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. 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. 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.) 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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). 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.

Summary: 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. 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.