Hospital City, Health Care Nation: Race, Capital, and the Costs of American Health Care

By Guian A. McKee

Hospital City, Health Care Nation recasts the story of the U.S. health care system by emphasizing its economic, social, and medical importance in American communities. Focusing on urban hospitals and academic medical centers, the book argues that the country’s high level of health care spending has allowed such institutions to become vital, if often problematic, economic anchors for communities. Yet that spending has also constrained possibilities for comprehensive health care reform over many decades, even after the passage of the Affordable Care Act in 2010. At the same time, the role of hospitals in urban renewal, in community health provision, and as employers of low-wage workers has contributed directly to racial health disparities.

Guian A. McKee explores these issues through a detailed historical case study of Baltimore’s Johns Hopkins Hospital while also tracing their connections across governmental scales—local, state, and federal. He shows that health care spending and its consequences, rather than insurance coverage alone, are core issues in the decades-long struggle over the American health care system. In particular, Hospital City, Health Care Nation points to the increased role of financial capital after the 1960s in shaping not only hospital growth but also the underlying character of these vital institutions. The book shows how hospitals’ quest for capital has interacted with structural racism and inequality to shape and constrain the U.S. health care system. Building on this reassessment of the hospital system, its politics, and its financing, Hospital City, Health Care Nation offers ideas for the next steps in health care reform.

• Language: English
• Publisher: University of Pennsylvania Press
• Release date: Mar 7, 2023
• ISBN: 9781512823929

Book preview

Cover: Hospital City, Health Care Nation, Race, Capital, and the Costs of American Health Care by Guian A. McKee

POLITICS AND CULTURE IN MODERN AMERICA

Series Editors: Keisha N. Blain, Margot Canaday,

Matthew Lassiter, Stephen Pitti, Thomas J. Sugrue

Volumes in the series narrate and analyze political and social change in the broadest dimensions from 1865 to the present, including ideas about the ways people have sought and wielded power in the public sphere and the language and institutions of politics at all levels—local, national, and transnational. The series is motivated by a desire to reverse the fragmentation of modern U.S. history and to encourage synthetic perspectives on social movements and the state, on gender, race, and labor, and on intellectual history and popular culture.

Hospital City, Health Care Nation

Race, Capital, and the Costs of American Health Care

Guian A. McKee

UNIVERSITY OF PENNSYLVANIA PRESS

PHILADELPHIA

Copyright © 2023 University of Pennsylvania Press

All rights reserved. Except for brief quotations used for purposes of review or scholarly citation, none of this book may be reproduced in any form by any means without written permission from the publisher.

Published by

University of Pennsylvania Press

Philadelphia, Pennsylvania 19104-4112

www.upenn.edu/pennpress

Printed in the United States of America on acid-free paper

10 9 8 7 6 5 4 3 2 1

Hardcover ISBN: 978-1-5128-2393-6

eBook ISBN: 978-1-5128-2392-9

Library of Congress Cataloging-in-Publication Data

Names: McKee, Guian A., author.

Title: Hospital city, health care nation : race, capital, and the costs of American health care / Guian A. McKee.

Other titles: Politics and culture in modern America.

Description: 1st edition. | Philadelphia : University of Pennsylvania Press, [2023] | Series: Politics and culture in modern America | Includes bibliographical references and index.

Identifiers: LCCN 2022032476 | ISBN 9781512823936 (hardcover)

Subjects: LCSH: Johns Hopkins Hospital. | Medical care, Cost of—United States. | Medical policy—Economic aspects—United States. | Urban hospitals—Economic aspects—United States. | Urban hospitals—Social aspects—United States. | Health care reform—United States. | Racism in medicine—United States.

Classification: LCC RA410.53 .M386 2023 | DDC 362.1109173/2—dc23/eng/20220808

LC record available at https://lccn.loc.gov/2022032476

For Joanna, Reece, and Nathaniel

CONTENTS

Abbreviations Used in Text

Introduction. Crisis in the Hospital City—and the Health Care Nation

PART I. BUILDING THE HOSPITAL CITY

1. The Public Foundations of the Hospital City

2. Urban Renewal in the Hospital City

3. Medicare, Hospitals, and the Gold at Fort Knox

4. Johns Hopkins in the Hospital Metropolis

PART II. LIVING WITH THE HOSPITAL CITY

5. The Hospital City and the National Health Insurance Struggle

6. Wages, Jobs, and Cost in the Hospital City

7. Hospital Cost Control in Maryland

8. To Stay or Go, and How to Pay for It

PART III. COSTS OF THE HOSPITAL CITY

9. The Dream Shall Never Die … but It May Be Compromised

10. A New Emphasis on Market Strategies

11. Markets, Medicaid, and Mergers

Conclusion. Reform in the Hospital City—and the Health Care Nation

Abbreviations Used in Notes

Notes

Index

Acknowledgments

ABBREVIATIONS USED IN TEXT

INTRODUCTION

Crisis in the Hospital City—and the Health Care Nation

The long struggle over health care in the United States has been based on a misunderstanding: the idea that the aim of the American health care system is to provide medical services. It does this, of course, but since World War II, it also has become something much more. It is now an industry that occupies a massive segment of American economic life, one on which entire communities depend for their very survival, material as well as medical. Hospitals in particular have become crucial sources of jobs and economic viability for communities around the country. Increasingly, they also have taken on responsibility for addressing their communities’ most pressing social problems, even as their own actions and practices have sometimes exacerbated those very problems. It is this centrality of hospitals—and of the health care industry more generally—across multiple facets of community life that constitutes what this book characterizes as the hospital city. This importance extends beyond cities alone. Hospitals and health care are dominant forces in suburban and rural communities as well. In all such areas, the social and economic functions of health care have become particularly important as older sources of community viability have disappeared. Yet cities, especially those that have experienced massive deindustrialization alongside the intentional concentration of racialized poverty, offer especially incisive insights into this phenomenon and its significance. The role and significance of the hospital city constitutes the first of three core concerns of this book.

Simultaneously, these same hospitals are also a key source of the U.S. health system’s excessive costs relative to other countries. It is those very costs that underwrite hospitals’ vital economic, social, and medical functions. Yet those costs have made the system immensely difficult to reform in a comprehensive manner. This is because of the top-line expense that they impose on all proposals for expanded coverage of Americans lacking health insurance and because such spending creates a range of influential interests that would be directly harmed by cost reduction. Quite simply, reformers have been unable to overcome the reality that most members of Congress not only have a hospital in their district but also constituents who depend on it for both medical care and jobs. This relationship between the hospital city and the struggle for reform represents the book’s second core concern: the broader political, economic, and social framework that constitutes—and limits—the health care nation.

The third focus of Hospital City, Health Care Nation lies in how the hospital city has contributed to serious problems of racially unequal access to health care. This issue is tied most obviously to lack of universal health insurance, but this story is incomplete. Racial inequity in the hospital city reflects not only inequalities in access to insurance coverage but also in housing, income, and education. Where a person lives and how much they earn affects where they are treated and the quality of care they receive. In the United States, such determinants have been profoundly shaped by both systemic and institutional discrimination. This has produced deep racial disparities in health outcomes. These disparities have been exacerbated by a history of unequal and discriminatory treatment, beginning in slavery and extending through the rise of scientific medicine, by medical professionals and—especially—hospitals.

How has this happened? What forces, choices, and policies created the hospital city, with all its consequences? The answer lies in the dysfunctional system through which the United States finances the health care of its citizens. Readers who have followed the debates, now many decades old, over how best to provide health insurance will not be shocked by that general observation. The specific nature and underlying cause of that dysfunction, though, is less familiar but critical to understanding the crisis facing American health care. The problem lies not merely in the malfeasance of private insurance companies but in the way that the system, in both its public and private components, pays hospitals and funds their capital needs. That payment system, rooted in larger financing structures, has forced hospitals to engage in competitive profit-seeking behavior simply to survive. When combined with pervasive dysfunction in the market for hospital services, this has driven costs higher, constrained reform, limited access, generated inequalities—and made possible the emergence of the hospital city as the economic backbone of American communities.

The problem, then, is much worse than most Americans understand. It is not simply a matter of replacing private insurance with a public system. It is a matter of fundamentally restructuring the provider payment system, embedded as it is within existing models of health care finance, even as coverage and equity questions are addressed. Such a solution requires altering how hospitals are reimbursed for their legitimate operating expenses and how their capital costs are funded. A single-payer system would make such steps easier, but its success would also depend on their implementation. The conundrum is that the opposition generated by the requisite changes to the payment system would make achieving a shift to single-payer much harder. In addition, such a transformation must be accomplished without devastating the communities that now depend on the health care economy for survival. A simplistic approach of cutting hospital costs would do exactly that, along with hurting those who rely on these institutions for care—even as they experience disparate health outcomes. We must, in other words, devise viable and sustainable modes of community economic development that include health care jobs but avoid overreliance on them. Simultaneously, we must develop a more rational structure for funding and paying hospitals.

In assessing the health system and its history, I draw on two foundational insights from the expansive field of health economics. The first perspective relies on the pathbreaking ideas of Kenneth Arrow in the early 1960s. Arrow’s work emphasized the peculiar nature of health care markets and in particular the extreme information asymmetries that exist between patients and providers (that is, doctors and hospitals). Arrow also highlighted the effective insulation of patients from price considerations because of the presence of insurers who acted as financial intermediaries. Because the consumer lacks complete information about both the product and its true price (the latter is usually true among producers too), price signals do not function in health care, and market forces do not operate according to standard economic expectations. Market failure is rampant.¹ This is critical in understanding the hospital city, as hospitals are run as businesses but do not exist in functional markets that meet societal needs or achieve efficiency through price competition. Although political theorists have long demonstrated that the state always constitutes markets, its role becomes particularly vital in health care and specifically in the hospital city.

The second insight is drawn from economists Gerard Anderson, Uwe Reinhardt, Peter Hussey, and Varduhi Petrosyan, who in 2003 published an influential paper with the striking title It’s the Prices, Stupid in which they challenged the then reigning view that the United States spends more on health care than other countries because Americans consume more health services—whether because of insulation from prices or because of the incentives that the payment system offered providers to deliver more services whether needed or not. The paper analyzed comparative data that showed this to be false: per capita health service consumption in the United States was not consistently higher than that in other countries, and in key areas such as physician visits and hospital days consumption was actually lower. Instead, excess spending in the United States came from the higher prices that health care providers were able to charge. Neither public (Medicare and Medicaid) nor private insurers could effectively challenge that pricing power. Hospitals, though not the only provider group driving up prices, are the major contributor. A revised version of the paper updated the data in 2019 and showed that the same basic relationships persisted.² These two ideas—that market forces fail in health care due to its inherent characteristics and that the power of hospitals and other providers to set prices drives higher U.S. health care spending—provide the underlying conceptual framework for this book’s analysis of the hospital city and how it has shaped the health care nation.

The high costs that support hospital cities are rooted in the history of the health care system, in its organization, in its financing, in its racial politics, and in its basic assumptions about what constitutes quality medical care. This book untangles the messy history of the hospital city, explains how it has shaped the health care nation that the United States has become, and suggests a path forward from the deep dysfunction of the status quo.

From Smokestacks to Hospitals

Most of our high-profile debates over health care reform have focused on the reorganization, subsidy, or regulation of health insurance coverage. For all their drama, such fights have obscured a basic reality about the U.S. health care system: health care is a critical source of economic viability in American communities. In large cities, hospitals are a particularly important source of such jobs, accounting for six of the top ten private employers in Baltimore, five of the top ten in Philadelphia and Boston, three of the top four in Cleveland, three of the top six in Houston, and three of the top ten in Detroit.³ These statistics illuminate a broader historical trend: as manufacturing declined in the United States after World War II, hospitals increasingly replaced factories at the core of the urban economy.⁴ Among the cities that had been the nation’s twelve leading manufacturing centers in 1967, hospitals by 2012 constituted the largest overall employment sector in Detroit, Cleveland, Buffalo, Philadelphia, Cincinnati, Pittsburgh, St. Louis, Baltimore, and Boston, the second largest in Minneapolis, the fourth largest in Chicago, and the fifth largest in New York.⁵ This key urban transformation, from centers of manufacturing to centers of health care delivery, has taken place in smaller communities too. While the latter are worthy of historical study as well, this book focuses on larger cities for three reasons. First, such cities generally wrestled earlier with the structural economic transformations wrought by deindustrialization and thus offer a longer historical perspective on the consequences of such changes; second, they are the nearly exclusive location of large academic medical centers, the institutions that form the scientific and economic core of the health care nation; third, deeply rooted patterns of racial discrimination in housing, employment, and health care access have made these cities—and often their hospitals—crucibles of the nation’s broader racial crisis. The implications of these factors in such hospital cities have not been fully understood. Although health care has shaped American cities in determinative ways, we know very little about the history of its development as a specifically urban institution. Similarly, we have not adequately considered how health care’s significance in American communities has shaped wider policy debates about its potential reform. Cities offer a key window into the latter question. This book takes one such city, Baltimore, and its leading hospital system, Johns Hopkins, as a central subject.

This narrative is part of a much larger story about the U.S. economy during the second half of the twentieth century. Health care spending in the United States in 2019 equaled 17.7 percent of gross domestic product (up from 4.3 percent in 1950), for a total of almost $3.8 trillion. Of this figure, the largest single contributor was hospital care, for which the country spent nearly $1.2 trillion (a 6.2 percent increase over 2018).⁶ Numerous costs, from technology to debt service, contribute to hospital spending, but one of the most important is labor—accounting for 59 percent of the cost of inpatient services.⁷ Hospitals quite simply employ large numbers of people. Nationally, hospitals in 2017 accounted for more than 6.17 million jobs, the fifth largest employment category in the nation. Employment in the health care sector as a whole totaled 20.5 million workers. By comparison, all categories of manufacturing together combined for a total of just under 11.5 million jobs.⁸ These statistics show how profoundly the United States has undergone a transition not just from manufacturing to services generally, but to a health care economy specifically. This economic significance for communities across the country and especially for large cities is a root cause of the explosively dysfunctional politics that have made reform of the U.S. health care system so challenging.

Hospitals, Cities, and Health Care Policy

Health care’s centrality in the economy of U.S. cities is thus inextricable from its high and almost certainly unsustainable rate of cost increase. Hospitals in particular represent an extremely cost-intensive way to provide health care services, and in the decades before and after World War II, federal policy makers consciously chose to emphasize the hospital sector as the key delivery mechanism for health care. In doing so, they rejected alternative systems that would have relied on smaller clinics, preventive care, and public health, with hospitals reserved for complex, advanced services. This choice coincided with the emergence of the insurance company model as the primary mechanism for financing health care coverage. It supplied insurance through employment-based plans offered by private insurers (both for-profit and nonprofit) who reimbursed hospitals and physicians for each service that they provided—what we call fee-for-service medicine—at prices the providers set. Federal tax exemptions for employee health benefits heavily subsidized the system. Providers effectively controlled the parameters of this system and structured it in their interests—to retain autonomy and control over the doctor-patient relationship, to secure stable revenue streams, and, for hospitals, to achieve reliable access to the capital that funded new construction and the acquisition of medical technology.⁹ Over the longer term, the insurance company model thus changed not only the behavior of hospitals but also their basic character. Faced with the opportunity and, increasingly, the need to develop revenue streams that supported capital access, this model created incentives for hospitals to compete for patients by building new wings or purchasing the latest curative devices. Over time, such pressures led many hospitals, even those in the nonprofit sector, to adopt characteristics of profit-seeking businesses without the corresponding pressure to increase efficiency.¹⁰

The resulting drive for the profitability that would fund the growth that would allow individual institutions to secure their competitive position generated intense upward cost pressure on the system as a whole. In recent decades, waves of mergers and consolidations have yielded hospital systems and networks that enjoy extensive pricing power in many markets. These forces have meant that hospital costs have been, and remain, a key cause of the larger health care cost crisis that threatens the fiscal soundness of federal and state budgets and the economic competitiveness of U.S. companies—and that has undermined comprehensive health care reform since at least the early 1970s.

Here, the national and the local intersect, for it is this drive for capital and the costs it has produced that has facilitated the sector’s vital economic role in U.S. cities: hospital costs are the financial foundations of health care’s centrality in urban economic development. Yet since the 1970s, health care reform efforts have struggled with an imperative, real or perceived, to control hospital costs as they sought to expand coverage. Such efforts have mostly failed, in part because of the economic importance of health care spending for the institutions, interest groups, workers, and communities that have come to depend on the current, high-cost hospital system. This tension, between health care costs as a key source of stress on both the public and private sectors and health care spending as a means of community development—and even survival—lies at the core of Hospital City, Health Care Nation. As such, the book weaves together a retelling of the national narrative of health care policy, organized around the power of the hospital industry as positioned against presidents and congressional leaders, with a detailed account of the growth, importance, and problems of the hospital city in Baltimore.

Racial inequalities play a key role in this story. Hospitals located in areas with concentrations of insured patients could generate reliable revenue streams, which, beginning in the 1960s, they used to secure access to capital markets and, more specifically, to both tax-exempt and taxable bonds. Many such hospitals were in heavily segregated white suburbs. This allowed them to undertake expansions and modernizations that made them even more competitive for patients. It is important to note that such competition was not based on price. Instead, it was based on services, facilities, and hospital amenities. Such competition did not serve as a check on inefficiency. Urban hospitals serving low-income and often minority patients, in contrast, lacked such reliable revenue, relied on the poorly funded Medicaid program, and had far more difficulty accessing the debt markets. Over time, this produced a decrease in the quality of care that many such hospitals offered, further exacerbating racial health disparities. The story that Hospital City, Health Care Nation tells is not only about health care, then, or about cities: it is about a larger narrative of racial inequality across metropolitan space, as expressed in the transformation of formerly social, community-based institutions by core capitalist financial structures.

A Hospital City in a Health Care Nation

Hospital City, Health Care Nation thus moves across multiple scales: local, state, and national. This approach requires careful attention to why and how the local or regional matters for the broader story of the U.S health care system. The particularity of Baltimore informs such questions as how the hospital industry delimited possibilities for reform and how American financial capitalism influenced local patterns of racial health disparity. Conversely, the book’s openness to the specific and the local demonstrates precisely what is at stake in otherwise abstract debates over health policy options: the lives, livelihoods, and neighborhoods shaped by the hospital city.

Baltimore, home of the massive Johns Hopkins Health System, provides an ideal case study of the hospital city. The Johns Hopkins Hospital and Medical School are iconic institutions that in the late nineteenth century created the model of modern academic medicine. Following a period of racial turnover after World War II, they have existed in an urban, African American neighborhood. Baltimore, meanwhile, emerged by 1900 as a leading manufacturing city with a strong presence in industries such as steel, sugar refining, and shipping, but it in turn experienced a devastating combination of deindustrialization, intense—and intentional—racial segregation, and impoverishment during the second half of the twentieth century. Race and the politics of racial exclusion and white supremacy shaped the city’s history in profound ways. During the late nineteenth and early twentieth centuries, Baltimore pioneered the devastating land control tactics that entrenched racial segregation in neighborhoods around the region and the country, from a municipal segregation ordinance that the U.S. Supreme Court overturned in 1913 to the more subtle but powerful techniques of deed and zoning restrictions and exclusionary realtor practices that allowed developers to build all-white residential communities. Before and after World War II, key figures in the local real estate and development industry continued to shape national housing and urban renewal policy through their roles in government and professional associations and in their own business practices.¹¹ In light of this history, it was not an accident that the 2015 Baltimore uprising made the city a national symbol of continued desperation in U.S. cities. More recently, the COVID-19 pandemic highlighted the vast racial health disparities that persist despite Baltimore’s world-leading hospitals. In this, once again, Baltimore has unfortunately been typical of the nation as a whole.

The scale of Johns Hopkins and other Baltimore health systems is also representative of larger patterns. Health care dominates Baltimore’s economy: when combined with the medical school, the Johns Hopkins Health System is the city’s largest single employer, and health care is—by far—the city’s biggest overall employment sector. The Hopkins system extends throughout the region to other areas of the United States and even around the world. Despite the presence of such powerful institutions, however, Maryland has also been a national leader in hospital cost control through its state-level Health Services Cost Review Commission (HSCRC). The commission’s history and its policies provide possible models for shaping health care reform nationally.

Figure 1. Map of central Baltimore showing the location of Johns Hopkins Hospital, the East Baltimore Medical Center, and Baltimore City Hospitals.

Johns Hopkins and Baltimore, though, cannot be understood in isolation. Along with connecting the Baltimore case to its broader reconsideration of the national health care policy story, Hospital City, Health Care Nation raises questions about the nature of the American state. In recent years, historians and political scientists have reassessed the nature of state power in the United States.¹² In particular, this work has challenged the traditional assumption that the nation possesses an exceptionally weak state. Such scholars argue that the American state in fact wields considerable power through decentralized means, relying on local and state governments and on cooperative, voluntary arrangements with intermediary institutions in the private sector.¹³ Based on voluntary relationships with for-profit and not-for-profit corporate associations empowered to accomplish state ends, this associational state is a form of national power that operates without the centralized bureaucratic structures of classical state theory. The balance between public and private varies, changes in form, and shifts over time, but the American associational tradition has proved capable of building a state with tremendous power both domestically and globally.¹⁴

Few sectors illustrate the blurred character of the public-private distinction more clearly than health care, and urban hospitals and especially medical centers offer a particularly formidable example of the associational state in action. Though nominally private, such institutions draw on direct government expenditures through Medicare and Medicaid and benefit from the hidden subsidies of the federal tax exemption for private insurance benefits. Hospitals and medical centers have also frequently relied on a range of public subsidies, both federal and local, for construction of their physical facilities. They continue to provide varying degrees of charity care, taking on a possible public function in doing so. More recently, they have assumed a wider range of governmental responsibilities—acting as employers, service providers, coordinators of redevelopment, providers of security and policing services, and in a few cases even reconstructing entire communities.¹⁵ All these functions, along with hospitals’ core responsibilities for providing medical services and conducting medical research and teaching, can be seen as part of an associational arrangement under which the state assigns basic public responsibilities to nominally private actors, who then receive both direct and indirect subsidies to support their activities.¹⁶

Finally, there is the question of the health care sector’s relationship to capitalist economies more generally: although many health care institutions and most prominent medical centers are nominally not-for-profit institutions, the largest bring in billions of dollars in annual revenue. This ties the urban health care economy to the history of capitalism. That field can be broadly defined by attention to the political construction of markets and the movement of capital through the economy—a focus that brings health care’s dominant institutions within its purview. The pursuit and service of capital has shaped not only for-profit hospitals but since the 1960s the not-for-profit sector as well. Regardless of their formal legal status, hospitals behave like businesses. Through hospitals (not to mention private insurers), capitalism has thus shaped the U.S. health care system, with significant negative effects that must be addressed if the nation is to have a system that is just and provides cost-effective care for all.

Ultimately, attention to these issues raises a final question for Hospital City, Health Care Nation: if urban health care institutions are simultaneously capitalist corporate entities, charity institutions, and associational actors invested with state powers, what exactly do we as a society expect of them? How have they acted in the city, and how do we need them to act? Should health care institutions take on social responsibilities outside of patient care, research, and teaching? Do we expect or even want them to act as a kind of quasi-government service in the uncertain urban spaces between public and private? Do such responsibilities interfere with their capacity to be the social institutions the health system actually needs? Such queries in turn generate other questions, about the basic identity of hospitals as institutions and about the role they should play in the health care system, in the economy, and even in our democracy itself. These are critical matters for how we understand the modern city, the health care system, and society. In order to begin answering them, we must understand how the hospital city came to be.

PART I

Building the Hospital City

CHAPTER 1

The Public Foundations of the Hospital City

The American state spurred the growth of the hospital city. During the decades after World War II, the federal government enlisted hospitals as agents for its goals of advancing medical research and expanding access to health care facilities. This approach had distinct drawbacks, running up against inadequate health insurance coverage for millions of Americans and generating costs that vastly exceeded those of other countries’ health systems. These flawed health structures also contributed to the reordering of American cities and metropolitan areas during a period of profound transformation that saw shifts of population away from central cities, intensified racial segregation in metropolitan areas, and the decline of manufacturing and its mass production–mass employment economies. Health care’s expansion, with its mounting economic power and its concentration in urban areas, shaped this process and its outcome. We live with the consequences today.

The state interacted with the hospital industry and helped build the hospital city through four federal programs: the Hill-Burton hospital loan and grant program, the urban renewal program, and the Medicare and Medicaid programs. Of these programs, only urban renewal was explicitly conceived as an urban policy. Yet all four expanded the connection between urban hospitals’ traditional role as providers of medical care—especially for the urban poor—and their increasing economic importance in what were soon to become postindustrial cities. These programs served two key hospital industry goals: Hill-Burton and urban renewal provided public capital for hospital construction, while Medicare and Medicaid improved hospital revenue streams generally and compensated hospitals for charity care specifically. The federal programs, though, had more far-reaching effects, as they reshaped hospitals’ financing, operations, and underlying character. In doing so, they laid the foundations for the hospital city.

Hospitals during the period moved away from their traditional dependence on voluntary philanthropy, first toward reliance on public grants as sources of capital and eventually toward deep engagement with private financial markets, regardless of the niceties of for-profit or not-for-profit legal status. Such intersections blur distinctions between policy areas, as well as between public and private spheres, to the extent that health care policy operated as a critical but largely unrecognized form of urban policy. Feedback effects from these social and economic characteristics in turn structured the limits of health policy reform. What the resulting system did not do was provide the best health care for the most people at the lowest possible cost.

World War II and the Origins of the Hospital City

At the close of World War II, health care accounted for less than 1 percent of national income, and the sector employed 892,000 workers, with 505,000 of them in nonprofit, for-profit, and state or local government hospitals. To place the relatively small size of the sector in perspective, manufacturing in 1945 employed more than 15 million workers and accounted for 28.4 percent of national income.¹ In many respects, the nation’s hospitals were actually in crisis. After a period of growth and investment in new facilities and medical technology during the 1920s, most private, voluntary hospitals (those supported by donations voluntarily given) had suffered from a decade and a half of economic depression and war, during which they had seen little in the way of modernization or upgrades. Public, tax-supported hospitals (federal, state, or municipal) had benefited from public works spending during the New Deal, but private hospitals had not been eligible for such funds. In addition, philanthropic donations from wealthy individuals, the traditional source of capital for voluntary hospitals, had dried up during the Depression. Although wartime spending and high employment had eased the extreme financial stress that hospitals experienced during the 1930s, charity care expenditures remained high at most urban hospitals, and the sector as a whole faced continued uncertainty.²

Despite these problems, the contours of the future health care empire had begun to emerge. Hospital insurance coverage developed during the 1930s with the hospital-based Blue Cross network. By the end of the decade, Blue Shield plans sponsored by state medical societies offered coverage of physicians’ bills as well. Most of these insurance plans tied coverage to employment because of the innate availability of large risk pools among workers in a mass industrial economy. Spurred by a federal tax exemption for insurance benefits and the exclusion of such benefits from the wartime wage freeze, the number of Americans with private health insurance increased from around 3 million in 1937 to 12 million in 1940 and 32 million, or 59.4 percent of the nonfarm civilian labor force, in 1945.³ The rapid expansion of corporate health insurance promised steadier revenues for hospitals, particularly those located in major industrial centers with a high rate of union contracts. This helped to stabilize hospital operating budgets.⁴

Even more important, the rise of this insurance company model of health care financing established norms for provider reimbursement. This development is central to the story of the hospital city and to the wider fate of health care policy in the United States because payment patterns and incentives shaped the behavior of hospitals and other providers in fundamental ways. Herman and Anne Ramsay Somers, two leading health care scholars of the mid-century period, were prescient when they noted that the method of payment is not just a neutral financial mechanism to ‘pay the bills.’ For good or ill, it inescapably affects costs, quality, and patterns of service. Over time, the resulting payment structures and the provider interests they encouraged constrained future reforms of the wider system.⁵

The payment systems created under the early insurance company model did three things: first, they accommodated the priorities of both physicians and hospitals. For physicians, the insurance company model paid fees for the services that doctors provided, a key demand of the American Medical Association (the primary physicians’ professional organization, also known as the AMA) because of the belief that such a structure protected physician autonomy over medical decisions, as well as the privacy of the doctor-patient relationship. For hospitals, it maintained the centrality of the hospital as the core of the system, the provider of major medical services, and the workplace of the physician. Insurers paid institutions one of two ways: on the basis of reimbursable costs per patient day in the hospital, the system adopted by most Blue Cross plans and later used in Medicare; or on the direct reimbursement of (generally higher) patient charges, the structure used by the for-profit commercial insurers who began to challenge the dominance of the Blues during the 1940s and 1950s. All of these mechanisms created inflationary incentives for doctors and hospitals. The more care, or services, they provided, the more revenue they would receive.

Second, the insurance company model limited the spread of alternative financing structures organized around the principle of subscriber prepayment and nonprofit group practice, such as the Kaiser Foundation Health Plan on the West Coast or the Group Health Plan of New York. Prepaid group practices reversed the incentives of fee-for-service medicine, as the provider received only their share of a patient’s monthly fee (along with those of all other plan members, including those who remained healthy). They did not receive extra fees for additional services that might not be needed. By emphasizing prevention and lower-cost clinic services, the prepaid group practice approach also decentered the expensive institutional care of the hospital. The dominance of the insurance company model, along with the pressure exerted by the AMA, pushed such alternatives to the sidelines in much of the country until the 1970s and 1980s.

Third, and critically, the insurance company model established the principle of reimbursing hospitals’ capital costs. Blue Cross typically included a flat-rate capital allowance in its payment schedules, while the commercial insurers paid patient charges that covered depreciation and interest costs. Such payments allowed hospitals to build capital reserves that could be used to pay for expansions and improvements or leveraged into borrowing to pay for even more growth. Over time, this would radically reorient the business practices of even nonprofit hospitals toward the maximization of revenues and in turn allow hospitals to move away from reliance on philanthropic and governmental sources of capital.⁶

Meanwhile, the private, voluntary hospital sector also began to articulate a new concept of its role both in the emerging public-private health care system and in the broader U.S. associational state. Private hospitals succeeded in claiming status as public institutions in order to avoid the collective-bargaining requirements of New Deal labor laws and the employee coverage requirements of the Social Security unemployment and old-age insurance programs. The hospitals justified these exemptions on the idea—and the ideal—that they had a core mission of public service, which they conveniently extended to the personal motivations of their employees. The psychic rewards of participating in this mission, hospital lobbyists explained, compensated hospital workers for low wages, lack of access to collective bargaining, and exclusion from social insurance. Building on this rather manipulative invocation of the service ethos, the industry thus promoted what historian Rosemary Stevens describes as a dual ‘public’ hospital system that included not only hospitals operated directly by government entities but also those run by nominally private, nonprofit associations.⁷ This positioning at the interface of public and private would provide the ideological framework for the growth of the hospital city in the decades after the war.

Health insurance and ideology aside, World War II created important precedents for federal subsidy of hospital construction. The 1941 Lanham Act provided federal public works funds to support construction of community facilities in areas vital to the war effort. Hospitals received 25 percent of all funds spent through the program. In contrast to the New Deal public works programs, which had funded only public hospitals, private nonprofit hospitals were eligible. As such, the act established a model for postwar federal funding of hospital expansion and modernization.⁸

The Lanham Act, along with an unsuccessful 1942 bill that proposed a follow-up hospital construction program, led the American Hospital Association (AHA) to undertake its own planning effort for the postwar period. In 1944, the AHA established the Commission on Hospital Care to study the needs of the nation’s postwar hospital system and shape any programs of federal funding—or regulation. The 1943 introduction of proposals for national health insurance by Senators Robert Wagner of New York and James Murray of Montana and Representative John Dingell Sr. of Michigan gave further impetus to the AHA’s effort, as did the success of depression and wartime experiments in comprehensive primary care and prepaid group medical practices. Along with Kaiser and a number of other prepaid group experiments, these included the Farm Security Administration’s (FSA) sponsorship of medical cooperatives and clinics and the U.S. Public Health Service’s Emergency Maternity and Infant Care (EMIC) program for the wives and children of service members during World War II. These efforts provided care for more than a million people and offered models for the public delivery of clinic-based health care services—a possible alternative to voluntary hospitals as the system’s core. At the same time, EMIC actually preceded Blue Cross in reimbursing hospitals for costs and in including capital expenses (such as depreciation and interest) in such cost calculations. A progressive public health care program thus contributed significantly, if unintentionally, to the development of the insurance company model of hospital finance.⁹

The AHA commission provided a means to block the wider threat that the EMIC and FSA programs posed to hospitals. Its final report identified gaping inadequacies in the nation’s hospitals and called for a massive program of hospital construction, modernization, and coordination that would create 195,000 new hospital beds (40 percent more than the existing supply) at a cost of $1.8 billion. This approach reflected a belief system that assumed technologically oriented hospital care represented a necessity for improving health. As such, the report deflected attention from clinic-based, preventive, and prepaid group alternatives. The commission also took pains to separate its call for hospital expansion from the wider debate about national health insurance.¹⁰ The emergence of the hospital city would be grounded in the wholesale national adoption of this perspective and, with it, the rejection of the possibility of building a coordinated health care delivery system, linked to a program of national health insurance, that would encompass hospitals but also extend beyond them.

The Hill-Burton Program, Capital, and the Hospital City

The choice to emphasize hospital construction rather than a more comprehensive approach to health care occurred amid the social and political ferment of the immediate postwar period. It took concrete form, quite literally, in the Hill-Burton hospital construction program, which Congress enacted in 1946. Yet such an outcome was not inevitable. As late as November 1945, President Harry Truman listed the construction of hospitals and public health centers as just one component in a program that would also include federal funding for public health, maternal and child health services, medical education and research, protection from lost wages due to illness or disability, and prepaid national health insurance covering both physician and hospital services. Hospital construction, though, represented the first priority within such a program, and Truman argued that it should be possible to meet deficiencies in hospital and health facilities so that modern services—for both prevention and cure—can be accessible to all the people.¹¹

In 1945, hospitals could be portrayed as an unquestioned good, bringing the unalloyed benefits of medical science to the American people. Supporters and opponents of national health insurance alike endorsed the idea of federal support for hospital construction, and it would be the only part of Truman’s package to become law. In contrast to national health insurance or public health programs, both of which the AMA bitterly opposed, federal aid for hospital construction had few natural enemies. It also had a cohesive base of interest group support. In particular, Hill-Burton resulted as much from the AHA’s push for increased hospital construction through the Commission on Hospital Care as it did from Truman’s advocacy.¹²

Well before Truman’s health message, AHA executive secretary George Bugbee sought bipartisan sponsorship for hospital construction legislation from Republican senator Harold Burton of Ohio and Democratic senator Lister Hill of Alabama. Bugbee’s greatest success, though, came in winning over Ohio Republican Robert Taft, the Senate minority leader. Taft, who attacked Truman’s national health insurance proposal as the most socialistic measure this Congress has ever had before it, hoped to run for president in 1948 and needed a health position of his own to counter Truman. Taft acknowledged that the U.S. health care system was inadequate in spots, but he did not believe it needed comprehensive reorganization. As a result, he insisted that the Hill-Burton legislation (formally known as the Hospital Survey and Construction Act) primarily benefit the poorest states with the worst hospital facilities and that it limit support for hospitals in richer states. Lister Hill readily agreed (by that time Burton had been appointed to the Supreme Court) and the staff of the Social Security Board designed an aid formula that met those criteria. The formula gained the support of Hill’s fellow Southern Democrats, whose generally poor region stood to benefit disproportionately. It also required local and state contributions of two dollars for every one dollar of federal aid, with contributions permitted from private sources as well as from state and local governments.¹³

In an important contrast with the Truman-backed