Are costs differences between specialist and general hospitals compensated by the prospective payment system?

Prospective payment systems fund hospitals based on a fixed-price regime that does not directly distinguish between specialist and general hospitals. We investigate whether current prospective payments in England compensate for differences in costs between specialist orthopaedic hospitals and trauma and orthopaedics (T&O) departments in general hospitals. We employ reference cost data for a sample of hospitals providing services in the trauma and orthopaedics specialty. Our regression results suggest that specialist orthopaedic hospitals have on average 13.5% lower profit margins. Under the assumption of break-even for the average trauma and orthopaedics department, two of the three specialist orthopaedic hospitals appear to make a loss on their activity. The same holds true for almost 34% of departments in our sample. Variations in the salary of doctors, scale economies, other hospital status (e.g. foundation trust, teaching hospital), and quality of care explain only a small proportion of such differences.