Session: Limited Service Providers
Room: Phillips 407
Time: Tue 15:00-16:30

Presenter: Kathleen Carey (Boston University. School of Public Health)

Discussant: Richard Lindrooth (University of Colorado, Denver)

Abstract

Research Objective: The recent growth of physician-owned hospitals specializing in cardiac, orthopedic, and surgical specialty services (specialty hospitals) in the U.S. has generated considerable controversy, yet there is little understanding of the economic logic of organizing hospital services around these single specialties. Because specialty hospitals are small relative to the general hospitals with which they compete, an important economic question that arises is: Do specialty hospitals have sufficient size to achieve economies of scale and economies of scope? This paper takes a multiple output hospital cost function approach to empirical investigation of this issue.

Methods: We estimated two hospital cost functions using random effects models for all specialty hospitals operating during the period 1998-2007 in the 10 key states in which 90 percent of specialty hospitals were located, as well as all acute care general hospitals serving the same market areas, defined as Dartmouth Hospital Referral Regions. Our models comprised regressions of total annual operating costs on discharges, outpatient visits, average length of stay, indices for inpatient and outpatient case-mix, input prices, and teaching and ownership status. In order to analyze economies of scale and scope separately for distinct types of specialty hospitals, the first model included cardiac specialty hospitals and the second model included orthopedic and surgical specialty hospitals. Binary variables indicating whether a particular hospital was a specialty hospital were entered as main effects and interacted with output variables. Using regression results, we calculated measures of ray scale economies for the two key outputs of discharges and outpatient visits. We also estimated economies of scope by simulating the cost of producing outputs separately in general hospitals and specialty hospitals compared to producing the same level of outputs jointly in general hospitals. The primary data source was the Medicare Cost Reports. Identification of specialty hospitals was made with the assistance of the Centers for Medicare and Medicaid Services supplemented by web searches. Additional data came from the American Hospital Association Annual Survey Database.

Results: The empirical results suggest that general hospitals realize significantly greater economies of scale than either cardiac or orthopedic/surgical specialty hospitals. Specialization of either cardiac or orthopedic/surgical services in separate facilities does not lower total cost compared to joint service in general hospitals.

Conclusions: Supply side theoretical constructs of economic efficiency are not supported by empirical evidence in the case of specialty hospitals.

Policy Implications: Following the recent lift of a three-year moratorium on new physician-owned cardiac, orthopedic, and surgical specialty hospitals, a number of bills have been introduced in the U.S. Congress that would ban the referral of Medicare and Medicaid patients to specialty hospitals by physician-owners. The results generated in this paper inform the heated policy debate over the future organization of hospital services.

Key Terms

hospitals; specialty; scale and scope economies

Authors:

Kathleen Carey (Boston University) , James F. Burgess (Boston University. School of Public Health) and Gary J. Young (Boston University. School of Public Health)