Specialty Hospitals:

Information on National Market Share, Physician Ownership, and Patients Served

GAO-03-683R: Published: Apr 18, 2003. Publicly Released: May 15, 2003.

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

Specialty hospitals represent a small but growing share of the national market. In February 2003, the 92 cardiac, orthopedic, surgical, and women's hospitals that we identified and were open for business accounted for less than 2 percent of the short-term, acute care hospitals nationwide. Recent growth in specialty hospitals has been rapid--the number of facilities has tripled since 1990 and another 20 facilities are under development. Because specialty hospitals tend to be relatively small, they account for a somewhat low share of inpatient spending relative to their share of hospitals. The specialty hospitals in existence in fiscal year 2000 accounted for about 1 percent of Medicare spending for inpatient services. About 70 percent of the specialty hospitals in existence or under development had some physician owners, according to our 2003 specialty hospital survey results. Among these hospitals, total physician ownership averaged slightly more than 50 percent. The average share owned by an individual physician was more than 2 percent at half the hospitals, while it was less than 2 percent at the other half. In about one-fifth of the hospitals with some degree of physician ownership, the largest share owned by an individual physician was at least 15 percent. Nearly all specialty hospitals with physician owners reported that some of the owners were members of a single group practice. The largest share owned by physicians in a single group practice was more than 25 percent at half the hospitals and less than 25 percent at the other half. In about 1 out of 10 specialty hospitals with physician owners, physicians in a single group practice owned 80 percent or more of the hospital. We found that patients at specialty hospitals tended to be less sick than patients with the same diagnoses at general hospitals, although we did not determine the clinical and economic importance of this finding. Our analysis of all inpatient discharge data from the 25 urban specialty hospitals for which these data were available--about one-fourth of all specialty hospitals we identified nationwide--showed that 21 of the 25 specialty hospitals treated lower proportions of severely ill patients than did area general hospitals. For example, at an urban cardiac hospital in Arizona, about 17 percent of patients with the most commonly treated diagnoses were severely ill, whereas at 26 general hospitals in the same urban area, about 22 percent of patients treated for the same diagnoses were severely ill. For all four specialty hospital types included in our study--cardiac, orthopedic, surgical, and women's--the median percentage of severely ill patients treated was lower than that for general hospitals. Four of the 25 specialty hospitals were exceptions, as they had treated patients that were as sick, or sicker, than the patients at general hospitals.

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