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Unaffected by Presence of Competing Specialty Hospitals' which was 
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United States Government Accountability Office:

GAO:

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:

GAO-06-520:

GAO Highlights: 

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

Why GAO Did This Study: 

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.

What GAO Found: 

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.  

Figure: Number of Medical Facilities by Type: 

[See PDF for image]

Source: American Hospital Association, GAO, and Medicare Payment 
Advisory Commission. 

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 figure] 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-520].

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

[End of section]

Contents:

Letter:

Results in Brief:

Background:

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

Concluding Observations:

Agency Comments and Comments from Organizations Representing General 
Hospitals:

Appendix I: Scope and Methodology:

Sample Selection:

Survey of General Hospitals:

Relationship between Regional and Local Health Care Markets:

Survey Data Analysis:

Data Reliability:

Appendix II: Survey Questionnaire:

Appendix III: Survey Response by Category:

Appendix IV: CMS Comments:

Appendix V: GAO Contact and Staff Acknowledgments:

Related GAO Products:

Tables:

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

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

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

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

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:

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:

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:

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:

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:

Table 10: Criteria for Selecting Regional Markets:

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

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:

Figures:

Figure 1: Number of Medical Facilities by Type:

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

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

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:

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,[Footnote 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.[Footnote 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.[Footnote 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.

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.[Footnote 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.[Footnote 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.[Footnote 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.[Footnote 7]

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.[Footnote 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.[Footnote 9]

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.[Footnote 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.[Footnote 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.

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.

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.[Footnote 12] In contrast, 
there were an estimated 4,800 general hospitals,[Footnote 13] 4,100 
Medicare certified ASCs, and 2,400 imaging centers.[Footnote 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.[Footnote 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.

Figure 1: Number of Medical Facilities by Type:

[See PDF for image] 

Source: American Hospital Association, GAO, and Medicare Payment 
Advisory Commission. 

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.

[End of figure]

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.[Footnote 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.[Footnote 
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.

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:

Perceived competition: Very or extremely competitive; 
General hospitals: Urban[A]: 77%; 
General hospitals: Rural: 35%.

Perceived competition: Somewhat competitive or competitive; General 
hospitals: Urban[A]: 22%; 
General hospitals: Rural: 65%.

Perceived competition: Not competitive; 
General hospitals: Urban[A]: 0%; 
General hospitals: Rural: 0%. 

Source: GAO.

[A] Because of rounding, the urban general hospital column does not add 
to 100 percent.

[End of table]

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:

Perceived change in competition: Increased or greatly increased; 
Source of competition: Other general hospitals: 75%; 
Source of competition: Limited-service facilities: 91%.

Perceived change in competition: Remained the same; 
Source of competition: Other general hospitals: 24%; 
Source of competition: Limited-service facilities: 8%.

Perceived change in competition: Decreased or greatly decreased; 
Source of competition: Other general hospitals: 1%; 
Source of competition: Limited-service facilities: 1%. 

Source: GAO.

[End of table]

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

Perceived change in competition: Increased or greatly increased; 
Source of competition: Other general hospitals: 53%; 
Source of competition: Limited-service facilities: 74%.

Perceived change in competition: Remained the same; 
Source of competition: Other general hospitals: 43%; 
Source of competition: Limited-service facilities: 24%.

Perceived change in competition: Decreased or greatly decreased; 
Source of competition: Other general hospitals: 3%; 
Source of competition: Limited-service facilities: 1%. 

Source: GAO.

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

[End of table]

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.[Footnote 18]

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

Operational change: Increased nursing wages; 
Percentage of general hospitals: 86%.

Operational change: Committed additional resources to marketing and 
community outreach efforts; 
Percentage of general hospitals: 74%.

Operational change: Introduced, increased, or improved upon bonuses for 
nursing staff; 
Percentage of general hospitals: 72%.

Operational change: Introduced, increased, or improved upon tuition 
support for nursing staff; 
Percentage of general hospitals: 71%.

Operational change: Focused on reducing the average turnover time 
between operations in their operating rooms; 
Percentage of general hospitals: 70%.

Operational change: Introduced or increased work schedule flexibility 
for nursing staff; 
Percentage of general hospitals: 70%.

Operational change: Implemented a formal process for evaluating efforts 
to improve quality and reduce costs; 
Percentage of general hospitals: 69%.

Operational change: Incorporated critical pathways for case 
management[A]; 
Percentage of general hospitals: 65%.

Operational change: Decreased patient wait times to attract new 
patients; 
Percentage of general hospitals: 65%.

Operational change: Increased physicians' roles in hospital governance; 
Percentage of general hospitals: 60%.

Operational change: Expanded emergency department capacity; 
Percentage of general hospitals: 59%.

Operational change: Standardized operating room supplies; 
Percentage of general hospitals: 56%.

Operational change: Increased communication with families during 
inpatient stays; 
Percentage of general hospitals: 55%.

Operational change: Increased income guarantees to recruit physicians; 
Percentage of general hospitals: 55%.

Operational change: Instituted a sliding fee scale for self-pay 
patients; 
Percentage of general hospitals: 54%.

Operational change: Hired additional physicians; 
Percentage of general hospitals: 54%.

Operational change: Implemented wireless technology; 
Percentage of general hospitals: 52%.

Operational change: Started a hospitalist program[B]; 
Percentage of general hospitals: 51%. 

Source: GAO.

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

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

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

[End of table]

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,[Footnote 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.[Footnote 20]

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:

Urban/rural status of general hospitals being compared: Rural; 
Presence of specialty hospitals: Regional market[A]; 
Average number of reported operational changes (maximum = 72): 21[B]; 
Average number of reported clinical services added or expanded (maximum 
= 34): 7; 
Average number of reported clinical services reduced or eliminated 
(maximum = 34): 1.

Urban/rural status of general hospitals being compared: Rural; 
Presence of specialty hospitals: None; 
Average number of reported operational changes (maximum = 72): 18[B]; 
Average number of reported clinical services added or expanded (maximum 
= 34): 6; 
Average number of reported clinical services reduced or eliminated 
(maximum = 34): 0.

Urban/rural status of general hospitals being compared: Urban; 
Presence of specialty hospitals: Regional market[A]; 
Average number of reported operational changes (maximum = 72): 23; 
Average number of reported clinical services added or expanded (maximum 
= 34): 7; 
Average number of reported clinical services reduced or eliminated 
(maximum = 34): 1.

Urban/rural status of general hospitals being compared: Urban; 
Presence of specialty hospitals: Local market; 
Average number of reported operational changes (maximum = 72): 24; 
Average number of reported clinical services added or expanded (maximum 
= 34): 7; 
Average number of reported clinical services reduced or eliminated 
(maximum = 34): 1.

Urban/rural status of general hospitals being compared: Urban; 
Presence of specialty hospitals: None; 
Average number of reported operational changes (maximum = 72): 24; 
Average number of reported clinical services added or expanded (maximum 
= 34): 8; 
Average number of reported clinical services reduced or eliminated 
(maximum = 34): 1. 

Source: GAO.

[A] A 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.

[B] The 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.

[End of table]

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.[Footnote 
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.

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:

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

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

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

[End of table]

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:

Reported changes: Operational changes: Increased marketing or community 
outreach efforts; 
Percentage of rural general hospitals making changes in: regional 
markets with a specialty hospital: 82%; 
Percentage of rural general hospitals making changes in: regional 
markets without a specialty hospital: 57%.

Reported changes: Operational changes: Increased income guarantees to 
attract physicians; 
Percentage of rural general hospitals making changes in: regional 
markets with a specialty hospital: 70%; 
Percentage of rural general hospitals making changes in: regional 
markets without a specialty hospital: 53%.

Reported changes: Operational changes: Offered bonuses to hire or 
retain nursing staff; 
Percentage of rural general hospitals making changes in: regional 
markets with a specialty hospital: 70%; 
Percentage of rural general hospitals making changes in: regional 
markets without a specialty hospital: 48%.

Reported changes: Operational changes: Increased physicians' roles in 
hospital governance; 
Percentage of rural general hospitals making changes in: regional 
markets with a specialty hospital: 69%; 
Percentage of rural general hospitals making changes in: regional 
markets without a specialty hospital: 53%.

Reported changes: Operational changes: Added wireless technology; 
Percentage of rural general hospitals making changes in: regional 
markets with a specialty hospital: 55%; 
Percentage of rural general hospitals making changes in: regional 
markets without a specialty hospital: 39%.

Reported changes: Operational changes: Negotiated larger discounts with 
private insurers relative to the guaranteed volume increases; 
Percentage of rural general hospitals making changes in: regional 
markets with a specialty hospital: 27%; 
Percentage of rural general hospitals making changes in: regional 
markets without a specialty hospital: 9%.

Reported changes: Clinical service changes: Added or expanded 
cardiology services; 
Percentage of rural general hospitals making changes in: regional 
markets with a specialty hospital: 60%; 
Percentage of rural general hospitals making changes in: regional 
markets without a specialty hospital: 42%.

Reported changes: Clinical service changes: Reduced or eliminated 
inpatient and outpatient psychiatric services; 
Percentage of rural general hospitals making changes in: regional 
markets with a specialty hospital: 9%; 
Percentage of rural general hospitals making changes in: regional 
markets without a specialty hospital: 1%.

Reported changes: Clinical service changes: Added or expanded sleep 
laboratory services; 
Percentage of rural general hospitals making changes in: regional 
markets with a specialty hospital: 41%; 
Percentage of rural general hospitals making changes in: regional 
markets without a specialty hospital: 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.

[End of table]

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.[Footnote 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.)

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:

Reported changes: Operational changes: Added an operating room; 
Percentage of urban general hospitals making changes in: regional 
markets with a specialty hospital: 49%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 33%.

Reported changes: Operational changes: Opened a specialty hospital; 
Percentage of urban general hospitals making changes in: regional 
markets with a specialty hospital: 5%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 0%[A].

Reported changes: Operational changes: Partnered with physicians to 
open[A] specialty hospital; 
Percentage of urban general hospitals making changes in: regional 
markets with a specialty hospital: 5%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 0%[A].

Reported changes: Operational changes: Opened an ambulatory surgical 
center; 
Percentage of urban general hospitals making changes in: regional 
markets with a specialty hospital: 14%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 26%.

Reported changes: Operational changes: Subsidized physicians' 
malpractice insurance costs; 
Percentage of urban general hospitals making changes in: regional 
markets with a specialty hospital: 7%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 21%.

Reported changes: Operational changes: Made a change other than those 
specifically listed on the survey to the management or operation of its 
operating room[B]; 
Percentage of urban general hospitals making changes in: regional 
markets with a specialty hospital: 8%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 18%.

Reported changes: Operational changes: Opened a limited service 
facility other than those specifically listed on the survey[C]; 
Percentage of urban general hospitals making changes in: regional 
markets with a specialty hospital: 7%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 16%.

Reported changes: Clinical service changes: Reduced or eliminated pain 
management services; 
Percentage of urban general hospitals making changes in: regional 
markets with a specialty hospital: 1%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 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.

[A] 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.

[B] Respondents 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.

[C] Respondents reported opening physical therapy/rehabilitation 
centers, oncology centers, pain management centers, and a hospice house.

[End of table]

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.[Footnote 23] (See table 9.)

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:

Reported changes: Operational changes: Increased physician on-call 
payments; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 70%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 52%.

Reported changes: Operational changes: Added a disease management 
program; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 51%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 37%.

Reported changes: Operational changes: Added operating room; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 49%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 33%.

Reported changes: Operational changes: Increased, instituted, or 
improved upon paid leave for nursing staff; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 23%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 12%.

Reported changes: Operational changes: Opened a specialty hospital; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 7%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 0%[A].

Reported changes: Operational changes: Partnered with physicians to 
open a specialty hospital; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 7%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 0%[A].

Reported changes: Operational changes: Opened an ambulatory surgery 
center; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 12%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 26%.

Reported changes: Operational changes: Partnered with physicians to 
open an imaging center; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 10%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 21%.

Reported changes: Operational changes: Subsidized physicians' 
malpractice insurance costs; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 9%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 21%.

Reported changes: Operational changes: Made a change other than those 
specifically listed on the survey to the management or operation of 
operating room[B]; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 8%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 18%.

Reported changes: Operational changes: Opened a limited-service 
facility other than those specifically listed on the survey[C]; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 7%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 16%.

Reported changes: Clinical service changes: Added or expanded bariatric 
services[D]; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 50%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 36%.

Reported changes: Clinical service changes: Reduced or eliminated sleep 
lab services; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 8%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 1%.

Reported changes: Clinical service changes: Reduced or eliminated 
women's health services; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 4%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 0%.

Reported changes: Clinical service changes: Added or expanded primary 
care services; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 19%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 35%.

Reported changes: Clinical service changes: Added or expanded physical 
rehabilitation services; 
Percentage of urban general hospitals making changes in: local markets 
with a specialty hospital in close proximity: 17%; 
Percentage of urban general hospitals making changes in: regional 
markets without a specialty hospital: 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.

[A] 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.

[B] Respondents 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.

[C] Respondents reported opening physical therapy/rehabilitation 
centers, oncology centers, pain management centers, and a hospice house.

[D] Bariatrics is the field of medicine pertaining to weight loss.

[End of table]

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 
[Hyperlink, http:/ /www.gao.gov].

If you or your staff have any questions, please contact me at (202) 512-
7101 or steinwalda@gao.gov. 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, 

Signed By:

Bruce Steinwald: 
Director: 
Health Care:

[End of section]

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.[Footnote 24] 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.[Footnote 25] We excluded markets in 
states where certificate of need (CON) laws existed,[Footnote 26] 
because specialty hospitals are located primarily in non-CON 
states.[Footnote 27] We identified 32 unique regional markets 
containing 53 specialty hospitals that met these criteria. (See table 
10.)

Table 10: Criteria for Selecting Regional Markets:

Sample markets: ; From 306 regional markets in the United States, we 
included; 

* markets that contained one or more specialty hospitals that opened 
during the period from 1998 through 2005; 
We excluded; 
* markets in states with certificate of need (CON) laws; 
N = 32 regional markets; 

Comparison markets: From 306 regional markets in the United States, we 
excluded; 
* markets that contained a specialty hospital, regardless of ownership 
or opening date; 
* markets in states with CON laws; and; 
* markets if any one of seven market characteristics did not fall 
between the minimum and maximum values for the 32 markets in the core 
sample; 
N = 78 regional markets.

Source: GAO.

[End of table]

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.[Footnote 28] 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 Index[Footnote 29]--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.

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,[Footnote 30] 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: From the list of general hospitals located in the 32 
sample markets, we excluded; 
* major teaching hospitals; 
* hospitals that had fewer than five cardiac, orthopedic, or surgical 
discharges in 2004; 
* rural hospitals located 120 miles or more from the nearest specialty 
hospital; and; 
* urban hospitals located 90 miles or more from the nearest specialty 
hospital; 
N = 326 general hospitals; 

Comparison hospitals: From the list of general hospitals located in the 
78 comparison sample markets, we excluded; 
* major teaching hospitals and; 
* hospitals that had fewer that five cardiac, orthopedic, or surgical 
discharges in 2004; 
N = 294 general hospitals. 

Source: GAO.

[End of table]

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.[Footnote 31] 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).

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.[Footnote 32] 
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 competitive 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.[Footnote 
33] 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 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:

[See PDF for image] 

Source: GAO.

[End of figure]

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.[Footnote 34] 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.[Footnote 35] This test enabled us to 
determine if differences between the paired sets of general hospitals 
were statistically significant.

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

[See PDF for image] 

Source: GAO. 

[End of figure]

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.

[End of section]

Appendix II: Survey Questionnaire: 

Figure: U.S. Government Accountability Office Survey of General 
Hospitals and Their Response to Recent Market Competition:

[See PDF for image] 

[End of figure]

[End of section]

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:

Change category: Operational changes: Made changes in relationship with 
physicians, in terms of facility management, planning, ownership, or 
retention; 
Total number of potential changes: 12; 
Average number of changes: Urban general hospitals in: regional market 
with a specialty hospital: 3.1; 
Average number of changes: Urban general hospitals in: regional market 
without a specialty hospital: 3.5; 
Average number of changes: Rural general hospitals in: regional market 
with a specialty hospital: 3.0; 
Average number of changes: Rural general hospitals in: regional market 
without a specialty hospital: 2.6.

Change category: Operational changes: Made changes in management or 
operation of operating room; 
Total number of potential changes: 7; 
Average number of changes: Urban general hospitals in: regional market 
with a specialty hospital: 2.8; 
Average number of changes: Urban general hospitals in: regional market 
without a specialty hospital: 2.6; 
Average number of changes: Rural general hospitals in: regional market 
with a specialty hospital: 2.2; 
Average number of changes: Rural general hospitals in: regional market 
without a specialty hospital: 2.3.

Change category: Operational changes: Made changes in management or 
operation of emergency department; 
Total number of potential changes: 5; 
Average number of changes: Urban general hospitals in: regional market 
with a specialty hospital: 1.0; 
Average number of changes: Urban general hospitals in: regional market 
without a specialty hospital: 1.1; 
Average number of changes: Rural general hospitals in: regional market 
with a specialty hospital: 1.0; 
Average number of changes: Rural general hospitals in: regional market 
without a specialty hospital: 0.8.

Change category: Operational changes: Made information technology 
changes; 
Total number of potential changes: 7; 
Average number of changes: Urban general hospitals in: regional market 
with a specialty hospital: 2.4; 
Average number of changes: Urban general hospitals in: regional market 
without a specialty hospital: 2.4; 
Average number of changes: Rural general hospitals in: regional market 
with a specialty hospital: 2.5; 
Average number of changes: Rural general hospitals in: regional market 
without a specialty hospital: 2.0.

Change category: Operational changes: Opened limited service 
facilities; 
Total number of potential changes: 9; 
Average number of changes: Urban general hospitals in: regional market 
with a specialty hospital: 0.8; 
Average number of changes: Urban general hospitals in: regional market 
without a specialty hospital: 1.0; 
Average number of changes: Rural general hospitals in: regional market 
with a specialty hospital: 0.7; 
Average number of changes: Rural general hospitals in: regional market 
without a specialty hospital: 0.5.

Change category: Operational changes: Increased, instituted, or 
improved upon benefits to retain or hire nursing staff; 
Total number of potential changes: 8; 
Average number of changes: Urban general hospitals in: regional market 
with a specialty hospital: 3.9; 
Average number of changes: Urban general hospitals in: regional market 
without a specialty hospital: 4.1; 
Average number of changes: Rural general hospitals in: regional market 
with a specialty hospital: 3.6; 
Average number of changes: Rural general hospitals in: regional market 
without a specialty hospital: 3.2.

Change category: Operational changes: Implemented changes intended to 
attract patients; 
Total number of potential changes: 6; 
Average number of changes: Urban general hospitals in: regional market 
with a specialty hospital: 2.9; 
Average number of changes: Urban general hospitals in: regional market 
without a specialty hospital: 2.9; 
Average number of changes: Rural general hospitals in: regional market 
with a specialty hospital: 2.6; 
Average number of changes: Rural general hospitals in: regional market 
without a specialty hospital: 2.4.

Change category: Operational changes: Changed existing or implemented 
new pricing strategies; 
Total number of potential changes: 4; 
Average number of changes: Urban general hospitals in: regional market 
with a specialty hospital: 1.0; 
Average number of changes: Urban general hospitals in: regional market 
without a specialty hospital: 1.2; 
Average number of changes: Rural general hospitals in: regional market 
with a specialty hospital: 1.2[A]; 
Average number of changes: Rural general hospitals in: regional market 
without a specialty hospital: 0.8[A].

Change category: Operational changes: Made other changes in hospital 
management; 
Total number of potential changes: 14; 
Average number of changes: Urban general hospitals in: regional market 
with a specialty hospital: 5.2; 
Average number of changes: Urban general hospitals in: regional market 
without a specialty hospital: 5.3; 
Average number of changes: Rural general hospitals in: regional market 
with a specialty hospital: 4.0; 
Average number of changes: Rural general hospitals in: regional market 
without a specialty hospital: 3.6.

Change category: Clinical service changes: Added or expanded clinical 
service; 
Total number of potential changes: 34; 
Average number of changes: Urban general hospitals in: regional market 
with a specialty hospital: 7.8; 
Average number of changes: Urban general hospitals in: regional market 
without a specialty hospital: 7.9; 
Average number of changes: Rural general hospitals in: regional market 
with a specialty hospital: 7.1; 
Average number of changes: Rural general hospitals in: regional market 
without a specialty hospital: 6.6.

Change category: Clinical service changes: Eliminated clinical service 
or decreased resources dedicated to it; 
Total number of potential changes: 34; 
Average number of changes: Urban general hospitals in: regional market 
with a specialty hospital: 0.2; 
Average number of changes: Urban general hospitals in: regional market 
without a specialty hospital: 0.2; 
Average number of changes: Rural general hospitals in: regional market 
with a specialty hospital: 0.2; 
Average number of changes: Rural general hospitals in: regional market 
without a specialty hospital: 0.2. 

Source: GAO.

[A] The 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.

[End of table]

[End of section]

Appendix IV: CMS Comments: 

Department Of Health & Human Services:
Centers for Medicare & Medicaid services:
200 Independence Avenue SW: 
Washington, DC 20201:

Date: March 23, 2006:

To: A. Bruce Steinwald: 
Director, Health Care: 
U.S. Government Accountability Office:

From: Mark B. McClellan, M.D., Ph.D.: 
Administrator:
Centers for Medicare & Medicaid Services:

Subject: Government Accountability Office's (GAO) Draft Report: General 
Hospitals: Operational and Clinical Changes Largely Unaffected by 
Presence of Competing Specialty Hospitals (GAO-06-520):

The Centers for Medicare & Medicaid Services appreciates the 
opportunity to review and comment on the GAO draft report entitled, 
"General Hospitals: Operational and Clinical Changes Largely Unaffected 
by Presence of Competing Specialty Hospitals." The implications of the 
rapid growth of physician-owned specialty hospitals on the market for 
hospital services have been the subject of much debate. Opponents of 
physician-owned specialty hospitals contend that physician owners or 
investors cherry-pick the easiest cases and provide lower levels of 
uncompensated care. Advocates of specialty hospitals contend that 
specialty hospitals have higher rates of patient satisfaction, operate 
more efficiently, and pay more taxes.

In response to these and other concerns, Congress required that two 
studies of physician-owned specialty hospitals be conducted as part of 
the Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (MMA). Section 507(c) of the MMA required the Medicare Payment 
Advisory Commission to study financial impacts and payment 
distributional issues, as well as the Department of Health and Human 
Services to study referral patterns of physician-owners, quality of 
care, patient satisfaction, uncompensated care, and the relative value 
of any tax exemption available to such hospitals. Both studies included 
recommendations for improving the payment systems, and noted 
differences in patients served.

This GAO draft report reinforces and builds upon both earlier studies 
and provides quantitative data in determining the market effect of 
specialty hospitals. As the report notes, much of the evidence of how 
general hospitals' competitive actions have been influenced by the 
presence of specialty hospitals has been anecdotal. We found the GAO 
study, which was based upon a comparison of general hospitals in 
regional markets with a specialty hospital, to general hospitals in 
regional markets where there were no specialty hospitals, to be 
extremely helpful. The GAO study found that general hospitals face 
competition from many types of facilities, not just specialty 
hospitals, and there was no uniquely competitive response of general 
hospitals to the existence of specialty hospitals.

We look forward to continuing to work with the GAO to address issues 
related to specialty hospitals and appreciate the effort that went into 
this report. We will use this information in developing the strategic 
and implementing plan required by section 5006 of the Deficit Reduction 
Act of 2005.

Our technical comments on the report are attached.

[End of section]

Appendix V: GAO Contact and Staff Acknowledgments:

GAO Contact:

A. Bruce Steinwald, (202) 512-7101 or steinwalda@gao.gov:

Acknowledgments:

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

[End of section]

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): 

[End of section]

FOOTNOTES

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

[2] Unless 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.

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

[4] For 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).

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

[6] Major 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. 

[7] In 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.

[8] We 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.

[9] By 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. 

[10] These 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). 

[11] Ambulatory 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. 

[12] The 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). 

[13] 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 our estimate of the number of specialty hospitals. 

[14] MedPAC 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. 

[15] In 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. 

[16] In 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. 

[17] Federal 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).

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

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

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

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

[22] In 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. 

[23] In 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. 

[24] For 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. 

[25] We 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).

[26] CON 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.

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

[28] We 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. 

[29] The 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. 

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

[31] One 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. 

[32] We 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.

[33] As 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.

[34] Because 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.

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

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