Hospital Services Industry

Types of U.S. Hospitals and Size Distribution

In 1980, there were 7,000 hospitals in the United States. In 2003, over twenty years later, that number had dropped to only 5,800 hospitals. In addition to the decrease in hospitals, the number of hospital beds has fallen by 30% over the past 25 years according to Santerre and Neun. However, grouping all hospitals together is kind of deceiving given that there are many different ways in which hospitals are grouped or categorized. Hospitals are put into groups according to who owns them, the types of services they offer, and the length of stay each hospital provides to their patients. When it comes to ownership, hospitals are either federal or non-federal hospitals. The federally-owned hospitals include those that are located on military institutions or that are run by the Veterans Administration (VA). Non-federal hospitals include community, long-term general and special, psychiatric, and tuberculosis hospitals. Community hospitals are by far the largest out of the five listed accounting for 85% of all hospitals. Community hospitals can even be broken down a step further, by splitting them up into not-for-profit or for-profit hospitals. The not-for-profit firms represent 61% of all community hospitals, while the for-profit hospitals only represent 16%.

Hospitals come in many shapes and sizes, whether they are private or public. The figures below correspond to the changes in percentage of community hospitals in each bed size category from 1970-2003 (Neun 385).


500 and over

After reviewing the data, the four largest hospitals increased until 1990, but then followed a general decline until 2003. However, the two smallest hospitals followed almost the exact opposite pattern. The smaller hospitals decreased until 1990 and then increased steadily until 2003. The reason for this trend for both the large and small hospitals is that as a result of price competition increasing, smaller hospitals became the favored ones. If only looking at the data from 1970 to 2000, the hospitals in the category of 100-199, are the only ones to have a steady increase out of all of the bed size categories.

In addition to looking at the size distribution of community hospitals, it is good to look at the number of hospitals by ownership type to get a good idea of the trends on a larger scale. The following data was taken from the Hospital Report that was published by the SUNY Downtown Medical Center in 2005. The data examines the different hospitals in the 100 largest cities and their suburbs from 1996 to 2002. During this time frame, there was a decline in the number of city hospitals. They went from 730 hospitals in 1996 to 645 in 2002, a 12% decrease. If the city hospitals are broken down into different ownership types, the data shows similar trends. The city public hospitals went from 83 to 70; the non-profit went from 486 to 432; and the for-profit city hospitals went from 161 to 143. The suburban hospitals showed very similar results. The number of suburban hospitals went from 906 to 839, a 7% decrease, which is almost half of the decline of the city hospitals. The breakdown of the suburban hospitals shows the following results: public suburban hospitals went from 134 to 98; non-profit hospitals went from 608 to 595; and the for-profit suburban hospitals went from 164 to 146. So, while the suburban hospitals decreased much less than the city hospitals, both groups showed a very consistent decline in the number of hospitals regardless of ownership type.

Types of Care

There are four main types of care provided by hospitals. Essentially no hospital provides all types of care to their patients due to the resources needed for each type.

1. Primary care is a very standard form of care which involves the prevention, early detection, and the treatment of disease. Hospitals offering this form of care usually offer services associated with obstetrics, gynecology, internal medicine, and general surgery.

2. Secondary care is a more sophisticated than primary care is includes the services provided by hospitals associated with cardiology, respiratory care, and physical therapy.

3. Tertiary care is aimed at arresting disease in process. Also included in tertiary care are heart surgery and cancer treatments such as chemotherapy.

4. Quaternary care is the most sophisticated out of all of the different types of care provided by hospitals. In essence, quaternary care hospitals are also known as research hospitals and are often associated with universities or other medical institutions.

Most community hospitals provide primary and secondary care. Sometimes they provide tertiary care, but that is not very common. An example of a hospital that provides primary and secondary care would be Ball Memorial Hospital in Muncie, Indiana. Indiana University’s Medical Center could be classified as a university that provides quaternary care.

Barriers to Entry

At first glance, it seems as if there would be many barriers to entry when it comes to opening up a new hospital. It seems that economies of scale and system affiliation would appear to be major barriers to entry but it is actually the opposite. Those two aspects actually have very little effect on the costs of existing and new hospitals in the long-run and are not significant barriers to entry. As stated by Santerre and Neun, “Learning by doing seems to be the only significant cost structure basis for barriers to entry (387).” Basically, the reason new hospitals do not or cannot enter the market is because it just takes too long to learn how to do things right. It seems that as long as there are hospitals who know what they are doing and are doing it well, then new hospitals will not be too tempted to enter the market.

Sources of Hospital Funds

Hospital funds can be broken up into two main categories: private funds and government funds. The private funds account for 41.7% ($215 billion) of total hospital care expenditures, which are at $515.9 billion. Private funds can be broken up into three categories: out-of-pocket, private insurance, and other. The out-of-pocket expenses are those paid by the individual consumers and these expenses only account for 3.2% ($16.3 billion) of total hospital care expenditures. This is backwards in the sense that individual consumers are the most price-sensitive but yet they have the least control of the market. The counterpart of private funds is government funds and they account for 58.3% ($300.8 billion) of total hospital care expenditures. The government funds can be divided into federal funds and state and local funds with the federal funds accounting for the majority of the government funds.

Talking about how much is paid for health care almost always leads to a discussion about the cost shifting behavior of hospitals. Cost shifting is when prices increase because of the low reimbursement rates under the Medicare and Medicaid programs. While this is not proven at all, people still think that it happens and that it is the cause of the increasing health care costs. Unfortunately this theory does not make complete sense because raising private prices in response to public price cuts would in fact produce lower profits for hospitals. This is because the demand for the services offered would fall just as the prices for those services would increase.


1. What are the four different types of care that were discussed?

A: Primary, secondary, tertiary, and quaternary.

2. What is the primary barrier to entry for new hospitals?

A: Learning by doing seems to be the only significant cost structure basis for barriers to entry.

3. Have the number of hospitals increased over the past 2 years of decreased?

A: Decreased by 1,200 hospitals.

4. How are hospitals grouped into different categories?

A: Hospitals are put into groups according to who owns them, the types of services they offer, and the length of stay each hospital provides to their patients.

5. Summarize the findings of the SUNY Downstate Medical Center in their Hospital Report.

A: When looking at the 100 largest cities and their suburbs, the number of hospitals, regardless of their ownership type, is found to be decreasing steadily. The number of hospitals in the city is decreasing almost twice as much as the number of hospitals in the suburban setting.

Works Cited:

Centers for Medicare and Medicaid Services. 2 Apr. 2007. <>

Hospital Report. Aug. 2005. SUNY Downstate Medical Center. 2 Apr. 2007.

Neun, Stephen P. and Rexford E. Santerre. Health Economics: Theories, Insights, and Industry Studies. Thomson South-Western, 2007. 380-426.