Financial History Issue 116 (Winter 2016) | Page 34
By the time the Bureau of the Census
published Benevolent Institutions in 1910,
there appeared to be one hospital for
every 28,000 inhabitants in New England,
but only one for every 125,000 people in
the West South Central region. In total,
there were about 1,800 for-profit hospitals
among the nation’s total of about 4,200.
During the next several decades the
number and percentage of for-profit hospitals declined steadily. Communities
across the country began to embrace the
obligation to support the provision of
medical care for their citizens, and physician-owners closed their businesses or
allowed their acquisition by municipal or
charitable operators. Proprietary hospitals
did not share in the federal largess given
in the Lanham Act of 1941 or the successor
Hill-Burton Act of 1946. In its four years
of existence, the former provided more
than $120 million in grants and loans for
the construction of not-for-profit community hospitals. In the subsequent 20
years, the latter provided an additional
$2.4 billion to aid in the construction of
such facilities.
Proprietary hospitals did not disappear entirely; in 1960 such institutions
accounted for about 12% of the nation’s
6,800 hospitals. Most had less than half
the number of beds as the average notfor-profit institution. Almost two-thirds
of the approximately 815 proprietary hospitals were located in only five states,
possibly due to historic regional practice
patterns, as well as differing licensing and
taxation regulations. During the next several years, many of those small, specialty
hospitals closed or converted to community-sponsored not-for-profit institutions.
These activities reflected both changes in
their local medical markets and the passing of many physician owner-operators.
An extensive body of academic literature
refers to several studies and reports of the
American Hospital Association’s Bureau
of Research Statistics that described the
ownership changes that occurred among
proprietary hospitals during the mid1960s. The figures cited for the period 1960
to 1967 document the decline in ownership by sole proprietors and partnerships
in favor of more ownership by corporations, some of which were publicly-owned
companies.
One event had the unintended effect
of accelerating the formation of such
firms and increasing the involvement of
investors in the heretofore unrecognized
business of providing healthcare treatment services for a profit. On July 30, 1965,
President Lyndon Johnson signed Public
Law 89–97: Social Security Amendments
of 1965, the law that established Medicare. The relatively short law (138 pages)
called for the federal government to pay
the costs of much medical treatment for
persons over 65 years old. The particularly
meaningful Part A provisions committed
the government to paying the “reasonable
direct and indirect” costs of providing
“inpatient hospital services” for up to 90
days and “post-hospital extended care
services” for up to 100 days during each
defined “spell of illness.”
Medicare: A New Source of Revenue
Attracts Public Investors
The long and colorful legislative history of
the effort to provide medical insurance to
the nation’s elderly reveals many discussions about the financing of the separate
Part A and Part B programs. (The former
covered hospital services and was financed
by a tax on employees and employers. The
latter covered physician services and was
financed by monthly premium payments
made by the elderly.) But the legislators
who had been pursuing this type of health
coverage for two decades made no serious
attempts to regulate the fees of any providers of medical care. Indeed, it was only
when organized medicine dropped its
objections to the concept of Medicare in
early 1965 that the law’s champions finally
found the votes in Congress to transform
their vision into a law.
So it appeared neither surprising nor
controversial when the final version
included language denying the government any authority to impose any
restraints on medical costs. In the absence
of such controls, the actual expenditures
for Medicare in its first year after implementation were over $2 billion more than
estimated. And entrepreneurs of all types
responded to that flood of government
spending by organizing healthcare service
companies to benefit from those funds.
By the late 1960s, a handful of investorowned hospital companies had emerged.
In 1960, entrepreneur Uranus “Bob”
Appel was running Medlabs, a firm that
provided laboratory services to hospitals
in Southern California. When one of his
clients was facing bankruptcy, he took
32 FINANCIAL HISTORY | Winter 2016 | www.MoAF.org
Medlabs public and used the money to
acquire that 26-bed hospital. Thus, the
re-named American Medical Enterprises
became the first investor-owned hospital company in the country. During the
next several years, the company acquired
businesses making health-related films
and providing inhalation therapy services.
After the passage of Medicare, it greatly
expanded in size by buying seven additional hospitals.
By the end of the decade, the renamed
American Medical International was a
leader in the rapidly-growing hospital
management industry, and its stock was
one of the most actively traded on the
New York Stock Exchange (NYSE).
In 1962, Louisville, Kentucky lawyers
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