Specialty Hospitals: Geographic Location, Services Provided, and 
Financial Performance (22-OCT-03, GAO-04-167).			 
                                                                 
The recent growth in specialty hospitals that are largely	 
for-profit and owned, in part, by physicians, has been		 
controversial. Advocates of these hospitals contend that the	 
focused mission and dedicated resources of specialty hospitals	 
both improve quality and reduce costs. Critics contend that	 
specialty hospitals siphon off the most profitable procedures and
patient cases, thus eroding the financial health of neighboring  
general hospitals and impairing their ability to provide	 
emergency care and other essential community services. Critics	 
also contend that physician ownership of specialty hospitals	 
creates financial incentives that may inappropriately affect	 
physicians' clinical and referral behavior. In April 2003, GAO	 
reported on certain aspects of specialty hospitals, including the
extent of physician ownership and the relative severity of	 
patients treated (GAO-03-683R). For this report, GAO was asked to
examine (1) state policies and local conditions associated with  
the location of specialty hospitals, (2) how specialty hospitals 
differ from general hospitals in providing emergency care and	 
serving a community's other medical needs, and (3) how specialty 
and general hospitals in the same communities compare in terms of
market share and financial health.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-167 					        
    ACCNO:   A08752						        
  TITLE:     Specialty Hospitals: Geographic Location, Services       
Provided, and Financial Performance				 
     DATE:   10/22/2003 
  SUBJECT:   Financial analysis 				 
	     Health statistics					 
	     Hospital administration				 
	     Hospital care services				 
	     Hospitals						 
	     Medical economic analysis				 
	     Patient care services				 
	     Physicians 					 
	     Emergency medical services 			 
	     Community hospitals				 
	     State/local relations				 
	     Comparative analysis				 
	     Quality-of-care					 

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GAO-04-167

United States General Accounting Office

GAO

                       Report to Congressional Requesters

October 2003

                                   SPECIALTY
                                   HOSPITALS

       Geographic Location, Services Provided, and Financial Performance

GAO-04-167

Highlights of GAO-04-167, a report to the 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 hospitals that are largely for-profit and
owned, in part, by physicians, has been controversial.

Advocates of these hospitals contend that the focused mission and
dedicated resources of specialty hospitals both improve quality and reduce
costs. Critics contend that specialty hospitals siphon off the most
profitable procedures and patient cases, thus eroding the financial health
of neighboring general hospitals and impairing their ability to provide
emergency care and other essential community services. Critics also
contend that physician ownership of specialty hospitals creates financial
incentives that may inappropriately affect physicians' clinical and
referral behavior. In April 2003, GAO reported on certain aspects of
specialty hospitals, including the extent of physician ownership and the
relative severity of patients treated (GAO-03-683R).

For this report, GAO was asked to examine (1) state policies and local
conditions associated with the location of specialty hospitals, (2) how
specialty hospitals differ from general hospitals in providing emergency
care and serving a community's other medical needs, and (3) how specialty
and general hospitals in the same communities compare in terms of market
share and financial health.

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.

October 2003

SPECIALTY HOSPITALS

Geographic Location, Services Provided, and Financial Performance

The 100 existing specialty hospitals identified by GAO-hospitals that
focus on cardiac, orthopedic, or women's medicine or on surgical
procedures-are geographically concentrated in areas where state policy
facilitates hospital growth. Although 28 states have at least 1 specialty
hospital, approximately two-thirds of the 100 specialty hospitals are
located in 7 states. At least an additional 26 specialty hospitals were
under development in 2003 and will tend to reinforce the existing pattern
of geographic concentration. Specialty hospitals are much more likely to
be found in states where hospitals are permitted to add beds or build new
facilities without first obtaining state approval for such health care
capacity increases.

Relative to general hospitals, specialty hospitals, as a group, were much
less likely to have emergency departments, treated smaller percentages of
Medicaid patients, and derived a smaller share of their revenues from
inpatient services. For example, 45 percent of specialty hospitals, but 92
percent of general hospitals, had emergency departments. There were,
however, important differences among the four specialty hospital types in
these and other service indicators.

Although general hospitals typically have more beds than specialty
hospitals, the focused mission of specialty hospitals often resulted in
their treating more patients in their given fields of specialization.
Financially, specialty hospitals tended to perform about as well as
general hospitals did on their Medicare inpatient business. However,
specialty hospitals tended to outperform general hospitals when the costs
from all lines of business and the revenues from all payers were
considered.

Officials from three specialty hospital organizations commented on a draft
of this report. They generally agreed with the report's information and
commented on key differences between specialty and general hospitals.

Figure: Specialty Hospitals by State, June 2003

Contents

  Letter

Results in Brief

Background

Specialty Hospitals Clustered in Areas Where State Policy and Local
Demographic Conditions Favor Growth

The Four Specialty Hospital Types Differed from General Hospitals in Size
and Scope but Also Differed from One Another

Specialty Hospitals Rivaled General Hospitals in Certain Market Share
Measures and Financial Performance

Comments from Organizations Representing Specialty Hospitals and Our
Evaluation

                                       1

                                      3 6

                                       11

                                       17

                                       23

                                       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

         Table 2: Medicare Inpatient Spending at Specialty and General
                 Hospitals, by Hospital Type, Fiscal Year 2001
         Table 3: Percentage of Hospitals and Population, by State CON

Requirement Status, June 2003

Table 4: Emergency Department Utilization at Specialty and General
Hospitals

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

Table 6: Medicare Inpatient and Total Facility Margins at Specialty and
General Hospitals, Fiscal Year 2001

8 11 16 19 20 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

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

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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separately.

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.

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

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.

2U.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).

3Thus, we excluded hospitals that specialized in providing rehabilitation
or in treating mental disorders, alcohol or drug problems, respiratory
conditions, or newborns and children.

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.

Results in Brief 	Hospitals that specialize in treating cardiac,
orthopedic, or women's 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

4HCUP 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.

5Eight 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.

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

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

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.

Background

Specialty hospitals have become a subject of debate among health care
policymakers. One issue concerns physician ownership of specialty
hospitals and whether such ownership might inappropriately affect
physicians' clinical decision-making and referral behavior. A related
issue concerns the potential for specialty hospitals to benefit
financially by treating patients who are less severely ill, and therefore
less costly, while leaving general hospitals responsible for a mix of
patients who need more care and are more expensive to treat. Our April
2003 report provided information on both issues: the extent of physician
ownership at specialty hospitals and the relative severity of patients'
illnesses at specialty and general hospitals.7

    Physician Self-Referral Law and Hospital Payment Rules Provide Context for
    Issues Regarding Specialty Hospitals

Much of the concern about specialty hospitals centers on physician
ownership issues. Federal law generally prohibits physicians from
referring Medicare patients for specific health care services to
facilities in which they (or their immediate family members) have
financial interests.8 This prohibition, a key component of the Medicare
self-referral or Stark law (named after its chief sponsor in the House of
Representatives, Representative Pete Stark) was enacted after several
studies found that physicians with ownership interests in separate
clinical laboratories, diagnostic imaging centers, or physical therapy
providers tended to make more referrals to them and order substantially
more services at higher costs.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

7GAO-03-683R.

842 U.S.C. S: 1395nn(a)(1)(A) (2000).

9U.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).

1042 U.S.C. S: 1395nn(d)(3) (2000).

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

11An "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.

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 
           Nonprofit                26.0                7.2 

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.

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.

12Physician ownership information was self-reported by hospitals and does
not reflect ownership by physician family members.

13Available data did not provide information on the proportion of patients
admitted by owners compared with those admitted by nonowners.

Figure 1: Median Percentage of Admitting Physicians with Ownership in
Specialty Hospitals, by Specialty Hospital Type, 2003

Percentage of admitting physicians 100

80

60

40

20

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.)

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      
                          Orthopedic      31           159.3      
                            Surgical      16           76.2       
                             Women's      16           94.8       
                   General hospitals    4,908        88,507.2              NA 

  Specialty Hospitals Clustered in Areas Where State Policy and Local
  Demographic Conditions Favor Growth

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-thirds of the 100 specialty hospitals we identified were located in 7
states. The specialty hospitals that are planned to open over the next few
months or years will reinforce this pattern of concentration. Specialty
hospital location was associated with regulatory and demographic
conditions that may facilitate or encourage hospital development.

    Specialty Hospitals Exist in Particular States

Specialty hospitals are concentrated in seven states: Arizona, California,
Kansas, Louisiana, Oklahoma, South Dakota, and Texas. Texas, with 20
specialty hospitals, had almost twice as many specialty hospitals as the
state with the second highest number of specialty hospitals, California,
with 11. States such as Oklahoma (9), Kansas (8), and South Dakota (7),
although smaller in area and population than California, had nearly as
many specialty hospitals. The remaining 21 states with specialty hospitals
had between 1 and 4 specialty hospitals each. (See fig. 2.)

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.

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

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

Figure 3: Specialty Hospitals under Development by State, June 2003

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

    Specialty Hospitals Tend to Locate in States That Do Not Restrict Hospital
    Growth

The location of specialty hospitals is strongly correlated to whether
states allow hospitals to add beds or build new facilities without first
obtaining state approval for such health care capacity increases. All of
the specialty hospitals that are under development and 96 percent of the
specialty hospitals that opened from 1990 to June 2003 are located in such
states. (See table 3.) State requirements for prior approval to increase
health care capacity are commonly referred to as certificate of need (CON)
laws or requirements. Federal legislation enacted in 1975 to promote
comprehensive planning and development of hospitals and other health care
resources conditioned funding to states on their establishment of CON
requirements.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

15National Health Planning and Resources Development Act of 1974, Pub. L.
No. 93-641, 88 Stat. 2225 (1975).

16Joshua M. Weiner, The Urban Institute, Controlling the Supply of
Long-Term Care Providers at the State Level (Washington, D.C.: December,
1998).

17Health Care Quality Improvement Act of 1986, Pub. L. No. 99-660, S:
701(a), 100 Stat. 3784, 3799.

18Maine Department of Human Services, Certificate of Need Project Report
(Augusta, Maine, March 2001). http://www.state.me.us/dhs/ (downloaded July
1, 2003).

19Includes 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.

20Population data are from the 2000 U.S. Decennial Census.

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 
           CON states        17            4           0        45 

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

    Specialty Hospital Location Associated with Population Density and Growth

Eighty-five percent of specialty hospitals are located in urban areas,21 a
distribution that is roughly proportional to that of the U.S. population.
An urban location was slightly more prevalent among women's hospitals (90
percent) and slightly less prevalent among cardiac hospitals (78 percent).

Specialty hospitals also tended to locate in counties where the population
growth rate from April 1990 through April 2000 far exceeded the national
average of 11.1 percent. About 43 percent of specialty hospitals that
opened in 1990 or later are located in counties where the population grew
by 20 percent or more between the 1990 and 2000 decennial censuses.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

21Areas within federally designated metropolitan statistical areas (MSA)
were considered urban; areas outside of MSAs were considered rural.

22These rapid-growth counties account for 25 percent of the U.S.
population.

23The 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).

  The Four Specialty Hospital Types Differed from General Hospitals in Size and
  Scope but Also Differed from One Another

Relative to general hospitals, specialty hospitals, as a group, were much
less likely to have emergency departments, saw fewer patients in their
emergency departments, treated smaller percentages of Medicaid patients,
and derived a smaller share of their revenues from inpatient services.
However, there were important differences among the four specialty
hospital types in these and other service indicators, such as the extent
to which hospitals' emergency departments focused on certain medical
conditions or procedures.

    Hospitals Differed in the Provision of Emergency Care

Several differences with respect to emergency departments highlight the
contrast between specialty hospitals and general hospitals and also the
contrast among the four types of specialty hospitals. The four specialty
hospital types were less likely than general hospitals to have emergency
departments, but the prevalence of emergency departments varied by
specialty hospital type.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.

24Whether 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.

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.

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      
                              Cardiac      329.0           4.8      
                           Orthopedic       87.0           1.4      
                             Surgical       15.0           1.4      
                    General hospitals     2,636.1a        12.3b            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).

aBased on responses from 1,471 general hospitals.

bBased 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-

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 
                                    Cardiac        13                      11 
                                 Orthopedic        12                       7 
                                   Surgical        10                       6 
                                    Women's        10                       3 

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 of Public Patients Served and Revenue Generated
    from Inpatient Services

The contrast between specialty and general hospitals was also marked with
respect to the share of public program inpatients treated and inpatient
services provided. Relative to general hospitals in the same urban areas,
specialty hospitals in our HCUP sample tended to treat a lower percentage
of Medicaid inpatients among all patients with the same types of
conditions. (See fig 5.) For example, Medicaid beneficiaries constituted
28 percent of obstetric and gynecological (OB/GYN) patients at women's
hospitals, but 37 percent of the OB/GYN patients at area general
hospitals.

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.

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

50

40

30

20

10

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.

Figure 7: Average Percentage of Inpatient and Outpatient Revenues at
Specialty and General Hospitals, 2003

Percentage 100

80

60

40

20

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
hospital had, the focused mission of a specialty hospital often resulted
in its treating more patients with a given condition. Financially,
specialty hospitals overall tended to perform about as well as general
hospitals did on their Medicare inpatient business. However, for-profit
specialty hospitals did not do as well, on average, as for-profit general
hospitals. When the costs from all lines of business and the revenues from
all payers were considered, specialty hospitals tended to outperform
general hospitals.

  Specialty Hospitals Rivaled General Hospitals in Certain Market Share Measures
  and Financial Performance

    Within Their Fields of Expertise, Specialty Hospitals Often Treated More
    Patients Than Many General Hospitals

Specialty hospitals in our HCUP sample were generally not small relative
to general hospitals when the comparison was based upon the number of
patients treated for specific conditions. For example, 1 cardiac hospital
treated nearly 4,000 cardiac patients in 2000. Among the 26 general
hospitals that also treated cardiac patients in the same urban area, the
median number treated was approximately 2,000. Each of the 7 cardiac
hospitals in our HCUP sample treated more patients than the median general
hospital's cardiac practice in the specialty hospitals' market areas. A
similar relationship to general hospitals existed among the HCUP
orthopedic and women's hospitals. Six of the 8 orthopedic hospitals and 6
of the 7 women's hospitals treated more patients than were treated in the
comparable departments of the median general hospitals in their markets.
In contrast, 2 of the 3 surgical hospitals performed fewer inpatient
surgical procedures relative to the general hospitals in their markets.

In some cases, a specialty hospital treated far more patients with certain
conditions than did any of the general hospitals in the same urban area.
For example, 1 orthopedic hospital in our HCUP sample treated
approximately 7,400 orthopedic patients in 2000. In contrast, the largest
number of orthopedic patients treated at any of the 73 general hospitals
in the same urban area was just over 3,000. In all, 4 of the 25 HCUP
specialty hospitals-1 cardiac, 2 orthopedic, and 1 women's-had higher
patient volumes than did the comparable departments at all of the general
hospitals in their markets. These hospitals represent the extreme end of
the relative size spectrum. The median cardiac and orthopedic hospitals
treated somewhat more than twice the number of patients treated in the
comparable departments of the median general hospital in their markets.
The median women's hospital was about 80 percent larger in patient volume
than the median comparable department at general hospitals in the area.

Specialty hospitals' market shares, measured as the percentage of
inpatient claims in an urban area, were much higher when only claims
within a particular specialty field were included instead of all inpatient
claims. (See fig. 8.) In markets that had from 5 to 26 general hospitals
that treated cardiac patients, cardiac hospitals had a median market share
of 15 percent of the cardiac patients. The median market share was 8
percent among women's hospitals, in markets that contained from 7 to 86
general hospitals, and 5 percent among orthopedic hospitals, in markets
that contained from 10 to 86 general hospitals. Surgical hospitals' median
market share of 4 percent was the smallest among the four specialty
hospital types. However, there was wide variation in the market shares of
individual hospitals-especially among women's hospitals. For example, 1

women's hospital had a 2 percent market share while another had a 47
percent market share.

Figure 8: Median Percentage of Local Market Share, 2000

                    Percentage of local inpatient claims 16

                                       15

Financially, specialty hospitals tended to perform about as well as
general hospitals did on their Medicare inpatient business in fiscal year
2001-the most recent year for which this information is available.
Medicare inpatient margins-which are used to gauge a hospital's financial
performance on Medicare inpatient business-averaged 9.4 percent at
specialty hospitals and 8.9 percent at general hospitals.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).

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

                                       14

                                       12

                                      10 8

                                       6

                                       4

                                       2

                                       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 Specialty Hospitals Tended to Equal or Exceed That
    of General Hospitals

Table 6: Medicare Inpatient and Total Facility Margins at Specialty and
General Hospitals, Fiscal Year 2001

Medicare inpatient margins

Total facility all payer margins

Specialty hospitals

General hospitals

                              Specialty hospitals

General hospitals

All hospitals 9.4 8.9 6.4

For-profit hospitals 12.4 14.6 9.7

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.

  Comments from Organizations Representing Specialty Hospitals and Our
  Evaluation

We obtained comments from officials representing ASHA-a specialty hospital
association-and from officials representing the MedCath Corporation and
NSH-two major specialty hospital chains. The officials generally agreed
with the information in our report and offered their views on reasons for
key differences between specialty and general hospitals. Their comments,
summarized below, largely pertained to our findings regarding hospital
location, presence and utilization of emergency departments, and
hospitals' financial performance. Unless otherwise noted, the following
comments reflect the positions of all three organizations.

In response to our finding that, on average, the number of physicians per
capita and the number of hospital inpatient beds per capita are the same
in communities with and without specialty hospitals, MedCath officials
said that they have a national strategy in which they project communities'
health care needs several years into the future and use the results to
help them choose potential locations for new cardiac hospitals. MedCath
officials said that this explains why specialty hospitals tend to locate
in areas experiencing rapid population growth. An ASHA official said that,
among the association's members, the decision to build a specialty

hospital begins with physicians in a community and their perception of the
community's health care needs.

Specialty hospital representatives stressed that the existence and
utilization of an emergency department is primarily a function of the
mission of a particular hospital. They said that a specialty hospital
might not include an emergency department if the hospital's intended role
in a community does not call for one. NSH officials noted that nonprofit
general hospitals receive tax advantages in return for providing certain
community services, including emergency care. MedCath officials said that,
because nonprofit hospitals are required to fulfill certain social needs,
our comparisons involving emergency departments and treatment of Medicaid
patients should have been made between for-profit specialty hospitals and
for-profit general hospitals. ASHA officials added that state law may
dictate whether a hospital has an emergency department.

MedCath officials noted that our results showed that, on average,
specialty hospitals' margins are similar to for-profit general hospitals'
margins. They said that this financial performance was the result of a
business model that emphasizes efficiency and cost control in the delivery
of quality health care.

Overall, MedCath officials said that our findings showed that specialty
hospitals should be no cause for concern. Specifically, the officials said
that there are relatively few specialty hospitals, specialty hospitals
account for a very small fraction of total Medicare inpatient hospital
spending, such hospitals are concentrated in a few states and in areas
where there is a need for such hospitals, and their business model leads
to profits that are similar to the profits earned by for-profit general
hospitals. Representatives from all three organizations, while generally
agreeing with the information in our report, emphasized the important role
that specialty hospitals play in efficiently providing quality health
care.

We agree that, on a national level, specialty hospitals have a small
presence. However, in the communities in which they locate, specialty
hospitals may treat a relatively large share of patients who have specific
medical conditions or need specific medical procedures. For the share of
the market that those patients represent, specialty hospitals are often
among the larger competitors that general hospitals face. In addition, the
number of specialty hospitals is growing rapidly. In the next few months
or years, the number of specialty hospitals that we identified is expected
to increase by at least 25 percent.

The policy issue regarding emergency care may be one that is focused more
on access to such care and less on whether every specialty hospital should
have an emergency department. Although some specialty hospitals-especially
cardiac hospitals-provide at least a limited amount of emergency care,
individuals who need emergency care typically must obtain treatment at
general hospitals. Critics of specialty hospitals are concerned that such
facilities may erode the financial health of general hospitals and impair
their ability to provide emergency care and meet other basic community
needs, such as stand-by capacity to respond to communitywide disasters. In
this report, we did not attempt to determine the financial effect that
specialty hospitals may have on neighboring general hospitals.

Finally, we previously reported that the 25 urban specialty hospitals that
we studied in six states tended to treat patients who were less severely
ill relative to patients treated at neighboring general hospitals. Because
we did not analyze the economic impact of such a pattern, we cannot
determine the extent to which the financial performance of specialty
hospitals may be due to patient mix, the efficient delivery of health
care, or other factors.

We are sending copies of this report to appropriate congressional
committees and other interested parties. We will also make copies
available to others upon request. This report will be available at no
charge on GAO's Web site at http://www.gao.gov.

If you or your staffs have any questions, please call me at (202) 512-7101
or James Cosgrove at (202) 512-7029. Other contributors to this report
include Hannah Fein, Zachary Gaumer, and Ariel Hill.

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

                       Appendix I: Scope and Methodology

  Specialty Hospital Definition and Identification

This appendix provides additional information on the key aspects of our
analysis. First, it lists the criteria we used to define specialty
hospitals and the process we followed to identify them. Second, it
discusses the survey used to collect a variety of information from the
universe of specialty hospitals. Third, it describes key data sources and
methodological approaches used in each subanalysis. Finally, it address
issues related to data reliability and limitations.

Although a standard definition for a specialty hospital does not exist, a
reasonable approach is to define specialty hospitals as those that
predominately treat certain diagnoses or perform certain procedures. For
this report, we classified a hospital as a specialty hospital if the data
indicated that

o  	two-thirds or more of its inpatient claims were in one or two major
diagnosis categories (MDC) or

o  	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

o  government-owned hospitals;

o  	hospitals for which the majority of inpatient claims were for MDCs
that related to rehabilitation, psychiatry, alcohol and drug treatment,
children, or newborns; and

o  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

1We 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.

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

2The 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.

3HCUP is a federal-state-industry partnership sponsored by the Agency for
Healthcare Research and Quality.

4We obtained HCUP data on hospitals in three of Texas's five regions.

                       Appendix I: Scope and Methodology

  2003 Specialty Hospital Survey

two national specialty hospital chains: National Surgical Hospitals and
MedCath Corporation. These organizations also provided information on the
26 specialty hospitals that are under development.

From January 2003 through March 2003, we conducted a survey of 100
cardiac, orthopedic, surgical, and women's hospitals that we identified as
being operational. The survey gathered basic hospital address information
and posed questions pertaining to the types of services offered at each
hospital, hospital size, physician ownership, partnership structure, and
the extent of emergency department services. Eighty percent of the
specialty hospitals that received our survey responded.

  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

                       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 Requirements

Data from the American Health Planning Association (AHPA) were used to
determine which states require hospitals to obtain state approval before
they may add beds or build new facilities. State regulations that require
prior approval for state health care capacity increases are commonly
referred to as certificate of need (CON) requirements. AHPA's document,
"2002 Relative Scope and Review Thresholds of CON Regulated Services,"
listed 37 states that have one or more of the approximately 30 different
types of CON requirements. For the purposes of this report, we considered
a state to have CON requirements if it required prior approval for new
acute care beds.5

    Health Care System Resources

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

5Examples of other types of CON regulated services include magnetic
resonance imaging scanners, long-term care services, and organ transplant
centers.

6Dartmouth 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).

                       Appendix I: Scope and Methodology

    Provision of Emergency Care

We relied on several data sources to obtain information pertaining to the
provision of emergency care at specialty and general hospitals. To
determine whether a specialty hospital had an emergency department, we
primarily relied upon the hospital's response to our specialty hospital
survey. When that information was missing, we used the information
contained in CMS's POS file or contacted the hospital's administrator. As
a result, our finding regarding the percentage of specialty hospitals with
emergency departments is based on data from all of the 100 specialty
hospitals that we identified. The information pertaining to the existence
of emergency departments at general hospitals was drawn from AHA's 2003
Annual Survey of Hospitals. Emergency department utilization data for
specialty hospitals were obtained from hospital responses to the specialty
hospital survey, while utilization data for general hospitals were drawn
from our 2002 general hospital survey.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.

7U.S. General Accounting Office, Hospital Emergency Departments: Crowded
Conditions Vary Among Hospitals and Communities, GAO-03-460 (Washington,
D.C.: Mar. 14, 2003).

8One 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.

                       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

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

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.

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