Specialty Hospitals: Information on National Market Share,	 
Physician Ownership, and Patients Served (18-APR-03,		 
GAO-03-683R).							 
                                                                 
Specialty hospitals represent a small but growing segment of the 
health care industry. These hospitals specialize in providing	 
care for certain conditions, such as cardiac care, or performing 
certain procedures, such as orthopedic surgery. Specialty	 
hospitals are not an entirely new phenomenon, as children's and  
other types of specialty hospitals have existed for decades.	 
Consequently, it is challenging to distinguish between the old	 
and new types of specialty hospitals. One aspect that sets apart 
the newer genre of specialty hospitals is that many are owned, in
part, by the physicians who work in them. Advocates contend that,
because of their focused mission, specialty hospitals can provide
high-quality specialty services more efficiently than general	 
hospitals. Because specialty hospitals can tailor their 	 
facilities and resources to best fit the needs of certain types  
of patients, individuals treated in such hospitals may enjoy	 
relatively greater convenience and comfort. Specialty hospitals  
may also offer physicians financial and work environment	 
advantages. Advocates have stated that the focused mission and	 
dedicated resources of specialty hospitals allow physicians to	 
treat more patients than they could in general hospitals.	 
Physicians may gain financially from this increased productivity.
If they are part owners, physicians may also share in the	 
financial gains that accrue to the hospital. Physicians in	 
specialty hospitals may also have more control over patient	 
scheduling and the purchasing of desired equipment. However,	 
concerns have been raised by general hospitals and others in the 
health care community that specialty hospitals are siphoning off 
the most financially rewarding portions of general hospitals'	 
business. Representatives of general hospitals contend that	 
specialty hospitals concentrate on the most profitable procedures
and serve patients that have fewer complicating 		 
conditions--leaving general hospitals with a sicker, higher-cost 
patient population. Part of the concern is that physician	 
ownership in specialty hospitals creates incentives to		 
concentrate on patients who are less sick than other patients	 
with the same diagnosis, as a hospital is typically paid a fixed,
lump-sum amount for treating someone with a given diagnosis.	 
Hospitals can benefit financially by treating a disproportionate 
share of less ill patients because the payment amounts for these 
patients are not reduced to reflect the fact that fewer services 
are needed. Critics 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 	 
community-wide disasters. In light of these concerns, Congress	 
asked us to provide information on the prevalence of specialty	 
hospitals, their characteristics in terms of ownership and	 
patients treated, and the effect specialty hospitals have on the 
greater hospital communities in which they operate. We are	 
preparing a comprehensive report to be issued later this year	 
that will address these issues. This report provides available	 
information on the (1) share of the national hospital market	 
comprising specialty hospitals, (2) extent to which physicians	 
have ownership interests in specialty hospitals, and (3) patients
served by specialty hospitals compared with those served by	 
general hospitals, in terms of illness severity.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-683R					        
    ACCNO:   A06695						        
  TITLE:     Specialty Hospitals: Information on National Market      
Share, Physician Ownership, and Patients Served 		 
     DATE:   04/18/2003 
  SUBJECT:   Hospital administration				 
	     Hospital care services				 
	     Hospitals						 
	     Medical economic analysis				 
	     Strategic planning 				 

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GAO-03-683R

GAO- 03- 683R Specialty Hospitals United States General Accounting Office
Washington, DC 20548

April 18, 2003 The Honorable Bill Thomas Chairman Committee on Ways and
Means House of Representatives The Honorable Jerry Kleczka

House of Representatives Subject: Specialty Hospitals: Information on
National Market Share, Physician Ownership, and Patients Served Specialty
hospitals represent a small but growing segment of the health care
industry. These hospitals specialize in providing care for certain
conditions, such as cardiac care, or performing certain procedures, such
as orthopedic surgery. Specialty hospitals are not an entirely new
phenomenon, as children*s and other types of specialty hospitals have
existed for decades. Consequently, it is challenging to

distinguish between the old and new types of specialty hospitals. One
aspect that sets apart the newer genre of specialty hospitals is that many
are owned, in part, by the physicians who work in them.

Advocates contend that, because of their focused mission, specialty
hospitals can provide high- quality specialty services more efficiently
than general hospitals. Because specialty hospitals can tailor their
facilities and resources to best fit the needs of certain types of
patients, individuals treated in such hospitals may enjoy relatively
greater convenience and comfort. Specialty hospitals may also offer
physicians financial and work environment advantages. Advocates have
stated that the focused mission and dedicated resources of specialty
hospitals allow physicians to treat more patients than they could in
general hospitals. Physicians may gain financially from this increased
productivity. If they are part owners, physicians may also share in the
financial gains that accrue to the hospital. Physicians in specialty
hospitals may also have more control over patient scheduling and the
purchasing of desired equipment.

However, concerns have been raised by general hospitals and others in the
health care community that specialty hospitals are siphoning off the most
financially rewarding portions of general hospitals* business.
Representatives of general hospitals contend that specialty hospitals
concentrate on the most profitable procedures and serve patients that have
fewer complicating conditions* leaving general hospitals with a sicker,
higher- cost patient population. Part of the concern is that physician
ownership in specialty hospitals creates incentives to concentrate on

GAO- 03- 683R Specialty Hospitals 2 patients who are less sick than other
patients with the same diagnosis, as a hospital is

typically paid a fixed, lump- sum amount for treating someone with a given
diagnosis. Hospitals can benefit financially by treating a
disproportionate share of less ill patients because the payment amounts
for these patients are not reduced to reflect the fact that fewer services
are needed. Critics 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 community- wide disasters. A federal law, known
as the Stark anti- self- referral law, generally prohibits physicians

from referring Medicare patients to facilities in which they (or their
immediate family members) have financial interests. 1 The law 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. 2 The Stark self- referral
prohibitions do not apply in the case of specialty hospitals, however,
because the law does not prohibit physicians who have ownership in an
entire hospital from referring patients to that hospital. 3 It is likely
that any referral or decision made by a physician who has a stake in an
entire general hospital would produce little personal economic

gain because such hospitals tend to provide a diverse and large group of
services. However, the Stark law does prohibit physicians who have an
ownership interest only in a hospital subdivision from referring patients
to that subdivision. Concern exists with respect to specialty hospitals,
that since they are usually much smaller in size

and scope than general hospitals and closer in size to hospital
departments, that their physician owners could influence their hospitals**
and therefore their own* financial gain through practice patterns and
referrals.

In light of these concerns, you asked us to provide information on the
prevalence of specialty hospitals, their characteristics in terms of
ownership and patients treated, and the effect specialty hospitals have on
the greater hospital communities in which they operate. We are preparing a
comprehensive report to be issued later this year that will address these
issues. This report provides available information on the

share of the national hospital market comprising specialty hospitals,

extent to which physicians have ownership interests in specialty
hospitals, and

patients served by specialty hospitals compared with those served by
general hospitals, in terms of illness severity.

1 42 U. S. C. S: 1395nn( a)( 1)( A) (2000). 2 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 (Oct. 21, 1992). For additional
discussion of the topic, see Jennifer O*Sullivan, Health Care: Physician
Self- Referrals *Stark I and II,* Congressional Research Service 97- 5 EPW
(Dec. 6, 1996). 3 42 U. S. C. S: 1395nn( d)( 3) (2000).

GAO- 03- 683R Specialty Hospitals 3 Our work focused on 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 twothirds 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. 4
We classified the hospitals that fit these criteria into five specialty
types* cardiac, orthopedic, surgical, women*s, and other specialty.
Because the other- specialty category contained a diverse set of hospitals
that could not be compared to one another, we excluded hospitals in that
category. 5 The information in this report is derived from our analysis of
hospital inpatient discharge data, various administrative databases, and
responses to our survey of specialty hospitals. We analyzed Medicare
inpatient discharge data from all hospitals nationwide to help identify
specialty hospitals. We also obtained Healthcare Cost and Utilization
Project (HCUP) data on all patient discharges in 2000 from hospitals
located in six states. 6 These states contained 25 urban specialty
hospitals, slightly more than one- fourth of the existing specialty
hospitals we identified. The all- patient discharge data from hospitals in
these states were used to help identify specialty hospitals and analyze
the relative illness severity among patients at specialty and general
hospitals. For more detail regarding our specialty hospital criteria and
analysis methodology, see the enclosure at the end of this report. Our
work was performed from September 2002 through April 2003 in accordance
with generally accepted government auditing standards. Results in Brief

Specialty hospitals represent a small but growing share of the national
market. In February 2003, the 92 cardiac, orthopedic, surgical, and
women*s hospitals that we identified and were open for business accounted
for less than 2 percent of the shortterm, acute care hospitals nationwide.
Recent growth in specialty hospitals has been rapid* the number of
facilities has tripled since 1990 and another 20 facilities are under
development. Because specialty hospitals tend to be relatively small, they
account for a somewhat low share of inpatient spending relative to their
share of hospitals. The specialty hospitals in existence in fiscal year
2000 accounted for about

1 percent of Medicare spending for inpatient services. 4 Thus, we excluded
hospitals that specialized in providing rehabilitation or in treating
mental disorders, alcohol or drug problems, respiratory conditions, or
newborns and children. 5 The other- specialty category contained 18
hospitals that specialized in a variety of other areas, such as eye and
ear, nose, and throat procedures. 6 Data were from all hospitals in
Arizona, California, New Jersey, New York, and North Carolina and the
hospitals located in three regions of Texas.

GAO- 03- 683R Specialty Hospitals 4 About 70 percent of the specialty
hospitals in existence or under development had

some physician owners, according to our 2003 specialty hospital survey
results. Among these hospitals, total physician ownership averaged
slightly more than 50 percent. The average share owned by an individual
physician was more than 2 percent at half the hospitals, while it was less
than 2 percent at the other half. In about one- fifth of the hospitals
with some degree of physician ownership, the largest share owned by an
individual physician was at least 15 percent. Nearly all specialty

hospitals with physician owners reported that some of the owners were
members of a single group practice. The largest share owned by physicians
in a single group practice was more than 25 percent at half the hospitals
and less than 25 percent at the other half. In about 1 out of 10 specialty
hospitals with physician owners, physicians in a single group practice
owned 80 percent or more of the hospital.

We found that patients at specialty hospitals tended to be less sick than
patients with the same diagnoses at general hospitals, although we did not
determine the clinical and economic importance of this finding. Our
analysis of all inpatient discharge data

from the 25 urban specialty hospitals for which these data were available*
about one- fourth of all specialty hospitals we identified nationwide*
showed that 21 of the 25 specialty hospitals treated lower proportions of
severely ill patients than did area general hospitals. For example, at an
urban cardiac hospital in Arizona, about 17 percent of patients with the
most commonly treated diagnoses were severely ill, whereas at 26 general
hospitals in the same urban area, about 22 percent of patients treated for
the same diagnoses were severely ill. For all four specialty hospital
types included in our study* cardiac, orthopedic, surgical, and women*s*
the median percentage of severely ill patients treated was lower than that
for general hospitals. Four of the 25 specialty hospitals were exceptions,
as they had treated patients that were as sick, or sicker, than the
patients at general hospitals.

The American Surgical Hospital Association and two major specialty
hospital chains* MedCath Corporation and National Surgical Hospitals*
provided comments on a draft of this report. Representatives from these
groups stated that physician ownership of specialty hospitals did not
affect physician referral behavior and that our physician ownership
discussion was potentially misleading. Our report provides information on
the extent of physician ownership of specialty hospitals but, because

of data limitations, we did not attempt to analyze the relationship
between ownership and referral patterns. The specialty hospital
representatives also questioned the extent to which the illness severity
differences we reported might apply to specialty hospitals not in our
sample and the economic significance of these differences. The illness
severity differences that we report are based on an analysis of thousands
of claims from more than one- fourth of the specialty hospitals that we
identified. We did not attempt to assess the economic significance of
these differences. A more complete summary of their comments and our
evaluation of their comments is included at the end of this report.

GAO- 03- 683R Specialty Hospitals 5

Background

The fixed- rate, lump- sum payments that 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 low- cost patients. The mechanics of
Medicare*s hospital payment system 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. 7
Therefore, hospitals have a financial incentive to treat as many patients
as possible whose costs are low relative to the average patient in each
DRG.

Specialty Hospitals Represent a Small but Growing Share of the National
Market

In February 2003, there were 17 cardiac, 36 orthopedic, 22 surgical, and
17 women*s hospitals that met our specialty hospital definition and were
open for business. 8 These 92 hospitals represent about 2 percent of all
short- term, acute care hospitals nationwide. (See fig. 1.) The most
recent Medicare discharge data indicate that the

80 specialty hospitals in existence in 2001 accounted for slightly less
than 1 percent of Medicare spending for inpatient services.

7 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. 8 Although we used
several methods to identify specialty hospitals, the counts included in
this report should not be interpreted as a complete census of the
specialty hospitals in existence or under development. In particular, it
is likely that our estimate of the number of women*s hospitals is low. See
the enclosure for a discussion of this issue.

GAO- 03- 683R Specialty Hospitals 6

Figure 1: Number of Specialty Hospitals Relative to All Short- term, Acute
Care General Hospitals, 2003 92

4,816

Specialty hospitals Short- term, acute care general hospitals Sources: GAO
and American Hospital Association (AHA). The number of these facilities
has grown rapidly in recent years* as of March 2003, the number of
specialty hospitals had tripled from the 29 that existed in 1990. (See
fig. 2.)

Figure 2: Opening Years of Existing Specialty Hospitals, by Decade

10 0

5 9

5 35

27

0 5

10 15

20 25

30 35

40 Pre- 1950s 1950s 1960s 1970s 1980s 1990s 2000 to

present Decade Number of hospitals

Sources: GAO and Centers for Medicare and Medicaid Services (CMS). Note:
Data are from the GAO specialty hospital universe file (2003) and the CMS
Medicare Providers of Service file (2002).

An additional 20 specialty hospitals are now under development, most of
which specialize in surgical care. (See fig. 3.)

GAO- 03- 683R Specialty Hospitals 7

Figure 3: Number of Specialty Hospitals Open and Under Development, by
Specialty Type

17 36

22 17 5

1 14

0 5

10 15

20 25

30 35

40 Cardiac Orthopedic Surgical Women*s Specialty hospital type Number of
hospitals

Under development Open Sources: HCUP, CMS, industry groups, and hospital
chains. Note: Data are from HCUP (2000) and CMS Medicare Provider Analysis
and Review (MedPar) file (2001). Data

on the number of women*s hospitals under development were not readily
available.

In terms of beds, specialty hospitals are relatively small. In our study,
surgical care facilities were the smallest, with a median of 16 beds,
compared with a median of 61 beds for women*s hospitals. (See fig. 4.) In
contrast, the average short- term general hospital had approximately 170
beds.

GAO- 03- 683R Specialty Hospitals 8

Figure 4: Median Number of Beds in Specialty Hospitals, by Specialty Type
59 21

16 61

0 10

20 30

40 50

60 70

Cardiac Orthopedic Surgical Women*s Specialty hospital type Median bed
size

Source: GAO. Note: Data are from GAO*s specialty hospital survey (2003).
Physician Ownership of Specialty Hospitals Is Common, but Shares Owned by
Individual Physicians or Physician Group Practices Vary Widely Our survey
of the more than 100 specialty hospitals in existence or under development
indicates that about 70 percent of specialty hospitals had some physician
owners. 9 Of the specialty hospitals with any degree of physician
ownership, physicians* combined ownership shares averaged slightly more
than 50 percent of the hospital. About one- fifth of specialty hospitals
were owned entirely, or nearly so, by physicians. (See fig 5.) Physicians
owned 20 percent or less of the hospital in relatively few specialty
hospitals. 9 Approximately 80 percent of specialty hospitals returned our
survey, although the response rate on

certain questions was somewhat lower. Physician ownership information was
self- reported by hospitals and does not reflect ownership by physician
family members.

GAO- 03- 683R Specialty Hospitals 9

Figure 5: Specialty Hospitals by Extent of Physician Ownership

5.4 28.6

42.9 3.6

19.6

0 5

10 15

20 25

30 35

40 45

50 1 to 20 21 to 40 41 to 60 61 to 80 81 to 100 Percentage of physician
ownership Percentage of specialty hospitals

Source: GAO. Note: Data are from GAO*s specialty hospital survey (2003).
Data include the approximately 70 percent of specialty hospitals that
reported some degree of physician ownership.

Physicians tended to own somewhat smaller percentages of cardiac hospitals
and larger percentages of surgical hospitals. (See fig 6.)

Figure 6: Median Percentage of Hospital Owned by Physicians, by Specialty
Type

31 50

70 50

0 10

20 30

40 50

60 70

80 Cardiac Orthopedic Surgical Women*s Specialty hospital type Percentage
physician ownership

Source: GAO. Note: Data are from GAO*s specialty hospital survey (2003).
Data include the approximately 70 percent of specialty hospitals that
reported some degree of physician ownership.

GAO- 03- 683R Specialty Hospitals 10 On average, individual physicians
owned relatively small shares of their hospitals. At

half the specialty hospitals with physician ownership, the average
individual share was less than 2 percent; at the other half, it was
greater than 2 percent. Some physicians owned substantially larger shares.
In nearly one- fifth of the specialty hospitals with some physician
ownership, the largest share owned by a single physician was 15 percent or
greater. (See fig. 7.)

Figure 7: Largest Share of Specialty Hospital Owned by an Individual
Physician 47.7 22.7

4.5 4.5 2.3 18.2

0 10

20 30

40 50

60 0.2 to 3 4 to 6 7 to 9 10 to 12 13 to 15 >15 Largest percentage of
hospital owned by one physician Percentage of specialty hospitals

Source: GAO. Note: Data are from GAO*s specialty hospital survey (2003).
Data include the approximately 70 percent of specialty hospitals that
reported some degree of physician ownership.

Nearly all specialty hospitals with physician owners reported that some of
the owners were members of a single group practice. The largest percentage
of each hospital owned by physicians in a single group varied widely* at
half the hospitals the largest percentage was more than 25 percent and at
the other half it was less than 25 percent. In about 1 in 10 specialty
hospitals, physicians in a single group practice owned 80 percent or more
of the hospital. (See fig 8.)

GAO- 03- 683R Specialty Hospitals 11

Figure 8: Largest Ownership Share by Physicians in a Single Group Practice
at Specialty Hospitals

17.1 22

24.4 12.2

4.9 9.8

0 0 2.4

7.3

0 5

10 15

20 25

30 <10 10 to 19 20 to 29 30 to 39 40 to 49 50 to 59 60 to 69 70 to 79 80
to 89 90 to 100 Percentage of hospital owned by physician group Percentage
of specialty hospitals

Source: GAO. Note: Data are from GAO*s specialty hospital survey (2003).
Data include the approximately 70 percent of specialty hospitals that
reported some degree of physician ownership.

Specialty Hospitals Tend to Treat a Lower Percentage of Severely Ill
Patients than General Hospitals Some patients are more severely ill than
others* even when compared to individuals

who have the same principal diagnosis. Differences in age, secondary
diagnosis, and other complicating conditions can affect the severity of
patients* illnesses and the amount and cost of the resources required for
their treatment.

To determine whether there were differences in illness severity between
the patients treated at specialty hospitals and the patients treated at
general hospitals, we analyzed calendar year 2000 patient discharge data
at 25 specialty hospitals. These hospitals were located in 18 urban areas
in six states: Arizona, California, New Jersey, New York, North Carolina,
and Texas. 10 Our group of comparison hospitals consisted of the 396
general hospitals located in the same 18 urban areas. Our comparisons
included only those general hospitals that provided short- term, acute
care. We used a widely recognized system, known as All Payer Refined-
Diagnosis Related Groups (APR- DRG), to assign an illness severity level
to each patient on the basis of the

information contained in the discharge data. This system, which is
frequently used by hospitals and private insurers, groups patients into
one of 355 diagnosis categories and assigns one of four severity levels
(minor, moderate, major, or extreme) to each

patient based on patient diagnosis, age, sex, and procedure. While we
examined 10 Data on all inpatient discharges were obtained from HCUP, a
federal- state- industry partnership sponsored by the Agency for
Healthcare Research and Quality.

GAO- 03- 683R Specialty Hospitals 12 illness severity differences between
specialty and general hospitals, we did not

determine the clinical or economic importance of these differences. 11 The
vast majority of specialty hospitals with HCUP data available to us* 21
out of 25* treated a lower percentage of patients who were severely ill*
that is, assigned to the major or extreme severity levels by the APR- DGR
system* relative to patients in the same diagnosis categories treated at
general hospitals in the same urban areas. For example, 3 percent of the
patients in the 10 most common diagnosis categories at one Texas
orthopedic hospital were classified as severely ill. A higher proportion*
8 percent* of the patients in the same diagnosis categories were
classified as severely ill at the 51 general hospitals in the same urban
area. A cardiac hospital in Arizona provides a similar example. About 17
percent of the patients in that hospital*s most common diagnosis
categories were classified as severely ill. In contrast, 22 percent of the
patients in the same diagnosis categories who were treated at the 26
general hospitals in the same urban area were classified as severely ill.
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.

For all four specialty hospital categories* cardiac, orthopedic, surgical,
and women*s* the median share of severely ill patients treated was lower
than the median share of severely ill patients in the same diagnostic
categories treated at the corresponding general hospitals. (See fig 9.)
For example, the median orthopedic hospital, in terms of patient illness
severity, had 5 percent of patients in its most common diagnosis group
classified as severely ill. The median general hospital in the urban areas
with orthopedic hospitals had 8 percent of patients in the same diagnosis
groups classified as severely ill.

11 Average inpatient costs may be substantially higher for sicker
individuals. In its March 2000 report to Congress, the Medicare Payment
Review Advisory Commission (MedPAC) illustrated this relationship with
several examples, including one for patients diagnosed with intracranial
hemorrhage (APR- DRG 44). MedPAC found, based on its analysis of fiscal
year 1997 Medicare data, that the estimated inpatient cost was $3, 195 for
patients whose illness severity was classified as minor. The estimated
costs were higher for patients with the same diagnosis who were classified
as more severely ill: $4,214 for moderate severity, $5, 454 for major
severity, and $11,255 for extreme severity. MedPAC noted that illness
severity cost differences were smaller for some diagnoses and larger for
others. In June 2000, MedPAC recommended that Medicare*s hospital
inpatient payment system be improved by accounting for illness severity
differences within DRGs.

GAO- 03- 683R Specialty Hospitals 13

Figure 9: Median Percentage of Severely Ill Patients Treated in Specialty
Hospitals and General Hospitals, by Specialty Hospital Category

17 5

2 3 22

8 4 5

0 5

10 15

20 25

Cardiac Orthopedic Surgical Women*s Specialty hospital type Percentage

Specialty hospitals General hospitals in urban areas with specialty
hospitals Source: HCUP. Note: Data are from HCUP (2000).

Comments Obtained from Organizations Representing Specialty Hospitals and
Our Evaluation

We obtained comments from officials representing the American Surgical
Hospital Association* a specialty hospital association* and from officials
representing MedCath Corporation and National Surgical Hospitals* two
major specialty hospital chains. Their comments, summarized below,
primarily focused on physician ownership issues and our illness severity
analysis. Unless otherwise noted, the following comments reflect the
positions of all three organizations.

The specialty hospital representatives said that our report provided an
inadequate, and potentially misleading, discussion of the financial
incentives facing the physician owners of specialty hospitals. The
officials believe that the average physician who

invests in a specialty hospital owns such a small share that the
theoretical incentive to steer relatively sick patients away from the
facility is very weak. Instead, they believe that there is a strong
incentive for physicians to treat patients in specialty hospitals because
high- quality care can be provided efficiently in such facilities.
According the representatives, our report did not sufficiently discuss the
efficiency gains achieved by specialty hospitals. The representatives also
noted that many physicians who work in specialty hospitals are completely
unaffected by investorrelated financial incentives because they have no
ownership stake in the facilities.

GAO- 03- 683R Specialty Hospitals 14 The representatives stated that our
illness severity analysis had several potential

limitations and that our results may not apply to all specialty hospitals.
The representatives said that our results are based on a sample that is
too small to be representative of all specialty hospitals. MedCath
representatives noted that Medicare data were available for most of the 92
specialty hospitals that we identified and that we could have increased
our sample size if our illness severity analysis had been based on
Medicare data. Representatives from the three specialty hospital
organizations suggested that we might have obtained different results if
we had analyzed more claims from the hospitals that we did include. They
also stressed that our reported differences in illness severity could be
misleading because we did not analyze the economic or clinical
implications of the differences.

Our report discusses the concerns that some have raised regarding
physician ownership of specialty hospitals and the potential effect on
referrals. Data were not available on the identity of physician owners and
therefore we could not determine if

there was a relationship between physician ownership and referral
behavior. Instead, our report provides descriptive information on the
extent to which physicians own specialty hospitals. Our results show that
many physicians who invest in specialty hospitals own relatively small
shares. In about half the specialty hospitals the average share was 2
percent or less. However, our results also show that some physicians own
considerably larger shares of 15 percent or more. Furthermore, the
combined share owned by physicians who are members of a single group
practice represents the majority ownership in some hospitals.

We disagree with the criticisms of our illness severity analysis. The 25
specialty hospitals included represent more than one- fourth of the
facilities that we identified as meeting our criteria for a specialty
hospital. We analyzed data pertaining to nearly 75,000 specialty hospital
patients and approximately 900,000 general hospital patients. By focusing
on the 10 most common diagnoses at each specialty hospital, we included
nearly two- thirds of all patients treated at the specialty hospitals in
our sample. Although an analysis of Medicare patients alone would have
allowed us to increase the number of hospitals in our sample, it would
have provided much less

comprehensive information on the patients treated at each hospital. As we
stated in our report, we did not attempt to determine the economic
implications of the illness severity differences we observed between
specialty and general hospitals. Research

by MedPAC suggests that average treatment costs tend to rise with illness
severity, as classified by the APR- DRG system, but we did not quantify
the cost differences for the specific diagnoses we analyzed.

- - - - - We plan no further distribution of this report until 30 days
after the letter*s date. At that time, we will send copies of this report
to appropriate congressional committees and other interested parties. We
will also make copies available to others upon

request. This report will be available at no charge on GAO*s Web site at
http:// www. gao. gov.

GAO- 03- 683R Specialty Hospitals 15 If you or your staffs have any
questions, please call me at (202) 512- 7119 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 Enclosure

Enclosure Enclosure 16 GAO- 03- 683R Specialty Hospitals Scope and
Methodology This enclosure provides additional information on three 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
physician ownership information. Finally, it describes the data and
methodological approach used to compare patient illness severity at
specialty and general hospitals.

Specialty Hospital Definition and Identification Although a standard
definition for a specialty hospital does not exist, a reasonable approach
is to define specialty hospitals as those that predominately treat certain
diagnoses or perform certain procedures. For this report, we classified a
hospital as a specialty hospital if the data indicated that two- thirds or
more of its inpatient claims were in one or two major diagnosis categories
(MDC) or

two- thirds or more of its inpatient claims were for surgical diagnosis-
related groups (DRGs).

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 shortterm,

acute care general hospitals. Thus, we excluded

government- owned hospitals; hospitals where 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, 92 could be classified into four specialization
categories: cardiac, orthopedic, surgical, and women*s. 12 An additional
18 hospitals specialized in a variety of other areas, such as eye and ear,
nose, and throat

procedures. 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 file and the 2000 Healthcare
Cost and Utilization Project (HCUP) data set. Medicare and HCUP data both
have distinct advantages and disadvantages. Medicare data contain 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 12 This number does not
include 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.

Enclosure Enclosure

GAO- 03- 683R Specialty Hospitals 17 not represented at all, in Medicare
data. Thus, it is likely that an identification based

on Medicare data may undercount the number of hospitals that specialize in
treating such conditions.

In contrast to Medicare, HCUP data provide information on all of a
hospital*s patients. However, HCUP data are only available for hospitals
in 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. 13 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 and two national specialty hospital chains:
MedCath Corporation and National Surgical Hospitals. These three
organizations also provided information on specialty hospitals that are
under development. Source of Physician Ownership Information

To obtain information on physician ownership of specialty hospitals, we
surveyed the more than 100 cardiac, orthopedic, surgical, and women*s
hospitals that we identified as in existence or under development. Among
other questions, 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, and the largest
combined percentage of the hospital owned by physicians in a single
revenue- sharing group practice. The survey was conducted from January
through March 2003. Approximately 80 percent of the hospitals responded to
our survey.

Severity of Illness Analysis

To compare patient illness severity at specialty and general hospitals, we
analyzed 2000 HCUP data from Arizona, California, New Jersey, New York,
North Carolina, and Texas. An analysis of HCUP data for these six states
identified 25 specialty hospitals in 18 urban areas. 14 Patients at each
specialty hospital were compared to patients in the same diagnosis
categories at short- term, acute care general hospitals in the same urban
area. (See table 1.) A total of 396 general hospitals were used in the
comparisons.

13 We obtained HCUP data on hospitals in three of Texas*s five regions. .
14 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
should serve as the comparison group.

Enclosure Enclosure

GAO- 03- 683R Specialty Hospitals 18

Table 1: Number of Urban Specialty Hospitals and Comparison General
Hospitals Used in Patient Illness Severity Analysis, by Specialty Hospital
Type

Specialty hospital type Number of urban specialty hospitals Number of

urban areas Number of

general hospitals in urban areas (range)

Cardiac 7 7 5 to 26 Orthopedic 8 6 10 to 87 Surgical 3 3 2 to 51 Women*s 7
7 7 to 87 Source: HCUP.

Note: Data are from HCUP (2000).

We used All Payer Refined Diagnosis Related Groups (APR- DRG), a widely
recognized patient classification system developed by 3M Health
Information Systems, to assign an illness- severity level (minor,
moderate, major, or extreme) to each patient on the basis of the DRG
information contained in the HCUP discharge data. The system, which is
frequently used by hospitals and private insurers, groups patients into
one of 355 diagnosis categories and assigns a severity level based on

patient diagnosis, age, sex, discharge status, and procedure. Based on
numbers of patients treated, we identified the 10 most common diagnosis
categories at each specialty hospital and computed the percentage of
patients in each of those categories determined to be severely ill (that
is, assigned to the major or extreme severity level by the APR- DRG
system). We then determined the percentage of severely ill patients in the
same 10 diagnostic categories treated at general hospitals located in the
same urban area and used the result as a benchmark against which to
compare the specialty hospitals. We repeated this process for each
specialty hospital. This ensured that we compared illness severity among
the types of patients typically treated at each specialty hospital to the
illness severity for similar types of patients treated at area general
hospitals.

(290181)

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