Advocates for physician-owned hospitals specializing in cardiac, orthopedic, and surgical services claim that these facilities induce healthy competition, stimulating improved performance among acute care hospitals. This paper examines the effect of specialty hospital entry on one indicator of competition among hospitals: changes in service provision by general hospitals in local markets. Results suggest that general hospitals are stepping up their own offerings of services that are in direct competition with those of specialty hospitals. Entry of specialty hospitals is also associated with significantly higher growth in high-technology diagnostic imaging services in the general hospitals in those markets.
The Medicare Modernization Act (MMA) of 2003 imposed a congressional moratorium on referrals of Medicare and Medicaid patients by physician owners to new cardiac, orthopedic, and surgical hospitals. The moratorium ended in August 2006, but the controversy surrounding the development of physician-owned single specialty hospitals (SSHs) continues in full force. Opponents claim that SSHs engender unfair competition by targeting patient referrals, offering services leading to overutilization, cream-skimming patients, and limiting the ability of acute care general hospitals to cross-subsidize unprofitable services (Kahn 2006). Advocates maintain that by focusing on a limited range of services, SSHs offer better care and provide services more efficiently, promoting competition that stimulates higher quality of performance among their local general hospital competitors (Herzlinger 2005; Greenwald et al. 2006).
The SSH is a relatively new organizational model in the hospital industry, and of the approximately 100 currently in operation, most have opened in the last 15 years. Despite the moratorium, SSH growth has gained considerable momentum in very recent years, and currently dozens are under construction or in planning stages (U.S. GAO 2005; AHA 2008). Supporters on both sides of the debate generally agree that reimbursement inequities under the Medicare payment system has provided significant impetus for SSH development; shortly after the moratorium was lifted, the Centers for Medicare and Medicaid
Services (CMS) began refining reimbursement methods to level the playing field for competition (Hayes, Pettengill, and Stensland 2007). There are a number of other proposed regulatory approaches to SSH growth, some under policy discussion and others being tested and evaluated in various states.
Current policy concern and regulatory interest in SSHs are substantial, yet research that might inform policy on SSHs is limited. The two leading research efforts to date have been undertaken by the Medicare Payment Advisory Commission (MedPAC) and CMS, both in response to the MMA mandate. MedPAC found cardiac SSHs to be associated with increased rates of cardiac surgeries in local markets (MedPAC 2006), a conclusion reiterated in a recent study of coronary revascularization (Nallamothu et al. 2007). CMS investigated the quality of care at cardiac SSHs and concluded that it was as good as or better than competitors' care, although the evidence was drawn from a very small sample (Leavitt 2005; Greenwald et al. 2006). Both MedPAC and CMS found that SSHs treat lower severity patients, as have a small number of other researchers (Cram, Rosenthal, and Vaughan-Sarrazin 2005; Mitchell 2005). As for the relative efficiency of SSHs, the evidence is mixed (MedPAC 2006; Barro, Huckman, and Kessler 2006; Carey, Burgess, and Young 2008).
Understanding SSH impact on the performance of the hospital industry is only beginning, and whether SSHs are stimulating healthy competition is still an unsettled question. Prior to the emergence of managed care, hospitals competed for patients largely on quality by attempting to attract physicians, who preferred to refer their price-insensitive patients to facilities having a wide range of services and the latest and most sophisticated medical technology (Luft et al. …