United States Government Accountability Office

GAO Report to the Chairman, Committee on 

Ways and Means, House of 

Representatives 

GENERAL 

HOSPITALS 

Operational and 

Clinical Changes 

Largely Unaffected by 

Presence of 

Competing Specialty 

Hospitals 

April 2006 

 

GAO-06-520 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 2006

GENERAL HOSPITALS

Operational and Clinical Changes Largely 

Unaffected by Presence of Competing 

Specialty Hospitals 

Highlights of GAO-06-520, a report to the 

Chairman, Committee on Ways and 

Means, House of Representatives 

There has been much debate about 

specialty hospitals—short-term

acute care hospitals with physician 

owners or investors that primarily 

treat patients who have specific 

medical conditions or need surgical 

procedures—and the competitive 

effects they may have on general

hospitals. 

Advocates of specialty hospitals 

contend that competition from 

these physician-owned facilities 

can prompt general hospitals to 

implement efficiency, quality, and 

amenity improvements, thus 

favorably affecting the overall

health care delivery system. Critics 

of specialty hospitals are

concerned that general hospitals 

may respond to such competition 

by making changes that do not 

necessarily increase efficiency or

benefit patients or communities, 

for example, by adding services 

already available in the community.

The appropriateness of physicians’ 

financial interests in specialty 

hospitals has also been questioned. 

GAO was asked to provide

information on the competitive

response of general hospitals to 

specialty hospitals. GAO surveyed 

approximately 600 general

hospitals in markets with and 

without specialty hospitals to 

provide information on the extent 

to which these two groups of 

general hospitals reported

implementing operational and 

clinical service changes to remain

competitive. GAO received 

responses from 401 general

hospitals. 

Nearly all general hospitals responding to GAO’s survey reported making 

operational and clinical service changes to remain competitive in what they 

viewed as increasingly competitive healthcare markets; however, there was 

little evidence to suggest that general hospitals made substantially more or 

fewer changes or different types of changes if some of their competition 

came from a specialty hospital. While the majority of survey respondents 

indicated that competition from other general hospitals had increased, a 

larger proportion of respondents—91 percent of urban general hospitals and 

74 percent of rural general hospitals—reported increases in competition 

from limited service facilities, a category that includes approximately 100

specialty hospitals across the nation and thousands of ambulatory surgical 

centers and imaging centers. To enhance their ability to compete, general 

hospitals reported making an average of 22 operational changes, such as

introducing a formal process for evaluating efforts to improve quality and 

reduce costs, and 8 clinical service changes, such as adding or expanding 

cardiology services, from 2000 through 2005. Although specialty hospital 

advocates have hypothesized that the entrance of a specialty hospital into a 

market encourages the area’s existing general hospitals to adopt changes 

that make them more efficient and better able to compete, the survey 

responses largely did not support this view. There were no substantial 

differences in the average number of operational and clinical service 

changes made by general hospitals in markets with and without specialty 

hospitals and, for the vast majority of the potential changes included on 

GAO’s survey, there was no statistical difference between the two groups of 

hospitals in terms of the specific changes they reported implementing. 

GAO received comments on a draft of this report from the Centers for 

Medicare & Medicaid Services (CMS). In its comments, CMS stated that 

GAO’s study, by providing quantitative data on the market effect of specialty

hospitals, was extremely helpful. 

Number of Medical Facilities by Type 

Number of facilities

Sources: American Hospital Association, GAO, and Medicare Payment Advisory Commission.

0 1,000 2,000 3,000 4,000 5,000

Specialty hospitals (2005,

existing and under development)

Imaging centers (2002)

Ambulatory surgical centers

(ASC) (2004)

General hospitals (2004)

Note: Data include the most recently available count for each type of medical facility. Count of 

ASCs includes only those facilities that are Medicare certified. 

www.gao.gov/cgi-bin/getrpt?GAO-06-520.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact A. Bruce 

Steinwald at (202) 512-7101 or 

steinwalda@gao.gov. 
Contents 

Letter 1

Results in Brief 4

Background 6

Presence of Specialty Hospitals Had Little Effect on the Number or 

Type of Operational and Clinical Service Changes Reported by 

General Hospitals 9 

Concluding Observations 20 

Agency Comments and Comments from Organizations 

Representing General Hospitals 20 

Appendix I Scope and Methodology 22 

Sample Selection 22 

Survey of General Hospitals 24 

Relationship between Regional and Local Health Care Markets 25 

Survey Data Analysis 27 

Data Reliability 29 

Appendix II Survey Questionnaire 31 

Appendix III Survey Response by Category 38 

Appendix IV CMS Comments 40 

Appendix V GAO Contact and Staff Acknowledgments 42 

Related GAO Products 43 

Page i GAO-06-520 Hospital Competition
Tables 

Table 1: Hospitals’ Reported Perceptions of the Level of 

Competition in Their Market Environment, by Geographic 

Type, 2005 10 

Table 2: Urban General Hospitals’ Reported Perceptions of the 

Change in Competition from Other General Hospitals and 

Limited-service Facilities, 2005 10 

Table 3: Rural General Hospitals’ Reported Perceptions of the 

Change in Competition from Other General Hospitals and 

Limited-service Facilities, 2005 11 

Table 4: Operational Changes Reported by a Majority of General 

Hospitals, 2000 through 2005 12 

Table 5: Average Number of Operational and Clinical Service 

Changes Reported by General Hospitals with and without 

Specialty Hospitals in Their Markets from 2000 through 

2005, by Type of Change Implemented 14 

Table 6: Number of Reported Operational and Clinical Service 

Changes That Significantly Differed between General 

Hospitals with and without Specialty Hospitals in Their 

Markets from 2000 through 2005, by Type of Change 

Implemented 15

Table 7: Percentage of Rural General Hospitals Reporting 

Operational and Clinical Service Changes in Regional 

Markets with and without Specialty Hospitals from 2000 

through 2005 16 

Table 8: Percentage of Urban General Hospitals Reporting 

Operational and Clinical Service Changes in Regional 

Markets with and without Specialty Hospitals from 2000 

through 2005 17 

Table 9: Percentage of Urban General Hospitals Reporting 

Operational and Clinical Service Changes in Local Markets 

with Specialty Hospitals and Regional Markets without 

Specialty Hospitals from 2000 through 2005 19 

Table 10: Criteria for Selecting Regional Markets 23 

Table 11: Criteria for Selecting General Hospitals Included in the 

Sample and Comparison Sample 24 

Table 12: Average Number of Operational and Clinical Service 

Changes Reported by Urban and Rural General Hospitals 

from 2000 through 2005, by Category of Potential Change 39 

Page ii GAO-06-520 Hospital Competition
Figures 

Figure 1: Number of Medical Facilities by Type 7 

Figure 2: Illustration of the Relationship between Regional and 

Local Health Care Markets 26 

Figure 3: Illustration of the Three Types of Comparisons Performed 

between General Hospitals in Markets with and without 

Specialty Hospitals 28 

Abbreviations 

AHA American Hospital Association 

ASC ambulatory surgical center 

CMS Centers for Medicare & Medicaid Services 

CON certificate of need 

DAP Dartmouth Atlas Project 

DOJ Department of Justice 

DRA Deficit Reduction Act of 2005 

FAH Federation of American Hospitals 

FTC Federal Trade Commission 

HCIS Health Care Information System 

HRR hospital referral region 

HSA hospital service area 

IT information technology 

MedPAC Medicare Payment Advisory Commission 

MMA Medicare Prescription Drug, Improvement, and 

 Modernization Act of 2003 

MSA metropolitan statistical area

OMB Office of Management and Budget 

POS Provider of Service 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page iii GAO-06-520 Hospital Competition
United States Government Accountability Office

Washington, DC 20548 

April 7, 2006

The Honorable William M. Thomas 

Chairman 

Committee on Ways and Means 

House of Representatives 

Dear Mr. Chairman: 

The approximately 4,800 general hospitals in the nation face competition 

from a variety of sources,1

 including, in some markets, specialty hospitals 

whose owners or investors include physicians who admit patients to the 

facility. Specialty hospitals are distinguished from other short-term acute 

care hospitals in that the former primarily treat patients who have specific 

medical conditions or need surgical procedures. Specialty hospitals that 

have opened in recent years typically provide cardiac or orthopedic care 

or specialize in surgical procedures. In 2005, there were approximately 100 

such specialty hospitals in operation or under development that had 

physician owners or investors. 

Although there are relatively few physician-owned specialty hospitals, 

their potential effect on general hospitals and hospital markets has 

become a subject of debate. Advocates for specialty hospitals have stated

that competition from these facilities favorably affects the overall health 

care delivery system for hospital services.2

 According to advocates, this 

result occurs both because specialty hospitals’ focused missions enable 

them to provide high-quality care efficiently and because competition from 

specialty hospitals creates incentives for general hospitals to implement 

quality, efficiency, and amenity improvements. In contrast, critics of 

specialty hospitals have stated that these facilities, in part because of their 

focused missions, have an unfair competitive advantage relative to general 

hospitals, which have broad missions to serve all of a community’s health 

care needs, including the provision of emergency care. These critics are 

 1

For the purposes of this report we define general hospitals as nongovernmental, shortterm acute care hospitals that treat a broad range of medical conditions.

2

Unless otherwise specified, in this report the term specialty hospital refers to cardiac, 

orthopedic, and surgical specialty hospitals whose owners or investors include physicians

who admit patients to the facility.

Page 1 GAO-06-520 Hospital Competition
also concerned that physicians’ ownership or investment interests in 

specialty hospitals create financial incentives that could inappropriately

affect physicians’ clinical and referral behavior. Moreover, this view holds, 

the competitive behaviors that specialty hospitals elicit from general 

hospitals may not all be socially desirable. For example, in their quest to 

compete, general hospitals could add services that duplicate those already 

available in a community, enter into exclusive contracts with health plans,

or make changes to discourage physicians from opening rival specialty 

hospitals. We and other federal agencies have studied various issues 

related to hospital market competition and specialty hospitals.3

 To date, 

however, the evidence of how general hospitals’ competitive actions have

been influenced by the presence of specialty hospitals has largely been 

anecdotal. 

Provisions in the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) had the effect, in general, of 

establishing an 18-month moratorium on the development of new specialty 

hospitals.4

 Although the moratorium expired in June 2005, the recently 

enacted Deficit Reduction Act of 2005 (DRA) has the effect of extending

the moratorium until the date the Secretary of Health and Human Services 

issues a final report to appropriate committees of jurisdiction of Congress 

on a plan that addresses issues concerning physician investment in 

specialty hospitals or up to 8 months after the enactment date of DRA, 

whichever is earlier.5

Because the issue of specialty hospitals remains controversial, you 

expressed interest in knowing more about the competitive response of 

general hospitals to specialty hospitals. In this report, we provide 

information on the extent to which general hospitals in markets with 

specialty hospitals and general hospitals in markets without specialty 

hospitals reported implementing operational and clinical service changes

to remain competitive. 

To conduct our analysis, we surveyed a sample of general hospitals in 

regional markets with at least one specialty hospital that had opened since 

 3

See the end of this report for a list of GAO reports on this topic. 

4

For a discussion of MMA’s provisions related to specialty hospitals, see GAO, Specialty 

Hospitals: Information on Potential New Facilities, GAO-05-647R (Washington, D.C.: 

May 19, 2005). 

5

DRA was enacted on February 8, 2006. Pub. L. No. 109-171, § 5006, 120 Stat. 4, 33-34. 

Page 2 GAO-06-520 Hospital Competition
the beginning of 1998.6

 We also surveyed a comparison sample of general 

hospitals in regional markets where there were no specialty hospitals. 

General hospitals in both groups were asked to describe the extent of 

competition within their markets in 2005, and to indicate the operational 

changes and clinical service changes they made from 2000 through 2005 to

remain competitive in their markets. (See app. II for a copy of the survey.) 

The 72 potential operational changes listed in the survey included, for 

example, increasing income guarantees to recruit physicians. The 34 

potential clinical services listed in the survey that hospitals could have

reported adding, expanding, reducing, or eliminating included services 

such as cardiac care. We analyzed the survey responses to determine 

whether there were significant differences between the two groups of 

hospitals in terms of the total number and types of changes made. This 

comparison was made separately for urban general hospitals, defined as 

those hospitals located in a metropolitan statistical area (MSA), and rural 

general hospitals, defined as those hospitals located outside of an MSA, 

because the extent of changes made by general hospitals in response to 

the presence of a specialty hospital could be different in the two 

environments.7

Our analysis accounted for the possibility that the presence of a specialty

hospital might be more likely to elicit competitive responses from general 

hospitals that are reasonably close by. In constructing our sample of 

general hospitals in regional markets with specialty hospitals, we excluded 

urban general hospitals that were 90 miles or more from the nearest 

specialty hospital and rural general hospitals that were 120 miles or more 

from the nearest specialty hospital. We further explored this possibility by 

analyzing the responses of a subset of urban general hospitals—those that 

were in the same local market as a specialty hospital.8

 Urban general

 6

Major teaching hospitals were excluded from this study. See app. I for a discussion of the 

sample selection. We used the Dartmouth Atlas Project’s (DAP) hospital referral regions 

(HRR) as the basis for our regional health care markets. The 306 HRRs in the United States

each contain at least one hospital that performs major cardiovascular procedures and have

a minimum population of 120,000. 

7

In 2005, the Office of Management and Budget (OMB) defined an MSA as having at least 

one urbanized area of 50,000 or more population, plus adjacent territory that has a high 

degree of social and economic integration with the core as measured by commuting ties. 

8

We used the DAP’s hospital service areas (HSA) as the basis for our local health care

markets. An HSA is a collection of zip codes where residents receive most of their 

hospitalizations from hospitals in that area. In all but two cases, two or more HSAs 

constitute an HRR. Because only eight rural general hospitals had a specialty hospital in 

their local health care market, we did not analyze this group separately. 

Page 3 GAO-06-520 Hospital Competition
hospitals in this local subset may be more likely than other general 

hospitals in the same regions to be affected by the presence of a specialty

hospital and thus may be more likely to have implemented operational or 

clinical service changes in response. Therefore, we compared the 

responses from this subset with the responses from urban hospitals in 

regions without specialty hospitals.9

We selected specific regional markets for our hospital comparison groups 

by identifying areas that were similar to one another on several different 

dimensions, including, for example, the number of Medicare beneficiaries 

in each regional market. All of the regional markets were located in states

that did not have laws requiring hospitals to obtain state approval before

adding inpatient beds or building new inpatient facilities.10

We surveyed 603 general hospitals during August and September of 2005, 

and received responses from 401 facilities (67 percent response rate). (See 

app. I for more detail regarding our scope and methodology.) We took 

several steps to ensure that the data used to produce this report were 

sufficiently reliable. For example, we checked each survey response for 

internal consistency and contacted hospitals to clarify their responses 

when necessary. We ensured the reliability of the hospital and marketrelated data sets used in this report by verifying that they were widely 

used for similar research purposes and by performing appropriate 

electronic data checks. We conducted our work from July 2005 through

March 2006 in accordance with generally accepted government auditing 

standards. 

Nearly all general hospitals responding to our survey reported making 

operational and clinical service changes to remain competitive in what 

they viewed as increasingly competitive healthcare markets; however, 

there was little evidence to suggest that general hospitals made 

substantially more or fewer changes or different types of changes if some 

of their competition came from a specialty hospital. While the majority of 

Results in Brief 

 9

By definition, if there are no specialty hospitals in a regional market, there are no specialty 

hospitals in any of the local markets that constitute the regional market. 

10These laws are referred to as certificate of need (CON) laws. For more information on the 

relationship between CON laws and the location of specialty hospitals, see GAO, Specialty 

Hospitals: Geographic Location, Services Provided, and Financial Performance, 

GAO-04-167 (Washington, D.C.: Oct. 22, 2003). 

Page 4 GAO-06-520 Hospital Competition
survey respondents indicated that competition from other general 

hospitals had increased, a larger proportion of respondents—91 percent of

urban general hospitals and 74 percent of rural general hospitals—

reported increases in competition from limited service facilities, a 

category that includes specialty hospitals, but also many other types of 

facilities, such as ambulatory surgical centers (ASC), imaging centers, 

urgent care centers, and gastroenterology centers.11 General hospitals 

reported making an average of 22 operational changes, such as introducing 

a formal process for evaluating efforts to improve quality and reduce 

costs, and 8 clinical service changes, such as adding or expanding 

cardiology services, from 2000 through 2005. Overall, 100 percent of 

general hospitals we surveyed reported implementing at least 1 

operational change, while 97 percent reported adding at least 1 new 

clinical service or expanding an existing one and 32 percent reported 

eliminating at least 1 clinical service or devoting fewer resources to it. 

Although specialty hospital advocates have hypothesized that the entrance 

of a specialty hospital into a market encourages the area’s existing general 

hospitals to adopt changes that make them more efficient and better able 

to compete, the survey responses largely did not support this view. There 

were no substantial differences in the average number of operational and 

clinical service changes made by general hospitals in markets with and 

without specialty hospitals and, for the vast majority of the potential 

changes included on our survey, there was no statistical difference 

between the two groups of hospitals in terms of the specific changes they 

reported implementing.

In comments on a draft of this report, CMS stated that our study, by 

providing quantitative data on the market effect of specialty hospitals, was 

extremely helpful and that CMS would use the information as the agency 

developed its DRA-mandated report on physician investment in specialty

hospitals. We also received comments from the American Hospital 

Association (AHA) and the Federation of American Hospitals (FAH). Both 

organizations stated that their concerns regarding specialty hospitals were 

specific to those facilities that have physician owners or investors. AHA 

 11Ambulatory surgical centers (ASC) are facilities where surgeries that do not require

hospital admission are performed. Imaging centers are facilities, independent of hospitals 

and physicians’ offices, that provide diagnostic services. Urgent care centers are facilities 

that specialize in providing ambulatory medical care without scheduled appointments to 

patients with acute illnesses or injuries. Gastroenterology centers are facilities that 

specialize in the evaluation and treatment of gastrointestinal and liver diseases. 

Page 5 GAO-06-520 Hospital Competition
and FAH suggested text changes to emphasize that our report is focused 

on the effect of these types of specialty hospitals on general hospitals. 

General hospitals face competition from a variety of sources, including the 

approximately 100 specialty hospitals in operation or under development 

in some markets in 2005. Despite the relatively small number of specialty 

hospitals, the issue of how general hospitals have responded to the 

competition from specialty hospitals has been a subject of debate. Federal 

agencies have broadly addressed how general hospitals’ competitive 

actions have been influenced by the presence of specialty hospitals; 

however, to date, the evidence has been largely anecdotal. 

Specialty hospitals represent a small share of the national health care 

market and the competition that general hospitals face from other general

hospitals, ASCs, imaging centers, and other types of facilities. In 2005, we 

identified 66 existing specialty hospitals and an additional 46 that were 

under development.12 In contrast, there were an estimated 4,800 general 

hospitals,13 4,100 Medicare certified ASCs, and 2,400 imaging centers.14 (See 

fig. 1.) Another methodology for assessing the relative magnitude of 

specialty hospitals is through Medicare inpatient spending. In prior work

pertaining to specialty hospitals of various types and ownership 

structures, we found that specialty hospitals accounted for a low share of 

Medicare spending for inpatient services relative even to their low share of 

the hospital market.15 Specifically, in April 2003 we reported that specialty

Background 

Specialty Hospitals 

Represent a Small Share of 

Competition Facing 

General Hospitals 

 12The number of specialty hospitals in existence and under development is based on

information collected for our previous reports on specialty hospitals (GAO, Specialty 

Hospitals: Information on National Market Share, Physician Ownership, and Patients 

Served, GAO-03-683R [Washington, D.C.: Apr. 18, 2003]; GAO-04-167; and GAO-05-647R) and

from information obtained from the Medicare Payment Advisory Commission (MedPAC). 

13The estimate of the general hospitals reflects the difference between the American 

Hospital Association’s count of 4,919 community hospitals in 2004, which includes

specialty hospitals of various types, and our estimate of the number of specialty hospitals. 

14MedPAC reported in its June 2004 report, A Data Book: Healthcare Spending and the

Medicare Program (Washington, D.C.: June 2004), that there were 2,403 imaging centers in 

existence in 2002. In its June 2005 report, A Data Book: Healthcare Spending and the

Medicare Program (Washington, D.C.: June 2005), MedPAC reported that there were 4,136 

Medicare-certified ASCs in existence in 2004.

15In our April 2003 report, GAO-03-683R, we used a broader definition of specialty hospitals

that included physician- and non-physician-owned hospitals that focused on cardiac, 

orthopedic, surgical, and women’s services and procedures that opened in 2003 or earlier.

Page 6 GAO-06-520 Hospital Competition
hospitals in existence accounted for about 2 percent of existing hospitals,

but 1 percent of total Medicare inpatient spending. 

Figure 1: Number of Medical Facilities by Type 

Number of facilities

Sources: American Hospital Association, GAO, and Medicare Payment Advisory Commission.

0 1,000 2,000 3,000 4,000 5,000

Specialty hospitals (2005,

existing and under development)

Imaging centers (2002)

Ambulatory surgical centers

(ASC) (2004)

General hospitals (2004)

Note: This figure includes the most recently available count for each type of medical facility. The 

estimate of the general hospitals reflects the difference between the American Hospital Association’s 

count of 4,919 community hospitals in 2004, which includes specialty hospitals of various types, and 

the number of specialty hospitals we identified in our 2003 and 2005 reports. This figure includes a 

count of only Medicare-certified ASCs, a group that makes up an estimated 85 percent of all ASCs. 

Competitive Effect of 

Specialty Hospitals on 

General Hospitals Is 

Controversial 

The overall competitive effect of specialty hospitals on general hospitals 

continues to be the subject of debate. Advocates of specialty hospitals 

contend that the focused mission and dedicated resources of specialty 

hospitals enable them to offer reduced treatment costs, improved care 

quality, and enhanced amenities for patients compared with what general 

hospitals are able to provide. Moreover, some advocates maintain that 

competition from specialty hospitals can prompt general hospitals to 

implement efficiency, quality, and amenity improvements, thus favorably 

affecting the overall health care delivery system. 

However, critics are concerned that general hospitals may be adversely 

affected by specialty hospitals. In 2003, using a broader definition of 

specialty hospitals that included facilities with and without physician 

owners or investors, we reported that specialty hospitals tended to treat 

less-severely-ill patients, served proportionately fewer Medicaid patients,

Page 7 GAO-06-520 Hospital Competition
and were less likely to have emergency rooms.16 We also reported that 

physicians were owners or investors in the majority of specialty hospitals 

we identified. These findings were consistent with critics’ concerns that 

specialty hospitals tend to concentrate on the most profitable procedures 

and serve patients with the fewest complications. According to such 

critics, specialty hospitals draw financial resources away from general 

hospitals and leave those hospitals with the responsibility of caring for the 

sickest patients and fulfilling their broad missions to provide charity care,

emergency services, and standby capacity to respond to communitywide 

disasters. Critics are also concerned that physician ownership of specialty

hospitals creates financial incentives that could inappropriately affect 

physicians’ clinical behavior and their decisions to refer patients to 

specific facilities. 

Evidence of General 

Hospital Response to 

Specialty Hospitals Is 

Largely Anecdotal 

To date, there have been only anecdotal reports of how general hospitals 

have competitively responded to specialty hospitals. Two reports—one 

jointly issued by the Federal Trade Commission (FTC) and the Department 

of Justice (DOJ), and another issued by MedPAC—discussed general 

hospitals’ responses to specialty hospitals.17 The FTC/DOJ report was 

based primarily on written submissions and testimony provided by health

care experts at the agencies’ 2002 workshops and 2003 hearings. The 

information contained in MedPAC’s report was gathered through site visits 

and interviews with representatives of specialty and general hospitals in 

selected markets where specialty hospitals existed and interviews with 

others in the health care community. Collectively, the reports identified 

several actions general hospitals took in response to the entry, or the 

anticipation of entry, of specialty hospitals into the marketplace, 

including: improving operating room scheduling, extending service hours, 

building a single-specialty wing to discourage the establishment of 

competing facilities, partnering with physicians on their medical staff to 

open a specialty hospital, signing exclusive contracts with private payers 

to preclude specialty hospitals or the physicians who invest in them from 

 16In our April and October 2003 reports, GAO-03-683R and GAO-04-167, we included 

physician- and non-physician-owned hospitals that focused on cardiac, orthopedic, 

surgical, and women’s services and procedures. 

17Federal Trade Commission and Department of Justice, Improving Health Care: A Dose of

Competition (July 2004); Medicare Payment Advisory Commission, Report to the Congress: 

Physician-Owned Specialty Hospitals (Washington, D.C.: March 2005). 

Page 8 GAO-06-520 Hospital Competition
contracting with those payers, and revoking the admitting privileges of 

physicians involved with a competing specialty hospital. 

Nearly all general hospitals responding to our survey reported making 

operational and clinical service changes to remain competitive in markets 

they viewed as increasingly competitive; however, there was little 

evidence to suggest that the absence or presence of specialty hospitals had 

much of an effect on the number or types of changes general hospitals 

reported implementing between 2000 and 2005. General hospitals 

responding to our survey reported facing increasing competition both 

from other general hospitals and from limited-service facilities—a 

category that includes specialty hospitals, ambulatory surgical centers, 

and imaging centers. The general hospitals that responded to our survey 

reported implementing a variety of operational and clinical service 

changes. However, we found little evidence associating specific changes 

made by general hospitals with the presence or absence of a nearby 

specialty hospital. That is, with few exceptions, general hospitals did not 

report implementing a substantially different number of changes or 

different types of changes just because there was a specialty hospital in 

their market. 

Nearly all general hospitals that responded to our survey described their 

market environments as ranging from somewhat competitive to extremely 

competitive. Only one hospital described its market as not competitive. 

Urban general hospitals were much more likely than rural general 

hospitals to describe their market as either very or extremely competitive.

(See table 1.) 

Presence of Specialty 

Hospitals Had Little 

Effect on the Number 

or Type of 

Operational and 

Clinical Service 

Changes Reported by 

General Hospitals 

General Hospitals 

Perceived an Increase in 

Competition from Both 

Other General Hospitals 

and Limited-service 

Facilities

Page 9 GAO-06-520 Hospital Competition
Table 1: Hospitals’ Reported Perceptions of the Level of Competition in Their 

Market Environment, by Geographic Type, 2005 

Percentage

General hospitals 

Perceived competition Urbana

Rural

Very or extremely competitive 77 35

Somewhat competitive or competitive 22 65

Not competitive 0 0

Source: GAO.

a

Because of rounding, the urban general hospital column does not add to 100 percent. 

A larger percentage of general hospitals that responded to our survey—

both urban and rural—reported increased competition from limitedservice facilities relative to those that reported increased competition 

from other general hospitals. More than 90 percent of urban general 

hospitals indicated that competition from limited-service facilities had 

either increased or greatly increased in their markets, while 75 percent of 

urban general hospitals indicated that competition from other general 

hospitals had either increased or greatly increased. (See table 2.) Similarly, 

74 percent of rural general hospitals indicated that competition from 

limited-service facilities had either increased or greatly increased, while 

53 percent of rural general hospitals indicated that competition from other 

general hospitals had either increased or greatly increased. (See table 3.)

Table 2: Urban General Hospitals’ Reported Perceptions of the Change in

Competition from Other General Hospitals and Limited-service Facilities, 2005 

Percentage 

Source of competition

Perceived change in competition

Other general 

hospitals

Limited-service

facilities

Increased or greatly increased 75 91

Remained the same 24 8

Decreased or greatly decreased 1 1

Source: GAO.

Page 10 GAO-06-520 Hospital Competition
Table 3: Rural General Hospitals’ Reported Perceptions of the Change in

Competition from Other General Hospitals and Limited-service Facilities, 2005 

Percentage

Source of competition

Perceived change in competition

Other general 

hospitals

Limited-service

facilities

Increased or greatly increased 53 74

Remained the same 43 24

Decreased or greatly decreased 3 1

Source: GAO.

Note: Because of rounding, columns do not add up to 100 percent. 

General Hospitals 

Reported Implementing a 

Variety of Operational and 

Clinical Service Changes 

from 2000 through 2005 

Among the 72 potential operational changes survey respondents could 

have indicated that they made and the 34 potential clinical services 

respondents could have indicated that they added, expanded, reduced, or 

eliminated on our survey, general hospitals reported implementing an 

average of 30 changes (22 operational changes and 8 clinical service 

changes) from 2000 through 2005. Overall, general hospitals that 

responded to our survey had reported implementing between 3 and 66 

separate changes. 

Overall, 100 percent of general hospitals we surveyed reported 

implementing at least 1 operational change. There were 18 specific 

operational changes that at least half of the general hospitals that 

responded to our survey reported implementing. (See table 4.) Four of the 

6 most commonly reported operational changes involved increasing wages 

and benefits for nurses and offering more flexible working schedules in an 

effort to improve nursing staff retention or recruitment. In addition, 4 of 

the 18 most commonly reported operational changes related to physicians. 

These changes involved increasing the physicians’ role in hospital 

governance, increasing physician income guarantees, hiring new 

physicians, and beginning a hospitalist program.18

 18Hospitalists are physicians whose primary professional focus is the general medical care 

of hospitalized patients and the management of inpatient services. 

Page 11 GAO-06-520 Hospital Competition
Table 4: Operational Changes Reported by a Majority of General Hospitals, 2000 

through 2005 

Operational change

Percentage of general 

hospitals

Increased nursing wages 86

Committed additional resources to marketing and community

outreach efforts 74

Introduced, increased, or improved upon bonuses for nursing

staff 72

Introduced, increased, or improved upon tuition support for 

nursing staff 71

Focused on reducing the average turnover time between 

operations in their operating rooms 70

Introduced or increased work schedule flexibility for nursing

staff 70

Implemented a formal process for evaluating efforts to 

improve quality and reduce costs 69

Incorporated critical pathways for case management

a

65

Decreased patient wait times to attract new patients 65

Increased physicians’ roles in hospital governance 60

Expanded emergency department capacity 59

Standardized operating room supplies 56

Increased communication with families during inpatient stays 55

Increased income guarantees to recruit physicians 55

Instituted a sliding fee scale for self-pay patients 54

Hired additional physicians 54

Implemented wireless technology 52

Started a hospitalist programb51

Source: GAO.

Notes: Survey results were weighted for differences in response rate between rural and urban 

hospitals. 

a

Critical pathways refer to management plans that establish goals for patients and provide the 

sequence and timing of actions necessary to achieve these goals efficiently. 

b

Hospitalists are physicians whose primary professional focus is the general medical care of 

hospitalized patients and the management of inpatient services. 

Page 12 GAO-06-520 Hospital Competition
Nearly all general hospitals that responded to our survey reported 

implementing clinical service changes. Overall, 97 percent of the hospitals

added or expanded at least one type of clinical service. The majority of 

hospitals added or expanded imaging/radiology services (73 percent) and 

cardiology services (57 percent). Other types of clinical services were 

added or expanded by a minority of hospitals, such as outpatient surgical

services (37 percent) and orthopedic services (31 percent). Nearly onethird of hospitals (33 percent) reduced or eliminated at least one type of 

clinical service. The most commonly reported clinical services to be 

reduced or eliminated were inpatient/outpatient psychiatric services 

(7 percent). 

Few Operational and 

Clinical Service Change 

Differences Observed 

between General Hospitals 

in Markets with and 

without Specialty 

Hospitals 

Overall, the operational and clinical service changes reported by general 

hospitals that responded to our survey appeared largely unaffected by the 

presence or absence of specialty hospitals in their markets. On average, 

rural general hospitals with a specialty hospital in their regional market 

made a few more operational service changes than rural general hospitals 

in markets without specialty hospitals, but made a similar number of 

clinical service changes. More specifically, rural general hospitals in 

markets with specialty hospitals made an average of 21 operational 

changes, 7 clinical service additions or expansions, and 1 clinical service

reduction or elimination. Rural general hospitals in markets without 

specialty hospitals made an average of 18 operational changes,19 6 clinical 

service additions or expansions, and no clinical service reductions or 

eliminations. (See table 5.) Urban general hospitals in regional and local 

markets with specialty hospitals made similar numbers of operational and 

clinical service changes as general hospitals in markets without specialty 

hospitals.20

 19The difference between the average number of reported operational changes 

implemented by rural general hospitals in markets with and without specialty hospitals was

statistically significant. 

20See app. III for additional information on the average number of operational and clinical 

service changes reported by urban and rural general hospitals.

Page 13 GAO-06-520 Hospital Competition
Table 5: Average Number of Operational and Clinical Service Changes Reported by General Hospitals with and without

Specialty Hospitals in Their Markets from 2000 through 2005, by Type of Change Implemented 

Urban/rural status

of general hospitals 

being compared

Presence of specialty 

hospitals

Average number of

reported operational 

changes 

(maximum = 72)

Average number of

reported clinical services 

added or expanded 

(maximum = 34) 

Average number of

reported clinical services 

reduced or eliminated

(maximum = 34)

Rural Regional marketa 21b 7 1

Rural None 18b6 0

Urban Regional marketa23 7 1

Urban Local market 24 7 1

Urban None 24 8 1

Source: GAO.

a

A general hospital located in a regional market with a specialty hospital is also in a local market that

may or may not contain a specialty hospital. 

b

The difference between the average number of reported operational changes implemented by rural 

general hospitals in markets with and without specialty hospitals was statistically significant at the 

0.05 level. 

For most of the 72 potential operational changes and 34 potential clinical

service changes listed on our survey, the percentage of general hospitals 

that had reported implementing each change did not systematically vary 

with the presence or absence of a specialty hospital in the market. For 

example, 12 percent of urban general hospitals in regional markets with 

specialty hospitals and 13 percent of urban general hospitals in regional 

markets without specialty hospitals opened a new hospital wing 

specializing in one type of medicine between 2000 and 2005. However, for 

a few of the potential changes listed on our survey, there was a 

relationship between the percentage of general hospitals that had reported 

implementing the change and the presence of a specialty hospital in the 

market.21 For example, there were 6 operational changes and 3 clinical 

service changes (including clinical services that were added, expanded, 

reduced, or eliminated) for which the percentage of rural general hospitals 

implementing the change significantly differed depending on whether or 

not a specialty hospital existed in the regional market. (See table 6.) The

greatest number of differences (11 operational change differences and 5

clinical service change differences) was observed between the group of 

urban general hospitals in local markets with specialty hospitals and the 

 21All changes described as significantly different between general hospitals in markets with 

and without specialty hospitals were statistically significant at the 0.05 level. 

Page 14 GAO-06-520 Hospital Competition
group of urban general hospitals where there were no specialty hospitals 

in either the local or regional markets. 

Table 6: Number of Reported Operational and Clinical Service Changes That Significantly Differed between General Hospitals 

with and without Specialty Hospitals in Their Markets from 2000 through 2005, by Type of Change Implemented 

Urban/rural 

status of general 

hospitals being 

compared

Market levels being

compared

Number of operational 

changes where the 

percentage of

implementing hospitals

differed (maximum = 72)

Number of clinical 

services added or

expanded where the 

percentage of

implementing hospitals

differed (maximum = 34) 

Number of clinical 

services reduced or

eliminated where the 

percentage of

implementing hospitals

differed (maximum = 34)

Rural Regional markets with and 

without specialty hospitals 6 2 1

Urban Regional markets with and 

without specialty hospitals 7 0 1

Urban Local markets with 

specialty hospitals and 

regional markets without 

specialty hospitals 11 3 2

Source: GAO.

Note: Table includes the number of specific operational or clinical service changes for which the 

percentage of general hospitals that reported implementing the change differed significantly (at the 

0.05 level of significance) between the group of general hospitals in markets with specialty hospitals

and the group of general hospitals in markets without specialty hospitals. 

Rural general hospitals in markets with specialty hospitals were more 

likely to have reported implementing six operational changes and two 

clinical service changes relative to rural general hospitals in markets 

without specialty hospitals. (See table 7.) For only one clinical service—

adding or expanding sleep laboratory services—rural general hospitals in 

markets with specialty hospitals were less likely to have reported 

implementing a clinical service change. 

Page 15 GAO-06-520 Hospital Competition
Table 7: Percentage of Rural General Hospitals Reporting Operational and Clinical Service Changes in Regional Markets with

and without Specialty Hospitals from 2000 through 2005 

Percentage of rural general hospitals making changes in

Reported changes

regional markets with a 

specialty hospital 

regional markets without a

specialty hospital

Operational changes 

Increased marketing or community outreach efforts 82 57

Increased income guarantees to attract physicians 70 53

Offered bonuses to hire or retain nursing staff 70 48

Increased physicians’ roles in hospital governance 69 53

Added wireless technology 55 39

Negotiated larger discounts with private insurers relative to 

the guaranteed volume increases 27 9

Clinical service changes 

Added or expanded cardiology services 60 42

Reduced or eliminated inpatient and outpatient psychiatric 

services 9 1

Added or expanded sleep laboratory services 41 58

Source: GAO.

Note: Table includes only those operational and clinical service changes where there was a statistical 

difference, at the 0.05 level, between the percentage of each of the two sample groups that reported 

implementing a change. 

If there was a specialty hospital in its regional market, an urban general 

hospital was more likely to have reported making three of the seven 

operational changes that significantly differed between general hospitals 

in markets with and without specialty hospitals.22 Urban hospitals in 

regional markets with specialty hospitals were less likely to have made 

four operational changes and one clinical service change. (See table 8.) 

 22In the sample group—that is, general hospitals in regional markets with specialty 

hospitals—about 5 percent of the urban general hospitals reported opening a specialty 

hospital or opening a specialty hospital in partnership with physicians. None of the urban 

general hospitals in the comparison group had opened a specialty hospital because, by 

design, the comparison sample consisted only of general hospitals in regional markets

without specialty hospitals. 

Page 16 GAO-06-520 Hospital Competition
Table 8: Percentage of Urban General Hospitals Reporting Operational and Clinical Service Changes in Regional Markets with

and without Specialty Hospitals from 2000 through 2005 

Percentage of urban general hospitals making changes in

Reported changes

regional markets with a 

specialty hospital 

regional markets without a

specialty hospital

Operational changes 

Added an operating room 49 33

Opened a specialty hospital 5 0a

Partnered with physicians to opena specialty hospital 5 0a

Opened an ambulatory surgical center 14 26

Subsidized physicians’ malpractice insurance costs 7 21

Made a change other than those specifically listed on the survey 

to the management or operation of its operating roomb

8 18

Opened a limited service facility other than those specifically

listed on the surveyc

7 16

Clinical service changes 

Reduced or eliminated pain management services 1 5

Source: GAO.

Notes: Table includes only those operational and clinical service changes where there was a 

statistical difference, at the 0.05 level, between the percentage of each of the two sample groups that 

reported implementing a change.

a

None of the urban general hospitals in the comparison group had opened a specialty hospital 

because, by design, the comparison sample consisted only of general hospitals in regional markets 

without specialty hospitals. 

b

Respondents reported hiring operating room staff, offering a retention bonus to operating room staff, 

improving electronic documentation, reducing or closing operating room services, and improving 

anesthesia services. 

c

Respondents reported opening physical therapy/rehabilitation centers, oncology centers, pain 

management centers, and a hospice house. 

Page 17 GAO-06-520 Hospital Competition
Urban hospitals in local markets with specialty hospitals were more likely 

to have made six operational changes and three clinical service changes 

and less likely to have made five operational changes and two clinical

service changes relative to general hospitals in regional markets without 

specialty hospitals.23 (See table 9.) 

 23In the sample group—that is, general hospitals in regional markets with specialty 

hospitals—about 7 percent of the urban general hospitals reported opening a specialty 

hospital or opening a specialty hospital in partnership with physicians. None of the urban 

general hospitals in the comparison group had opened a specialty hospital because, by 

design, the comparison sample consisted only of general hospitals in regional markets

without specialty hospitals. 

Page 18 GAO-06-520 Hospital Competition
Table 9: Percentage of Urban General Hospitals Reporting Operational and Clinical Service Changes in Local Markets with

Specialty Hospitals and Regional Markets without Specialty Hospitals from 2000 through 2005 

Percentage of urban general hospitals making changes in

Reported changes

local markets with a specialty 

hospital in close proximity

regional markets without a

specialty hospital

Operational changes 

Increased physician on-call payments 70 52

Added a disease management program 51 37

Added operating room 49 33

Increased, instituted, or improved upon paid leave for nursing

staff 23 12

Opened a specialty hospital 7 0a

Partnered with physicians to open a specialty hospital 7 0a

Opened an ambulatory surgery center 12 26

Partnered with physicians to open an imaging center 10 21

Subsidized physicians’ malpractice insurance costs 9 21

Made a change other than those specifically listed on the 

survey to the management or operation of operating roomb

8 18

Opened a limited-service facility other than those specifically

listed on the surveyc

7 16

Clinical service changes 

Added or expanded bariatric servicesd50 36

Reduced or eliminated sleep lab services 8 1

Reduced or eliminated women’s health services 4 0

Added or expanded primary care services 19 35

Added or expanded physical rehabilitation services 17 30

Source: GAO.

Notes: Table includes only those operational and clinical service changes where there was a 

statistical difference, at the 0.05 level, between the percentage of each of the two sample groups that 

reported implementing a change.

a

None of the urban general hospitals in the comparison group had opened a specialty hospital 

because, by design, the comparison sample consisted only of general hospitals in regional markets 

without specialty hospitals. 

b

Respondents reported hiring operating room staff, offering a retention bonus to operating room staff, 

improving electronic documentation, reducing or closing operating room services, and improving 

anesthesia services. 

c

Respondents reported opening physical therapy/rehabilitation centers, oncology centers, pain 

management centers, and a hospice house. 

d

Bariatrics is the field of medicine pertaining to weight loss. 

Page 19 GAO-06-520 Hospital Competition
Overall, the general hospitals that responded to our survey reported 

making a variety of operational and clinical service changes to better 

compete in their markets. Some advocates of specialty hospitals have 

stated that the presence of one or more of these facilities in a market may 

prompt general hospitals to improve the quality of the care they deliver or

increase the efficiency with which they deliver their services. However, 

our survey results found relatively few differences, in terms of operational 

and clinical service changes reported, between general hospitals in 

markets with and without specialty hospitals. That is, on average, general 

hospitals in markets with specialty hospitals did not make a substantially 

different number of changes or different types of changes relative to 

general hospitals in markets without specialty hospitals. These results held 

for both rural and urban general hospitals. Our survey results did show 

that general hospitals reported facing a competitive market for their 

services. However, general hospitals face competition from many types of 

facilities, not just specialty hospitals. Competing facilities, including other 

general hospitals in the market, ASCs, and imaging centers, far outnumber 

the relatively few specialty hospitals in existence or under development. 

The predominance of other types of competitors may help explain the lack 

of a uniquely competitive response of the general hospitals in our study to 

the existence of specialty hospitals. 

We obtained comments from CMS and representatives of AHA—a group 

representing hospitals, health care systems, networks, and other providers 

of care—and FAH—a group representing investor-owned and investormanaged hospitals and health systems. Their comments are summarized 

below. 

In written comments on a draft of this report, CMS stated that our study,

by providing quantitative data on the market effect of specialty hospitals, 

was extremely helpful and that CMS would use the information as the 

agency developed its DRA-mandated report on physician investment in 

specialty hospitals. (CMS’s comments are reprinted in app. IV.) CMS also 

provided technical comments, which we incorporated where appropriate. 

Concluding 

Observations 

Agency Comments 

and Comments from 

Organizations 

Representing General 

Hospitals 

AHA and FAH stated that their concerns regarding specialty hospitals 

were specific to those facilities that have physician owners or investors. 

Both organizations suggested text changes to emphasize that our report is 

focused on the effect of these types of specialty hospitals on general 

hospitals, which we incorporated where appropriate. In addition, 

representatives of AHA stated that general hospitals may make operational 

and clinical service changes for a variety of reasons, regardless of the 

Page 20 GAO-06-520 Hospital Competition
degree of competition in their market. While we recognize that general 

hospitals may make changes for a variety of reasons, that fact does not 

detract from our finding that general hospitals largely did not make a 

different number of changes, or different types of changes, in response to 

competition from specialty hospitals. 

As agreed with your office, unless you publicly announce the contents of

this report earlier, we plan no further distribution of this report until 30 

days after its date. At that time, we will send copies of this report to 

appropriate congressional committees and other interested parties. We 

will also make copies available to others upon request. This report will be 

available at no charge on GAO’s Web site at http://www.gao.gov. 

If you or your staff have any questions, please contact me at (202) 512-7101

or steinwalda@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

GAO staff who made major contributions to this report are listed in app. V. 

Sincerely yours, 

Bruce Steinwald 

Director, Health Care 

Page 21 GAO-06-520 Hospital Competition
Appendix I: Scope and Methodology 

Page 22 GAO-06-520 

Appendix I: Scope and Methodology 

This appendix provides information on the key aspects of our analysis of 

the competitive response of general hospitals to specialty hospitals. First, 

it describes the sample selection process. Second, it discusses the survey 

used to collect data from a sample of general hospitals and the process of 

fielding the survey. Third, it explains the differences between local and 

regional markets. Fourth, it describes the methodology used to analyze 

survey data. Finally, it addresses issues related to data reliability and 

limitations. 

We selected two groups of general hospitals for this analysis—the sample 

and a comparison sample. The sample consisted of general hospitals in 

hospital referral regions (HRR)—which we refer to in this report as 

regional health care markets—with a specialty hospital that opened since

the start of 1998.1

 The comparison sample consisted of general hospitals in 

regional health care markets without any specialty hospitals. In

constructing the comparison sample, we also excluded regional health

care markets with specialty hospitals that did not have physician owners 

or investors. 

Sample Selection 

Regional markets capable of meeting the criteria for the sample were 

identified by compiling a current list of specialty hospitals that opened 

from 1998 through 2005.2

 We excluded markets in states where certificate 

of need (CON) laws existed,3

 because specialty hospitals are located 

primarily in non-CON states.4

 We identified 32 unique regional markets 

containing 53 specialty hospitals that met these criteria. (See table 10.) 

 1

For the purposes of this analysis we defined markets using HRRs. Researchers at the 

Dartmouth Atlas Project (DAP) defined HRRs as health care markets for tertiary medical 

care where there was at least one hospital that performed major cardiovascular procedures

and neurosurgery. Each of the 306 HRRs in the nation has a minimum population of 

120,000. For the purposes of defining the sample group, we utilized the methodology for 

identifying specialty hospitals from our May 2005 report, GAO-05-647R. 

2

We compiled a list of specialty hospitals in existence based on information collected for 

previous GAO reports (GAO-03-683R, GAO-04-167, and GAO-05-647R) and from information 

obtained from the Medicare Payment Advisory Commission (MedPAC). 

3

CON laws require hospitals to obtain state approval before taking actions to change their 

facility services or size, such as by constructing, modifying, or closing a health care facility, 

acquiring major new medical equipment, offering a new health care service, or 

discontinuing an existing one.

4

We obtained data on which states have CON laws from the American Health Planning 

Association (2002). 

 Hospital Competition
Appendix I: Scope and Methodology 

Table 10: Criteria for Selecting Regional Markets 

Sample markets Comparison markets 

From 306 regional markets in the United 

States, we included 

• markets that contained one or more 

specialty hospitals that opened during 

the period from 1998 through 2005. 

We excluded 

• markets in states with certificate of need 

(CON) laws. 

N = 32 regional markets 

From 306 regional markets in the United 

States, we excluded 

• markets that contained a specialty 

hospital, regardless of ownership or 

opening date; 

• markets in states with CON laws; and 

• markets if any one of seven market 

characteristics did not fall between the 

minimum and maximum values for the 

32 markets in the core sample. 

N = 78 regional markets 

Source: GAO.

We selected markets for the comparison sample on the basis of their 

similarity to the markets used for the sample, except for the presence of a

specialty hospital. We excluded markets from the comparison sample if 

they contained a specialty hospital, regardless of ownership or date of 

opening.5

 We used data from DAP pertaining to market characteristics to 

ensure that markets included in the comparison sample were similar to 

markets in the sample. We excluded markets from the comparison sample 

if any one of their values for seven market characteristics—overall 

population, Medicare population, average number of inpatient beds, 

population to beds ratio, physician specialists to total physicians ratio, 

average number of surgical discharges, and the Herfindahl-Hirschman 

Index6

—fell outside the range of values for markets in the sample. The 

application of these criteria resulted in a sample that consisted of 78 

unique regional markets. 

 5

We identified a total of 92 physician- and non-physician-owned specialty hospitals that 

opened in 2005 or earlier. We excluded markets from the comparison sample if they 

contained 1 or more of these 92 facilities. To isolate the effect of specialty hospitals on 

general hospitals we excluded markets that contained a specialty hospital, regardless of the 

extent to which physicians had an ownership stake in the specialty hospitals or when the 

specialty hospital opened. 

6

The Herfindahl-Hirschman Index is a measure of market competition based on the market 

shares of all of the hospitals in the geographic area. Higher values indicate less 

concentrated, and potentially less competitive, markets. 

Page 23 GAO-06-520 Hospital Competition
Appendix I: Scope and Methodology 

The Centers for Medicare & Medicaid Services’ (CMS) 2005 Provider of 

Services (POS) file was used to identify general hospitals located in the 

markets selected for the sample and the comparison sample, and these 

hospitals were subject to several exclusions. General hospitals that were 

major teaching hospitals or had fewer than five cardiac, orthopedic, or 

surgical discharges in 2004,7

 were excluded from both samples because the 

presence of a specialty hospital may not affect these hospitals in the same 

manner it would affect other types of general hospitals. In addition, we 

considered urban general hospitals to be in a regional market with a 

specialty hospital only if it was also less than 90 miles away from a 

specialty hospital. We considered rural general hospitals to be in a 

regional market with a specialty hospital only if it was also less than 120 

miles away from a specialty hospital. Information on these hospital 

characteristics were obtained from CMS’s 2005 POS file, 2002/2003 Cost 

Report file, and 2004 Health Care Information System (HCIS) file, and

Census 2000 US Gazetteer files. The sample included 326 general hospitals

and the comparison sample included 294 general hospitals. (See table 11.) 

Table 11: Criteria for Selecting General Hospitals Included in the Sample and

Comparison Sample 

Sample hospitals Comparison hospitals 

From the list of general hospitals located in 

the 32 sample markets, we excluded 

• major teaching hospitals; 

• hospitals that had fewer than five 

cardiac, orthopedic, or surgical

discharges in 2004; 

• rural hospitals located 120 miles or more 

from the nearest specialty hospital; and 

• urban hospitals located 90 miles or more 

from the nearest specialty hospital. 

N = 326 general hospitals 

From the list of general hospitals located in 

the 78 comparison sample markets, we 

excluded 

• major teaching hospitals and 

• hospitals that had fewer that five cardiac, 

orthopedic, or surgical discharges in 

2004. 

N = 294 general hospitals 

Source: GAO.

The survey questionnaire had two sections. (See app. II.) First, it obtained 

respondents’ perceptions of competition in their health care markets. 

Second, it asked respondents to provide information on the operational 

Survey of General 

Hospitals 

 7

Major teaching hospitals are defined as hospitals that have a ratio of interns and residents 

to beds of 0.25 or greater. 

Page 24 GAO-06-520 Hospital Competition
Appendix I: Scope and Methodology 

and clinical service changes that the respondents’ hospitals had made from 

2000 through 2005 to remain competitive in their markets. The 

questionnaire included 72 potential operational changes and 34 potential 

clinical service changes.8

 The specific operational and clinical service 

change questions included in the survey were identified through a review 

of articles in academic journals, industry reports, periodicals, a joint study 

by the Federal Trade Commission and the Department of Justice, and 

studies by CMS and the Medicare Payment Advisory Commission 

(MedPAC). 

We tested our survey questionnaire with external experts, including one 

MedPAC analyst and seven hospital administrators from four general 

hospitals and one hospital system. 

In August and September of 2005, survey questionnaires were distributed 

to 603 of the 620 hospitals in our sample—315 general hospitals in the 

sample and 288 general hospitals in the comparison sample.9

 Sixty-seven 

percent of general hospitals that received our survey questionnaire 

responded—401 general hospitals. Seventy percent of the sample and 

63 percent of the comparison sample responded to our survey 

questionnaire. 

We created a subsample to analyze the competive response of general 

hospitals to specialty hospitals that were in close proximity. The 

subsample consisted of general hospitals in hospital service areas (HSA)— 

which we refer to in this report as local health care markets—with a 

specialty hospital that opened from 1998 through 2005.10 Groups of local 

health care markets form a regional health care market. (See fig. 2.) On 

average, general hospitals in local health care markets with a specialty 

hospital were in closer proximity to a specialty hospital than were general 

Relationship between 

Regional and Local 

Health Care Markets 

 8

One of the potential operational changes listed on the survey was a change in nonclinical 

amenities, such as the addition of valet parking or gourmet meals. 

9

We were unable to obtain contact information for 13 of the 17 hospitals that did not

receive a survey; the remaining 4 were identified as either being closed or no longer general 

hospitals.

10As defined by researchers at DAP, HSAs represent local health care markets for hospital 

care. DAP defined HSAs by assigning ZIP codes to the hospital areas where the greatest 

proportion of their Medicare residents were hospitalized. Most of the 3,436 HSAs contain

only one hospital. 

Page 25 GAO-06-520 Hospital Competition
Appendix I: Scope and Methodology 

hospitals in regional health care markets with a specialty hospital. Among 

the 315 general hospitals in the sample, 152 resided in the same local 

health care market as a specialty hospital. Sixty-four percent of general

hospitals in the local health care market subsample responded to our 

survey. 

Figure 2: Illustration of the Relationship between Regional and Local Health Care 

Markets 

Source: GAO.

HRRs/Regional Markets

Hospital referral regions (HRRs) 

represent regional health care 

markets for tertiary medical care. 

Each HRR contains at least one 

hospital that performs major 

cardiovascular procedures and 

neurosurgery. 

HSAs/Local Markets

Hospital service areas (HSAs) 

are local health care markets for 

hospital care. An HSA is a

collection of ZIP codes whose 

Medicare residents receive most 

of their hospital care from the 

hospitals in that area.

HSA 1

HSA 9 HSA 2

HRR

HSA 8

HSA 3

HSA 5

HSA 7

HSA 4

HSA 6

HSA 10

Page 26 GAO-06-520 Hospital Competition
Appendix I: Scope and Methodology 

From the survey responses, we determined the percentage of general 

hospitals that reported making each of the potential operational and 

clinical changes and then compared those percentages for three paired

sets of general hospitals. First, we compared rural general hospitals in 

regional markets with specialty hospitals to rural general hospitals in 

regional markets without specialty hospitals. (See fig. 3.) Second, we 

compared urban general hospitals in regional markets with specialty

hospitals to urban general hospitals in regional markets without specialty 

hospitals. Third, we compared urban general hospitals that had a specialty 

hospital in their local markets to urban general hospitals that did not have 

a specialty hospital in either their local or regional markets. The third 

comparison was conducted to explore the possibility that specialty 

hospitals are more likely to elicit a competitive response from general 

hospitals that are closest to them.11 As a part of each comparison we 

conducted a statistical test, the Pearson chi-square, in order to test the 

statistical significance of the percentages for each of the three paired sets

of general hospitals.12 This test enabled us to determine if differences 

between the paired sets of general hospitals were statistically significant.

Survey Data Analysis 

 11Because only eight rural general hospitals that responded to our survey had a specialty 

hospital in their local hospital market, we did not analyze this group separately. 

12V.K. Rohatgi, An Introduction to Probability Theory and Mathematical Statistics (New

York, N.Y.: John Wiley & Sons, Inc., 1976), 444–45. 

Page 27 GAO-06-520 Hospital Competition
Appendix I: Scope and Methodology 

Figure 3: Illustration of the Three Types of Comparisons Performed between General Hospitals in Markets with and without

Specialty Hospitals 

Source: GAO.

Urban general hospital

Rural general hospital

Specialty hospital

GH

SH

GH

Rural general hospitals that had a

specialty hospital in their regional 

health care market (but not 

necessarily their local market)...

to rural general hospitals that 

did not have a specialty hospital 

in either their local or regional 

health care markets.

GH

SH

Regional market

Local market

GH

Regional market

Local market

Comparison 1: Rural Regional

Urban general hospitals that had 

a specialty hospital in their local 

health care market...

to urban general hospitals that 

did not have a specialty hospital 

in either their local or regional 

health care markets.

GH

SH

Regional market

Local market

GH

Regional market

Local market

Comparison 3: Urban Local

Urban general hospitals that had a

specialty hospital in their regional 

health care market (but not 

necessarily their local market)...

to urban general hospitals that 

did not have a specialty hospital 

in either their local or regional 

health care markets.

GH

SH

Regional market

Local market

GH

Regional market

Local market

Comparison 2: Urban Regional

Page 28 GAO-06-520 Hospital Competition
Appendix I: Scope and Methodology 

Among the general hospitals that responded to our survey, the comparison 

of rural general hospitals in regional health care markets included 71 rural 

general hospitals in regional markets with specialty hospitals and 79 rural 

general hospitals in regional markets without specialty hospitals. The 

comparison of urban general hospitals in regional health care markets 

included 148 urban general hospitals in regional markets with specialty 

hospitals and 103 urban general hospitals in regional markets without 

specialty hospitals. The comparison of urban general hospitals in local 

health care markets with urban general hospitals in regional markets 

included 90 urban general hospitals in markets with specialty hospitals 

and 103 urban general hospitals in regional markets without specialty 

hospitals. Because only 8 rural general hospitals in local markets 

responded to the survey, we did not conduct a comparison of rural general 

hospitals in local markets to rural general hospitals in regional markets. 

We used the survey data we collected for this work, three CMS datasets, 

and four datasets from DAP to produce the results of this report. In each 

case, we determined that the data were sufficiently reliable to address the 

reporting objective. 

Data Reliability 

Overall, 67 percent of general hospitals we contacted responded to our 

2005 survey, and few respondents failed to complete the questionnaire in 

full. We identified incomplete and inconsistent survey responses within 

individual surveys and placed follow-up calls to respondents to complete 

or verify their responses. We conducted an analysis to identify outliers 

who made extremely high numbers of service changes. We manually 

verified 10 percent of all survey responses contained in our aggregated 

electronic data files, in order to ensure that survey response data were 

accurately transferred to electronic files for analytical purposes. 

We determined the three CMS datasets—2002/2003 Cost Report File, first 

quarter 2005 POS file, and the 2004 HCIS File—and four DAP datasets—

2003 Zip Code Crosswalk File, 1999 Chapter 2 Table File, 2001 selected 

surgical discharge rates by HRR, and 1999 physician workforce data—

were sufficiently reliable for our purposes. The CMS datasets were used to 

gather descriptive information for hospitals in our sample, to determine 

general hospital teaching status, and to tie discharge data to individual 

hospitals. The DAP datasets were used to link the general hospitals in our 

sample to their corresponding market characteristics. These CMS and DAP 

files are widely used for similar research purposes. 

Page 29 GAO-06-520 Hospital Competition
Appendix I: Scope and Methodology 

We identified two potential limitations of our analysis. First, because 

independent information to verify survey responses was not available, all 

analyses in this report are based on data that are self-reported and 

potentially limited by the respondent’s ability to report the operational or 

clinical service changes implemented from 2000 through 2005 for 

competitive reasons. Second, in response to the threat of future 

competition, it is possible that general hospitals made changes to their 

facilities prior to 2000 or that changes made by some general hospitals in 

anticipation of the new specialty hospitals successfully deterred the entry 

of that hospital, which our survey did not capture. 

Page 30 GAO-06-520 Hospital Competition
Appendix II: Survey Questionnaire Appendix II: Survey Questionnaire 

Page 31 GAO-06-520 Hospital Competition
Appendix II: Survey Questionnaire 

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Appendix II: Survey Questionnaire 

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Appendix II: Survey Questionnaire 

Page 34 GAO-06-520 Hospital Competition
Appendix II: Survey Questionnaire 

Page 35 GAO-06-520 Hospital Competition
Appendix II: Survey Questionnaire 

Page 36 GAO-06-520 Hospital Competition
Appendix II: Survey Questionnaire 

Page 37 GAO-06-520 Hospital Competition
Appendix III: Survey Response by Category Appendix III: Survey Response by Category 

Our survey listed 72 potential operational changes and 34 potential clinical 

service changes that a respondent hospital could have indicated that they 

had implemented from 2000 through 2005. Within the survey, the potential

operational changes were organized into nine separate subject-oriented 

categories. For each of the clinical service changes, respondents were 

asked to indicate whether they had added, expanded, eliminated, or 

decreased the service. For analytical purposes, we grouped together 

“added” and “expanded” clinical service change responses. Also, we 

grouped together “eliminated” and “decreased” clinical service change 

responses. When stratified by urban and rural location there were few 

differences between general hospitals in markets with and without 

specialty hospitals, in terms of the average number of changes they 

reported implementing in each category of operational and clinical service 

change from 2000 through 2005. (See table 12.) 

Page 38 GAO-06-520 Hospital Competition
Appendix III: Survey Response by Category

Table 12: Average Number of Operational and Clinical Service Changes Reported by Urban and Rural General Hospitals from 

2000 through 2005, by Category of Potential Change

Average number of changes 

Urban general hospitals in Rural general hospitals in

Change category 

Total number 

of potential

changes 

regional market 

with a specialty 

hospital

regional market 

without a specialty 

hospital

regional market 

with a specialty 

hospital 

regional market 

without a specialty 

hospital

Operational changes 

Made changes in 

relationship with physicians, 

in terms of facility 

management, planning, 

ownership, or retention 12 3.1 3.5 3.0 2.6

Made changes in 

management or operation of 

operating room 7 2.8 2.6 2.2 2.3

Made changes in 

management or operation of 

emergency department 5 1.0 1.1 1.0 0.8

Made information 

technology changes 7 2.4 2.4 2.5 2.0

Opened limited service 

facilities 9 0.8 1.0 0.7 0.5

Increased, instituted, or 

improved upon benefits to 

retain or hire nursing staff 8 3.9 4.1 3.6 3.2

Implemented changes 

intended to attract patients 6 2.9 2.9 2.6 2.4

Changed existing or 

implemented new pricing 

strategies 4 1.0 1.2 1.2a

0.8a

Made other changes in 

hospital management 14 5.2 5.3 4.0 3.6

Clinical service changes 

Added or expanded clinical 

service 34 7.8 7.9 7.1 6.6

Eliminated clinical service or 

decreased resources 

dedicated to it 34 0.2 0.2 0.2 0.2

Source: GAO.

a

The difference between the average number of pricing strategies reported by rural general hospitals 

in markets with and without specialty hospitals was statistically significant at the 0.05 level. 

Page 39 GAO-06-520 Hospital Competition
Appendix IV: CMS Comments Appendix IV: CMS Comments 

Page 40 GAO-06-520 Hospital Competition
Appendix IV: CMS Comments 

Page 41 GAO-06-520 Hospital Competition
Appendix V: 

St

GAO Contact and 

aff Acknowledgments

Page 42 GAO-06-520 

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact A. Bruce Steinwald, (202) 512-7101 or steinwalda@gao.gov

Other contributors to this report include James Cosgrove, Assistant 

Director; Jennie Apter; Zachary Gaumer; Gregory Giusto; Kevin Milne; and 

Dae Park. 

Acknowledgments 

 Hospital Competition
Related GAO Products 

Page 43 GAO-06-520 

Related GAO Products 

Specialty Hospitals: Information on Potential New Facilities. GAO-05-

647R. Washington, D.C.: May 19, 2005. 

Specialty Hospitals: Geographic Location, Services Provided, and 

Financial Performance. GAO-04-167. Washington, D.C.: October 22, 2003.

Specialty Hospitals: Information on National Market Share, Physician

Ownership, and Patients Served. GAO-03-683R. Washington, D.C.: 

April 18, 2003. 

(290484) Hospital Competition
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