Regulatory change, constraints on adaptation and organizational failure: An empirical analysis of acute care hospitals

The advent of the Medicare prospective payment system (PPS) in 1983 affected individual general hospitals in varying degrees based on their revenue and cost structures. These same factors served to constrain a hospital's ability to adapt to the post‐PPS environment. The three constraints are based on the proportion of the hospital's private‐pay (non‐Medicare/Medicaid) patients, economies of scale and economies of scope among medical services. We test the relationship between these constraints and organizational failure in the Chicago area. Hospitals selected out of the new environment (1986‐91) were at a significant relative disadvantage with respect to the proposed constraints.