General hospitals face competition from a variety of sources, including the approximately 100 specialty hospitals in operation or under development in some markets in 2005. Despite the relatively small number of specialty hospitals, the issue of how general hospitals have responded to the competition from specialty hospitals has been a subject of debate. Federal agencies have broadly addressed how general hospitals’ competitive actions have been influenced by the presence of specialty hospitals; however, to date, the evidence has been largely anecdotal. Specialty hospitals represent a small share of the national health care market and the competition that general hospitals face from other general hospitals, ASCs, imaging centers, and other types of facilities. In 2005, we identified 66 existing specialty hospitals and an additional 46 that were under development. In contrast, there were an estimated 4,800 general hospitals, 4,100 Medicare certified ASCs, and 2,400 imaging centers. (See fig. 1.) Another methodology for assessing the relative magnitude of specialty hospitals is through Medicare inpatient spending. In prior work pertaining to specialty hospitals of various types and ownership structures, we found that specialty hospitals accounted for a low share of Medicare spending for inpatient services relative even to their low share of the hospital market. Specifically, in April 2003 we reported that specialty hospitals in existence accounted for about 2 percent of existing hospitals, but 1 percent of total Medicare inpatient spending. The overall competitive effect of specialty hospitals on general hospitals continues to be the subject of debate. Advocates of specialty hospitals contend that the focused mission and dedicated resources of specialty hospitals enable them to offer reduced treatment costs, improved care quality, and enhanced amenities for patients compared with what general hospitals are able to provide. Moreover, some advocates maintain that competition from specialty hospitals can prompt general hospitals to implement efficiency, quality, and amenity improvements, thus favorably affecting the overall health care delivery system. However, critics are concerned that general hospitals may be adversely affected by specialty hospitals. In 2003, using a broader definition of specialty hospitals that included facilities with and without physician owners or investors, we reported that specialty hospitals tended to treat less-severely-ill patients, served proportionately fewer Medicaid patients, and were less likely to have emergency rooms. We also reported that physicians were owners or investors in the majority of specialty hospitals we identified. These findings were consistent with critics’ concerns that specialty hospitals tend to concentrate on the most profitable procedures and serve patients with the fewest complications. According to such critics, specialty hospitals draw financial resources away from general hospitals and leave those hospitals with the responsibility of caring for the sickest patients and fulfilling their broad missions to provide charity care, emergency services, and standby capacity to respond to communitywide disasters. Critics are also concerned that physician ownership of specialty hospitals creates financial incentives that could inappropriately affect physicians’ clinical behavior and their decisions to refer patients to specific facilities. To date, there have been only anecdotal reports of how general hospitals have competitively responded to specialty hospitals. Two reports—one jointly issued by the Federal Trade Commission (FTC) and the Department of Justice (DOJ), and another issued by MedPAC—discussed general hospitals’ responses to specialty hospitals. The FTC/DOJ report was based primarily on written submissions and testimony provided by health care experts at the agencies’ 2002 workshops and 2003 hearings. The information contained in MedPAC’s report was gathered through site visits and interviews with representatives of specialty and general hospitals in selected markets where specialty hospitals existed and interviews with others in the health care community. Collectively, the reports identified several actions general hospitals took in response to the entry, or the anticipation of entry, of specialty hospitals into the marketplace, including: improving operating room scheduling, extending service hours, building a single-specialty wing to discourage the establishment of competing facilities, partnering with physicians on their medical staff to open a specialty hospital, signing exclusive contracts with private payers to preclude specialty hospitals or the physicians who invest in them from contracting with those payers, and revoking the admitting privileges of physicians involved with a competing specialty hospital. Nearly all general hospitals responding to our survey reported making operational and clinical service changes to remain competitive in markets they viewed as increasingly competitive; however, there was little evidence to suggest that the absence or presence of specialty hospitals had much of an effect on the number or types of changes general hospitals reported implementing between 2000 and 2005. General hospitals responding to our survey reported facing increasing competition both from other general hospitals and from limited-service facilities—a category that includes specialty hospitals, ambulatory surgical centers, and imaging centers. The general hospitals that responded to our survey reported implementing a variety of operational and clinical service changes. However, we found little evidence associating specific changes made by general hospitals with the presence or absence of a nearby specialty hospital. That is, with few exceptions, general hospitals did not report implementing a substantially different number of changes or different types of changes just because there was a specialty hospital in their market. Nearly all general hospitals that responded to our survey described their market environments as ranging from somewhat competitive to extremely competitive. Only one hospital described its market as not competitive. Urban general hospitals were much more likely than rural general hospitals to describe their market as either very or extremely competitive. (See table 1.) A larger percentage of general hospitals that responded to our survey— both urban and rural—reported increased competition from limited- service facilities relative to those that reported increased competition from other general hospitals. More than 90 percent of urban general hospitals indicated that competition from limited-service facilities had either increased or greatly increased in their markets, while 75 percent of urban general hospitals indicated that competition from other general hospitals had either increased or greatly increased. (See table 2.) Similarly, 74 percent of rural general hospitals indicated that competition from limited-service facilities had either increased or greatly increased, while 53 percent of rural general hospitals indicated that competition from other general hospitals had either increased or greatly increased. (See table 3.) Among the 72 potential operational changes survey respondents could have indicated that they made and the 34 potential clinical services respondents could have indicated that they added, expanded, reduced, or eliminated on our survey, general hospitals reported implementing an average of 30 changes (22 operational changes and 8 clinical service changes) from 2000 through 2005. Overall, general hospitals that responded to our survey had reported implementing between 3 and 66 separate changes. Overall, 100 percent of general hospitals we surveyed reported implementing at least 1 operational change. There were 18 specific operational changes that at least half of the general hospitals that responded to our survey reported implementing. (See table 4.) Four of the 6 most commonly reported operational changes involved increasing wages and benefits for nurses and offering more flexible working schedules in an effort to improve nursing staff retention or recruitment. In addition, 4 of the 18 most commonly reported operational changes related to physicians. These changes involved increasing the physicians’ role in hospital governance, increasing physician income guarantees, hiring new physicians, and beginning a hospitalist program. Nearly all general hospitals that responded to our survey reported implementing clinical service changes. Overall, 97 percent of the hospitals added or expanded at least one type of clinical service. The majority of hospitals added or expanded imaging/radiology services (73 percent) and cardiology services (57 percent). Other types of clinical services were added or expanded by a minority of hospitals, such as outpatient surgical services (37 percent) and orthopedic services (31 percent). Nearly one- third of hospitals (33 percent) reduced or eliminated at least one type of clinical service. The most commonly reported clinical services to be reduced or eliminated were inpatient/outpatient psychiatric services (7 percent). Overall, the operational and clinical service changes reported by general hospitals that responded to our survey appeared largely unaffected by the presence or absence of specialty hospitals in their markets. On average, rural general hospitals with a specialty hospital in their regional market made a few more operational service changes than rural general hospitals in markets without specialty hospitals, but made a similar number of clinical service changes. More specifically, rural general hospitals in markets with specialty hospitals made an average of 21 operational changes, 7 clinical service additions or expansions, and 1 clinical service reduction or elimination. Rural general hospitals in markets without specialty hospitals made an average of 18 operational changes, 6 clinical service additions or expansions, and no clinical service reductions or eliminations. (See table 5.) Urban general hospitals in regional and local markets with specialty hospitals made similar numbers of operational and clinical service changes as general hospitals in markets without specialty hospitals. For most of the 72 potential operational changes and 34 potential clinical service changes listed on our survey, the percentage of general hospitals that had reported implementing each change did not systematically vary with the presence or absence of a specialty hospital in the market. For example, 12 percent of urban general hospitals in regional markets with specialty hospitals and 13 percent of urban general hospitals in regional markets without specialty hospitals opened a new hospital wing specializing in one type of medicine between 2000 and 2005. However, for a few of the potential changes listed on our survey, there was a relationship between the percentage of general hospitals that had reported implementing the change and the presence of a specialty hospital in the market. For example, there were 6 operational changes and 3 clinical service changes (including clinical services that were added, expanded, reduced, or eliminated) for which the percentage of rural general hospitals implementing the change significantly differed depending on whether or not a specialty hospital existed in the regional market. (See table 6.) The greatest number of differences (11 operational change differences and 5 clinical service change differences) was observed between the group of urban general hospitals in local markets with specialty hospitals and the group of urban general hospitals where there were no specialty hospitals in either the local or regional markets. Rural general hospitals in markets with specialty hospitals were more likely to have reported implementing six operational changes and two clinical service changes relative to rural general hospitals in markets without specialty hospitals. (See table 7.) For only one clinical service— adding or expanding sleep laboratory services—rural general hospitals in markets with specialty hospitals were less likely to have reported implementing a clinical service change. If there was a specialty hospital in its regional market, an urban general hospital was more likely to have reported making three of the seven operational changes that significantly differed between general hospitals in markets with and without specialty hospitals. Urban hospitals in regional markets with specialty hospitals were less likely to have made four operational changes and one clinical service change. (See table 8.) Urban hospitals in local markets with specialty hospitals were more likely to have made six operational changes and three clinical service changes and less likely to have made five operational changes and two clinical service changes relative to general hospitals in regional markets without specialty hospitals. (See table 9.) Overall, the general hospitals that responded to our survey reported making a variety of operational and clinical service changes to better compete in their markets. Some advocates of specialty hospitals have stated that the presence of one or more of these facilities in a market may prompt general hospitals to improve the quality of the care they deliver or increase the efficiency with which they deliver their services. However, our survey results found relatively few differences, in terms of operational and clinical service changes reported, between general hospitals in markets with and without specialty hospitals. That is, on average, general hospitals in markets with specialty hospitals did not make a substantially different number of changes or different types of changes relative to general hospitals in markets without specialty hospitals. These results held for both rural and urban general hospitals. Our survey results did show that general hospitals reported facing a competitive market for their services. However, general hospitals face competition from many types of facilities, not just specialty hospitals. Competing facilities, including other general hospitals in the market, ASCs, and imaging centers, far outnumber the relatively few specialty hospitals in existence or under development. The predominance of other types of competitors may help explain the lack of a uniquely competitive response of the general hospitals in our study to the existence of specialty hospitals. We obtained comments from CMS and representatives of AHA—a group representing hospitals, health care systems, networks, and other providers of care—and FAH—a group representing investor-owned and investor- managed hospitals and health systems. Their comments are summarized below. In written comments on a draft of this report, CMS stated that our study, by providing quantitative data on the market effect of specialty hospitals, was extremely helpful and that CMS would use the information as the agency developed its DRA-mandated report on physician investment in specialty hospitals. (CMS’s comments are reprinted in app. IV.) CMS also provided technical comments, which we incorporated where appropriate. AHA and FAH stated that their concerns regarding specialty hospitals were specific to those facilities that have physician owners or investors. Both organizations suggested text changes to emphasize that our report is focused on the effect of these types of specialty hospitals on general hospitals, which we incorporated where appropriate. In addition, representatives of AHA stated that general hospitals may make operational and clinical service changes for a variety of reasons, regardless of the degree of competition in their market. While we recognize that general hospitals may make changes for a variety of reasons, that fact does not detract from our finding that general hospitals largely did not make a different number of changes, or different types of changes, in response to competition from specialty hospitals. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of this report until 30 days after its date. At that time, we will send copies of this report to appropriate congressional committees and other interested parties. We will also make copies available to others upon request. This report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions, please contact me at (202) 512-7101 or steinwalda@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in app. V. This appendix provides information on the key aspects of our analysis of the competitive response of general hospitals to specialty hospitals. First, it describes the sample selection process. Second, it discusses the survey used to collect data from a sample of general hospitals and the process of fielding the survey. Third, it explains the differences between local and regional markets. Fourth, it describes the methodology used to analyze survey data. Finally, it addresses issues related to data reliability and limitations. We selected two groups of general hospitals for this analysis—the sample and a comparison sample. The sample consisted of general hospitals in hospital referral regions (HRR)—which we refer to in this report as regional health care markets—with a specialty hospital that opened since the start of 1998. The comparison sample consisted of general hospitals in regional health care markets without any specialty hospitals. In constructing the comparison sample, we also excluded regional health care markets with specialty hospitals that did not have physician owners or investors. Regional markets capable of meeting the criteria for the sample were identified by compiling a current list of specialty hospitals that opened from 1998 through 2005. We excluded markets in states where certificate of need (CON) laws existed, because specialty hospitals are located primarily in non-CON states. We identified 32 unique regional markets containing 53 specialty hospitals that met these criteria. (See table 10.) We selected markets for the comparison sample on the basis of their similarity to the markets used for the sample, except for the presence of a specialty hospital. We excluded markets from the comparison sample if they contained a specialty hospital, regardless of ownership or date of opening. We used data from DAP pertaining to market characteristics to ensure that markets included in the comparison sample were similar to markets in the sample. We excluded markets from the comparison sample if any one of their values for seven market characteristics—overall population, Medicare population, average number of inpatient beds, population to beds ratio, physician specialists to total physicians ratio, average number of surgical discharges, and the Herfindahl-Hirschman Index—fell outside the range of values for markets in the sample. The application of these criteria resulted in a sample that consisted of 78 unique regional markets. The Centers for Medicare & Medicaid Services’ (CMS) 2005 Provider of Services (POS) file was used to identify general hospitals located in the markets selected for the sample and the comparison sample, and these hospitals were subject to several exclusions. General hospitals that were major teaching hospitals or had fewer than five cardiac, orthopedic, or surgical discharges in 2004, were excluded from both samples because the presence of a specialty hospital may not affect these hospitals in the same manner it would affect other types of general hospitals. In addition, we considered urban general hospitals to be in a regional market with a specialty hospital only if it was also less than 90 miles away from a specialty hospital. We considered rural general hospitals to be in a regional market with a specialty hospital only if it was also less than 120 miles away from a specialty hospital. Information on these hospital characteristics were obtained from CMS’s 2005 POS file, 2002/2003 Cost Report file, and 2004 Health Care Information System (HCIS) file, and Census 2000 US Gazetteer files. The sample included 326 general hospitals and the comparison sample included 294 general hospitals. (See table 11.) The survey questionnaire had two sections. (See app. II.) First, it obtained respondents’ perceptions of competition in their health care markets. Second, it asked respondents to provide information on the operational and clinical service changes that the respondents’ hospitals had made from 2000 through 2005 to remain competitive in their markets. The questionnaire included 72 potential operational changes and 34 potential clinical service changes. The specific operational and clinical service change questions included in the survey were identified through a review of articles in academic journals, industry reports, periodicals, a joint study by the Federal Trade Commission and the Department of Justice, and studies by CMS and the Medicare Payment Advisory Commission (MedPAC). We tested our survey questionnaire with external experts, including one MedPAC analyst and seven hospital administrators from four general hospitals and one hospital system. In August and September of 2005, survey questionnaires were distributed to 603 of the 620 hospitals in our sample—315 general hospitals in the sample and 288 general hospitals in the comparison sample. Sixty-seven percent of general hospitals that received our survey questionnaire responded—401 general hospitals. Seventy percent of the sample and 63 percent of the comparison sample responded to our survey questionnaire. We created a subsample to analyze the competive response of general hospitals to specialty hospitals that were in close proximity. The subsample consisted of general hospitals in hospital service areas (HSA)— which we refer to in this report as local health care markets—with a specialty hospital that opened from 1998 through 2005. Groups of local health care markets form a regional health care market. (See fig. 2.) On average, general hospitals in local health care markets with a specialty hospital were in closer proximity to a specialty hospital than were general hospitals in regional health care markets with a specialty hospital. Among the 315 general hospitals in the sample, 152 resided in the same local health care market as a specialty hospital. Sixty-four percent of general hospitals in the local health care market subsample responded to our survey. From the survey responses, we determined the percentage of general hospitals that reported making each of the potential operational and clinical changes and then compared those percentages for three paired sets of general hospitals. First, we compared rural general hospitals in regional markets with specialty hospitals to rural general hospitals in regional markets without specialty hospitals. (See fig. 3.) Second, we compared urban general hospitals in regional markets with specialty hospitals to urban general hospitals in regional markets without specialty hospitals. Third, we compared urban general hospitals that had a specialty hospital in their local markets to urban general hospitals that did not have a specialty hospital in either their local or regional markets. The third comparison was conducted to explore the possibility that specialty hospitals are more likely to elicit a competitive response from general hospitals that are closest to them. As a part of each comparison we conducted a statistical test, the Pearson chi-square, in order to test the statistical significance of the percentages for each of the three paired sets of general hospitals. This test enabled us to determine if differences between the paired sets of general hospitals were statistically significant. Among the general hospitals that responded to our survey, the comparison of rural general hospitals in regional health care markets included 71 rural general hospitals in regional markets with specialty hospitals and 79 rural general hospitals in regional markets without specialty hospitals. The comparison of urban general hospitals in regional health care markets included 148 urban general hospitals in regional markets with specialty hospitals and 103 urban general hospitals in regional markets without specialty hospitals. The comparison of urban general hospitals in local health care markets with urban general hospitals in regional markets included 90 urban general hospitals in markets with specialty hospitals and 103 urban general hospitals in regional markets without specialty hospitals. Because only 8 rural general hospitals in local markets responded to the survey, we did not conduct a comparison of rural general hospitals in local markets to rural general hospitals in regional markets. We used the survey data we collected for this work, three CMS datasets, and four datasets from DAP to produce the results of this report. In each case, we determined that the data were sufficiently reliable to address the reporting objective. Overall, 67 percent of general hospitals we contacted responded to our 2005 survey, and few respondents failed to complete the questionnaire in full. We identified incomplete and inconsistent survey responses within individual surveys and placed follow-up calls to respondents to complete or verify their responses. We conducted an analysis to identify outliers who made extremely high numbers of service changes. We manually verified 10 percent of all survey responses contained in our aggregated electronic data files, in order to ensure that survey response data were accurately transferred to electronic files for analytical purposes. We determined the three CMS datasets—2002/2003 Cost Report File, first quarter 2005 POS file, and the 2004 HCIS File—and four DAP datasets— 2003 Zip Code Crosswalk File, 1999 Chapter 2 Table File, 2001 selected surgical discharge rates by HRR, and 1999 physician workforce data— were sufficiently reliable for our purposes. The CMS datasets were used to gather descriptive information for hospitals in our sample, to determine general hospital teaching status, and to tie discharge data to individual hospitals. The DAP datasets were used to link the general hospitals in our sample to their corresponding market characteristics. These CMS and DAP files are widely used for similar research purposes. We identified two potential limitations of our analysis. First, because independent information to verify survey responses was not available, all analyses in this report are based on data that are self-reported and potentially limited by the respondent’s ability to report the operational or clinical service changes implemented from 2000 through 2005 for competitive reasons. Second, in response to the threat of future competition, it is possible that general hospitals made changes to their facilities prior to 2000 or that changes made by some general hospitals in anticipation of the new specialty hospitals successfully deterred the entry of that hospital, which our survey did not capture. Our survey listed 72 potential operational changes and 34 potential clinical service changes that a respondent hospital could have indicated that they had implemented from 2000 through 2005. Within the survey, the potential operational changes were organized into nine separate subject-oriented categories. For each of the clinical service changes, respondents were asked to indicate whether they had added, expanded, eliminated, or decreased the service. For analytical purposes, we grouped together “added” and “expanded” clinical service change responses. Also, we grouped together “eliminated” and “decreased” clinical service change responses. When stratified by urban and rural location there were few differences between general hospitals in markets with and without specialty hospitals, in terms of the average number of changes they reported implementing in each category of operational and clinical service change from 2000 through 2005. (See table 12.) Other contributors to this report include James Cosgrove, Assistant Director; Jennie Apter; Zachary Gaumer; Gregory Giusto; Kevin Milne; and Dae Park. Specialty Hospitals: Information on Potential New Facilities. GAO-05- 647R. Washington, D.C.: May 19, 2005. Specialty Hospitals: Geographic Location, Services Provided, and Financial Performance. GAO-04-167. Washington, D.C.: October 22, 2003. Specialty Hospitals: Information on National Market Share, Physician Ownership, and Patients Served. GAO-03-683R. Washington, D.C.: April 18, 2003.

Summary: There has been much debate about specialty hospitals--short-term acute care hospitals with physician owners or investors that primarily treat patients who have specific medical conditions or need surgical procedures--and the competitive effects they may have on general hospitals. Advocates of specialty hospitals contend that competition from these physician-owned facilities can prompt general hospitals to implement efficiency, quality, and amenity improvements, thus favorably affecting the overall health care delivery system. Critics of specialty hospitals are concerned that general hospitals may respond to such competition by making changes that do not necessarily increase efficiency or benefit patients or communities, for example, by adding services already available in the community. The appropriateness of physicians' financial interests in specialty hospitals has also been questioned. GAO was asked to provide information on the competitive response of general hospitals to specialty hospitals. GAO surveyed approximately 600 general hospitals in markets with and without specialty hospitals to provide information on the extent to which these two groups of general hospitals reported implementing operational and clinical service changes to remain competitive. GAO received responses from 401 general hospitals. Nearly all general hospitals responding to GAO's survey reported making operational and clinical service changes to remain competitive in what they viewed as increasingly competitive healthcare markets; however, there was little evidence to suggest that general hospitals made substantially more or fewer changes or different types of changes if some of their competition came from a specialty hospital. While the majority of survey respondents indicated that competition from other general hospitals had increased, a larger proportion of respondents--91 percent of urban general hospitals and 74 percent of rural general hospitals--reported increases in competition from limited service facilities, a category that includes approximately 100 specialty hospitals across the nation and thousands of ambulatory surgical centers and imaging centers. To enhance their ability to compete, general hospitals reported making an average of 22 operational changes, such as introducing a formal process for evaluating efforts to improve quality and reduce costs, and 8 clinical service changes, such as adding or expanding cardiology services, from 2000 through 2005. Although specialty hospital advocates have hypothesized that the entrance of a specialty hospital into a market encourages the area's existing general hospitals to adopt changes that make them more efficient and better able to compete, the survey responses largely did not support this view. There were no substantial differences in the average number of operational and clinical service changes made by general hospitals in markets with and without specialty hospitals and, for the vast majority of the potential changes included on GAO's survey, there was no statistical difference between the two groups of hospitals in terms of the specific changes they reported implementing. GAO received comments on a draft of this report from the Centers for Medicare & Medicaid Services (CMS). In its comments, CMS stated that GAO's study, by providing quantitative data on the market effect of specialty hospitals, was extremely helpful.