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  | 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 Dav YK