Specialty and full-service hospitals: a comparative cost analysis

To compare the costs of physician-owned cardiac, orthopedic, and surgical single specialty hospitals with those of full-service hospital competitors.

The primary data sources are the Medicare Cost Reports for 1998-2004 and hospital inpatient discharge data for three of the states where single specialty hospitals are most prevalent, Texas, California, and Arizona. The latter were obtained from the Texas Department of State Health Services, the California Office of Statewide Health Planning and Development, and the Agency for Healthcare Research and Quality Healthcare Cost and Utilization Project. Additional data comes from the American Hospital Association Annual Survey Database.

We identified all physician-owned cardiac, orthopedic, and surgical specialty hospitals in these three states as well as all full-service acute care hospitals serving the same market areas, defined using Dartmouth Hospital Referral Regions. We estimated a hospital cost function using stochastic frontier regression analysis, and generated hospital specific inefficiency measures. Application of t-tests of significance compared the inefficiency measures of specialty hospitals with those of full-service hospitals to make general comparisons between these classes of hospitals.

Results do not provide evidence that specialty hospitals are more efficient than the full-service hospitals with whom they compete. In particular, orthopedic and surgical specialty hospitals appear to have significantly higher levels of cost inefficiency. Cardiac hospitals, however, do not appear to be different from competitors in this respect.

Policymakers should not embrace the assumption that physician-owned specialty hospitals produce patient care more efficiently than their full-service hospital competitors.