General Hospitals: Operational and Clinical Changes Largely	 
Unaffected by Presence of Competing Specialty Hospitals 	 
(07-APR-06, GAO-06-520).					 
                                                                 
There has been much debate about specialty hospitals--short-term 
acute care hospitals with physician owners or investors that	 
primarily treat patients who have specific medical conditions or 
need surgical procedures--and the competitive effects they may	 
have on general hospitals. Advocates of specialty hospitals	 
contend that competition from these physician-owned facilities	 
can prompt general hospitals to implement efficiency, quality,	 
and amenity improvements, thus favorably affecting the overall	 
health care delivery system. Critics of specialty hospitals are  
concerned that general hospitals may respond to such competition 
by making changes that do not necessarily increase efficiency or 
benefit patients or communities, for example, by adding services 
already available in the community. The appropriateness of	 
physicians' financial interests in specialty hospitals has also  
been questioned. GAO was asked to provide information on the	 
competitive response of general hospitals to specialty hospitals.
GAO surveyed approximately 600 general hospitals in markets with 
and without specialty hospitals to provide information on the	 
extent to which these two groups of general hospitals reported	 
implementing operational and clinical service changes to remain  
competitive. GAO received responses from 401 general hospitals.  
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-520 					        
    ACCNO:   A51177						        
  TITLE:     General Hospitals: Operational and Clinical Changes      
Largely Unaffected by Presence of Competing Specialty Hospitals  
     DATE:   04/07/2006 
  SUBJECT:   Competition					 
	     Hospitals						 
	     Surveys						 
	     Hospital administration				 
	     Community hospitals				 

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GAO-06-520

     

     * Results in Brief
     * Background
          * Specialty Hospitals Represent a Small Share of Competition F
          * Competitive Effect of Specialty Hospitals on General Hospita
          * Evidence of General Hospital Response to Specialty Hospitals
     * Presence of Specialty Hospitals Had Little Effect on the Num
          * General Hospitals Perceived an Increase in Competition from
          * General Hospitals Reported Implementing a Variety of Operati
          * Few Operational and Clinical Service Change Differences Obse
     * Concluding Observations
     * Agency Comments and Comments from Organizations Representing
     * Sample Selection
     * Survey of General Hospitals
     * Relationship between Regional and Local Health Care Markets
     * Survey Data Analysis
     * Data Reliability
     * GAO Contact
     * Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Report to the Chairman, Committee on Ways and Means, House of
Representatives

United States Government Accountability Office

GAO

April 2006

GENERAL HOSPITALS

Operational and Clinical Changes Largely Unaffected by Presence of
Competing Specialty Hospitals

GAO-06-520

Contents

Letter 1

Results in Brief 4
Background 6
Presence of Specialty Hospitals Had Little Effect on the Number or Type of
Operational and Clinical Service Changes Reported by General Hospitals 9
Concluding Observations 20
Agency Comments and Comments from Organizations Representing General
Hospitals 20
Appendix I Scope and Methodology 22
Sample Selection 22
Survey of General Hospitals 24
Relationship between Regional and Local Health Care Markets 25
Survey Data Analysis 27
Data Reliability 29
Appendix II Survey Questionnaire 31
Appendix III Survey Response by Category 38
Appendix IV CMS Comments 40
Appendix V GAO Contact and Staff Acknowledgments 42
Related GAO Products 43

Tables

Table 1: Hospitals' Reported Perceptions of the Level of Competition in
Their Market Environment, by Geographic Type, 2005 10
Table 2: Urban General Hospitals' Reported Perceptions of the Change in
Competition from Other General Hospitals and Limited-service Facilities,
2005 10
Table 3: Rural General Hospitals' Reported Perceptions of the Change in
Competition from Other General Hospitals and Limited-service Facilities,
2005 11
Table 4: Operational Changes Reported by a Majority of General Hospitals,
2000 through 2005 12
Table 5: Average Number of Operational and Clinical Service Changes
Reported by General Hospitals with and without Specialty Hospitals in
Their Markets from 2000 through 2005, by Type of Change Implemented 14
Table 6: Number of Reported Operational and Clinical Service Changes That
Significantly Differed between General Hospitals with and without
Specialty Hospitals in Their Markets from 2000 through 2005, by Type of
Change Implemented 15
Table 7: Percentage of Rural General Hospitals Reporting Operational and
Clinical Service Changes in Regional Markets with and without Specialty
Hospitals from 2000 through 2005 16
Table 8: Percentage of Urban General Hospitals Reporting Operational and
Clinical Service Changes in Regional Markets with and without Specialty
Hospitals from 2000 through 2005 17
Table 9: Percentage of Urban General Hospitals Reporting Operational and
Clinical Service Changes in Local Markets with Specialty Hospitals and
Regional Markets without Specialty Hospitals from 2000 through 2005 19
Table 10: Criteria for Selecting Regional Markets 23
Table 11: Criteria for Selecting General Hospitals Included in the Sample
and Comparison Sample 24
Table 12: Average Number of Operational and Clinical Service Changes
Reported by Urban and Rural General Hospitals from 2000 through 2005, by
Category of Potential Change 39

Figures

Figure 1: Number of Medical Facilities by Type 7
Figure 2: Illustration of the Relationship between Regional and Local
Health Care Markets 26
Figure 3: Illustration of the Three Types of Comparisons Performed between
General Hospitals in Markets with and without Specialty Hospitals 28

Abbreviations

AHA American Hospital Association ASC ambulatory surgical center CMS
Centers for Medicare & Medicaid Services CON certificate of need DAP
Dartmouth Atlas Project DOJ Department of Justice DRA Deficit Reduction
Act of 2005 FAH Federation of American Hospitals FTC Federal Trade
Commission HCIS Health Care Information System HRR hospital referral
region HSA hospital service area IT information technology MedPAC Medicare
Payment Advisory Commission MMA Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 MSA metropolitan statistical area OMB Office
of Management and Budget POS Provider of Service

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separately.

United States Government Accountability Office

Washington, DC 20548

April 7, 2006

The Honorable William M. Thomas Chairman Committee on Ways and Means House
of Representatives

Dear Mr. Chairman:

The approximately 4,800 general hospitals in the nation face competition
from a variety of sources,1 including, in some markets, specialty
hospitals whose owners or investors include physicians who admit patients
to the facility. Specialty hospitals are distinguished from other
short-term acute care hospitals in that the former primarily treat
patients who have specific medical conditions or need surgical procedures.
Specialty hospitals that have opened in recent years typically provide
cardiac or orthopedic care or specialize in surgical procedures. In 2005,
there were approximately 100 such specialty hospitals in operation or
under development that had physician owners or investors.

Although there are relatively few physician-owned specialty hospitals,
their potential effect on general hospitals and hospital markets has
become a subject of debate. Advocates for specialty hospitals have stated
that competition from these facilities favorably affects the overall
health care delivery system for hospital services.2 According to
advocates, this result occurs both because specialty hospitals' focused
missions enable them to provide high-quality care efficiently and because
competition from specialty hospitals creates incentives for general
hospitals to implement quality, efficiency, and amenity improvements. In
contrast, critics of specialty hospitals have stated that these
facilities, in part because of their focused missions, have an unfair
competitive advantage relative to general hospitals, which have broad
missions to serve all of a community's health care needs, including the
provision of emergency care. These critics are also concerned that
physicians' ownership or investment interests in specialty hospitals
create financial incentives that could inappropriately affect physicians'
clinical and referral behavior. Moreover, this view holds, the competitive
behaviors that specialty hospitals elicit from general hospitals may not
all be socially desirable. For example, in their quest to compete, general
hospitals could add services that duplicate those already available in a
community, enter into exclusive contracts with health plans, or make
changes to discourage physicians from opening rival specialty hospitals.
We and other federal agencies have studied various issues related to
hospital market competition and specialty hospitals.3 To date, however,
the evidence of how general hospitals' competitive actions have been
influenced by the presence of specialty hospitals has largely been
anecdotal.

1For the purposes of this report we define general hospitals as
nongovernmental, short-term acute care hospitals that treat a broad range
of medical conditions.

2Unless otherwise specified, in this report the term specialty hospital
refers to cardiac, orthopedic, and surgical specialty hospitals whose
owners or investors include physicians who admit patients to the facility.

Provisions in the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) had the effect, in general, of
establishing an 18-month moratorium on the development of new specialty
hospitals.4 Although the moratorium expired in June 2005, the recently
enacted Deficit Reduction Act of 2005 (DRA) has the effect of extending
the moratorium until the date the Secretary of Health and Human Services
issues a final report to appropriate committees of jurisdiction of
Congress on a plan that addresses issues concerning physician investment
in specialty hospitals or up to 8 months after the enactment date of DRA,
whichever is earlier.5

Because the issue of specialty hospitals remains controversial, you
expressed interest in knowing more about the competitive response of
general hospitals to specialty hospitals. In this report, we provide
information on the extent to which general hospitals in markets with
specialty hospitals and general hospitals in markets without specialty
hospitals reported implementing operational and clinical service changes
to remain competitive.

To conduct our analysis, we surveyed a sample of general hospitals in
regional markets with at least one specialty hospital that had opened
since the beginning of 1998.6 We also surveyed a comparison sample of
general hospitals in regional markets where there were no specialty
hospitals. General hospitals in both groups were asked to describe the
extent of competition within their markets in 2005, and to indicate the
operational changes and clinical service changes they made from 2000
through 2005 to remain competitive in their markets. (See app. II for a
copy of the survey.) The 72 potential operational changes listed in the
survey included, for example, increasing income guarantees to recruit
physicians. The 34 potential clinical services listed in the survey that
hospitals could have reported adding, expanding, reducing, or eliminating
included services such as cardiac care. We analyzed the survey responses
to determine whether there were significant differences between the two
groups of hospitals in terms of the total number and types of changes
made. This comparison was made separately for urban general hospitals,
defined as those hospitals located in a metropolitan statistical area
(MSA), and rural general hospitals, defined as those hospitals located
outside of an MSA, because the extent of changes made by general hospitals
in response to the presence of a specialty hospital could be different in
the two environments.7

3See the end of this report for a list of GAO reports on this topic.

4For a discussion of MMA's provisions related to specialty hospitals, see
GAO, Specialty Hospitals: Information on Potential New Facilities,
GAO-05-647R (Washington, D.C.: May 19, 2005).

5DRA was enacted on February 8, 2006. Pub. L. No. 109-171, S: 5006, 120
Stat. 4, 33-34.

Our analysis accounted for the possibility that the presence of a
specialty hospital might be more likely to elicit competitive responses
from general hospitals that are reasonably close by. In constructing our
sample of general hospitals in regional markets with specialty hospitals,
we excluded urban general hospitals that were 90 miles or more from the
nearest specialty hospital and rural general hospitals that were 120 miles
or more from the nearest specialty hospital. We further explored this
possibility by analyzing the responses of a subset of urban general
hospitals-those that were in the same local market as a specialty
hospital.8 Urban general hospitals in this local subset may be more likely
than other general hospitals in the same regions to be affected by the
presence of a specialty hospital and thus may be more likely to have
implemented operational or clinical service changes in response.
Therefore, we compared the responses from this subset with the responses
from urban hospitals in regions without specialty hospitals.9

6Major teaching hospitals were excluded from this study. See app. I for a
discussion of the sample selection. We used the Dartmouth Atlas Project's
(DAP) hospital referral regions (HRR) as the basis for our regional health
care markets. The 306 HRRs in the United States each contain at least one
hospital that performs major cardiovascular procedures and have a minimum
population of 120,000.

7In 2005, the Office of Management and Budget (OMB) defined an MSA as
having at least one urbanized area of 50,000 or more population, plus
adjacent territory that has a high degree of social and economic
integration with the core as measured by commuting ties.

8We used the DAP's hospital service areas (HSA) as the basis for our local
health care markets. An HSA is a collection of zip codes where residents
receive most of their hospitalizations from hospitals in that area. In all
but two cases, two or more HSAs constitute an HRR. Because only eight
rural general hospitals had a specialty hospital in their local health
care market, we did not analyze this group separately.

We selected specific regional markets for our hospital comparison groups
by identifying areas that were similar to one another on several different
dimensions, including, for example, the number of Medicare beneficiaries
in each regional market. All of the regional markets were located in
states that did not have laws requiring hospitals to obtain state approval
before adding inpatient beds or building new inpatient facilities.10

We surveyed 603 general hospitals during August and September of 2005, and
received responses from 401 facilities (67 percent response rate). (See
app. I for more detail regarding our scope and methodology.) We took
several steps to ensure that the data used to produce this report were
sufficiently reliable. For example, we checked each survey response for
internal consistency and contacted hospitals to clarify their responses
when necessary. We ensured the reliability of the hospital and
market-related data sets used in this report by verifying that they were
widely used for similar research purposes and by performing appropriate
electronic data checks. We conducted our work from July 2005 through March
2006 in accordance with generally accepted government auditing standards.

                                Results in Brief

Nearly all general hospitals responding to our survey reported making
operational and clinical service changes to remain competitive in what
they viewed as increasingly competitive healthcare markets; however, there
was little evidence to suggest that general hospitals made substantially
more or fewer changes or different types of changes if some of their
competition came from a specialty hospital. While the majority of survey
respondents indicated that competition from other general hospitals had
increased, a larger proportion of respondents-91 percent of urban general
hospitals and 74 percent of rural general hospitals-reported increases in
competition from limited service facilities, a category that includes
specialty hospitals, but also many other types of facilities, such as
ambulatory surgical centers (ASC), imaging centers, urgent care centers,
and gastroenterology centers.11 General hospitals reported making an
average of 22 operational changes, such as introducing a formal process
for evaluating efforts to improve quality and reduce costs, and 8 clinical
service changes, such as adding or expanding cardiology services, from
2000 through 2005. Overall, 100 percent of general hospitals we surveyed
reported implementing at least 1 operational change, while 97 percent
reported adding at least 1 new clinical service or expanding an existing
one and 32 percent reported eliminating at least 1 clinical service or
devoting fewer resources to it. Although specialty hospital advocates have
hypothesized that the entrance of a specialty hospital into a market
encourages the area's existing general hospitals to adopt changes that
make them more efficient and better able to compete, the survey responses
largely did not support this view. There were no substantial differences
in the average number of operational and clinical service changes made by
general hospitals in markets with and without specialty hospitals and, for
the vast majority of the potential changes included on our survey, there
was no statistical difference between the two groups of hospitals in terms
of the specific changes they reported implementing.

9By definition, if there are no specialty hospitals in a regional market,
there are no specialty hospitals in any of the local markets that
constitute the regional market.

10These laws are referred to as certificate of need (CON) laws. For more
information on the relationship between CON laws and the location of
specialty hospitals, see GAO, Specialty Hospitals: Geographic Location,
Services Provided, and Financial Performance, GAO-04-167 (Washington,
D.C.: Oct. 22, 2003).

In comments on a draft of this report, CMS stated that our study, by
providing quantitative data on the market effect of specialty hospitals,
was extremely helpful and that CMS would use the information as the agency
developed its DRA-mandated report on physician investment in specialty
hospitals. We also received comments from the American Hospital
Association (AHA) and the Federation of American Hospitals (FAH). Both
organizations stated that their concerns regarding specialty hospitals
were specific to those facilities that have physician owners or investors.
AHA and FAH suggested text changes to emphasize that our report is focused
on the effect of these types of specialty hospitals on general hospitals.

11Ambulatory surgical centers (ASC) are facilities where surgeries that do
not require hospital admission are performed. Imaging centers are
facilities, independent of hospitals and physicians' offices, that provide
diagnostic services. Urgent care centers are facilities that specialize in
providing ambulatory medical care without scheduled appointments to
patients with acute illnesses or injuries. Gastroenterology centers are
facilities that specialize in the evaluation and treatment of
gastrointestinal and liver diseases.

                                   Background

General hospitals face competition from a variety of sources, including
the approximately 100 specialty hospitals in operation or under
development in some markets in 2005. Despite the relatively small number
of specialty hospitals, the issue of how general hospitals have responded
to the competition from specialty hospitals has been a subject of debate.
Federal agencies have broadly addressed how general hospitals' competitive
actions have been influenced by the presence of specialty hospitals;
however, to date, the evidence has been largely anecdotal.

Specialty Hospitals Represent a Small Share of Competition Facing General
Hospitals

Specialty hospitals represent a small share of the national health care
market and the competition that general hospitals face from other general
hospitals, ASCs, imaging centers, and other types of facilities. In 2005,
we identified 66 existing specialty hospitals and an additional 46 that
were under development.12 In contrast, there were an estimated 4,800
general hospitals,13 4,100 Medicare certified ASCs, and 2,400 imaging
centers.14 (See fig. 1.) Another methodology for assessing the relative
magnitude of specialty hospitals is through Medicare inpatient spending.
In prior work pertaining to specialty hospitals of various types and
ownership structures, we found that specialty hospitals accounted for a
low share of Medicare spending for inpatient services relative even to
their low share of the hospital market.15 Specifically, in April 2003 we
reported that specialty hospitals in existence accounted for about 2
percent of existing hospitals, but 1 percent of total Medicare inpatient
spending.

12The number of specialty hospitals in existence and under development is
based on information collected for our previous reports on specialty
hospitals (GAO, Specialty Hospitals: Information on National Market Share,
Physician Ownership, and Patients Served, GAO-03-683R [Washington, D.C.:
Apr. 18, 2003]; GAO-04-167 ; and GAO-05-647R ) and from information
obtained from the Medicare Payment Advisory Commission (MedPAC).

13The estimate of the general hospitals reflects the difference between
the American Hospital Association's count of 4,919 community hospitals in
2004, which includes specialty hospitals of various types, and our
estimate of the number of specialty hospitals.

14MedPAC reported in its June 2004 report, A Data Book: Healthcare
Spending and the Medicare Program (Washington, D.C.: June 2004), that
there were 2,403 imaging centers in existence in 2002. In its June 2005
report, A Data Book: Healthcare Spending and the Medicare Program
(Washington, D.C.: June 2005), MedPAC reported that there were 4,136
Medicare-certified ASCs in existence in 2004.

15In our April 2003 report, GAO-03-683R , we used a broader definition of
specialty hospitals that included physician- and non-physician-owned
hospitals that focused on cardiac, orthopedic, surgical, and women's
services and procedures that opened in 2003 or earlier.

Figure 1: Number of Medical Facilities by Type

Note: This figure includes the most recently available count for each type
of medical facility. The estimate of the general hospitals reflects the
difference between the American Hospital Association's count of 4,919
community hospitals in 2004, which includes specialty hospitals of various
types, and the number of specialty hospitals we identified in our 2003 and
2005 reports. This figure includes a count of only Medicare-certified
ASCs, a group that makes up an estimated 85 percent of all ASCs.

Competitive Effect of Specialty Hospitals on General Hospitals Is Controversial

The overall competitive effect of specialty hospitals on general hospitals
continues to be the subject of debate. Advocates of specialty hospitals
contend that the focused mission and dedicated resources of specialty
hospitals enable them to offer reduced treatment costs, improved care
quality, and enhanced amenities for patients compared with what general
hospitals are able to provide. Moreover, some advocates maintain that
competition from specialty hospitals can prompt general hospitals to
implement efficiency, quality, and amenity improvements, thus favorably
affecting the overall health care delivery system.

However, critics are concerned that general hospitals may be adversely
affected by specialty hospitals. In 2003, using a broader definition of
specialty hospitals that included facilities with and without physician
owners or investors, we reported that specialty hospitals tended to treat
less-severely-ill patients, served proportionately fewer Medicaid
patients, and were less likely to have emergency rooms.16 We also reported
that physicians were owners or investors in the majority of specialty
hospitals we identified. These findings were consistent with critics'
concerns that specialty hospitals tend to concentrate on the most
profitable procedures and serve patients with the fewest complications.
According to such critics, specialty hospitals draw financial resources
away from general hospitals and leave those hospitals with the
responsibility of caring for the sickest patients and fulfilling their
broad missions to provide charity care, emergency services, and standby
capacity to respond to communitywide disasters. Critics are also concerned
that physician ownership of specialty hospitals creates financial
incentives that could inappropriately affect physicians' clinical behavior
and their decisions to refer patients to specific facilities.

Evidence of General Hospital Response to Specialty Hospitals Is Largely
Anecdotal

To date, there have been only anecdotal reports of how general hospitals
have competitively responded to specialty hospitals. Two reports-one
jointly issued by the Federal Trade Commission (FTC) and the Department of
Justice (DOJ), and another issued by MedPAC-discussed general hospitals'
responses to specialty hospitals.17 The FTC/DOJ report was based primarily
on written submissions and testimony provided by health care experts at
the agencies' 2002 workshops and 2003 hearings. The information contained
in MedPAC's report was gathered through site visits and interviews with
representatives of specialty and general hospitals in selected markets
where specialty hospitals existed and interviews with others in the health
care community. Collectively, the reports identified several actions
general hospitals took in response to the entry, or the anticipation of
entry, of specialty hospitals into the marketplace, including: improving
operating room scheduling, extending service hours, building a
single-specialty wing to discourage the establishment of competing
facilities, partnering with physicians on their medical staff to open a
specialty hospital, signing exclusive contracts with private payers to
preclude specialty hospitals or the physicians who invest in them from
contracting with those payers, and revoking the admitting privileges of
physicians involved with a competing specialty hospital.

16In our April and October 2003 reports, GAO-03-683R and GAO-04-167 , we
included physician- and non-physician-owned hospitals that focused on
cardiac, orthopedic, surgical, and women's services and procedures.

17Federal Trade Commission and Department of Justice, Improving Health
Care: A Dose of Competition (July 2004); Medicare Payment Advisory
Commission, Report to the Congress: Physician-Owned Specialty Hospitals
(Washington, D.C.: March 2005).

Presence of Specialty Hospitals Had Little Effect on the Number or Type of
     Operational and Clinical Service Changes Reported by General Hospitals

Nearly all general hospitals responding to our survey reported making
operational and clinical service changes to remain competitive in markets
they viewed as increasingly competitive; however, there was little
evidence to suggest that the absence or presence of specialty hospitals
had much of an effect on the number or types of changes general hospitals
reported implementing between 2000 and 2005. General hospitals responding
to our survey reported facing increasing competition both from other
general hospitals and from limited-service facilities-a category that
includes specialty hospitals, ambulatory surgical centers, and imaging
centers. The general hospitals that responded to our survey reported
implementing a variety of operational and clinical service changes.
However, we found little evidence associating specific changes made by
general hospitals with the presence or absence of a nearby specialty
hospital. That is, with few exceptions, general hospitals did not report
implementing a substantially different number of changes or different
types of changes just because there was a specialty hospital in their
market.

General Hospitals Perceived an Increase in Competition from Both Other General
Hospitals and Limited-service Facilities

Nearly all general hospitals that responded to our survey described their
market environments as ranging from somewhat competitive to extremely
competitive. Only one hospital described its market as not competitive.
Urban general hospitals were much more likely than rural general hospitals
to describe their market as either very or extremely competitive. (See
table 1.)

Table 1: Hospitals' Reported Perceptions of the Level of Competition in
Their Market Environment, by Geographic Type, 2005

Percentage                          
                                       General hospitals
Perceived competition                  Urbana   Rural 
Very or extremely competitive              77      35 
Somewhat competitive or competitive        22      65 
Not competitive                             0       0 

Source: GAO.

aBecause of rounding, the urban general hospital column does not add to
100 percent.

A larger percentage of general hospitals that responded to our survey-both
urban and rural-reported increased competition from limited-service
facilities relative to those that reported increased competition from
other general hospitals. More than 90 percent of urban general hospitals
indicated that competition from limited-service facilities had either
increased or greatly increased in their markets, while 75 percent of urban
general hospitals indicated that competition from other general hospitals
had either increased or greatly increased. (See table 2.) Similarly, 74
percent of rural general hospitals indicated that competition from
limited-service facilities had either increased or greatly increased,
while 53 percent of rural general hospitals indicated that competition
from other general hospitals had either increased or greatly increased.
(See table 3.)

Table 2: Urban General Hospitals' Reported Perceptions of the Change in
Competition from Other General Hospitals and Limited-service Facilities,
2005

Percentage                  
                                           Source of competition
Perceived change in               Other general              
competition                           hospitals Limited-service facilities
Increased or greatly                                      75            91 
increased                                                    
Remained the same                                         24             8 
Decreased or greatly                                       1             1 
decreased                                                    

Source: GAO.

Table 3: Rural General Hospitals' Reported Perceptions of the Change in
Competition from Other General Hospitals and Limited-service Facilities,
2005

Percentage                  
                                           Source of competition
Perceived change in               Other general              
competition                           hospitals Limited-service facilities
Increased or greatly                                      53            74 
increased                                                    
Remained the same                                         43            24 
Decreased or greatly                                       3             1 
decreased                                                    

Source: GAO.

Note: Because of rounding, columns do not add up to 100 percent.

General Hospitals Reported Implementing a Variety of Operational and Clinical
Service Changes from 2000 through 2005

Among the 72 potential operational changes survey respondents could have
indicated that they made and the 34 potential clinical services
respondents could have indicated that they added, expanded, reduced, or
eliminated on our survey, general hospitals reported implementing an
average of 30 changes (22 operational changes and 8 clinical service
changes) from 2000 through 2005. Overall, general hospitals that responded
to our survey had reported implementing between 3 and 66 separate changes.

Overall, 100 percent of general hospitals we surveyed reported
implementing at least 1 operational change. There were 18 specific
operational changes that at least half of the general hospitals that
responded to our survey reported implementing. (See table 4.) Four of the
6 most commonly reported operational changes involved increasing wages and
benefits for nurses and offering more flexible working schedules in an
effort to improve nursing staff retention or recruitment. In addition, 4
of the 18 most commonly reported operational changes related to
physicians. These changes involved increasing the physicians' role in
hospital governance, increasing physician income guarantees, hiring new
physicians, and beginning a hospitalist program.18

18Hospitalists are physicians whose primary professional focus is the
general medical care of hospitalized patients and the management of
inpatient services.

Table 4: Operational Changes Reported by a Majority of General Hospitals,
2000 through 2005

                                                        Percentage of general 
Operational change                                               hospitals 
Increased nursing wages                                                 86 
Committed additional resources to marketing and                            
community outreach efforts                                              74
Introduced, increased, or improved upon bonuses for                        
nursing staff                                                           72
Introduced, increased, or improved upon tuition                            
support for nursing staff                                               71
Focused on reducing the average turnover time                              
between operations in their operating rooms                             70
Introduced or increased work schedule flexibility                          
for nursing staff                                                       70
Implemented a formal process for evaluating efforts                        
to improve quality and reduce costs                                     69
Incorporated critical pathways for case managementa                     65 
Decreased patient wait times to attract new patients                    65 
Increased physicians' roles in hospital governance                      60 
Expanded emergency department capacity                                  59 
Standardized operating room supplies                                    56 
Increased communication with families during                               
inpatient stays                                                         55
Increased income guarantees to recruit physicians                       55 
Instituted a sliding fee scale for self-pay patients                    54 
Hired additional physicians                                             54 
Implemented wireless technology                                         52 
Started a hospitalist programb                                          51 

Source: GAO.

Notes: Survey results were weighted for differences in response rate
between rural and urban hospitals.

aCritical pathways refer to management plans that establish goals for
patients and provide the sequence and timing of actions necessary to
achieve these goals efficiently.

bHospitalists are physicians whose primary professional focus is the
general medical care of hospitalized patients and the management of
inpatient services.

Nearly all general hospitals that responded to our survey reported
implementing clinical service changes. Overall, 97 percent of the
hospitals added or expanded at least one type of clinical service. The
majority of hospitals added or expanded imaging/radiology services (73
percent) and cardiology services (57 percent). Other types of clinical
services were added or expanded by a minority of hospitals, such as
outpatient surgical services (37 percent) and orthopedic services (31
percent). Nearly one-third of hospitals (33 percent) reduced or eliminated
at least one type of clinical service. The most commonly reported clinical
services to be reduced or eliminated were inpatient/outpatient psychiatric
services (7 percent).

Few Operational and Clinical Service Change Differences Observed between General
Hospitals in Markets with and without Specialty Hospitals

Overall, the operational and clinical service changes reported by general
hospitals that responded to our survey appeared largely unaffected by the
presence or absence of specialty hospitals in their markets. On average,
rural general hospitals with a specialty hospital in their regional market
made a few more operational service changes than rural general hospitals
in markets without specialty hospitals, but made a similar number of
clinical service changes. More specifically, rural general hospitals in
markets with specialty hospitals made an average of 21 operational
changes, 7 clinical service additions or expansions, and 1 clinical
service reduction or elimination. Rural general hospitals in markets
without specialty hospitals made an average of 18 operational changes,19 6
clinical service additions or expansions, and no clinical service
reductions or eliminations. (See table 5.) Urban general hospitals in
regional and local markets with specialty hospitals made similar numbers
of operational and clinical service changes as general hospitals in
markets without specialty hospitals.20

19The difference between the average number of reported operational
changes implemented by rural general hospitals in markets with and without
specialty hospitals was statistically significant.

20See app. III for additional information on the average number of
operational and clinical service changes reported by urban and rural
general hospitals.

Table 5: Average Number of Operational and Clinical Service Changes
Reported by General Hospitals with and without Specialty Hospitals in
Their Markets from 2000 through 2005, by Type of Change Implemented

                                                    Average                   
                                                  number of                   
                                                   reported                   
                                                   clinical                   
Urban/rural                    Average number   services Average number of 
status of                         of reported   added or reported clinical
general         Presence of       operational   expanded  services reduced
hospitals being specialty    changes (maximum (maximum =     or eliminated
compared        hospitals               = 72)        34)    (maximum = 34)
Rural           Regional                                                   
                   marketa                   21b          7                 1
Rural           None                      18b          6                 0 
Urban           Regional                                                   
                   marketa                    23          7                 1
Urban           Local market               24          7                 1 
Urban           None                       24          8                 1 

Source: GAO.

aA general hospital located in a regional market with a specialty hospital
is also in a local market that may or may not contain a specialty
hospital.

bThe difference between the average number of reported operational changes
implemented by rural general hospitals in markets with and without
specialty hospitals was statistically significant at the 0.05 level.

For most of the 72 potential operational changes and 34 potential clinical
service changes listed on our survey, the percentage of general hospitals
that had reported implementing each change did not systematically vary
with the presence or absence of a specialty hospital in the market. For
example, 12 percent of urban general hospitals in regional markets with
specialty hospitals and 13 percent of urban general hospitals in regional
markets without specialty hospitals opened a new hospital wing
specializing in one type of medicine between 2000 and 2005. However, for a
few of the potential changes listed on our survey, there was a
relationship between the percentage of general hospitals that had reported
implementing the change and the presence of a specialty hospital in the
market.21 For example, there were 6 operational changes and 3 clinical
service changes (including clinical services that were added, expanded,
reduced, or eliminated) for which the percentage of rural general
hospitals implementing the change significantly differed depending on
whether or not a specialty hospital existed in the regional market. (See
table 6.) The greatest number of differences (11 operational change
differences and 5 clinical service change differences) was observed
between the group of urban general hospitals in local markets with
specialty hospitals and the group of urban general hospitals where there
were no specialty hospitals in either the local or regional markets.

21All changes described as significantly different between general
hospitals in markets with and without specialty hospitals were
statistically significant at the 0.05 level.

Table 6: Number of Reported Operational and Clinical Service Changes That
Significantly Differed between General Hospitals with and without
Specialty Hospitals in Their Markets from 2000 through 2005, by Type of
Change Implemented

                                      Number of    Number of 
                                       clinical     clinical 
                         Number of     services     services 
                       operational     added or   reduced or 
                           changes     expanded   eliminated Rural Regional        
                         where the    where the    where the       markets       
                        percentage   percentage   percentage       with and      
Urban/rural                     of           of           of       without       
status of             implementing implementing implementing       specialty     
general     Market       hospitals    hospitals    hospitals       hospitals     
hospitals   levels        differed     differed     differed                     
being       being       (maximum =   (maximum =   (maximum =                     
compared    compared           72)          34)          34)                 6 2 1
Urban       Regional                                         
            markets                                          
            with and                                         
            without                                          
            specialty                                        
            hospitals            7            0            1 
Urban       Local                                            
            markets                                          
            with                                             
            specialty                                        
            hospitals                                        
            and                                              
            regional                                         
            markets                                          
            without                                          
            specialty                                        
            hospitals           11            3            2 

Source: GAO.

Note: Table includes the number of specific operational or clinical
service changes for which the percentage of general hospitals that
reported implementing the change differed significantly (at the 0.05 level
of significance) between the group of general hospitals in markets with
specialty hospitals and the group of general hospitals in markets without
specialty hospitals.

Rural general hospitals in markets with specialty hospitals were more
likely to have reported implementing six operational changes and two
clinical service changes relative to rural general hospitals in markets
without specialty hospitals. (See table 7.) For only one clinical
service-adding or expanding sleep laboratory services-rural general
hospitals in markets with specialty hospitals were less likely to have
reported implementing a clinical service change.

Table 7: Percentage of Rural General Hospitals Reporting Operational and
Clinical Service Changes in Regional Markets with and without Specialty
Hospitals from 2000 through 2005

                                        Percentage of rural general hospitals
                                                  making changes in
                                         regional markets    regional markets
                                         with a specialty without a specialty
Reported changes                              hospital            hospital
Operational changes                                             
Increased marketing or community                                           
outreach efforts                                             82         57
Increased income guarantees to                                             
attract physicians                                           70         53
Offered bonuses to hire or retain                                          
nursing staff                                                70         48
Increased physicians' roles in                                             
hospital governance                                          69         53
Added wireless technology                                    55         39 
Negotiated larger discounts with                                           
private insurers relative to the                                
guaranteed volume increases                                  27          9
Clinical service changes                                        
Added or expanded cardiology                                               
services                                                     60         42
Reduced or eliminated inpatient and                                        
outpatient psychiatric services                               9          1
Added or expanded sleep laboratory                                         
services                                                     41         58

Source: GAO.

Note: Table includes only those operational and clinical service changes
where there was a statistical difference, at the 0.05 level, between the
percentage of each of the two sample groups that reported implementing a
change.

If there was a specialty hospital in its regional market, an urban general
hospital was more likely to have reported making three of the seven
operational changes that significantly differed between general hospitals
in markets with and without specialty hospitals.22 Urban hospitals in
regional markets with specialty hospitals were less likely to have made
four operational changes and one clinical service change. (See table 8.)

22In the sample group-that is, general hospitals in regional markets with
specialty hospitals-about 5 percent of the urban general hospitals
reported opening a specialty hospital or opening a specialty hospital in
partnership with physicians. None of the urban general hospitals in the
comparison group had opened a specialty hospital because, by design, the
comparison sample consisted only of general hospitals in regional markets
without specialty hospitals.

Table 8: Percentage of Urban General Hospitals Reporting Operational and
Clinical Service Changes in Regional Markets with and without Specialty
Hospitals from 2000 through 2005

                                             Percentage of urban general
                                             hospitals making changes in
                                         regional markets    regional markets 
                                         with a specialty without a specialty 
Reported changes                              hospital            hospital 
Operational changes                                    
Added an operating room                             49                  33 
Opened a specialty hospital                          5                  0a 
Partnered with physicians to opena                                         
specialty hospital                                   5                  0a
Opened an ambulatory surgical center                14                  26 
Subsidized physicians' malpractice                                         
insurance costs                                      7                  21
Made a change other than those                                             
specifically listed on the survey to                   
the management or operation of its                     
operating roomb                                      8                  18
Opened a limited service facility                                          
other than those specifically listed                   
on the surveyc                                       7                  16
Clinical service changes                               
Reduced or eliminated pain management                                      
services                                             1                   5

Source: GAO.

Notes: Table includes only those operational and clinical service changes
where there was a statistical difference, at the 0.05 level, between the
percentage of each of the two sample groups that reported implementing a
change.

aNone of the urban general hospitals in the comparison group had opened a
specialty hospital because, by design, the comparison sample consisted
only of general hospitals in regional markets without specialty hospitals.

bRespondents reported hiring operating room staff, offering a retention
bonus to operating room staff, improving electronic documentation,
reducing or closing operating room services, and improving anesthesia
services.

cRespondents reported opening physical therapy/rehabilitation centers,
oncology centers, pain management centers, and a hospice house.

Urban hospitals in local markets with specialty hospitals were more likely
to have made six operational changes and three clinical service changes
and less likely to have made five operational changes and two clinical
service changes relative to general hospitals in regional markets without
specialty hospitals.23 (See table 9.)

23In the sample group-that is, general hospitals in regional markets with
specialty hospitals-about 7 percent of the urban general hospitals
reported opening a specialty hospital or opening a specialty hospital in
partnership with physicians. None of the urban general hospitals in the
comparison group had opened a specialty hospital because, by design, the
comparison sample consisted only of general hospitals in regional markets
without specialty hospitals.

Table 9: Percentage of Urban General Hospitals Reporting Operational and
Clinical Service Changes in Local Markets with Specialty Hospitals and
Regional Markets without Specialty Hospitals from 2000 through 2005

                                        Percentage of urban general hospitals
                                                  making changes in
                                         local markets with  regional markets 
                                                a specialty         without a 
                                          hospital in close         specialty 
Reported changes                               proximity          hospital 
Operational changes                                      
Increased physician on-call payments                  70                52 
Added a disease management program                    51                37 
Added operating room                                  49                33 
Increased, instituted, or improved                                         
upon paid leave for nursing staff                     23                12
Opened a specialty hospital                            7                0a 
Partnered with physicians to open a                                        
specialty hospital                                     7                0a
Opened an ambulatory surgery center                   12                26 
Partnered with physicians to open an                                       
imaging center                                        10                21
Subsidized physicians' malpractice                                         
insurance costs                                        9                21
Made a change other than those                                             
specifically listed on the survey to                     
the management or operation of                           
operating roomb                                        8                18
Opened a limited-service facility                                          
other than those specifically listed                     
on the surveyc                                         7                16
Clinical service changes                                 
Added or expanded bariatric                                                
servicesd                                             50                36
Reduced or eliminated sleep lab                                            
services                                               8                 1
Reduced or eliminated women's health                                       
services                                               4                 0
Added or expanded primary care                                             
services                                              19                35
Added or expanded physical                                                 
rehabilitation services                               17                30

Source: GAO.

Notes: Table includes only those operational and clinical service changes
where there was a statistical difference, at the 0.05 level, between the
percentage of each of the two sample groups that reported implementing a
change.

aNone of the urban general hospitals in the comparison group had opened a
specialty hospital because, by design, the comparison sample consisted
only of general hospitals in regional markets without specialty hospitals.

bRespondents reported hiring operating room staff, offering a retention
bonus to operating room staff, improving electronic documentation,
reducing or closing operating room services, and improving anesthesia
services.

cRespondents reported opening physical therapy/rehabilitation centers,
oncology centers, pain management centers, and a hospice house.

dBariatrics is the field of medicine pertaining to weight loss.

                            Concluding Observations

Overall, the general hospitals that responded to our survey reported
making a variety of operational and clinical service changes to better
compete in their markets. Some advocates of specialty hospitals have
stated that the presence of one or more of these facilities in a market
may prompt general hospitals to improve the quality of the care they
deliver or increase the efficiency with which they deliver their services.
However, our survey results found relatively few differences, in terms of
operational and clinical service changes reported, between general
hospitals in markets with and without specialty hospitals. That is, on
average, general hospitals in markets with specialty hospitals did not
make a substantially different number of changes or different types of
changes relative to general hospitals in markets without specialty
hospitals. These results held for both rural and urban general hospitals.
Our survey results did show that general hospitals reported facing a
competitive market for their services. However, general hospitals face
competition from many types of facilities, not just specialty hospitals.
Competing facilities, including other general hospitals in the market,
ASCs, and imaging centers, far outnumber the relatively few specialty
hospitals in existence or under development. The predominance of other
types of competitors may help explain the lack of a uniquely competitive
response of the general hospitals in our study to the existence of
specialty hospitals.

 Agency Comments and Comments from Organizations Representing General Hospitals

We obtained comments from CMS and representatives of AHA-a group
representing hospitals, health care systems, networks, and other providers
of care-and FAH-a group representing investor-owned and investor-managed
hospitals and health systems. Their comments are summarized below.

In written comments on a draft of this report, CMS stated that our study,
by providing quantitative data on the market effect of specialty
hospitals, was extremely helpful and that CMS would use the information as
the agency developed its DRA-mandated report on physician investment in
specialty hospitals. (CMS's comments are reprinted in app. IV.) CMS also
provided technical comments, which we incorporated where appropriate.

AHA and FAH stated that their concerns regarding specialty hospitals were
specific to those facilities that have physician owners or investors. Both
organizations suggested text changes to emphasize that our report is
focused on the effect of these types of specialty hospitals on general
hospitals, which we incorporated where appropriate. In addition,
representatives of AHA stated that general hospitals may make operational
and clinical service changes for a variety of reasons, regardless of the
degree of competition in their market. While we recognize that general
hospitals may make changes for a variety of reasons, that fact does not
detract from our finding that general hospitals largely did not make a
different number of changes, or different types of changes, in response to
competition from specialty hospitals.

As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution of this report until
30 days after its date. At that time, we will send copies of this report
to appropriate congressional committees and other interested parties. We
will also make copies available to others upon request. This report will
be available at no charge on GAO's Web site at http://www.gao.gov.

If you or your staff have any questions, please contact me at (202)
512-7101 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in app. V.

Sincerely yours,

Bruce Steinwald Director, Health Care

Appendix I: Scope and Methodology

This appendix provides information on the key aspects of our analysis of
the competitive response of general hospitals to specialty hospitals.
First, it describes the sample selection process. Second, it discusses the
survey used to collect data from a sample of general hospitals and the
process of fielding the survey. Third, it explains the differences between
local and regional markets. Fourth, it describes the methodology used to
analyze survey data. Finally, it addresses issues related to data
reliability and limitations.

                                Sample Selection

We selected two groups of general hospitals for this analysis-the sample
and a comparison sample. The sample consisted of general hospitals in
hospital referral regions (HRR)-which we refer to in this report as
regional health care markets-with a specialty hospital that opened since
the start of 1998.1 The comparison sample consisted of general hospitals
in regional health care markets without any specialty hospitals. In
constructing the comparison sample, we also excluded regional health care
markets with specialty hospitals that did not have physician owners or
investors.

Regional markets capable of meeting the criteria for the sample were
identified by compiling a current list of specialty hospitals that opened
from 1998 through 2005.2 We excluded markets in states where certificate
of need (CON) laws existed,3 because specialty hospitals are located
primarily in non-CON states.4 We identified 32 unique regional markets
containing 53 specialty hospitals that met these criteria. (See table 10.)

1For the purposes of this analysis we defined markets using HRRs.
Researchers at the Dartmouth Atlas Project (DAP) defined HRRs as health
care markets for tertiary medical care where there was at least one
hospital that performed major cardiovascular procedures and neurosurgery.
Each of the 306 HRRs in the nation has a minimum population of 120,000.
For the purposes of defining the sample group, we utilized the methodology
for identifying specialty hospitals from our May 2005 report, GAO-05-647R
.

2We compiled a list of specialty hospitals in existence based on
information collected for previous GAO reports ( GAO-03-683R , GAO-04-167
, and GAO-05-647R ) and from information obtained from the Medicare
Payment Advisory Commission (MedPAC).

3CON laws require hospitals to obtain state approval before taking actions
to change their facility services or size, such as by constructing,
modifying, or closing a health care facility, acquiring major new medical
equipment, offering a new health care service, or discontinuing an
existing one.

4We obtained data on which states have CON laws from the American Health
Planning Association (2002).

Table 10: Criteria for Selecting Regional Markets

Sample markets                   Comparison markets                        
From 306 regional markets in the From 306 regional markets in the United   
United States, we included       States, we excluded                       
                                                                              
      o  markets that contained one    o  markets that contained a specialty  
      or more specialty hospitals      hospital, regardless of ownership or   
      that opened during the period    opening date;                          
      from 1998 through 2005.          o  markets in states with CON laws;    
                                       and                                    
We excluded                         o  markets if any one of seven market  
                                       characteristics did not fall between   
      o  markets in states with        the minimum and maximum values for the 
      certificate of need (CON)        32 markets in the core sample.         
      laws.                                                                   
                                    N = 78 regional markets                   
N = 32 regional markets          

Source: GAO.

We selected markets for the comparison sample on the basis of their
similarity to the markets used for the sample, except for the presence of
a specialty hospital. We excluded markets from the comparison sample if
they contained a specialty hospital, regardless of ownership or date of
opening.5 We used data from DAP pertaining to market characteristics to
ensure that markets included in the comparison sample were similar to
markets in the sample. We excluded markets from the comparison sample if
any one of their values for seven market characteristics-overall
population, Medicare population, average number of inpatient beds,
population to beds ratio, physician specialists to total physicians ratio,
average number of surgical discharges, and the Herfindahl-Hirschman
Index6-fell outside the range of values for markets in the sample. The
application of these criteria resulted in a sample that consisted of 78
unique regional markets.

5We identified a total of 92 physician- and non-physician-owned specialty
hospitals that opened in 2005 or earlier. We excluded markets from the
comparison sample if they contained 1 or more of these 92 facilities. To
isolate the effect of specialty hospitals on general hospitals we excluded
markets that contained a specialty hospital, regardless of the extent to
which physicians had an ownership stake in the specialty hospitals or when
the specialty hospital opened.

6The Herfindahl-Hirschman Index is a measure of market competition based
on the market shares of all of the hospitals in the geographic area.
Higher values indicate less concentrated, and potentially less
competitive, markets.

The Centers for Medicare & Medicaid Services' (CMS) 2005 Provider of
Services (POS) file was used to identify general hospitals located in the
markets selected for the sample and the comparison sample, and these
hospitals were subject to several exclusions. General hospitals that were
major teaching hospitals or had fewer than five cardiac, orthopedic, or
surgical discharges in 2004,7 were excluded from both samples because the
presence of a specialty hospital may not affect these hospitals in the
same manner it would affect other types of general hospitals. In addition,
we considered urban general hospitals to be in a regional market with a
specialty hospital only if it was also less than 90 miles away from a
specialty hospital. We considered rural general hospitals to be in a
regional market with a specialty hospital only if it was also less than
120 miles away from a specialty hospital. Information on these hospital
characteristics were obtained from CMS's 2005 POS file, 2002/2003 Cost
Report file, and 2004 Health Care Information System (HCIS) file, and
Census 2000 US Gazetteer files. The sample included 326 general hospitals
and the comparison sample included 294 general hospitals. (See table 11.)

Table 11: Criteria for Selecting General Hospitals Included in the Sample
and Comparison Sample

Sample hospitals                       Comparison hospitals                
From the list of general hospitals     From the list of general hospitals  
located in the 32 sample markets, we   located in the 78 comparison sample 
excluded                               markets, we excluded                
                                                                              
      o  major teaching hospitals;           o  major teaching hospitals and  
      o  hospitals that had fewer than       o  hospitals that had fewer that 
      five cardiac, orthopedic, or           five cardiac, orthopedic, or     
      surgical discharges in 2004;           surgical discharges in 2004.     
      o  rural hospitals located 120                                          
      miles or more from the nearest      N = 294 general hospitals           
      specialty hospital; and             
      o  urban hospitals located 90 miles 
      or more from the nearest specialty  
      hospital.                           
                                          
N = 326 general hospitals              

Source: GAO.

                          Survey of General Hospitals

The survey questionnaire had two sections. (See app. II.) First, it
obtained respondents' perceptions of competition in their health care
markets. Second, it asked respondents to provide information on the
operational and clinical service changes that the respondents' hospitals
had made from 2000 through 2005 to remain competitive in their markets.
The questionnaire included 72 potential operational changes and 34
potential clinical service changes.8 The specific operational and clinical
service change questions included in the survey were identified through a
review of articles in academic journals, industry reports, periodicals, a
joint study by the Federal Trade Commission and the Department of Justice,
and studies by CMS and the Medicare Payment Advisory Commission (MedPAC).

7Major teaching hospitals are defined as hospitals that have a ratio of
interns and residents to beds of 0.25 or greater.

We tested our survey questionnaire with external experts, including one
MedPAC analyst and seven hospital administrators from four general
hospitals and one hospital system.

In August and September of 2005, survey questionnaires were distributed to
603 of the 620 hospitals in our sample-315 general hospitals in the sample
and 288 general hospitals in the comparison sample.9 Sixty-seven percent
of general hospitals that received our survey questionnaire responded-401
general hospitals. Seventy percent of the sample and 63 percent of the
comparison sample responded to our survey questionnaire.

          Relationship between Regional and Local Health Care Markets

We created a subsample to analyze the competive response of general
hospitals to specialty hospitals that were in close proximity. The
subsample consisted of general hospitals in hospital service areas (HSA)-
which we refer to in this report as local health care markets-with a
specialty hospital that opened from 1998 through 2005.10 Groups of local
health care markets form a regional health care market. (See fig. 2.) On
average, general hospitals in local health care markets with a specialty
hospital were in closer proximity to a specialty hospital than were
general

8One of the potential operational changes listed on the survey was a
change in nonclinical amenities, such as the addition of valet parking or
gourmet meals.

9We were unable to obtain contact information for 13 of the 17 hospitals
that did not receive a survey; the remaining 4 were identified as either
being closed or no longer general hospitals.

10As defined by researchers at DAP, HSAs represent local health care
markets for hospital care. DAP defined HSAs by assigning ZIP codes to the
hospital areas where the greatest proportion of their Medicare residents
were hospitalized. Most of the 3,436 HSAs contain only one hospital.

hospitals in regional health care markets with a specialty hospital. Among
the 315 general hospitals in the sample, 152 resided in the same local
health care market as a specialty hospital. Sixty-four percent of general
hospitals in the local health care market subsample responded to our
survey.

Figure 2: Illustration of the Relationship between Regional and Local
Health Care Markets

                              Survey Data Analysis

From the survey responses, we determined the percentage of general
hospitals that reported making each of the potential operational and
clinical changes and then compared those percentages for three paired sets
of general hospitals. First, we compared rural general hospitals in
regional markets with specialty hospitals to rural general hospitals in
regional markets without specialty hospitals. (See fig. 3.) Second, we
compared urban general hospitals in regional markets with specialty
hospitals to urban general hospitals in regional markets without specialty
hospitals. Third, we compared urban general hospitals that had a specialty
hospital in their local markets to urban general hospitals that did not
have a specialty hospital in either their local or regional markets. The
third comparison was conducted to explore the possibility that specialty
hospitals are more likely to elicit a competitive response from general
hospitals that are closest to them.11 As a part of each comparison we
conducted a statistical test, the Pearson chi-square, in order to test the
statistical significance of the percentages for each of the three paired
sets of general hospitals.12 This test enabled us to determine if
differences between the paired sets of general hospitals were
statistically significant.

11Because only eight rural general hospitals that responded to our survey
had a specialty hospital in their local hospital market, we did not
analyze this group separately.

12V.K. Rohatgi, An Introduction to Probability Theory and Mathematical
Statistics (New York, N.Y.: John Wiley & Sons, Inc., 1976), 444-45.

Figure 3: Illustration of the Three Types of Comparisons Performed between
General Hospitals in Markets with and without Specialty Hospitals

Among the general hospitals that responded to our survey, the comparison
of rural general hospitals in regional health care markets included 71
rural general hospitals in regional markets with specialty hospitals and
79 rural general hospitals in regional markets without specialty
hospitals. The comparison of urban general hospitals in regional health
care markets included 148 urban general hospitals in regional markets with
specialty hospitals and 103 urban general hospitals in regional markets
without specialty hospitals. The comparison of urban general hospitals in
local health care markets with urban general hospitals in regional markets
included 90 urban general hospitals in markets with specialty hospitals
and 103 urban general hospitals in regional markets without specialty
hospitals. Because only 8 rural general hospitals in local markets
responded to the survey, we did not conduct a comparison of rural general
hospitals in local markets to rural general hospitals in regional markets.

                                Data Reliability

We used the survey data we collected for this work, three CMS datasets,
and four datasets from DAP to produce the results of this report. In each
case, we determined that the data were sufficiently reliable to address
the reporting objective.

Overall, 67 percent of general hospitals we contacted responded to our
2005 survey, and few respondents failed to complete the questionnaire in
full. We identified incomplete and inconsistent survey responses within
individual surveys and placed follow-up calls to respondents to complete
or verify their responses. We conducted an analysis to identify outliers
who made extremely high numbers of service changes. We manually verified
10 percent of all survey responses contained in our aggregated electronic
data files, in order to ensure that survey response data were accurately
transferred to electronic files for analytical purposes.

We determined the three CMS datasets-2002/2003 Cost Report File, first
quarter 2005 POS file, and the 2004 HCIS File-and four DAP datasets-2003
Zip Code Crosswalk File, 1999 Chapter 2 Table File, 2001 selected surgical
discharge rates by HRR, and 1999 physician workforce data-were
sufficiently reliable for our purposes. The CMS datasets were used to
gather descriptive information for hospitals in our sample, to determine
general hospital teaching status, and to tie discharge data to individual
hospitals. The DAP datasets were used to link the general hospitals in our
sample to their corresponding market characteristics. These CMS and DAP
files are widely used for similar research purposes.

We identified two potential limitations of our analysis. First, because
independent information to verify survey responses was not available, all
analyses in this report are based on data that are self-reported and
potentially limited by the respondent's ability to report the operational
or clinical service changes implemented from 2000 through 2005 for
competitive reasons. Second, in response to the threat of future
competition, it is possible that general hospitals made changes to their
facilities prior to 2000 or that changes made by some general hospitals in
anticipation of the new specialty hospitals successfully deterred the
entry of that hospital, which our survey did not capture.

Appendix II: Survey Questionnaire

Appendix III: Survey Response by
Category

Our survey listed 72 potential operational changes and 34 potential
clinical service changes that a respondent hospital could have indicated
that they had implemented from 2000 through 2005. Within the survey, the
potential operational changes were organized into nine separate
subject-oriented categories. For each of the clinical service changes,
respondents were asked to indicate whether they had added, expanded,
eliminated, or decreased the service. For analytical purposes, we grouped
together "added" and "expanded" clinical service change responses. Also,
we grouped together "eliminated" and "decreased" clinical service change
responses. When stratified by urban and rural location there were few
differences between general hospitals in markets with and without
specialty hospitals, in terms of the average number of changes they
reported implementing in each category of operational and clinical service
change from 2000 through 2005. (See table 12.)

Table 12: Average Number of Operational and Clinical Service Changes
Reported by Urban and Rural General Hospitals from 2000 through 2005, by
Category of Potential Change

                                      Average   
                                     number of  
                                      changes   
                                       Urban      Rural   
                                      general    general  
                                     hospitals  hospitals 
                                        in         in     
                                                 regional  regional  regional 
                              Total    regional    market    market    market 
                          number of market with without a    with a without a 
                          potential a specialty specialty specialty specialty 
Change category          changes    hospital  hospital  hospital  hospital 
Operational changes                                              
Made changes in                                                            
relationship with                                                
physicians, in terms                                             
of facility                                                      
management, planning,                                            
ownership, or                                                    
retention                     12         3.1       3.5       3.0       2.6
Made changes in                                                            
management or                                                    
operation of operating                                           
room                           7         2.8       2.6       2.2       2.3
Made changes in                                                            
management or                                                    
operation of emergency                                           
department                     5         1.0       1.1       1.0       0.8
Made information                                                           
technology changes             7         2.4       2.4       2.5       2.0
Opened limited service                                                     
facilities                     9         0.8       1.0       0.7       0.5
Increased, instituted,                                                     
or improved upon                                                 
benefits to retain or                                            
hire nursing staff             8         3.9       4.1       3.6       3.2
Implemented changes                                                        
intended to attract                                              
patients                       6         2.9       2.9       2.6       2.4
Changed existing or                                                        
implemented new                                                  
pricing strategies             4         1.0       1.2      1.2a      0.8a
Made other changes in                                                      
hospital management           14         5.2       5.3       4.0       3.6
Clinical service                                                 
changes                                                          
Added or expanded                                                          
clinical service              34         7.8       7.9       7.1       6.6
Eliminated clinical                                                        
service or decreased                                             
resources dedicated to                                           
it                            34         0.2       0.2       0.2       0.2

Source: GAO.

aThe difference between the average number of pricing strategies reported
by rural general hospitals in markets with and without specialty hospitals
was statistically significant at the 0.05 level.

Appendix IV: CMS Comments

Appendix V: GAO Contact and Staff Acknowledgments

                                  GAO Contact

A. Bruce Steinwald, (202) 512-7101 or [email protected]

                                Acknowledgments

Other contributors to this report include James Cosgrove, Assistant
Director; Jennie Apter; Zachary Gaumer; Gregory Giusto; Kevin Milne; and
Dae Park.

Related GA Related GAO Products

Specialty Hospitals: Information on Potential New Facilities. GAO-05-647R
. Washington, D.C.: May 19, 2005.

Specialty Hospitals: Geographic Location, Services Provided, and Financial
Performance. GAO-04-167 . Washington, D.C.: October 22, 2003.

Specialty Hospitals: Information on National Market Share, Physician
Ownership, and Patients Served. GAO-03-683R . Washington, D.C.: April 18,
2003.

(290484)

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Highlights of GAO-06-520 , a report to the Chairman, Committee on Ways and
Means, House of Representatives

April 2006

GENERAL HOSPITALS

Operational and Clinical Changes Largely Unaffected by Presence of
Competing Specialty Hospitals

There has been much debate about specialty hospitals-short-term acute care
hospitals with physician owners or investors that primarily treat patients
who have specific medical conditions or need surgical procedures-and the
competitive effects they may have on general hospitals.

Advocates of specialty hospitals contend that competition from these
physician-owned facilities can prompt general hospitals to implement
efficiency, quality, and amenity improvements, thus favorably affecting
the overall health care delivery system. Critics of specialty hospitals
are concerned that general hospitals may respond to such competition by
making changes that do not necessarily increase efficiency or benefit
patients or communities, for example, by adding services already available
in the community. The appropriateness of physicians' financial interests
in specialty hospitals has also been questioned.

GAO was asked to provide information on the competitive response of
general hospitals to specialty hospitals. GAO surveyed approximately 600
general hospitals in markets with and without specialty hospitals to
provide information on the extent to which these two groups of general
hospitals reported implementing operational and clinical service changes
to remain competitive. GAO received responses from 401 general hospitals.

Nearly all general hospitals responding to GAO's survey reported making
operational and clinical service changes to remain competitive in what
they viewed as increasingly competitive healthcare markets; however, there
was little evidence to suggest that general hospitals made substantially
more or fewer changes or different types of changes if some of their
competition came from a specialty hospital. While the majority of survey
respondents indicated that competition from other general hospitals had
increased, a larger proportion of respondents-91 percent of urban general
hospitals and 74 percent of rural general hospitals-reported increases in
competition from limited service facilities, a category that includes
approximately 100 specialty hospitals across the nation and thousands of
ambulatory surgical centers and imaging centers. To enhance their ability
to compete, general hospitals reported making an average of 22 operational
changes, such as introducing a formal process for evaluating efforts to
improve quality and reduce costs, and 8 clinical service changes, such as
adding or expanding cardiology services, from 2000 through 2005. Although
specialty hospital advocates have hypothesized that the entrance of a
specialty hospital into a market encourages the area's existing general
hospitals to adopt changes that make them more efficient and better able
to compete, the survey responses largely did not support this view. There
were no substantial differences in the average number of operational and
clinical service changes made by general hospitals in markets with and
without specialty hospitals and, for the vast majority of the potential
changes included on GAO's survey, there was no statistical difference
between the two groups of hospitals in terms of the specific changes they
reported implementing.

GAO received comments on a draft of this report from the Centers for
Medicare & Medicaid Services (CMS). In its comments, CMS stated that GAO's
study, by providing quantitative data on the market effect of specialty
hospitals, was extremely helpful.

Number of Medical Facilities by Type

Note: Data include the most recently available count for each type of
medical facility. Count of ASCs includes only those facilities that are
Medicare certified.
*** End of document. ***