Single Specialty Hospitals and Economic Efficiency: Evidence from the Supply Side

Slide Presentation from the AHRQ 2011 Annual Conference

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Single Specialty Hospitals And Economic Efficiency: Evidence From The Supply Side

Kathleen Carey* James F. Burgess Jr.* and Gary J. Young**

AHRQ Annual Meeting—September 21, 2011

Research funded in part by the Robert Wood Johnson Foundation and by AHRQ.

*Boston University School of Public Health and Department of Veterans Affairs
** Northeastern University

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Legislative History of Single Specialty Hospitals (SSHs): I

  • Ethics in Patient Referrals Act (Stark I & II): 1989, 1993.
  • "Whole Hospital Exception": a fertile environment for development of new SSHs.
  • Reasons for proliferation?
    • Distortions in the payment system.
    • Technological advances.
    • Dissatisfaction on the part of physicians with responses of hospital administrators.
  • Moratorium on new physician-owned cardiac, orthopedic, and surgical SSHs: 2003 to 2006.

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Legislative History of Single Specialty Hospitals (SSHs): II

  • What were the issues?
    • Patient selection: cherry-picking.
    • Financial impact on community hospitals.
    • Conflict of interest: self-referral, induced demand.
  • Medicare inpatient reimbursement structure reform: FY2007.
  • Patient Protection and Affordable Care Act Section 6001:
    • Whole hospital exception dismantled.
    • Stricter limitations on grandfathered SSHs.

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What Lies Ahead? I

  • Efforts to remove restrictions in Section 6001 underway:
    • Lobbying efforts to persuade legislators.
    • Legal challenges around the constitutionality to persuade the courts.
  • Restrictions only relate to SSHs with respect to reimbursement under federal insurance programs (viz., Medicare).
  • SSHs can continue to operate by relying on reimbursements from private plans and on out-of-pocket payments by patients.

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What Lies Ahead? II

  • All SSHs are not the same.
  • Two types: Orthopedic/Surgical and Cardiac.
  • Key differentiating factors in addition to specialization:
    • Size: Cardiac average 60 beds—OrthSurg average 20.
    • Scope of Services: Most OrthSurg SSHs do not have Emergency Departments but most Cardiac SSHs do.
    • Payer mix: MedPAC found that ~ 2/3 of Cardiac SSH patients were reimbursed by Medicare and 1/3 by private payers; for OrthSurg SSHs just the reverse.

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What Does the Literature Show?

  • Self-referral:
    • Mitchell, Medical Care (2008):
      • In referrals by orthopedic doc-owners compared to non-owners, OK SSHs.
  • Utilization:
    • Nallamothu, JAMA (2007):
      • In coronary revascularization procedures, Medicare population.
    • Mitchell, Medical Care Research & Review (2007):
      • In complex spinal fusion procedures, OK SSHs.
  • Selection:
    • GAO Report, 2003.
    • Cram et al., NEJM 2005.
    • Mitchell, Health Affairs 2005.
    • Guterman, Health Affairs 2006.
  • Cost:
    • Barro et al. Journal of Health Economics (2006):
      • Spending for cardiac care in markets w/ cardiac SSHs w/o worse outcomes.
    • Schneider et al., Inquiry 2007: ? in hospital level costs, national SSH study.
    • Carey et al. Health Services Research (2008):
      • Orthopedic/Surgical SSHs cost inefficiency.

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Research Questions

  • The question of SSH cost efficiency is deep.
  • One economic issue is whether there is "enough scale at all of these separate institutions to allow them to operate efficiently" (Newhouse, 2004).
  • Also, more services allow for joint costs of services.

Do SSHs realize economies of scale?

Do SSHs realize economies of scope?

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  • Too few observations on cardiac SSHs.
  • We focused on orthopedic and surgical SSHs.
  • These hospitals are primarily engaged in outpatient surgical services.
  • They also treat inpatients, although on a smaller scale.
  • Multiple output cost function with 2 outputs:
    • Inpatient Discharges.
    • Outpatient Visits.

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Hospital Cost Function Approach

Operating Costs =
f (discharges, outpatient visits, average length of stay, wage index, bed size, case-mix index, outpatient case-mix index, teaching hospital indicator, ownership, SSH indicator, SSH*discharges, SSH*outpatient visits).

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Data Sources

  • Medicare Cost Reports 1998-2008.
  • American Hospital Association Annual Survey Database.
  • ~ 90% of SSHs are located in 10 states (n=405):
    • Arizona.
    • California.
    • Idaho.
    • Indiana.
    • Kansas.
    • Louisiana.
    • Ohio.
    • Oklahoma.
    • South Dakota.
    • Texas.
  • Competitors in same market (n=5,273)
    (Dartmouth Hospital Referral Regions).

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Production Cost Efficiency Construct I: EOS

  • Economies of Scale (EOS).
  • Does the average cost decline as output increases? Or, is cost ↑ < output ↑(in proportional terms).
  • EOS = [1/ (MC/AC)] = [1 / cost elasticity].
  • For multiple outputs, Ray Scale EOS assumes that all outputs increase proportionately.
  • Ray EOS = [1 / Σ cost elasticities].

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Graphic Conceptualization of EOS

Image: Line graph with "Cost" and "Medical Services" on the x and y axes compares Range of EOS, Marginal Cost, and Average Cost.

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  • Short-run cost function.
  • Cubic functional form.
  • GEE estimator.


(1 - BED elasticity) / (DIS elasticity + OPV elasticity) =

(1 - δ*BED) / [(α11DIS + 2*α21DIS2 + 3*α31DIS)3 +
β11OPV +2* β21OPV2 + 3*β31OPV)3

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Results: EOS

 General HospitalsSpecialty Hospitals

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Production Cost Efficiency Construct II: ESC

  • Economies of scope (ESC): present if the cost of jointly producing a set of outputs is lower than the costs of producing those outputs separately.
  • For the 2 output case:

    ESC = [C(DIS,0) + C(0,OPV) - C(DIS,OPV)] / C(DIS,OPV)

  • ESC are present if the expression is positive:
    • Will occur if the numerator is positive.
    • Indicates it is cheaper to produce outputs DIS and OPV jointly than in separate facilities.
  • The expression rarely applied in the case of hospitals.
  • Why not? Because it is unusual that hospitals would be producing at levels of zero output.

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ESC: What if orthopedic and surgical SSHs closed their doors?

  • Alternative conception of economies of Scope (ESC).
  • ESC exist if it is possible to produce outputs jointly in the same hospital cheaper than it is to produce them separately.
  • How will we measure ESC?
    • ESC = [C(System A) + C(System B) - C(System C)] / C(System C).
    • Where System A is general hospital production, System B is SSH production, and System C is a simulation of general hospital technology cost of producing (general hospital + SSH) outputs.

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Cost A refers to production of general hospital output using general hospital technology.

Cost B refers to production of specialty hospital output using specialty hospital technology.

Cost C refers to joint production of general hospital and specialty hospital output using general hospital technology.

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[ESC = (Cost A + Cost B - Cost C) / Cost C]

Specialty HospitalsGeneral Hospitals
1st QuartileMedian3rd Quartile
1st Quartile(22.71+8.62-23.95)/23.95
= 0.30
= 0.16
= 0.05
= 0.38
= 0.18
= 0.05
3rd Quartile(22.71+21.09-27.62)/27.62
= 0.59
= 0.28
= 0.07

Costs measured in million $.
Quartile values taken across distributions of discharges and outpatient visits.

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Results: ESC, continued

Implicit Cost Savings (million dollars):
(Cost A + Cost B—Cost C).

Specialty HospitalsGeneral Hospitals
1st QuartileMedian3rd Quartile
1st Quartile7.386.725.37
3rd Quartile16.1813.618.34

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  • SSHs may lack sufficient scale to compete effectively with general hospitals on the basis of cost efficiency:
    • Yet this supply side analysis does not account for demand side price competition pressures.
  • Simulation analyses also suggest potential improvement in cost efficiency through exploitation of economies of scope by shifting SSH production to general hospitals.
  • But only one piece of evidence in understanding a very complex issue: SSHs might be able to control costs through leaner staffing, tighter inventory control and/or effective discharge planning, e.g.
Page last reviewed October 2014
Internet Citation: Single Specialty Hospitals and Economic Efficiency: Evidence from the Supply Side. October 2014. Agency for Healthcare Research and Quality, Rockville, MD.