General Hospitals, Specialty Hospitals and Financially Vulnerable Patients

Originally published as HSC Research Brief No. 11 by the Center for Studying Health System Change (HSC). Authors: Ann Tynan, Elizabeth A. November, Johanna Lauer, Hoangmai H. Pham, Peter Cram. HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

General Hospitals and the Competitive Threat from Specialty Hospitals

Over the preceding decade, the rapid expansion of specialty hospitals concentrated on profitable service lines -- particularly cardiac and orthopedic care -- had generated persistent concerns about the impact on general hospitals' ability to compete. Critics argued that specialty hospitals actively attracted less complicated, more profitable patients covered by Medicare while leaving general hospitals to handle sicker, more costly cases. This research brief examined the competitive dynamics between specialty and general hospitals, analyzing whether general hospitals were losing market share, how they were responding to the competitive threat, and what the implications were for patients and communities.

Patient Selection and Cream-Skimming Concerns

The research examined whether specialty hospitals were systematically selecting less complex patients. The analysis found evidence consistent with the cream-skimming hypothesis: patients treated at physician-owned specialty hospitals tended to be less severely ill, had fewer comorbidities, and were more likely to have favorable payer mix compared with patients receiving the same procedures at nearby general hospitals. This patient selection had financial implications because Medicare's diagnosis-related group payment system paid the same amount regardless of where the procedure was performed, meaning specialty hospitals could achieve higher margins by treating less complex cases while general hospitals absorbed the costs of serving sicker patients.

How General Hospitals Competed

General hospitals in markets with specialty hospital competition adopted various strategies to defend their market position. Many invested in upgrading their own cardiac and orthopedic facilities, purchasing new equipment, and improving amenities to make their specialty service lines more attractive to patients and physicians. Some general hospitals formed joint ventures with their own physicians, offering ownership stakes in dedicated service lines to retain specialists who might otherwise join or start competing specialty hospitals. Others responded by emphasizing their comprehensive capabilities -- including emergency departments, intensive care units, and the ability to manage complex patients with multiple conditions -- as advantages over specialty facilities with narrower service offerings.

Impact on Quality, Cost, and Access

The quality implications of specialty hospital competition remained mixed. Specialty hospitals reported high patient satisfaction and short lengths of stay, but it was difficult to determine whether these results reflected genuine quality advantages or simply the selection of healthier patients. From a cost perspective, the proliferation of specialty hospitals in some markets appeared to increase total spending by adding capacity without eliminating equivalent capacity at general hospitals -- the classic problem of supply-driven demand in health care. Access concerns centered on whether general hospitals, losing profitable cases to specialty competitors, would need to cut back on money-losing services like emergency care, psychiatric services, and community health programs that served as essential components of the local safety net.

Policy Considerations

The research supported several policy recommendations. Reforming Medicare's payment system to better reflect the severity of patients treated would reduce the financial advantage specialty hospitals gained from treating less complex cases. Strengthening disclosure requirements for physician financial interests in specialty hospitals would improve transparency. And maintaining or expanding the ACA's restrictions on physician self-referral to new specialty hospitals would limit the growth of facilities whose primary competitive advantage derived from payment system distortions rather than genuine quality or efficiency improvements.

Sources and Further Reading

This Research Brief was conducted by Ann Tynan, Elizabeth A. November, Johanna Lauer, Hoangmai H. Pham, and Peter Cram of the Center for Studying Health System Change. The analysis drew on Medicare claims data, hospital discharge records, and interviews with hospital executives and physician leaders. Earlier HSC research on specialty hospitals, including Issue Brief No. 62, provided the foundation for this updated analysis.