The prohibition on care in public institutions did have an effect on the use of poorhouses -- many of the poorhouses and poor farms saw their population dwindle sharply after 1935. Following a pattern that was repeated throughout the country, 15 Minnesota poor farms closed between 1935 and 1950. (Ramsey County Nursing Home)
Although some potential poorhouse residents may have been able to remain at home, that didn't solve the problems for everyone. The payments were not generous, and some recipients needed to find shared quarters in order to get by. Others needed a level of care or supervision that they couldn't get at home. They couldn't go to a poorhouse without losing their benefits, but they did have some money to pay for their care. Most of the nonprofit old age homes restricted access to members of their own organizations, and, since they were dependent on donations and contributions for survival, they had a limited ability to expand quickly. That left proprietary nursing homes as the only facilities with an unlimited potential to grow to fill the emerging need. As a result, the number of for-profit facilities began to quickly multiply after the Social Security Act became effective.
OAA recipients were able to pay cash at a time when there was little real money in circulation, making them very attractive customers for proprietary operators, and old age homes were a perfect "cottage" industry. They could be easily and often inexpensively launched by "mom and pop" operators who boarded their elderly customers in unused rooms in private homes. Some were run by unemployed nurses who provided rudimentary care in addition to room and board, giving rise to the term "nursing home." In a time when many people were still out of work, the fledgling industry provided homeowners with an opportunity to use the only asset they owned to generate a welcome source of cash.
In contrast, while the nursing home industry was becoming primarily a for-profit industry, hospitals continued to develop under government and non-profit sponsorship. By 1935, there were about 6,400 hospitals in the United States, and virtually all were either non-profit or government facilities. Most hospitals had always admitted a significant percentage of "charity" patients who could not pay their own way, whose care was heavily subsidized by the government or by the religious or charitable institutions that supported the hospitals. They also required more capital and operated on a scale that few private operators would have been able to finance.