier to use for those people, we have added a new choice of font to the Reader. That font is called OpenDyslexic, and has been designed to help with some of the symptoms of dyslexia. For more information on this font, please visit

    To use OpenDyslexic, choose it from the Typeface list in Font settings.

    OK, got it!

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search


    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.