oversight

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

Published by the Government Accountability Office on 2003-10-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO            Report to Congressional Requesters




October 2003
               SPECIALTY 

               HOSPITALS 


               Geographic Location,
               Services Provided,
               and Financial
               Performance




GAO-04-167 

                                                October 2003


                                                SPECIALTY HOSPITALS

                                                Geographic Location, Services Provided,
Highlights of GAO-04-167, a report to the       and Financial Performance
Honorable Bill Thomas, Chairman,
Committee on Ways and Means, House of
Representatives, and the Honorable Jerry
Kleczka, House of Representatives




The recent growth in specialty                  The 100 existing specialty hospitals identified by GAO—hospitals that focus
hospitals that are largely for-profit           on cardiac, orthopedic, or women’s medicine or on surgical procedures—are
and owned, in part, by physicians,              geographically concentrated in areas where state policy facilitates hospital
has been controversial.                         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
Advocates of these hospitals
contend that the focused mission
                                                additional 26 specialty hospitals were under development in 2003 and will
and dedicated resources of                      tend to reinforce the existing pattern of geographic concentration. Specialty
specialty hospitals both improve                hospitals are much more likely to be found in states where hospitals are
quality and reduce costs. Critics               permitted to add beds or build new facilities without first obtaining state
contend that specialty hospitals                approval for such health care capacity increases.
siphon off the most profitable
procedures and patient cases, thus              Relative to general hospitals, specialty hospitals, as a group, were much less
eroding the financial health of                 likely to have emergency departments, treated smaller percentages of
neighboring general hospitals and               Medicaid patients, and derived a smaller share of their revenues from
impairing their ability to provide              inpatient services. For example, 45 percent of specialty hospitals, but 92
emergency care and other essential              percent of general hospitals, had emergency departments. There were,
community services. Critics also
contend that physician ownership
                                                however, important differences among the four specialty hospital types in
of specialty hospitals creates                  these and other service indicators.
financial incentives that may
inappropriately affect physicians’              Although general hospitals typically have more beds than specialty hospitals,
clinical and referral behavior. In              the focused mission of specialty hospitals often resulted in their treating
April 2003, GAO reported on                     more patients in their given fields of specialization. Financially, specialty
certain aspects of specialty                    hospitals tended to perform about as well as general hospitals did on their
hospitals, including the extent of              Medicare inpatient business. However, specialty hospitals tended to
physician ownership and the                     outperform general hospitals when the costs from all lines of business and
relative severity of patients treated           the revenues from all payers were considered.
(GAO-03-683R).

For this report, GAO was asked to
                                                Officials from three specialty hospital organizations commented on a draft of
examine (1) state policies and local            this report. They generally agreed with the report’s information and
conditions associated with the                  commented on key differences between specialty and general hospitals.
location of specialty hospitals,
(2) how specialty hospitals differ              Figure: Specialty Hospitals by State, June 2003
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.



www.gao.gov/cgi-bin/getrpt?GAO-04-167.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact A. Bruce
Steinwald at (202) 512-7101.
Contents 



Letter                                                                                    1
             Results in Brief                                                             3
             Background                                                                   6
             Specialty Hospitals Clustered in Areas Where State Policy and
               Local Demographic Conditions Favor Growth                                11
             The Four Specialty Hospital Types Differed from General Hospitals
               in Size and Scope but Also Differed from One Another                     17
             Specialty Hospitals Rivaled General Hospitals in Certain Market
               Share Measures and Financial Performance                                 23
             Comments from Organizations Representing Specialty Hospitals
               and Our Evaluation                                                       26

Appendix I   Scope and Methodology                                                      29
             Specialty Hospital Definition and Identification                           29
             2003 Specialty Hospital Survey                                             31
             Data Sources and Methodological Approach by Topic                          31


Tables
             Table 1: Percentage of For-profit and Nonprofit Hospitals, 2003              8
             Table 2: Medicare Inpatient Spending at Specialty and General 

                      Hospitals, by Hospital Type, Fiscal Year 2001
                    11
             Table 3: Percentage of Hospitals and Population, by State CON 

                      Requirement Status, June 2003                                     16
             Table 4: Emergency Department Utilization at Specialty and
                      General Hospitals                                                 19
             Table 5: Physician Staffing in Emergency Departments at Specialty
                      Hospitals, 2003                                                   20
             Table 6: Medicare Inpatient and Total Facility Margins at Specialty
                      and General Hospitals, Fiscal Year 2001                           26


Figures
             Figure 1: Median Percentage of Admitting Physicians with
                      Ownership in Specialty Hospitals, by Specialty Hospital
                      Type, 2003                                                        10
             Figure 2: Specialty Hospitals by State, June 2003                          12
             Figure 3: Specialty Hospitals under Development by State, June
                      2003                                                              14




             Page i                                          GAO-04-167 Specialty Hospitals
Figure 4: Percentage of Specialty and General Hospitals with 

         Emergency Departments, 2003                                      18

Figure 5: Percentage of Patients Covered by Medicaid at Specialty 

         and Area General Hospitals for Services in the Same Field 

         of Specialization, 2000                                          21

Figure 6: Percentage of Patients Covered by Medicare at Specialty 

         and General Hospitals for Services in the Same Field of 

         Specialization, 2000                                             22

Figure 7: Average Percentage of Inpatient and Outpatient Revenues 

         at Specialty and General Hospitals, 2003                         23

Figure 8: Median Percentage of Local Market Share, 2000                   25





Page ii                                        GAO-04-167 Specialty Hospitals
Abbreviations

AHA               American Hospital Association 

AHPA              American Health Planning Association 

ASHA              American Surgical Hospital Association 

CMS               Centers for Medicare & Medicaid Services 

CON               certificate of need

DRG               diagnosis-related group 

HCR               hospital cost report 

HCUP              Healthcare Cost and Utilization Project

HRR               hospital referral region 

MDC               major diagnosis category

MedPAC            Medicare Payment Advisory Commission 

MedPAR            Medicare Provider Analysis and Review 

MSA               metropolitan statistical area 

NSH               National Surgical Hospitals 

OB/GYN            obstetric and gynecological 

POS               Provider of Services File





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Page iii                                                 GAO-04-167 Specialty Hospitals
United States General Accounting Office
Washington, DC 20548




                                   October 22, 2003 


                                   The Honorable Bill Thomas 

                                   Chairman 

                                   Committee on Ways and Means 

                                   House of Representatives 


                                   The Honorable Jerry Kleczka 

                                   House of Representatives 


                                   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.1 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.





                                   1
                                    For the purposes of this report, general hospitals refer to those that are acute care, short-
                                   term, and nongovernmental.



                                   Page 1                                                       GAO-04-167 Specialty Hospitals
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
20032 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.3 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.




2
 U.S. General Accounting Office, Specialty Hospitals: Information on National Market
Share, Physician Ownership, and Patients Served, GAO-03-683R (Washington, D.C.:
Apr. 18, 2003).
3
 Thus, we excluded hospitals that specialized in providing rehabilitation or in treating
mental disorders, alcohol or drug problems, respiratory conditions, or newborns and
children.




Page 2                                                      GAO-04-167 Specialty Hospitals
                     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.4
                     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).5 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.


                     Hospitals that specialize in treating cardiac, orthopedic, or women’s
Results in Brief 	   conditions or in performing surgery tended to be concentrated in certain
                     geographic areas where state policy or local demographic conditions were
                     favorable to hospital growth. Although 28 states had at least one specialty
                     hospital, approximately two-thirds of the 100 specialty hospitals that we
                     identified were located in seven states: Arizona, California, Kansas,
                     Louisiana, Oklahoma, South Dakota, and Texas. The specialty hospitals



                     4
                      HCUP is a federal-state-industry partnership sponsored by the Agency for Healthcare
                     Research and Quality. We used HCUP’s state inpatient databases from six states to include
                     all hospitals in Arizona, California, New Jersey, New York, and North Carolina and from
                     hospitals located in three regions in Texas.
                     5
                       Eight existing specialty hospitals were not included in our survey either because they were
                     not identified as specialty hospitals or because they were not identified as being among the
                     type of specialty hospitals under consideration until after April 2003. However, we did
                     contact these eight hospitals and the specialty hospitals that did not respond to our survey
                     to obtain certain information, such as whether they had an emergency department.




                     Page 3                                                     GAO-04-167 Specialty Hospitals
that are planned to open over the next few months or years will reinforce
this pattern of concentration. Approximately 60 percent of the 26 specialty
hospitals under development that we identified as of June 2003 were
located in California, Louisiana, and Texas. Of the 10 states that had one
or more specialty hospitals under development, 9 already had at least 1
existing specialty hospital. All of the specialty hospitals under
development, and 96 percent of those that opened in 1990 or later, are
located in states where hospitals may add beds or build new facilities
without first obtaining state approval for the hospital bed capacity
increase.6 Counties with populations that grew the fastest from 1990
through 2000 were somewhat more likely than slower growing counties to
have had a specialty hospital open since 1990. However, 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, 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. Seventy-
two percent of the cardiac hospitals, 50 percent of the women’s hospitals,
39 percent of the surgical hospitals, and 33 percent of the orthopedic
hospitals reported having emergency departments. In contrast, 92 percent
of general hospitals had emergency departments. Among specialty hospital
types, there were substantial emergency department differences in terms
of numbers of patients served, variety of conditions treated, and physician
staffing. For example, of the hospitals that responded to our survey
question on emergency department staffing, all of the cardiac hospitals—
but only about one-third of the orthopedic and surgical hospitals—
reported having a physician in the emergency department around the
clock. Compared to general hospitals in the same urban areas, specialty
hospitals in our HCUP sample tended to treat a lower percentage of
Medicaid patients among all patients with the same types of conditions.
For example, Medicaid patients constituted 3 percent of the cardiac
patients at cardiac hospitals, but 6 percent of the cardiac patients at area
general hospitals. The results were more mixed for Medicare patients.
Cardiac hospitals in our HCUP sample treated a higher percentage of
Medicare patients relative to area general hospitals, while the percentage


6
 About half of all states did not have such regulations.




Page 4                                                     GAO-04-167 Specialty Hospitals
of Medicare patients at other specialty hospital types was lower or about
the same relative to area general hospitals. Differences also appeared in
the mix of inpatient and outpatient services. Cardiac and women’s
hospitals derived the majority of their revenues from inpatient services,
while orthopedic and surgical hospitals derived the majority of their
revenues from outpatient services. Overall, inpatient services accounted
for about 46 percent of revenues at specialty hospitals and about 57
percent of revenues at general hospitals.

In many cases, specialty hospitals in our HCUP sample treated more
patients than the comparable departments at many area general hospitals.
For example, one cardiac hospital treated 4,000 cardiac patients in 2000,
approximately double the median number of cardiac patients treated at
the 26 general hospitals in the same urban area. Each of the other 6
cardiac hospitals also treated more cardiac patients than were treated at
the median general hospital in its area. The vast majority of orthopedic
and women’s hospitals in the HCUP sample were also larger than at least
half of the relevant general hospitals’ departments in the same urban
areas. However, two of the three surgical hospitals in our HCUP sample
treated relatively few cases. Although there was substantial variation in
the market share of individual specialty hospitals, the median cardiac
hospital was responsible for 15 percent of the cardiac cases treated in its
urban area. Orthopedic, surgical, and women’s hospitals had median
market shares that ranged from 4 percent (surgical hospitals) to 8 percent
(women’s hospitals). The financial performance of specialty hospitals
tended to equal or exceed that of general hospitals in fiscal year 2001. The
55 specialty hospitals with available financial data tended to perform
better than general hospitals when revenues and costs from all lines of
business and all payers were included. When the focus was limited to
Medicare inpatient business only, specialty hospitals appeared to perform
about as well as general hospitals.

We obtained comments from officials representing the American Surgical
Hospital Association (ASHA)—a specialty hospital association—and from
officials representing the MedCath Corporation and National Surgical
Hospitals (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 largely pertained to our findings regarding hospital
location, presence and utilization of emergency departments, and
hospitals’ financial performance.




Page 5                                           GAO-04-167 Specialty Hospitals
                             Specialty hospitals have become a subject of debate among health care
Background                   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.7


Physician Self-Referral      Much of the concern about specialty hospitals centers on physician
Law and Hospital Payment     ownership issues. Federal law generally prohibits physicians from
Rules Provide Context for    referring Medicare patients for specific health care services to facilities in
                             which they (or their immediate family members) have financial interests.8
Issues Regarding Specialty   This prohibition, a key component of the Medicare self-referral or Stark
Hospitals                    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.9

                             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.10 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



                             7
                              GAO-03-683R.
                             8
                              42 U.S.C. § 1395nn(a)(1)(A) (2000).
                             9
                              U.S. General Accounting Office, Medicare: Referrals to Physician-Owned Imaging
                             Facilities Warrant HCFA’s Scrutiny, GAO/HEHS-95-2 (Washington, D.C.: Oct. 20, 1994).
                             Jean Mitchell and Elton Scott, “Physician Ownership of Physical Therapy Services,”
                             Journal of the American Medical Association, vol. 268, issue 15 (Oct. 21, 1992).
                             10
                                  42 U.S.C. § 1395nn(d)(3) (2000).




                             Page 6                                                 GAO-04-167 Specialty Hospitals
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.11 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



11
   An “outlier” policy exists to make additional payments to hospitals when their costs for a
particular patient are extraordinarily high compared with the DRG rate for that patient’s
diagnosis group.




Page 7                                                      GAO-04-167 Specialty Hospitals
                           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.


Specialty Hospital Types   For-profit status is a salient characteristic of specialty hospitals we
Vary in Ownership          identified. More than 90 percent of the specialty hospitals that have
Arrangements and           opened since 1990 were for-profit. Overall, 74 percent of specialty
                           hospitals are for-profit, as compared to about 20 percent of all general
Medicare Spending 	        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.

                           Table 1: Percentage of For-profit and Nonprofit Hospitals, 2003

                                                                                           Specialty hospitals
                                                       Specialty hospitals                  opened 1990-2003     General hospitals
                            For-profit                                       74.0                        92.8                  20.1
                            Nonprofit                                        26.0                          7.2                 79.9

                           Sources: AHA, Centers for Medicare & Medicaid Services (CMS), and GAO.

                           Note: We determined each hospital’s profit status from AHA’s Annual Survey (2001) and the CMS
                           Provider of Services File (POS) (2003). If these sources did not include information on a specialty
                           hospital’s profit status, we contacted that hospital’s administrator.




                           Page 8                                                                    GAO-04-167 Specialty 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.12 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.13 (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.




12
 Physician ownership information was self-reported by hospitals and does not reflect
ownership by physician family members.
13
 Available data did not provide information on the proportion of patients admitted by
owners compared with those admitted by nonowners.




Page 9                                                   GAO-04-167 Specialty Hospitals
Figure 1: Median Percentage of Admitting Physicians with Ownership in Specialty
Hospitals, by Specialty Hospital Type, 2003

Percentage of admitting physicians
100



 80
                                                55.9
         74.6                74.1                                                   72.5
 60
                                                                      92.7

 40



 20                                             44.1
         25.4                25.9                                                   27.5

                                                                      7.3
   0
       Cardiac           Orthopedic          Surgical          Women’s          All specialty
                                                                                 hospitals
       Specialty hospital type

                 Admitting physicians without ownership in hospital

                 Admitting physicians with ownership in hospital

 Source: GAO.

Note: Data are from GAO’s specialty hospital survey (2003).


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.)




Page 10                                                                      GAO-04-167 Specialty Hospitals
                            Table 2: Medicare Inpatient Spending at Specialty and General Hospitals, by
                            Hospital Type, Fiscal Year 2001

                                                                                                     Distribution of Medicare 

                                                                              Total Medicare            inpatient spending at 

                                                          Number of       inpatient spending               specialty hospitals 

                                                           hospitals                (millions)                   (percentage)

                             Specialty hospitals                    78                   $870.8                             100.0
                                Cardiac                             15                     540.5                              62.1
                                Orthopedic                          31                     159.3                              18.3
                                Surgical                            16                      76.2                               8.7
                                Women’s                             16                      94.8                              10.9
                             General hospitals                  4,908                  88,507.2                                NA

                            Source: CMS.

                            Notes: Medicare spending data are from the CMS Medicare Provider Analysis and Review (MedPAR)
                            file for fiscal year 2001. Some of the 100 specialty hospitals that we identified opened too recently to
                            be included in this data file.


                            Although 28 states had at least one existing specialty hospital, about two-
Specialty Hospitals         thirds of the 100 specialty hospitals we identified were located in 7 states.
Clustered in Areas          The specialty hospitals that are planned to open over the next few months
                            or years will reinforce this pattern of concentration. Specialty hospital
Where State Policy          location was associated with regulatory and demographic conditions that
and Local                   may facilitate or encourage hospital development.
Demographic
Conditions Favor
Growth

Specialty Hospitals Exist   Specialty hospitals are concentrated in seven states: Arizona, California,
in Particular States        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.)




                            Page 11                                                           GAO-04-167 Specialty Hospitals
Figure 2: Specialty Hospitals by State, June 2003




                                          Note: Data are from HCUP (2000), the CMS MedPAR file for fiscal year 2001, and GAO contacts with
                                          industry groups and specialty hospital chains.




                                          Page 12                                                      GAO-04-167 Specialty Hospitals
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.14




14
 We did not have access to information that would enable us to determine the number of
women’s hospitals under development, if any.




Page 13                                                 GAO-04-167 Specialty Hospitals
Figure 3: Specialty Hospitals under Development by State, June 2003




                                        Note: Data are from GAO contacts with industry groups and specialty hospital chains.




                                        Page 14                                                        GAO-04-167 Specialty Hospitals
Specialty Hospitals Tend to   The location of specialty hospitals is strongly correlated to whether states
Locate in States That Do      allow hospitals to add beds or build new facilities without first obtaining
Not Restrict Hospital         state approval for such health care capacity increases. All of the specialty
                              hospitals that are under development and 96 percent of the specialty
Growth                        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.15 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,16
                              and in 1986 the federal legislation was repealed.17 Subsequently, several
                              states dropped their CON requirements.18 In 2002, 37 states maintained
                              CON requirements to varying degrees.19 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.20




                              15
                               National Health Planning and Resources Development Act of 1974, Pub. L. No. 93-641, 88
                              Stat. 2225 (1975).
                              16
                               Joshua M. Weiner, The Urban Institute, Controlling the Supply of Long-Term Care
                              Providers at the State Level (Washington, D.C.: December, 1998).
                              17
                               Health Care Quality Improvement Act of 1986, Pub. L. No. 99-660, § 701(a), 100 Stat. 3784,
                              3799.
                              18
                               Maine Department of Human Services, Certificate of Need Project Report (Augusta,
                              Maine, March 2001). http://www.state.me.us/dhs/ (downloaded July 1, 2003).
                              19
                                 Includes the District of Columbia. Approximately 30 different types of CON requirements
                              were present in state regulations in 2002, such as those for acute-care beds, nursing homes,
                              and magnetic resonance imaging scanners. In 2002, 27 states had CON requirements for
                              acute-care beds.
                              20
                                   Population data are from the 2000 U.S. Decennial Census.




                              Page 15                                                     GAO-04-167 Specialty Hospitals
                           Table 3: Percentage of Hospitals and Population, by State CON Requirement Status,
                           June 2003

                                                                        Specialty                Specialty
                                                                        hospitals                hospitals
                                                  Specialty         opened 1990-                    under            General          U.S.
                                                  hospitals            June 2003              development           hospitals   population
                            Non-CON
                            states                          83                      96                      100           55           50
                            CON states                      17                        4                        0          45           50

                           Sources: American Health Planning Association (AHPA), AHA, GAO, and the U.S. Census Bureau.




Specialty Hospital         Eighty-five percent of specialty hospitals are located in urban areas,21 a
Location Associated with   distribution that is roughly proportional to that of the U.S. population. An
Population Density and     urban location was slightly more prevalent among women’s hospitals (90
                           percent) and slightly less prevalent among cardiac hospitals (78 percent).
Growth
                           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.22
                           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.23




                           21
                            Areas within federally designated metropolitan statistical areas (MSA) were considered
                           urban; areas outside of MSAs were considered rural.
                           22
                                These rapid-growth counties account for 25 percent of the U.S. population.
                           23
                            The Dartmouth Atlas of Health Care, “Chapter Two Table: Acute Care Hospital
                           Resources and the Physician Workforce by Hospital Referral Region,” (Hanover, N.H.:
                           Center for Evaluative Clinical Sciences, Dartmouth Medical School, 1996),
                           http://www.dartmouthatlas.org/tables/99table2.xls (downloaded June 1, 2003).




                           Page 16                                                                        GAO-04-167 Specialty Hospitals
                            Relative to general hospitals, specialty hospitals, as a group, were much
The Four Specialty          less likely to have emergency departments, saw fewer patients in their
Hospital Types              emergency departments, treated smaller percentages of Medicaid patients,
                            and derived a smaller share of their revenues from inpatient services.
Differed from General       However, there were important differences among the four specialty
Hospitals in Size and       hospital types in these and other service indicators, such as the extent to
                            which hospitals’ emergency departments focused on certain medical
Scope but Also              conditions or procedures.
Differed from One
Another

Hospitals Differed in the   Several differences with respect to emergency departments highlight the
Provision of Emergency      contrast between specialty hospitals and general hospitals and also the
Care                        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.24 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.




                            24
                               Whether a hospital has an emergency department may depend, in part, on whether a
                            facility is obliged to have an emergency department under state hospital licensing
                            requirements, which vary by state.




                            Page 17                                                 GAO-04-167 Specialty Hospitals
Figure 4: Percentage of Specialty and General Hospitals with Emergency
Departments, 2003




Note: Data for general hospitals are from AHA’s Annual Survey (2001). Specialty hospital data are
from GAO’s specialty hospital survey (2003), GAO’s contacts with hospital administrators, and the
CMS POS file (2003).


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.




Page 18                                                         GAO-04-167 Specialty Hospitals
Table 4: Emergency Department Utilization at Specialty and General Hospitals

                                                                           Median percentage of 

                          Median number of Median number of                           emergency 

                               patients per patients per bed                 department visits in 

                                    month         per month                field of specialization

    Specialty hospitals                  225.0                      2.9                           75
      Cardiac                            329.0                      4.8                           57
      Orthopedic                           87.0                     1.4                           95
      Surgical                             15.0                     1.4                           93
                                               a                       b
    General hospitals                 2,636.1                     12.3                           NA

Source: GAO.

Notes: Data for specialty hospitals are from GAO’s specialty hospital survey (2003). Data for general
hospitals are from GAO’s general hospital survey (2002), conducted for Hospital Emergency
Departments: Crowded Conditions Vary Among Hospitals and Communities, GAO-03-460
(Washington, D.C.: Mar. 14, 2003), which included general hospitals in MSAs that had emergency
departments in 2000. Of the 45 specialty hospitals that reported having emergency departments, 28
(62 percent) provided information on the number of patients treated. Because of the low response
rate among women’s hospitals (30 percent), the table reports the median number of emergency
department patients only for 11 cardiac hospitals (85 percent responded), 6 orthopedic hospitals (50
percent responded), and 8 surgical hospitals (80 percent responded). The percentage of emergency
department visits in the hospital’s field of specialization is based on responses from 10 cardiac
hospitals (77 percent responded), 6 orthopedic hospitals (50 percent responded), and 6 surgical
hospitals (60 percent responded).
a
Based on responses from 1,471 general hospitals.
b
Based on responses from 1,271 general hospitals.


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—


Page 19                                                          GAO-04-167 Specialty Hospitals
                              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.

                              Table 5: Physician Staffing in Emergency Departments at Specialty Hospitals, 2003

                                                                          Number of hospitals
                                                         Number of              that provided   Number of hospitals
                                                      hospitals with               emergency with physicians in the
                                                        emergency         department staffing emergency department
                                                       departments                information      24 hours per day
                               Specialty hospitals                  45                         27                           17
                                  Cardiac                           13                         11                           11
                                  Orthopedic                        12                           7                           2
                                  Surgical                          10                           6                           2
                                  Women’s                           10                           3                           2

                              Source: GAO.

                              Note: Data are from GAO’s specialty hospital survey (2003). Twenty-seven of the 45 specialty
                              hospitals that reported having emergency departments answered the survey questions pertaining to
                              emergency department staffing.




Hospitals Differed in Share   The contrast between specialty and general hospitals was also marked
of Public Patients Served     with respect to the share of public program inpatients treated and
and Revenue Generated         inpatient services provided. Relative to general hospitals in the same
                              urban areas, specialty hospitals in our HCUP sample tended to treat a
from Inpatient Services       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.




                              Page 20                                                       GAO-04-167 Specialty Hospitals
Figure 5: Percentage of Patients Covered by Medicaid at Specialty and Area
General Hospitals for Services in the Same Field of Specialization, 2000




Note: Analysis based on HCUP data from six states. General hospitals in the same market areas as
each type of specialty hospital were the basis for comparison.


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.




Page 21                                                       GAO-04-167 Specialty Hospitals
Figure 6: Percentage of Patients Covered by Medicare at Specialty and General
Hospitals for Services in the Same Field of Specialization, 2000

Percentage of Medicare patients
70

       59
60
                55

50

                                      40
40
                             33            32     33
30


20


10
                                                                2
                                                          1
 0
        Cardiac           Orthopedic       Surgical       Women’s
     Specialty hospital type

                Specialty hospitals
                General hospitals
Source: HCUP.

Note: Analysis based on HCUP data from six states. General hospitals in the same market areas as
each type of specialty hospital were the basis for comparison.


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.



Page 22                                                       GAO-04-167 Specialty Hospitals
                       Figure 7: Average Percentage of Inpatient and Outpatient Revenues at Specialty
                       and General Hospitals, 2003

                       Percentage
                       100
                                                              15.3

                        80     42.6                                                                        41.9
                                                 54.3
                                                                            63.5
                                                                                            74.9
                        60



                                                              84.7
                        40

                               57.4                                                                        58.1
                                                 45.7
                        20                                                  36.5
                                                                                            25.1


                         0
                             General           Specialty    Cardiac      Orthopedic      Surgical        Women’s
                             hospitals         hospitals
                             Hospital type
                                      Outpatient revenues

                                      Inpatient revenues

                       Sources: AHA and GAO.

                       Note: Data are from AHA’s Annual Survey (2001) and GAO’s survey of specialty hospitals (2003).




                       Although a general hospital typically had more beds than a specialty
Specialty Hospitals    hospital had, the focused mission of a specialty hospital often resulted in
Rivaled General        its treating more patients with a given condition. Financially, specialty
                       hospitals overall tended to perform about as well as general hospitals did
Hospitals in Certain   on their Medicare inpatient business. However, for-profit specialty
Market Share           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
Measures and           were considered, specialty hospitals tended to outperform general
Financial              hospitals.
Performance




                       Page 23                                                        GAO-04-167 Specialty Hospitals
Within Their Fields of    Specialty hospitals in our HCUP sample were generally not small relative
Expertise, Specialty      to general hospitals when the comparison was based upon the number of
Hospitals Often Treated   patients treated for specific conditions. For example, 1 cardiac hospital
                          treated nearly 4,000 cardiac patients in 2000. Among the 26 general
More Patients Than Many   hospitals that also treated cardiac patients in the same urban area, the
General Hospitals         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


                          Page 24                                          GAO-04-167 Specialty Hospitals
                             women’s hospital had a 2 percent market share while another had a 47
                             percent market share.

                             Figure 8: Median Percentage of Local Market Share, 2000

                             Percentage of local inpatient claims
                             16
                                        15

                             14

                             12

                             10

                                                                                                  8
                                  8

                                  6
                                                               5
                                        4                                         4           4
                                  4

                                  2
                                                                           1
                                                       0
                                  0
                                      Cardiac         Orthopedic           Surgical           Women’s
                                      Specialty hospital type

                                                Percentage of all claims

                                                Percentage of claims in field of specialization
                             Source: HCUP.

                             Notes: Analysis based on HCUP data from six states. The percentage of all claims at orthopedic
                             hospitals was less than 0.5.




Financial Performance of     Financially, specialty hospitals tended to perform about as well as general
Specialty Hospitals Tended   hospitals did on their Medicare inpatient business in fiscal year 2001—the
to Equal or Exceed That of   most recent year for which this information is available. Medicare
                             inpatient margins—which are used to gauge a hospital’s financial
General Hospitals            performance on Medicare inpatient business—averaged 9.4 percent at
                             specialty hospitals and 8.9 percent at general hospitals.25 (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).



                             25
                              Medicare inpatient margins are computed as the ratio of Medicare inpatient revenue in
                             excess of the cost of treating Medicare patients to Medicare inpatient revenue.



                             Page 25                                                                    GAO-04-167 Specialty Hospitals
                      Table 6: Medicare Inpatient and Total Facility Margins at Specialty and General
                      Hospitals, Fiscal Year 2001

                                                        Medicare inpatient                     Total facility all payer
                                                            margins                                   margins

                                                       Specialty         General               Specialty         General
                                                       hospitals        hospitals              hospitals        hospitals
                       All hospitals                           9.4              8.9                   6.4                 3.1
                       For-profit hospitals                   12.4            14.6                    9.7                 9.2

                      Source: CMS.

                      Note: Data are from CMS’s Hospital Cost Report file, fiscal year 2001.


                      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
Comments from         hospital association—and from officials representing the MedCath
Organizations         Corporation and NSH—two major specialty hospital chains. The officials
                      generally agreed with the information in our report and offered their views
Representing          on reasons for key differences between specialty and general hospitals.
Specialty Hospitals   Their comments, summarized below, largely pertained to our findings
                      regarding hospital location, presence and utilization of emergency
and Our Evaluation    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



                      Page 26                                                          GAO-04-167 Specialty Hospitals
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.



Page 27                                          GAO-04-167 Specialty Hospitals
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.




A. Bruce Steinwald
Director, Health Care—Economic
 and Payment Issues




Page 28                                          GAO-04-167 Specialty Hospitals
Appendix I: Scope and Methodology 



                          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
Specialty Hospital        reasonable approach is to define specialty hospitals as those that
Definition and            predominately treat certain diagnoses or perform certain procedures. For
                          this report, we classified a hospital as a specialty hospital if the data
Identification            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.1
                          Twenty-six specialty hospitals were also identified as under development




                          1
                           We eliminated hospitals that initially appeared to be specialty hospitals, but informed us
                          through our survey that they did not meet our criteria for a specialty hospital.




                          Page 29                                                    GAO-04-167 Specialty Hospitals
Appendix I: Scope and Methodology




and scheduled to open in the next few months or years.2 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.3 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.4 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


2
  The total number of identified specialty hospitals—both existing hospitals and those under
development—is somewhat higher that the number we reported in April 2003. New
industry information identified an additional 12 specialty hospitals—6 in existence and 6
under development. Also, 2 of the 18 hospitals originally classified as “other specialty” were
reclassified as women’s hospitals and included in our universe of existing hospitals.
Specialty hospitals identified after April 2003 were not included in our survey, but we did
obtain information on their location, profit status, and whether they had emergency
departments.
3
HCUP is a federal-state-industry partnership sponsored by the Agency for Healthcare
Research and Quality.
4
 We obtained HCUP data on hospitals in three of Texas’s five regions.




Page 30                                                     GAO-04-167 Specialty Hospitals
                        Appendix I: Scope and Methodology




                        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
2003 Specialty          cardiac, orthopedic, surgical, and women’s hospitals that we identified as
Hospital Survey         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.




Data Sources and
Methodological
Approach by Topic
Physician Ownership     Information pertaining to physician ownership of specialty hospitals was
Information 	           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.


Business Structures 	   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.


Hospital Location 	     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


                        Page 31                                         GAO-04-167 Specialty Hospitals
                      Appendix I: Scope and Methodology




                      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.


Certificate of Need   Data from the American Health Planning Association (AHPA) were used to
Requirements          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.5


Health Care System    We used data from the Dartmouth Atlas of Health Care to determine the
Resources             number of available beds per capita and physicians per capita in a hospital
                      referral region (HRR).6 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.




                      5
                       Examples of other types of CON regulated services include magnetic resonance imaging
                      scanners, long-term care services, and organ transplant centers.
                      6
                       Dartmouth Atlas of Health Care, “Chapter Two Table: Acute Care Hospital Resources and
                      the Physician Workforce by Hospital Referral Region” (Hanover, N.H.: Center for
                      Evaluative Clinical Sciences, Dartmouth Medical School, 1996),
                      http://www.dartmouthatlas.org/tables/99table2.xls (downloaded June 1, 2003).




                      Page 32                                                GAO-04-167 Specialty Hospitals
                         Appendix I: Scope and Methodology




Provision of Emergency   We relied on several data sources to obtain information pertaining to the
Care                     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.7 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.


Payer Sources            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.8 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.




                         7
                          U.S. General Accounting Office, Hospital Emergency Departments: Crowded Conditions
                         Vary Among Hospitals and Communities, GAO-03-460 (Washington, D.C.: Mar. 14, 2003).
                         8
                          One specialty hospital was excluded because it was located in a rural area and we could
                         not readily identify a set of general hospitals that could serve as the comparison group.




                         Page 33                                                   GAO-04-167 Specialty Hospitals
                     Appendix I: Scope and Methodology




Market Share 	       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.


Hospital Margins 	   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).9


Data Reliability     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



                     9
                     A margin is calculated by dividing the difference between revenues and costs by revenues.
                     Medicare margins are based on Medicare-allowed costs and revenues.




                     Page 34                                                  GAO-04-167 Specialty Hospitals
           Appendix I: Scope and Methodology




           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.




(290299)
           Page 35                                       GAO-04-167 Specialty Hospitals
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