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April 18, 2003:

The Honorable Bill Thomas:

Chairman:

Committee on Ways and Means:

House of Representatives:

The Honorable Jerry Kleczka:

House of Representatives:

Subject: Specialty Hospitals: Information on National Market Share, 
Physician Ownership, and Patients Served:

Specialty hospitals represent a small but growing segment of the health 
care industry. These hospitals specialize in providing care for certain 
conditions, such as cardiac care, or performing certain procedures, 
such as orthopedic surgery. Specialty hospitals are not an entirely new 
phenomenon, as children's and other types of specialty hospitals have 
existed for decades. Consequently, it is challenging to distinguish 
between the old and new types of specialty hospitals. One aspect that 
sets apart the newer genre of specialty hospitals is that many are 
owned, in part, by the physicians who work in them.

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

However, concerns have been raised by general hospitals and others in 
the health care community that specialty hospitals are siphoning off 
the most financially rewarding portions of general hospitals' business. 
Representatives of general hospitals contend that specialty hospitals 
concentrate on the most profitable procedures and serve patients that 
have fewer complicating conditions--leaving general hospitals with a 
sicker, higher-cost patient population. Part of the concern is that 
physician ownership in specialty hospitals creates incentives to 
concentrate on patients who are less sick than other patients with the 
same diagnosis, as a hospital is typically paid a fixed, lump-sum 
amount for treating someone with a given diagnosis. Hospitals can 
benefit financially by treating a disproportionate share of less ill 
patients because the payment amounts for these patients are not reduced 
to reflect the fact that fewer services are needed. Critics contend 
that this practice of drawing away a more favorable selection of 
patients makes it more financially difficult for general hospitals to 
fulfill their broad mission to serve all of a community's needs, 
including charity care, emergency services, and stand-by capacity to 
respond to community-wide disasters.

A federal law, known as the Stark anti-self-referral law, generally 
prohibits physicians from referring Medicare patients to facilities in 
which they (or their immediate family members) have financial 
interests.[Footnote 1] The law was enacted after several studies found 
that physicians with ownership interests in separate clinical 
laboratories, diagnostic imaging centers, or physical therapy providers 
tended to make more referrals to them and order substantially more 
services at higher costs.[Footnote 2] The Stark self-referral 
prohibitions do not apply in the case of specialty hospitals, however, 
because the law does not prohibit physicians who have ownership in an 
entire hospital from referring patients to that hospital.[Footnote 3] 
It is likely that any referral or decision made by a physician who has 
a stake in an entire general hospital would produce little personal 
economic gain because such hospitals tend to provide a diverse and 
large group of services. However, the Stark law does prohibit 
physicians who have an ownership interest only in a hospital 
subdivision from referring patients to that subdivision. Concern exists 
with respect to specialty hospitals, that since they are usually much 
smaller in size and scope than general hospitals and closer in size to 
hospital departments, that their physician owners could influence their 
hospitals'--and therefore their own--financial gain through practice 
patterns and referrals.

In light of these concerns, you asked us to provide information on the 
prevalence of specialty hospitals, their characteristics in terms of 
ownership and patients treated, and the effect specialty hospitals have 
on the greater hospital communities in which:

they operate. We are preparing a comprehensive report to be issued 
later this year that will address these issues. This report provides 
available information on the:

share of the national hospital market comprising specialty hospitals,

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

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

Our work focused on hospitals that tended to treat patients for a 
limited group of diseases or conditions or that tended to perform 
surgical procedures. Specifically, we considered a hospital to be a 
specialty hospital if the diagnosis-related group (DRG) classification 
for two-thirds of its Medicare patients (or two-thirds of all of its 
patients where such data were available) fell into no more than two 
major diagnosis categories, such as diseases of the circulatory system 
(cardiac), or if at least two-thirds of its patients were classified in 
surgical DRGs. We excluded hospitals that specialized in providing 
long-term care or otherwise had missions that were largely distinct 
from the missions of short-term, acute care general hospitals.[Footnote 
4] We classified the hospitals that fit these criteria into five 
specialty types--cardiac, orthopedic, surgical, women's, and other 
specialty. Because the other-specialty category contained a diverse set 
of hospitals that could not be compared to one another, we excluded 
hospitals in that category.[Footnote 5] The information in this report 
is derived from our analysis of hospital inpatient discharge data, 
various administrative databases, and responses to our survey of 
specialty hospitals. We analyzed Medicare inpatient discharge data from 
all hospitals nationwide to help identify specialty hospitals. We also 
obtained Healthcare Cost and Utilization Project (HCUP) data on all 
patient discharges in 2000 from hospitals located in six 
states.[Footnote 6] These states contained 25 urban specialty 
hospitals, slightly more than one-fourth of the existing specialty 
hospitals we identified. The all-patient discharge data from hospitals 
in these states were used to help identify specialty hospitals and 
analyze the relative illness severity among patients at specialty and 
general hospitals. For more detail regarding our specialty hospital 
criteria and analysis methodology, see the enclosure at the end of this 
report. Our work was performed from September 2002 through April 2003 
in accordance with generally accepted government auditing standards.

Results in Brief:

Specialty hospitals represent a small but growing share of the national 
market. In February 2003, the 92 cardiac, orthopedic, surgical, and 
women's hospitals that we identified and were open for business 
accounted for less than 2 percent of the short-term, acute care 
hospitals nationwide. Recent growth in specialty hospitals has been 
rapid--the number of facilities has tripled since 1990 and another 20 
facilities are under development. Because specialty hospitals tend to 
be relatively small, they account for a somewhat low share of inpatient 
spending relative to their share of hospitals. The specialty hospitals 
in existence in fiscal year 2000 accounted for about 1 percent of 
Medicare spending for inpatient services.

About 70 percent of the specialty hospitals in existence or under 
development had some physician owners, according to our 2003 specialty 
hospital survey results. Among these hospitals, total physician 
ownership averaged slightly more than 50 percent. The average share 
owned by an individual physician was more than 2 percent at half the 
hospitals, while it was less than 2 percent at the other half. In about 
one-fifth of the hospitals with some degree of physician ownership, the 
largest share owned by an individual physician was at least 15 percent. 
Nearly all specialty hospitals with physician owners reported that some 
of the owners were members of a single group practice. The largest 
share owned by physicians in a single group practice was more than 25 
percent at half the hospitals and less than 25 percent at the other 
half. In about 1 out of 10 specialty hospitals with physician owners, 
physicians in a single group practice owned 80 percent or more of the 
hospital.

We found that patients at specialty hospitals tended to be less sick 
than patients with the same diagnoses at general hospitals, although we 
did not determine the clinical and economic importance of this finding. 
Our analysis of all inpatient discharge data from the 25 urban 
specialty hospitals for which these data were available--about one-
fourth of all specialty hospitals we identified nationwide--showed that 
21 of the 25 specialty hospitals treated lower proportions of severely 
ill patients than did area general hospitals. For example, at an urban 
cardiac hospital in Arizona, about 17 percent of patients with the most 
commonly treated diagnoses were severely ill, whereas at 26 general 
hospitals in the same urban area, about 22 percent of patients treated 
for the same diagnoses were severely ill. For all four specialty 
hospital types included in our study--cardiac, orthopedic, surgical, 
and women's--the median percentage of severely ill patients treated was 
lower than that for general hospitals. Four of the 25 specialty 
hospitals were exceptions, as they had treated patients that were as 
sick, or sicker, than the patients at general hospitals.

The American Surgical Hospital Association and two major specialty 
hospital chains--MedCath Corporation and National Surgical Hospitals--
provided comments on a draft of this report. Representatives from these 
groups stated that physician ownership of specialty hospitals did not 
affect physician referral behavior and that our physician ownership 
discussion was potentially misleading. Our report provides information 
on the extent of physician ownership of specialty hospitals but, 
because of data limitations, we did not attempt to analyze the 
relationship between ownership and referral patterns. The specialty 
hospital representatives also questioned the extent to which the 
illness severity differences we reported might apply to specialty 
hospitals not in our sample and the economic significance of these 
differences. The illness severity differences that we report are based 
on an analysis of thousands of claims from more than one-fourth of the 
specialty hospitals that we identified. We did not attempt to assess 
the economic significance of these differences. A more complete summary 
of their comments and our evaluation of their comments is included at 
the end of this report.

:

Background:

The fixed-rate, lump-sum payments that health care payers typically 
make to hospitals for inpatient care for patients with a given 
diagnosis, regardless of the costs of serving particular patients, are 
designed to promote efficiency by discouraging hospitals from providing 
unnecessary services as a way to boost revenues. However, these lump-
sum payments foster undesirable incentives, as hospitals may gain 
financially by serving a disproportionate share of low-cost patients. 
The mechanics of Medicare's hospital payment system illustrate this 
principle.

Under its system of prospective payments, Medicare pays a predetermined 
rate for each hospital discharge, based on the patient's diagnosis and 
whether the patient received surgery. In other words, the payments 
reflect an average bundle of services that the beneficiary is expected 
to receive as an inpatient for a particular diagnosis. Discharges are 
classified according to a list of DRGs. DRG payment rates are based on 
the expected cost of the diagnosis group's typical case compared with 
the cost for all Medicare inpatient cases. The DRG payment is not 
adjusted for within-DRG differences in severity of illness.[Footnote 7] 
Therefore, hospitals have a financial incentive to treat as many 
patients as possible whose costs are low relative to the average 
patient in each DRG.

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

In February 2003, there were 17 cardiac, 36 orthopedic, 22 surgical, 
and 17 women's hospitals that met our specialty hospital definition and 
were open for business.[Footnote 8] These 92 hospitals represent about 
2 percent of all short-term, acute care hospitals nationwide. (See fig. 
1.) The most recent Medicare discharge data indicate that the 80 
specialty hospitals in existence in 2001 accounted for slightly less 
than 1 percent of Medicare spending for inpatient services.

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

[See PDF for image]

The number of these facilities has grown rapidly in recent years--as of 
March 2003, the number of specialty hospitals had tripled from the 29 
that existed in 1990. (See fig. 2.):

[End of figure]

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

[See PDF for image]

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

[End of figure]

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

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

[See PDF for image]

Note: Data are from HCUP (2000) and CMS Medicare Provider Analysis and 
Review (MedPar) file (2001). Data on the number of women's hospitals 
under development were not readily available.

[End of figure]

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

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

[See PDF for image]

Note: Data are from GAO's specialty hospital survey (2003).

[End of figure]

Physician Ownership of Specialty Hospitals Is Common, but Shares Owned 
by Individual Physicians or Physician Group Practices Vary Widely:

Our survey of the more than 100 specialty hospitals in existence or 
under development indicates that about 70 percent of specialty 
hospitals had some physician owners.[Footnote 9] Of the specialty 
hospitals with any degree of physician ownership, physicians' combined 
ownership shares averaged slightly more than 50 percent of the 
hospital. About one-fifth of specialty hospitals were owned entirely, 
or nearly so, by physicians. (See fig 5.) Physicians owned 20 percent 
or less of the hospital in relatively few specialty hospitals.

Figure 5: Specialty Hospitals by Extent of Physician Ownership:

[See PDF for image]

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

[End of figure]

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

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

[See PDF for image]

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

[End of figure]

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

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

[See PDF for image]

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

[End of figure]

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

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

[See PDF for image]

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

[End of figure]

Specialty Hospitals Tend to Treat a Lower Percentage of Severely Ill 
Patients than General Hospitals:

Some patients are more severely ill than others--even when compared to 
individuals who have the same principal diagnosis. Differences in age, 
secondary diagnosis, and other complicating conditions can affect the 
severity of patients' illnesses and the amount and cost of the 
resources required for their treatment.

To determine whether there were differences in illness severity between 
the patients treated at specialty hospitals and the patients treated at 
general hospitals, we analyzed calendar year 2000 patient discharge 
data at 25 specialty hospitals. These hospitals were located in 18 
urban areas in six states: Arizona, California, New Jersey, New York, 
North Carolina, and Texas.[Footnote 10] Our group of comparison 
hospitals consisted of the 396 general hospitals located in the same 18 
urban areas. Our comparisons included only those general hospitals that 
provided short-term, acute care. We used a widely recognized system, 
known as All Payer Refined-Diagnosis Related Groups (APR-DRG), to 
assign an illness severity level to each patient on the basis of the 
information contained in the discharge data. This system, which is 
frequently used by hospitals and private insurers, groups patients into 
one of 355 diagnosis categories and assigns one of four severity levels 
(minor, moderate, major, or extreme) to each patient based on patient 
diagnosis, age, sex, and procedure. While we examined
illness severity differences between specialty and general hospitals, 
we did not determine the clinical or economic importance of these 
differences.[Footnote 11]

The vast majority of specialty hospitals with HCUP data available to 
us--21 out of 25--treated a lower percentage of patients who were 
severely ill--that is, assigned to the major or extreme severity levels 
by the APR-DGR system--relative to patients in the same diagnosis 
categories treated at general hospitals in the same urban areas. For 
example, 3 percent of the patients in the 10 most common diagnosis 
categories at one Texas orthopedic hospital were classified as severely 
ill. A higher proportion--8 percent--of the patients in the same 
diagnosis categories were classified as severely ill at the 51 general 
hospitals in the same urban area. A cardiac hospital in Arizona 
provides a similar example. About 17 percent of the patients in that 
hospital's most common diagnosis categories were classified as severely 
ill. In contrast, 22 percent of the patients in the same diagnosis 
categories who were treated at the 26 general hospitals in the same 
urban area were classified as severely ill. Not all specialty hospitals 
treated patients who were, by comparison, less sick. Two of the 25 
specialty hospitals treated a higher percentage of severely ill 
patients and two others treated about the same percentage as area 
general hospitals.

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

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

[See PDF for image]

Note: Data are from HCUP (2000).

[End of figure]

Comments Obtained from Organizations
Representing Specialty Hospitals and Our Evaluation:

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

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

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

Our report discusses the concerns that some have raised regarding 
physician ownership of specialty hospitals and the potential effect on 
referrals. Data were not available on the identity of physician owners 
and therefore we could not determine if there was a relationship 
between physician ownership and referral behavior. Instead, our report 
provides descriptive information on the extent to which physicians own 
specialty hospitals. Our results show that many physicians who invest 
in specialty hospitals own relatively small shares. In about half the 
specialty hospitals the average share was 2 percent or less. However, 
our results also show that some physicians own considerably larger 
shares of 15 percent or more. Furthermore, the combined share owned by 
physicians who are members of a single group practice represents the 
majority ownership in some hospitals.

We disagree with the criticisms of our illness severity analysis. The 
25 specialty hospitals included represent more than one-fourth of the 
facilities that we identified as meeting our criteria for a specialty 
hospital. We analyzed data pertaining to nearly 75,000 specialty 
hospital patients and approximately 900,000 general hospital patients. 
By focusing on the 10 most common diagnoses at each specialty hospital, 
we included nearly two-thirds of all patients treated at the specialty 
hospitals in our sample. Although an analysis of Medicare patients 
alone would have allowed us to increase the number of hospitals in our 
sample, it would have provided much less comprehensive information on 
the patients treated at each hospital. As we stated in our report, we 
did not attempt to determine the economic implications of the illness 
severity differences we observed between specialty and general 
hospitals. Research by MedPAC suggests that average treatment costs 
tend to rise with illness severity, as classified by the APR-DRG 
system, but we did not quantify the cost differences for the specific 
diagnoses we analyzed.

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

If you or your staffs have any questions, please call me at (202) 512-
7119 or James Cosgrove at (202) 512-7209. Other contributors to this 
report include Hannah Fein, Zachary Gaumer, and Ariel Hill.

A. Bruce Steinwald:

Director, Health Care--Economic and Payment Issues:

Signed by A. Bruce Steinwald:

Enclosure:

[End of section]

Scope and Methodology:

This enclosure provides additional information on three key aspects of 
our analysis. First, it lists the criteria we used to define specialty 
hospitals and the process we followed to identify them. Second, it 
discusses the survey used to collect physician ownership information. 
Finally, it describes the data and methodological approach used to 
compare patient illness severity at specialty and general hospitals.

Specialty Hospital Definition and Identification:

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

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

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

Because our study focused on private, short-term, acute care hospitals, 
we eliminated from consideration hospitals that were government-owned 
and those that tended to provide long-term care or otherwise had 
missions very different from those of short-term, acute care general 
hospitals. Thus, we excluded government-owned hospitals;
hospitals where the majority of inpatient claims were for MDCs that 
related to rehabilitation, psychiatry, alcohol and drug treatment, 
children, or newborns; and hospitals with fewer than 10 claims per 
bed per year.

Of the hospitals that met our criteria, 92 could be classified into 
four specialization categories: cardiac, orthopedic, surgical, and 
women's.[Footnote 12] An additional 18 hospitals specialized in a 
variety of other areas, such as eye and ear, nose, and throat 
procedures. For this report, we focused on the specialty hospitals in 
the four major categories listed above.

We applied our criteria to inpatient discharge data from two different 
data sources: the 2001 Medicare Provider Analysis Review file and the 
2000 Healthcare Cost and Utilization Project (HCUP) data set. Medicare 
and HCUP data both have distinct advantages and disadvantages. Medicare 
data contain patient information from virtually all of the nation's 
hospitals, but only for Medicare patients. Patients covered by Medicare 
are predominately age 65 or older. Consequently, some conditions--such 
as those that affect women of childbearing age--may be 
underrepresented, or not represented at all, in Medicare data. Thus, it 
is likely that an identification based on Medicare data may undercount 
the number of hospitals that specialize in treating such conditions.

In contrast to Medicare, HCUP data provide information on all of a 
hospital's patients. However, HCUP data are only available for 
hospitals in 29 states and each state's data must be purchased 
separately. We obtained HCUP data from the following six states: 
Arizona, California, New Jersey, New York, North Carolina, and 
Texas.[Footnote 13] These states were selected because Medicare data 
identified them as having potentially large concentrations of specialty 
hospitals.

To identify specialty hospitals that opened too recently to be included 
in the Medicare or HCUP data, we obtained information from the American 
Surgical Hospital Association and two national specialty hospital 
chains: MedCath Corporation and National Surgical Hospitals. These 
three organizations also provided information on specialty hospitals 
that are under development.

:

Source of Physician Ownership Information:

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

Severity of Illness Analysis:

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

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

[See PDF for image]

Source: HCUP.

Note: Data are from HCUP (2000).

[End of table]

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

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

(290181):

FOOTNOTES

[1] 42 U.S.C.  1395nn(a)(1)(A) (2000).

[2] U.S. General Accounting Office, Medicare: Referrals to Physician-
Owned Imaging Facilities Warrant HCFA's Scrutiny, GAO/HEHS-95-2 
(Washington, D.C.: Oct. 20, 1994). Jean Mitchell and Elton Scott, 
"Physician Ownership of Physical Therapy Services," Journal of the 
American Medical Association, vol. 268 (Oct. 21, 1992). For additional 
discussion of the topic, see Jennifer O'Sullivan, Health Care: 
Physician Self-Referrals "Stark I and II," Congressional Research 
Service 97-5 EPW (Dec. 6, 1996).

[3] 42 U.S.C.  1395nn(d)(3) (2000).

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

[5] The other-specialty category contained 18 hospitals that 
specialized in a variety of other areas, such as eye and ear, nose, and 
throat procedures.

[6] Data were from all hospitals in Arizona, California, New Jersey, 
New York, and North Carolina and the hospitals located in three regions 
of Texas.

[7] An "outlier" policy exists to make additional payments to hospitals 
when their costs for a particular patient are extraordinarily high 
compared with the DRG rate for that patient's diagnosis group.

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

[9] Approximately 80 percent of specialty hospitals returned our 
survey, although the response rate on certain questions was somewhat 
lower. Physician ownership information was self-reported by hospitals 
and does not reflect ownership by physician family members.

[10] Data on all inpatient discharges were obtained from HCUP, a 
federal-state-industry partnership sponsored by the Agency for 
Healthcare Research and Quality.

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

[12] This number does not include hospitals that initially appeared to 
be specialty hospitals, but informed us through our survey that they 
did not meet our criteria for a specialty hospital.

[13] We obtained HCUP data on hospitals in three of Texas's five 
regions. .

[14] One specialty hospital was excluded because it was located in a 
rural area and we could not readily identify a set of general hospitals 
that should serve as the comparison group.