In 1922 the Reverend John Flynn visited the town to assess the suitability for establishing an Australian Inland Mission (AIM) hospital. The Western Australian Government agreed to subsidise the building of the hospital, which was subsequently built by AIM and opened in April 1926 staffed by two nurses, Olive Bennett and Helen Cousin. In July 1934 the Lake Grace Hospital Board repaid the loan from the Australian Inland Mission and took over the ownership of the hospital. The hospital served an area of including providing maternity ward facilities. The hospital ceased operation in 1952 with the construction and replacement by the Lake Grace Memorial Hospital. The Lake Grace AIM Hospital building was in disrepair by 1983 with the state Government deciding to demolish the building. Protests by former staff and the local community halted the destruction, and the building was restored as a museum with the help of the Lake Grace Shire Council and the local community.