Specialty Hospitals: Geographic Location, Services Provided, and Financial Performance
Published: 2003-10-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The recent growth in specialty hospitals that are largely for-profit and owned, in part, by physicians, has been controversial. Advocates of these hospitals contend that the focused mission and dedicated resources of specialty hospitals both improve quality and reduce costs. Critics contend that specialty hospitals siphon off the most profitable procedures and patient cases, thus eroding the financial health of neighboring general hospitals and impairing their ability to provide emergency care and other essential community services. Critics also contend that physician ownership of specialty hospitals creates financial incentives that may inappropriately affect physicians' clinical and referral behavior. In April 2003, GAO reported on certain aspects of specialty hospitals, including the extent of physician ownership and the relative severity of patients treated (GAO-03-683R). For this report, GAO was asked to examine (1) state policies and local conditions associated with the location of specialty hospitals, (2) how specialty hospitals differ from general hospitals in providing emergency care and serving a community's other medical needs, and (3) how specialty and general hospitals in the same communities compare in terms of market share and financial health.
section_title: What GAO Found
paragraphs: The 100 existing specialty hospitals identified by GAO--hospitals that focus on cardiac, orthopedic, or women's medicine or on surgical procedures--are geographically concentrated in areas where state policy facilitates hospital growth. Although 28 states have at least 1 specialty hospital, approximately two-thirds of the 100 specialty hospitals are located in 7 states. At least an additional 26 specialty hospitals were under development in 2003 and will tend to reinforce the existing pattern of geographic concentration. Specialty hospitals are much more likely to be found in states where hospitals are permitted to add beds or build new facilities without first obtaining state approval for such health care capacity increases. Relative to general hospitals, specialty hospitals, as a group, were much less likely to have emergency departments, treated smaller percentages of Medicaid patients, and derived a smaller share of their revenues from inpatient services. For example, 45 percent of specialty hospitals, but 92 percent of general hospitals, had emergency departments. There were, however, important differences among the four specialty hospital types in these and other service indicators. Although general hospitals typically have more beds than specialty hospitals, the focused mission of specialty hospitals often resulted in their treating more patients in their given fields of specialization. Financially, specialty hospitals tended to perform about as well as general hospitals did on their Medicare inpatient business. However, specialty hospitals tended to outperform general hospitals when the costs from all lines of business and the revenues from all payers were considered. Officials from three specialty hospital organizations commented on a draft of this report. They generally agreed with the report's information and commented on key differences between specialty and general hospitals.

section_title: Letter
paragraphs: Specialty hospitals, which tend to focus on patients with specific medical  conditions or who need surgical procedures, represent a small but growing  segment of the health care industry. Such hospitals are not an entirely new  phenomenon, as children’s and other types of specialty hospitals have  existed for decades. However, the recent growth in specialty hospitals has  been controversial because it has involved a new genre of hospitals. In  contrast to earlier forms of specialty hospitals, this new genre is  characterized by hospitals that are often for-profit and frequently owned,  in part, by some of the physicians who work in them.
Advocates of these newer specialty hospitals contend that the focused  mission and dedicated resources of specialty hospitals allow physicians to treat more patients needing the same specialty services than they could in general hospitals and that, through such specialization and economies of  scale, the potential exists to improve quality and reduce costs. In contrast,  critics are concerned that specialty hospitals may concentrate on the most  profitable procedures and serve patients that have fewer complicating  conditions—leaving general hospitals with a sicker, higher-cost patient  population. They contend that this practice of drawing away a more  favorable selection of patients makes it more financially difficult for  general hospitals to fulfill their broad mission to serve all of a community’s  needs, including charity care, emergency services, and stand-by capacity  to respond to communitywide disasters. Critics have also raised concerns  that physician ownership of specialty hospitals creates financial incentives  that could inappropriately affect physicians’ clinical and referral behavior.
In light of these concerns, you asked us to provide information about the  newer genre of specialty hospitals. In response, we issued a report in April  2003 that provided information on four specialty hospital types—cardiac,  orthopedic, surgical, and women’s—regarding their share of the national  hospital market, the extent to which physicians have ownership interests  in these hospitals, and the patients served by these hospitals compared  with those served by general hospitals, in terms of illness severity. This  report provides additional information related to your request.  Specifically, it examines (1) what state policies and local market  conditions are associated with the location of specialty hospitals, (2) how  specialty hospitals differ from general hospitals in providing emergency  care and serving a community’s other medical needs, and (3) how  specialty and general hospitals in the same communities compare in terms  of market share and financial health.
Our work focused on acute care hospitals that tended to treat patients for  a limited group of diseases or conditions or that tended to perform  surgical procedures. Specifically, we considered a hospital to be a  specialty hospital if the diagnosis-related group (DRG) classification for  two-thirds of its Medicare patients (or two-thirds of all of its patients  where such data were available) fell into no more than two major  diagnosis categories, such as diseases of the circulatory system (cardiac),  or if at least two-thirds of its patients were classified in surgical DRGs. We  excluded hospitals that specialized in providing long-term care or  otherwise had missions that were largely distinct from the missions of  short-term, acute care general hospitals. We classified the hospitals that  fit these criteria into five specialty types—cardiac, orthopedic, surgical,  women’s, and other specialty. The other-specialty category contained six  hospitals that specialized in a variety of areas, such as eye and ear, nose,  and throat procedures. Because summary statistics for such a diverse  group would not be meaningful, we excluded these six hospitals from our  analysis.
The information in this report is derived from our analysis of hospital  inpatient discharge data, responses to our 2003 survey of specialty  hospitals, responses to our 2002 survey of general hospitals, and other  data. We analyzed Medicare inpatient discharge data from all hospitals  nationwide to help identify specialty hospitals. We also used Healthcare  Cost and Utilization Project (HCUP) data on all patient discharges in 2000  from hospitals located in six states to help identify specialty hospitals.These six states contained slightly more than one-fourth of the existing  specialty hospitals that we identified nationwide. Our findings related to  the percentage of each hospital’s patients covered by Medicaid or  Medicare, and hospitals’ market shares are based on an analysis of HCUP  data from urban specialty and general hospitals in these six states. Our  findings related to hospitals’ financial performance are based on fiscal  year 2001 data that hospitals nationwide submitted to Medicare. These  data include 55 of the 100 specialty hospitals we identified. (Although the  2001 data are the most recent available, many specialty hospitals were too  new to be included.) Other findings in this report are based on hospitals’  responses to the survey that we sent to all of the specialty hospitals that  we identified or information that hospitals provided to Medicare or the  American Hospital Association (AHA). For more detail regarding our  specialty hospital criteria and analysis methodology, see appendix I. Our  work was performed from September 2002 through October 2003 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Specialty hospitals have become a subject of debate among health care  policymakers. One issue concerns physician ownership of specialty  hospitals and whether such ownership might inappropriately affect  physicians’ clinical decision-making and referral behavior. A related issue  concerns the potential for specialty hospitals to benefit financially by  treating patients who are less severely ill, and therefore less costly, while  leaving general hospitals responsible for a mix of patients who need more  care and are more expensive to treat. Our April 2003 report provided  information on both issues: the extent of physician ownership at specialty  hospitals and the relative severity of patients’ illnesses at specialty and  general hospitals.
subsections: section_title: Physician Self-Referral Law and Hospital Payment Rules Provide Context for Issues Regarding Specialty Hospitals
paragraphs: Much of the concern about specialty hospitals centers on physician  ownership issues. Federal law generally prohibits physicians from  referring Medicare patients for specific health care services to facilities in  which they (or their immediate family members) have financial interests.This prohibition, a key component of the Medicare self-referral or Stark  law (named after its chief sponsor in the House of Representatives,  Representative Pete Stark) was enacted after several studies found that  physicians with ownership interests in separate clinical laboratories,  diagnostic imaging centers, or physical therapy providers tended to make  more referrals to them and order substantially more services at higher  costs.
The Stark law contains an exception that is relevant in the case of referrals  to specialty hospitals. The law includes an exception that permits  physicians who have an ownership interest in an entire hospital and who  also are authorized to perform services there to refer patients to that  hospital. The premise is that any referral or decision made by a physician  who has a stake in an entire hospital would produce little personal  economic gain because hospitals tend to provide a diverse and large group  of services. However, the Stark law does prohibit physicians who have  ownership interest only in a hospital subdivision from referring patients to  that subdivision. With respect to specialty hospitals, the concern exists  that, as these hospitals are usually much smaller in size and scope than  general hospitals and closer in size to hospital departments, the exception  to Stark could allow physician owners to influence their hospitals’—and  therefore their own—financial gain through practice patterns and  referrals.
The question of favorable patient selection—the contention that specialty  hospitals treat a more financially favorable selection of patients as  compared to general hospitals—has added to the debate about the  advantages and drawbacks of specialty hospitals. This issue is linked to  the way hospitals are paid. The fixed-rate, lump-sum payments that  Medicare and many other health care payers typically make to hospitals  for inpatient care for patients with a given diagnosis, regardless of the  costs of serving particular patients, are designed to promote efficiency by  discouraging hospitals from providing unnecessary services as a way to  boost revenues. However, these lump-sum payments foster undesirable  incentives, as hospitals may gain financially by serving a disproportionate  share of lower-cost patients with the same diagnoses. Medicare’s hospital  payment system rules illustrate this principle.
Under its system of prospective payments, Medicare pays a predetermined  rate for each hospital discharge, based on the patient’s diagnosis and  whether the patient received surgery. In other words, the payments reflect  an average bundle of services that the beneficiary is expected to receive as  an inpatient for a particular diagnosis. Discharges are classified according  to a list of DRGs. DRG payment rates are based on the expected cost of  the diagnosis group’s typical case compared with the cost for all Medicare  inpatient cases. The DRG payment is not adjusted for within-DRG  differences in severity of illness. Therefore, hospitals have a financial  incentive to treat as many patients as possible whose costs are low relative  to the costs of the average patient in each DRG.
Our April 2003 study found that 21 out of 25 specialty hospitals treated a  lower percentage of patients who were severely ill compared with patients  in the same diagnosis categories treated at general hospitals in the same  urban areas. For example, in an urban area in Texas, 3 percent of an  orthopedic hospital’s patients with that hospital’s most common diagnoses  were classified as severely ill, as compared with 8 percent of patients with  the same diagnoses treated by the area’s more than four dozen general  hospitals. In an urban area in Arizona, about 17 percent of a cardiac  hospital’s patients with that hospital’s most common diagnoses were  classified as severely ill, as compared to 22 percent of patients with the  same diagnoses treated by the area’s more than two dozen general  hospitals. Not all specialty hospitals treated patients who were, by  comparison, less sick. Two of the 25 specialty hospitals treated a higher  percentage of severely ill patients and two others treated about the same  percentage as area general hospitals. In examining the illness severity  differences between specialty and general hospitals, we did not determine  the clinical or economic importance of these differences.
section_title: Specialty Hospital Types Vary in Ownership Arrangements and Medicare Spending
paragraphs: For-profit status is a salient characteristic of specialty hospitals we  identified. More than 90 percent of the specialty hospitals that have  opened since 1990 were for-profit. Overall, 74 percent of specialty  hospitals are for-profit, as compared to about 20 percent of all general hospitals. (See table 1.) For-profit status varied somewhat by specialty  type, ranging from 78 percent of orthopedic hospitals to 65 percent of  women’s hospitals.
In our April 2003 report, we found that 70 percent of the more than 100  specialty hospitals in existence or under development had some degree of  physician ownership. Among specialty hospitals with any degree of  physician ownership, physicians’ combined ownership shares averaged  slightly more than 50 percent of the hospital. Physicians’ combined  ownership tended to be somewhat smaller at cardiac hospitals (31  percent) and larger at surgical hospitals (70 percent). The degree of  individual physician ownership varied by hospital, but was generally low.  At approximately half of all specialty hospitals with physician ownership,  the average share owned by an individual physician was less than 2  percent. The share of a specialty hospital owned in the aggregate by the  physicians in a revenue-sharing group practice could be much higher. At  more than half of the specialty hospitals with physician owners, physicians  in a single group practice owned more than 25 percent of the hospital.
The majority of physicians who worked in specialty hospitals had no  ownership interest in the facilities. Overall, approximately 73 percent of  physicians with admitting privileges to specialty hospitals were not  investors in their hospitals. (See fig. 1.) The percentage of admitting  physicians who were investors varied by specialty hospital type, ranging  from about 7 percent at women’s hospitals to about 44 percent at surgical  hospitals.
We identified three basic business structures for specialty hospitals. Our  survey results indicated that about one-third of specialty hospitals were  independent. Most of these hospitals were orthopedic or surgical and 76  percent had some degree of physician ownership. Approximately one-third  of specialty hospitals were owned in part by a specialty hospital chain.  Among this group, most hospitals were cardiac or orthopedic and 76  percent had some degree of physician ownership. The remaining one-third  of specialty hospitals were owned or operated in part by local general  hospitals. Almost half (48 percent) of the hospitals in this last group,  which varied in specialty type, had some degree of physician ownership.
In 2001, specialty hospitals accounted for approximately $871 million, or 1  percent, of Medicare’s spending on hospital inpatient services. Nearly two- thirds of this amount went to cardiac hospitals. (See table 2.)
section_title: Specialty Hospitals Clustered in Areas Where State Policy and Local Demographic Conditions Favor Growth
paragraphs: Although 28 states had at least one existing specialty hospital, about two- thirds of the 100 specialty hospitals we identified were located in 7 states.  The specialty hospitals that are planned to open over the next few months  or years will reinforce this pattern of concentration. Specialty hospital  location was associated with regulatory and demographic conditions that  may facilitate or encourage hospital development.
subsections: section_title: Specialty Hospitals Exist in Particular States
paragraphs: Specialty hospitals are concentrated in seven states: Arizona, California,  Kansas, Louisiana, Oklahoma, South Dakota, and Texas. Texas, with 20  specialty hospitals, had almost twice as many specialty hospitals as the  state with the second highest number of specialty hospitals, California,  with 11. States such as Oklahoma (9), Kansas (8), and South Dakota (7),  although smaller in area and population than California, had nearly as  many specialty hospitals. The remaining 21 states with specialty hospitals  had between 1 and 4 specialty hospitals each. (See fig. 2.)
The specialty hospitals that are planned to open over the next few months  or years will tend to reinforce the existing pattern of geographic  concentration. In June 2003, at least 26 specialty hospitals were under  development in 10 states. (See fig. 3.) Nine of the 10 states that had one or  more specialty hospitals under development already had at least 1 existing  specialty hospital. About 60 percent of specialty hospitals under  development were located in three states: Texas had 7; California, 5; and  Louisiana, 4. Seven other states had 1 or 2 specialty hospitals that were  under development as of June 2003. Based on the specialty hospitals  known to be under development, the number of surgical hospitals will  increase by 65 percent and the number of cardiac hospitals will increase  by approximately 40 percent in the next few months or years. Seven  cardiac hospitals, 2 orthopedic hospitals, and 17 surgical hospitals are  under development.
section_title: Specialty Hospitals Tend to Locate in States That Do Not Restrict Hospital Growth
paragraphs: The location of specialty hospitals is strongly correlated to whether states  allow hospitals to add beds or build new facilities without first obtaining  state approval for such health care capacity increases. All of the specialty  hospitals that are under development and 96 percent of the specialty  hospitals that opened from 1990 to June 2003 are located in such states.  (See table 3.) State requirements for prior approval to increase health care  capacity are commonly referred to as certificate of need (CON) laws or  requirements. Federal legislation enacted in 1975 to promote  comprehensive planning and development of hospitals and other health  care resources conditioned funding to states on their establishment of  CON requirements. At that time, many policymakers contended that CON  requirements could prevent the construction of unnecessary capacity and  help control health care costs. CON opponents argued that such  requirements could stifle competition and lead to higher health care costs.  Whether CON requirements achieved their objectives was inconclusive,and in 1986 the federal legislation was repealed. Subsequently, several  states dropped their CON requirements. In 2002, 37 states maintained  CON requirements to varying degrees. Overall, 83 percent of all specialty  hospitals, 55 percent of general hospitals, and 50 percent of the U.S.  population are located in states without CON requirements.
section_title: Specialty Hospital Location Associated with Population Density and Growth
paragraphs: Eighty-five percent of specialty hospitals are located in urban areas, a  distribution that is roughly proportional to that of the U.S. population. An  urban location was slightly more prevalent among women’s hospitals (90  percent) and slightly less prevalent among cardiac hospitals (78 percent).
Specialty hospitals also tended to locate in counties where the population  growth rate from April 1990 through April 2000 far exceeded the national  average of 11.1 percent. About 43 percent of specialty hospitals that  opened in 1990 or later are located in counties where the population grew  by 20 percent or more between the 1990 and 2000 decennial censuses.There did not appear to be a consistent relationship between specialty  hospital location and a relative abundance or shortage of local health care  resources, as measured by physicians per capita or hospital beds per  capita.
section_title: The Four Specialty Hospital Types Differed from General Hospitals in Size and Scope but Also Differed from One Another
paragraphs: Relative to general hospitals, specialty hospitals, as a group, were much  less likely to have emergency departments, saw fewer patients in their  emergency departments, treated smaller percentages of Medicaid patients,  and derived a smaller share of their revenues from inpatient services.  However, there were important differences among the four specialty  hospital types in these and other service indicators, such as the extent to  which hospitals’ emergency departments focused on certain medical  conditions or procedures.
subsections: section_title: Hospitals Differed in the Provision of Emergency Care
paragraphs: Several differences with respect to emergency departments highlight the  contrast between specialty hospitals and general hospitals and also the  contrast among the four types of specialty hospitals. The four specialty  hospital types were less likely than general hospitals to have emergency  departments, but the prevalence of emergency departments varied by  specialty hospital type. Overall, 45 percent of specialty hospitals had  emergency departments, compared with 92 percent of general hospitals.  (See fig. 4.) The prevalence of emergency departments in specialty  hospitals ranged from 72 percent of the cardiac hospitals to 33 percent of  the orthopedic hospitals.
The emergency departments at specialty hospitals treated less than one- tenth the median number of patients treated at the emergency  departments of general hospitals. (See table 4.) The number of patients  treated at general hospitals’ emergency departments remained greater  when hospital size was accounted for: the median number of patients  treated per bed per month was about 12 at general hospitals’ emergency  departments and slightly less than 3 at specialty hospitals’ emergency  departments.
Based on the responses to our 2003 survey, the emergency departments at  specialty hospitals often appeared to have missions that were focused on  certain medical conditions or procedures. For example, 95 percent of the  patients at orthopedic hospitals’ emergency departments were orthopedic  patients, and 93 percent of the patients at surgical hospitals’ emergency  departments were surgical patients. The median percentage of emergency  department patients who fit within the hospital’s field of specialization  was lower at cardiac hospitals (57 percent).
Specialty hospital types varied in how many had a physician around-the- clock in their emergency departments. Overall, 63 percent of specialty  hospitals that had emergency departments, and that responded to our  staffing questions, reported having a physician staffing the department 24  hours a day. (See table 5.) Cardiac hospitals were the most likely to have  24-hour physician staffing. Eleven of the 13 cardiac hospitals responded to  our survey question. All 11—100 percent—indicated that they had 24-hour  physician staffing of their emergency departments. Response rates to the  staffing question were far lower among other specialty hospital types—  approximately 60 percent of the orthopedic and surgical hospitals with  emergency departments, and 30 percent of the women’s hospitals with  emergency departments, answered the staffing question. Among the  surgical and orthopedic hospitals with emergency departments that did  respond, one-third or less reported having a physician in the department  24 hours per day. Two of the three women’s hospitals that provided  staffing information reported having a physician in their emergency  departments 24 hours per day.
section_title: Hospitals Differed in Share of Public Patients Served and Revenue Generated from Inpatient Services
paragraphs: The contrast between specialty and general hospitals was also marked  with respect to the share of public program inpatients treated and  inpatient services provided. Relative to general hospitals in the same  urban areas, specialty hospitals in our HCUP sample tended to treat a  lower percentage of Medicaid inpatients among all patients with the same  types of conditions. (See fig 5.) For example, Medicaid beneficiaries  constituted 28 percent of obstetric and gynecological (OB/GYN) patients  at women’s hospitals, but 37 percent of the OB/GYN patients at area  general hospitals.
The pattern for Medicare inpatients served differed somewhat from that  for Medicaid patients. Relative to area general hospitals, cardiac hospitals  tended to have larger shares of Medicare cardiac patients. (See fig. 6.)  Medicare patients constituted similar shares of surgical patients at surgical  specialty and area general hospitals and of gynecological patients at  women’s specialty and area general hospitals. In contrast, orthopedic  hospitals served a lower percentage of Medicare orthopedic inpatients  than did area general hospitals.
Dissimilarity between specialty and general hospitals was noticeable in the  mix of inpatient and outpatient revenues. For the four specialty hospital  types, hospitals that responded to our survey reported that inpatient  revenues accounted for about 46 percent of their total revenues, compared  with about 57 percent of total revenues for general hospitals. (See fig. 7.)  However, percentage of inpatient business varied substantially by  specialty hospital type. For example, about 25 percent of surgical  hospitals’ revenues were derived from their inpatient business. Their mix  of services may, in part, reflect the fact that some of these hospitals  started as ambulatory surgical centers—distinct facilities that perform  outpatient surgery exclusively—and later added inpatient capacity. The  percentage of inpatient revenues at orthopedic hospitals (approximately  37 percent) was somewhat higher than the percentage at surgical  hospitals. Inpatient revenues made up about 58 percent of total revenues  at the women’s hospitals, which was similar to the proportion at area  general hospitals (57 percent). In contrast, cardiac hospitals derived 85  percent of their revenues from their inpatient business.
section_title: Specialty Hospitals Rivaled General Hospitals in Certain Market Share Measures and Financial Performance
paragraphs: Although a general hospital typically had more beds than a specialty  hospital had, the focused mission of a specialty hospital often resulted in  its treating more patients with a given condition. Financially, specialty  hospitals overall tended to perform about as well as general hospitals did  on their Medicare inpatient business. However, for-profit specialty  hospitals did not do as well, on average, as for-profit general hospitals.  When the costs from all lines of business and the revenues from all payers  were considered, specialty hospitals tended to outperform general  hospitals.
subsections: section_title: Within Their Fields of Expertise, Specialty Hospitals Often Treated More Patients Than Many General Hospitals
paragraphs: Specialty hospitals in our HCUP sample were generally not small relative  to general hospitals when the comparison was based upon the number of  patients treated for specific conditions. For example, 1 cardiac hospital  treated nearly 4,000 cardiac patients in 2000. Among the 26 general  hospitals that also treated cardiac patients in the same urban area, the  median number treated was approximately 2,000. Each of the 7 cardiac  hospitals in our HCUP sample treated more patients than the median  general hospital’s cardiac practice in the specialty hospitals’ market areas.  A similar relationship to general hospitals existed among the HCUP  orthopedic and women’s hospitals. Six of the 8 orthopedic hospitals and 6  of the 7 women’s hospitals treated more patients than were treated in the  comparable departments of the median general hospitals in their markets.  In contrast, 2 of the 3 surgical hospitals performed fewer inpatient surgical  procedures relative to the general hospitals in their markets.
In some cases, a specialty hospital treated far more patients with certain  conditions than did any of the general hospitals in the same urban area.  For example, 1 orthopedic hospital in our HCUP sample treated  approximately 7,400 orthopedic patients in 2000. In contrast, the largest  number of orthopedic patients treated at any of the 73 general hospitals in  the same urban area was just over 3,000. In all, 4 of the 25 HCUP specialty  hospitals—1 cardiac, 2 orthopedic, and 1 women’s—had higher patient  volumes than did the comparable departments at all of the general  hospitals in their markets. These hospitals represent the extreme end of  the relative size spectrum. The median cardiac and orthopedic hospitals  treated somewhat more than twice the number of patients treated in the  comparable departments of the median general hospital in their markets.  The median women’s hospital was about 80 percent larger in patient  volume than the median comparable department at general hospitals in  the area.
Specialty hospitals’ market shares, measured as the percentage of  inpatient claims in an urban area, were much higher when only claims  within a particular specialty field were included instead of all inpatient  claims. (See fig. 8.) In markets that had from 5 to 26 general hospitals that  treated cardiac patients, cardiac hospitals had a median market share of 15  percent of the cardiac patients. The median market share was 8 percent  among women’s hospitals, in markets that contained from 7 to 86 general  hospitals, and 5 percent among orthopedic hospitals, in markets that  contained from 10 to 86 general hospitals. Surgical hospitals’ median  market share of 4 percent was the smallest among the four specialty  hospital types. However, there was wide variation in the market shares of  individual hospitals—especially among women’s hospitals. For example, 1  women’s hospital had a 2 percent market share while another had a 47  percent market share.
section_title: Financial Performance of Specialty Hospitals Tended to Equal or Exceed That of General Hospitals
paragraphs: Financially, specialty hospitals tended to perform about as well as general  hospitals did on their Medicare inpatient business in fiscal year 2001—the  most recent year for which this information is available. Medicare  inpatient margins—which are used to gauge a hospital’s financial  performance on Medicare inpatient business—averaged 9.4 percent at  specialty hospitals and 8.9 percent at general hospitals. (See table 6.)  Among for-profit hospitals—both specialty and general hospitals—average  Medicare inpatient margins were higher. However, for-profit general  hospitals had average Medicare inpatient margins (14.6 percent) that  exceeded those at for-profit specialty hospitals (12.4 percent).
When revenues and costs from all lines of business and all payers were  included, the average financial performance of specialty hospitals  exceeded that of general hospitals. Total facility margins—constructed  similarly to Medicare inpatient margins—averaged 6.4 percent among all  specialty hospitals and 3.1 percent among all general hospitals. Among  both specialty hospitals and general hospitals, the average total margin at  for-profit hospitals was higher than the total margin among all hospitals.
section_title: Comments from Organizations Representing Specialty Hospitals and Our Evaluation
paragraphs: We obtained comments from officials representing ASHA—a specialty  hospital association—and from officials representing the MedCath  Corporation and NSH—two major specialty hospital chains. The officials  generally agreed with the information in our report and offered their views  on reasons for key differences between specialty and general hospitals.  Their comments, summarized below, largely pertained to our findings  regarding hospital location, presence and utilization of emergency  departments, and hospitals’ financial performance. Unless otherwise  noted, the following comments reflect the positions of all three  organizations.
In response to our finding that, on average, the number of physicians per  capita and the number of hospital inpatient beds per capita are the same in  communities with and without specialty hospitals, MedCath officials said  that they have a national strategy in which they project communities’  health care needs several years into the future and use the results to help  them choose potential locations for new cardiac hospitals. MedCath  officials said that this explains why specialty hospitals tend to locate in  areas experiencing rapid population growth. An ASHA official said that,  among the association’s members, the decision to build a specialty  hospital begins with physicians in a community and their perception of the  community’s health care needs.
Specialty hospital representatives stressed that the existence and  utilization of an emergency department is primarily a function of the  mission of a particular hospital. They said that a specialty hospital might  not include an emergency department if the hospital’s intended role in a  community does not call for one. NSH officials noted that nonprofit  general hospitals receive tax advantages in return for providing certain  community services, including emergency care. MedCath officials said  that, because nonprofit hospitals are required to fulfill certain social  needs, our comparisons involving emergency departments and treatment  of Medicaid patients should have been made between for-profit specialty  hospitals and for-profit general hospitals. ASHA officials added that state  law may dictate whether a hospital has an emergency department.
MedCath officials noted that our results showed that, on average, specialty  hospitals’ margins are similar to for-profit general hospitals’ margins. They  said that this financial performance was the result of a business model that  emphasizes efficiency and cost control in the delivery of quality health  care.
Overall, MedCath officials said that our findings showed that specialty  hospitals should be no cause for concern. Specifically, the officials said  that there are relatively few specialty hospitals, specialty hospitals account  for a very small fraction of total Medicare inpatient hospital spending,  such hospitals are concentrated in a few states and in areas where there is  a need for such hospitals, and their business model leads to profits that are  similar to the profits earned by for-profit general hospitals.  Representatives from all three organizations, while generally agreeing with  the information in our report, emphasized the important role that specialty  hospitals play in efficiently providing quality health care.
We agree that, on a national level, specialty hospitals have a small  presence. However, in the communities in which they locate, specialty  hospitals may treat a relatively large share of patients who have specific  medical conditions or need specific medical procedures. For the share of  the market that those patients represent, specialty hospitals are often  among the larger competitors that general hospitals face. In addition, the  number of specialty hospitals is growing rapidly. In the next few months  or years, the number of specialty hospitals that we identified is expected  to increase by at least 25 percent.
The policy issue regarding emergency care may be one that is focused  more on access to such care and less on whether every specialty hospital  should have an emergency department. Although some specialty  hospitals—especially cardiac hospitals—provide at least a limited amount  of emergency care, individuals who need emergency care typically must  obtain treatment at general hospitals. Critics of specialty hospitals are  concerned that such facilities may erode the financial health of general  hospitals and impair their ability to provide emergency care and meet  other basic community needs, such as stand-by capacity to respond to  communitywide disasters. In this report, we did not attempt to determine  the financial effect that specialty hospitals may have on neighboring  general hospitals.
Finally, we previously reported that the 25 urban specialty hospitals that  we studied in six states tended to treat patients who were less severely ill  relative to patients treated at neighboring general hospitals. Because we  did not analyze the economic impact of such a pattern, we cannot  determine the extent to which the financial performance of specialty  hospitals may be due to patient mix, the efficient delivery of health care,  or other factors.
We are sending 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 staffs have any questions, please call me at (202) 512-7101 or  James Cosgrove at (202) 512-7029. Other contributors to this report  include Hannah Fein, Zachary Gaumer, and Ariel Hill.
section_title: Appendix I: Scope and Methodology
paragraphs: This appendix provides additional information on the key aspects of our  analysis. First, it lists the criteria we used to define specialty hospitals and  the process we followed to identify them. Second, it discusses the survey  used to collect a variety of information from the universe of specialty  hospitals. Third, it describes key data sources and methodological  approaches used in each subanalysis. Finally, it address issues related to  data reliability and limitations.
subsections: section_title: Specialty Hospital Definition and Identification
paragraphs: Although a standard definition for a specialty hospital does not exist, a  reasonable approach is to define specialty hospitals as those that  predominately treat certain diagnoses or perform certain procedures. For  this report, we classified a hospital as a specialty hospital if the data  indicated that two-thirds or more of its inpatient claims were in one or two major  diagnosis categories (MDC) or two-thirds or more of its inpatient claims were for surgical diagnosis- related groups (DRG).
Because our study focused on private, short-term acute care hospitals, we  eliminated from consideration hospitals that were government-owned and  those that tended to provide long-term care or otherwise had missions  very different from those of short-term, acute care general hospitals. Thus,  we excluded government-owned hospitals; hospitals for which the majority of inpatient claims were for MDCs that  related to rehabilitation, psychiatry, alcohol and drug treatment, children,  or newborns; and hospitals with fewer than 10 claims per bed per year.
Of the hospitals that met our criteria, 100 could be classified into four  specialization categories: cardiac, orthopedic, surgical, and women’s.Twenty-six specialty hospitals were also identified as under development  and scheduled to open in the next few months or years. An additional 6  hospitals specialized in a variety of other areas—such as eye or ear, nose,  and throat procedures—but were not included in this analysis. For this  report, we focused on the specialty hospitals in the four major categories  listed above.
We applied our criteria to inpatient discharge data from two different data  sources: the 2001 Medicare Provider Analysis Review (MedPAR) file and  the 2000 Healthcare Cost and Utilization Project (HCUP) state inpatient  data from six states. Medicare and HCUP data both have distinct  advantages and disadvantages. The MedPAR file contains patient  information from virtually all of the nation’s hospitals, but only for  Medicare patients. Patients covered by Medicare are predominately age 65  or older. Consequently, some conditions—such as those that affect women  of childbearing age—may be underrepresented, or not represented at all,  in the MedPAR file. Thus, it is likely that an identification based on the  MedPAR file undercount the number of hospitals that specialize in treating  such conditions.
In contrast to Medicare data, HCUP data provide information on all of a  hospital’s patients. However, HCUP data are available for hospitals in only  29 states, and each state’s data must be purchased separately. We obtained  HCUP data from the following six states: Arizona, California, New Jersey,  New York, North Carolina, and Texas. These states were selected because  Medicare data identified them as having potentially large concentrations of  specialty hospitals.
To identify specialty hospitals that opened too recently to be included in  the Medicare or HCUP data, we obtained information from the American  Surgical Hospital Association, the American Federation of Hospitals, and  two national specialty hospital chains: National Surgical Hospitals and  MedCath Corporation. These organizations also provided information on  the 26 specialty hospitals that are under development.
section_title: 2003 Specialty Hospital Survey
paragraphs: From January 2003 through March 2003, we conducted a survey of 100  cardiac, orthopedic, surgical, and women’s hospitals that we identified as  being operational. The survey gathered basic hospital address information  and posed questions pertaining to the types of services offered at each  hospital, hospital size, physician ownership, partnership structure, and the  extent of emergency department services. Eighty percent of the specialty  hospitals that received our survey responded.
section_title: Data Sources and Methodological Approach by Topic
subsections: section_title: Physician Ownership Information
paragraphs: Information pertaining to physician ownership of specialty hospitals was  drawn from hospital responses to our 2003 specialty hospital survey.  Among the questions related to physician ownership, hospital  representatives were asked about the number of physician owners, the  overall percentage of the hospital owned by physicians, the largest share  owned by a single physician, the overall number of admitting physicians,  and the largest combined percentage of the hospital owned by physicians  in a single revenue-sharing group practice.
section_title: Business Structures
paragraphs: Information pertaining to the business structure of each specialty hospital  was drawn from responses to our 2003 specialty hospital survey. Hospitals  were grouped into one of three categories-independent freestanding  hospitals, hospitals associated with a hospital chain, or hospitals  associated with a local general hospital—based on their responses to  questions regarding hospital affiliation.
section_title: Hospital Location
paragraphs: We identified state, county, and zip code location of existing specialty  hospitals and those under development through a four-part process. First,  we identified the name and identification number of each specialty  hospital by using the Centers for Medicare & Medicaid Service’s (CMS)  MedPAR file or the HCUP dataset. Second, we located these names and  identification numbers in CMS’s Medicare Provide of Services File (POS),  because it contains the most current location information available. If  these hospitals were not found in POS , we used the American Hospital  Association’s (AHA) 2003 Annual Survey for the same purpose. Third,  when specialty hospitals were not found in the CMS or AHA databases, we  located as much information as possible using the Internet or direct  telephone contact. Fourth, our specialty hospital survey (2003) provided  county location information and other missing address or location  information.
section_title: Certificate of Need Requirements
paragraphs: Data from the American Health Planning Association (AHPA) were used to  determine which states require hospitals to obtain state approval before  they may add beds or build new facilities. State regulations that require  prior approval for state health care capacity increases are commonly  referred to as certificate of need (CON) requirements. AHPA’s document,  “2002 Relative Scope and Review Thresholds of CON Regulated Services,”  listed 37 states that have one or more of the approximately 30 different  types of CON requirements. For the purposes of this report, we considered  a state to have CON requirements if it required prior approval for new  acute care beds.
section_title: Health Care System Resources
paragraphs: We used data from the Dartmouth Atlas of Health Care to determine the  number of available beds per capita and physicians per capita in a hospital  referral region (HRR). HRRs represent regional health care markets for  tertiary medical care. Each HRR contains at least one hospital that  performed major cardiovascular procedures or neurosurgery. We analyzed  the overall relationship between specialty hospital location and health  system resources by comparing the average number of beds and  physicians per 1,000 people in HRRs with and without specialty hospitals.
section_title: Provision of Emergency Care
paragraphs: We relied on several data sources to obtain information pertaining to the  provision of emergency care at specialty and general hospitals. To  determine whether a specialty hospital had an emergency department, we  primarily relied upon the hospital’s response to our specialty hospital  survey. When that information was missing, we used the information  contained in CMS’s POS file or contacted the hospital’s administrator. As a  result, our finding regarding the percentage of specialty hospitals with  emergency departments is based on data from all of the 100 specialty  hospitals that we identified. The information pertaining to the existence of  emergency departments at general hospitals was drawn from AHA’s 2003  Annual Survey of Hospitals. Emergency department utilization data for  specialty hospitals were obtained from hospital responses to the specialty  hospital survey, while utilization data for general hospitals were drawn  from our 2002 general hospital survey. We obtained information on  specialty hospitals’ staffing of emergency departments from our specialty  hospital survey. Comparable staffing information for general hospitals was  not readily available.
section_title: Payer Sources
paragraphs: To determine the mean percentage of Medicare and Medicaid patients at  specialty and general hospitals, we analyzed 2000 HCUP data from  Arizona, California, New Jersey, New York, North Carolina, and three of  five regions in Texas. Our analysis of HCUP data for these six states  identified 25 specialty hospitals and 396 general hospitals in 18 urban  areas. For each specialty hospital type, we first computed the percentage  of specialty hospital claims within that type’s field of specialization that  were paid by Medicaid. For example, we calculated the percentage of  cardiac hospitals’ cardiac claims that were paid by Medicaid. We then  computed the percentage of general hospital claims in the same field of  specialization that were paid by Medicaid. Only general hospitals located  in urban areas with a relevant specialty hospital were included. Continuing  the previous example, we calculated the percentage of cardiac claims paid  by Medicaid at general hospitals located in urban areas with a cardiac  hospital. We followed a similar process for computing the percentage of  Medicare claims at specialty and general hospitals.
section_title: Market Share
paragraphs: Using 2000 HCUP data, we computed a local inpatient market share for  each of the 25 urban specialty hospitals in our six HCUP states. The  number of inpatient claims at each specialty hospital was divided by the  total number of inpatient claims at all hospitals—both specialty and  general—in the same metropolitan statistical area (MSA) . We then  determined the median market share for specialty hospitals, by specialty  type. We followed a similar process to determine the local market shares  of specialty hospitals within their fields of specialization. For example, we  compared the number of cardiac claims at a cardiac hospital to the total  number of cardiac claims at all hospitals within the same MSA.
section_title: Hospital Margins
paragraphs: We used data from CMS’s 2001 Hospital Cost Report (HCR) to calculate  Medicare and total margins for specialty and general hospitals. Although  not yet complete, the 2001 HCR file includes information from 55 specialty  hospitals and approximately 84 percent (5,166) of the individual hospital  records contained in the 1999 HCR file. To calculate the profit margins of  specialty and general hospitals, we utilized a formula created by the  Medicare Payment Advisory Commission (MedPAC).
section_title: Data Reliability
paragraphs: We used a variety of data sources in our analysis; the three primary  sources were our 2003 specialty hospital survey, 2000 HCUP data for six  states, and CMS’s 2001 HCR file. In each case, we determined that the data  were sufficiently reliable to address the report’s objectives.
Overall, 80 percent of specialty hospitals responded to GAO’s 2003 survey,  although response rates for certain questions were sometimes lower. In  cases where question responses were unclear, we contacted the hospital  administrators to resolve any ambiguity. Because we did not  independently verify the information, the report identifies data from the  survey as self-reported. HCUP data are widely used for research purposes.  Although the HCUP data we used represent a subset of the available HCUP  data, the subset contains one-quarter of all of the specialty hospitals that  we identified nationwide. HCR data are routinely used by the MedPAC to  estimate hospital margins and recommend updates to Medicare’s hospital  payment rates. We followed the same procedures used by the MedPAC to  estimate hospital margins from these data. The 2001 file we used was 84  percent complete at the time of our analysis. We compared these data to  data from prior years and consulted with MedPAC experts to determine  that this degree of completeness would produce reliable margin estimates.