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Chapter 11 described the loose, but nevertheless complex relationship between the hospital and the physicians on its medical staff. Healthcare delivery by hospitals and physicians has grown more intertwined over the past 4 decades. Much of this has been spurred by federal government efforts to control rising healthcare costs, which relied on regulatory approaches in the 1970s (eg, certificate of need legislation), budgetary remedies (eg, diagnosis-related groups [DRGs] and the Inpatient Prospective Payment System [IPPS]) in the 1980s, and an increasingly diverse and complex reimbursement environment for Medicare and Medicaid patients. Federal efforts were supplemented by private sector efforts in the form of “managed care.” Most of these efforts were directed at the largest destination of healthcare spending—the hospital (40% of national health expenditures in 1980).

These public and private sector forces jointly motivated a series of organizational responses by hospitals that encompassed (in order) diversification, corporate restructuring to protect some of the newly diversified services, horizontal integration, vertical integration, and payer-provider integration. They are discussed in the following sections.


Starting in the early 1900s, hospitals began to diversify beyond their core function of inpatient services. The new services included hospital outpatient care, emergency care, ambulatory care, and post-acute care. Outpatient and emergency care have been offered for over a century; their use mushroomed, however, in the 1960s after the passage of Medicare and Medicaid. By contrast, ambulatory care and post-acute care are more recent offerings, dating to the 1980s.

Outpatient Care

Outpatient care began as a charitable function. Freestanding “dispensaries” began in the late 18th century to serve the urban poor who did not need to be hospitalized. They dispensed medications, performed minor surgery, and extracted teeth. Dispensaries reached roughly 100 in number by 1900 and gradually ceded their role over to the hospitals and their newly opened outpatient departments.

The US hospital sector witnessed rapid growth in the early 20th century, and so did the number of outpatient clinics. In 1914, 250 outpatient clinics were associated with hospitals; by 1926, the number had reached 1,790.1 Outpatient clinics were used for teaching and training younger physicians, who staffed the clinics in return for hospital admitting privileges, and who could be exposed to diseases in their early stages (before hospitalization was required). They nevertheless remained a “stepchild” of the core inpatient hospital. Medical social workers conducted “means tests” on patients to ensure they were poor enough to qualify for charitable care; the poor patients were routed to the clinics where they were given low priority. The staff at these clinics were almost exclusively young professionals in training, reinforcing this inferiority.

Over time, with the growth of the US hospital, more hospitals opened outpatient departments, and more patients were seen in such settings. Between the late 1920s and the early 1960s, hospital outpatient ...

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