In this paper we examined a highly policy-relevant question: whether physician-owned hospitals with services limited to cardiac, orthopedic, and SSHs are more cost efficient than full-service hospitals with whom they compete locally. Results from a stochastic frontier cost function analysis showed orthopedic/surgical SSHs to be significantly more inefficient than their full-service hospital competitors. However, this effect was not observed among cardiac SSHs. In both respects, our results are consistent with those of MedPAC, even though we have taken a much more theoretically and empirically detailed approach to evaluating comparative hospital costs, and have expanded our analysis to include all treated patients, rather than just Medicare patients.
For policy purposes, an important finding from our study is that inefficiency measures differed significantly across SSH type. In this vein, several key differences exist between cardiac and orthopedic/surgical hospitals. Cardiac hospitals are more similar to full-service hospitals in many respects than are orthopedic/surgical hospitals. They are much larger than orthopedic/surgical hospitals, falling at the 30th percentile of the bed size distribution among acute care hospitals in the U.S. (AHA 2004
). The percentage of physician ownership in cardiac SSHs is only about one-half that of orthopedic/surgical SSHs (MedPAC 2005
), so that concerns over physician self-interest should be lower in cardiac SSHs. Finally, unlike orthopedic/surgical SSHs, most cardiac SSHs offer emergency services. The debate over specialty hospitals has focused on cardiac, orthopedic, and surgical hospitals, the three specialties subject to the moratorium, and most of the policy recommendations proposed to date target these three categories of physician-owned specialty hospitals as a group. The broad array of differences between cardiac and orthopedic/surgical hospitals, which we complement in this study, suggests that policy makers should remain open to the notion that SSHs are not all alike, and should not necessarily be treated in the same way.
Our study generated some additional results worthy of note. Theory predicts that for-profit hospitals have greater incentives to control costs and should therefore exhibit greater cost efficiency than other hospitals. Yet research shows mixed results for the effects of ownership on hospital costs, and overall the literature does not demonstrate systematic differences in costs between for-profit and nonprofit hospitals (Sloan 2000
; Shen, Eggleston, and Schmid 2007
). Our results show lower costs for the for-profit hospitals in our sample. Stratification of inefficiency scores among full-service hospitals also shows lower inefficiency in for-profit hospitals, so that among full-service hospitals in the markets we study, the for-profit incentive appears to promote cost-containing efficiencies. Because virtually all SSHs are for-profit enterprises, why the profit motive does not have the same effect on SSHs or, put the other way, why SSHs blossom in markets where for-profit hospitals are successful in containing costs is a question worth exploring in the future.
Another interesting finding was that the HHI measure of competition among hospitals was insignificant. Recent studies on the effects of competition are also mixed, with some evidence of increasing price competition among hospitals (Gift, Arnould, and DeBrock 2002
) and other evidence of increased emphasis on nonprice competition (Devers, Brewster, and Casalino 2003
). A powerful argument that has been put forth in support of SSHs is that through the competitive process, they induce community hospitals to perform more efficiently. But this argument assumes robust price competition in hospital markets. If the nature of competition in hospital markets is primarily one of nonprice competition, SSHs will be less motivated to focus on productive efficiency. Recent development in the study of hospital competition suggests a potential positive correlation between HHI measures and unobserved quality, owing to patient flows to higher quality hospitals (Kessler and McClellan 2000
). We do not test for endogeneity arising from this possibility here; however, such endogeneity would only have the effect of understating the presence of nonprice competition.
There are limitations to our analysis. Specialty hospitals are a new and growing phenomenon, and data are only beginning to materialize with enough time for these new entities either individually or collectively to achieve desired levels of efficiency. To date, SSH development has been almost exclusively in states that do not have Certificate of Need (CON) laws. If the absence of hospital CON regulation allows less-efficient hospitals to enter the market, or alternatively, if the absence of CON laws increases competition among providers, our results may not generalize to future SSH development in CON states. While our controls on quality are highly significant and account for considerable variation in cost, they are still proxy measures for hospital quality. This is a perennial problem for hospital cost function analyses; however, the measures and approaches we employ here for both case mix and quality measurement exceed those in almost all previous literature. Site visits and focus groups conducted as part of the CMS study showed that some specialty hospitals had more spacious private rooms, more comfortable surroundings, space for families, and better food. If specialty hospitals are offering service amenities that are systematically different from those of competitors, and that are unobservable, then some of what is regarded as inefficiency in our analysis may be extra costs incurred by these service offerings in specialty hospitals. Private and societal perspectives may differ on the extent to which such amenities add to value in health care by increasing quality of care versus reducing value by adding unnecessary costs in markets characterized by substantial degrees of insurance.
Our study focuses on relative cost inefficiency of SSHs. In the context of escalation of U.S. health care costs, it should be borne in mind that cost inefficiency is only one element of the effect of services on total medical care expenditures, which are also driven by quantity. We do not assess whether SSHs lead to a higher quantity of hospital services being provided. However, we do conclude from our analysis that policy makers should not adopt the assumption that physician-owned specialty hospitals produce patient care more efficiently than their full-service competitors. Further study of why specialty hospitals are not less costly than the hospitals with whom they compete for the same services, as well as further effort to uncover what alternative goals the SSHs may be trying to optimize over, is very important for future research.