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Abstract:
This paper studies the governance of a sample of California hospitals. We document a number of empirical relations about hospital governance: The composition of the board of directors varies systematically across ownership types; poor performance and low levels of uncompensated care increase board turnover, with this sensitivity varying by organizational type. Poor performance, high administrative costs, and high uncompensated care lead to higher CEO turnover, with these effects again varying across different organizational types. Overall, these results are consistent with the view that boards of directors of hospitals of different organizational forms are substantially different, and that these boards make decisions to maximize different objective functions.

Abstract:
This paper studies the governance of a sample of California hospitals. We document a number of empirical relations about hospital governance: The composition of the board of directors varies systematically across ownership types; poor performance and high administrative costs increase board turnover, with this sensitivity varying by organizational type; and poor performance, high administrative costs, and high uncompensated care lead to higher CEO turnover, with these effects again varying across different organizational types. Overall, these results are consistent with the view that boards of directors of hospitals of different organizational forms are substantially different, and that these boards make decisions to maximize different objective functions.

board structure, corporate governance

Abstract:
This paper studies the governance of a sample of California hospitals. We find a number of empirical relations about hospital governance: The composition of the board of directors varies systematically across ownership types; poor performance and high administrative costs increase board turnover, with this sensitivity varying by organizational type; and poor performance, high administrative costs, and high uncompensated care lead to higher CEO turnover, with these effects again varying across different organizational types. Overall, these results are consistent with the view that boards of directors of hospitals of different organizational forms are substantially different, and that these boards make decisions to maximize different objective functions.

Abstract:
This study tests an implication of the real-options theory of investment, that uncertainty leads firms to prefer technologies with low fixed and high variable costs. In 1983, a change in Medicare reimbursement increased the uncertainty of revenues for hospitals. Using a sample of 831 departments in 59 Washington State hospitals over the 19771994 period, we find that the ratio of variable to total costs increased after 1983. This increase is not attributable to a gradual increase in the ratio over time: We estimate a significant increase after 1983 even after controlling for a time trend. Further, we find a greater increase in the variable-to-total cost ratio for hospitals that had higher percentages of Medicare patients, increasing our confidence in the conclusion that the change in cost behavior is attributable to Medicare`s change in reimbursement.

Abstract:
Variable costs need not be incurred unless a firm wants to produce goods or services; the opportunity to incur variable costs is therefore a real (European) option (McDonald and Siegel 1985). Moreover, fixed investments can usually be postponed; the ability to wait before investing is also a real (American) option (McDonald and Siegel 1986). Decision-makers usually have more accurate information available when choosing to incur subsequent expenditures (variable costs) than when committing to fixed costs for long-term projects. Therefore, decision-makers have greater flexibility to respond to changes in business conditions when upfront (fixed) costs are lower in relation to subsequent expenditures. Because the value of flexibility increases with uncertainty, technologies with high variable and low fixed costs become more attractive as uncertainty increases. We argue that real-options theory therefore implies that the ratio of variable to fixed costs should increase with higher uncertainty.

Hospitals faced an increase in uncertainty when Medicare began reimbursing them using prospectively defined rates in 1983 instead of cost. Empirically we show that the slope coefficient in the regression of log costs on log volume, representing the ratio of variable to total costs, did increase after Medicare introduced the prospective payment system, as predicted by the real options theory. Our sample consists of 831 departments within 59 Washington State hospitals from 1977 through 1994. We also find that departments in hospitals with higher percentages of Medicare revenues exhibit greater increases in the slope coefficient; this increases our confidence in the conclusion that our results are attributable to the Medicare change.

Our research adds to the empirical work on the real-options theory (Quigg 1993; Leahy and Whited 1996; Moel and Tufano 2002). It also adds to the empirical studies of cost behavior which have examined the extent to which costs are fixed and variable, or sticky, and what factors other than volume drive costs. We extend the cost behavior literature by showing that cost behavior is not exogenously specified; rather, changes in uncertainty lead to managerial actions that affect cost behavior.

real options, uncertainty, cost behavior, fixed and variable costs

Abstract:
This paper analyzes the association between ownership, top management incentives, and expenditures on accounting information. We argue that organizations with privately appointed boards of directors such as for-profit and non-governmental nonprofit organizations use incentive pay practices which encourage managers to use accounting information to improve performance. In contrast, government organizations are publicly governed and are constrained in their compensation practices because hospital CEOs are administrators of government provided services. However, these hospitals must prove their efficiency to continue to receive adequate budgetary funding. Therefore government hospitals are more likely to use accounting information to gain legitimacy with stakeholders and regulators. Accordingly, we predict a positive relationship between expenditures on accounting information and contracting intensity in privately governed organizations, whereas we expect no such association for publicly governed organizations. We analyze data from California hospitals to determine differences in these roles across ownership types. We find a positive association between contracting intensity and expenditures on accounting information in privately governed hospitals, but no relation in publicly governed hospitals. Finally, we find differences in the use of accounting information within the privately governed hospitals, based on ownership. While for-profit hospitals expend resources on accounting information that helps improve their revenue positions, nonprofit hospitals expend resources on accounting information that facilitates decision-making related to operating efficiency and cost containment.

Governance, accounting information, ownership structure, hospitals

Abstract:
This study uses a hospital setting to explore incentives and performance in organizations that are subsidized by taxes and governed by elected boards of directors. This governance system introduces incentives to over-monitor CEO performance, constraining administrative decision-making and leading to poor performance. Using data from California Hospitals for the period 1980-1998, we compare municipal district hospitals to a sample of non-profit hospitals. While district hospitals' charges are lower, their subsidies and donations are larger. Overall, we find that district hospitals have lower operating margins that deteriorate more rapidly in a difficult business environment and lower compensation for CEOs.

Tax subsidization, Public monitoring, Operational performance

Abstract:
This paper analyzes the effects of hospital ownership on three specific strategies to improve financial performance. These strategies include (1) spending on advertising to increase revenues through increased market share and premium prices; (2) spending on accounting systems to cut costs, increase accounts receivable collections, or increase legitimacy with stakeholders and donors; and (3) improving efficiency through professional administration. We analyze California hospital expenditures on advertising, accounting, and administration for the period 1998 to 2000 to determine differences in these strategies across ownership type. We also examine the relationships among these expenditures and revenues and excess income margins. We find differences in strategies by ownership, i.e., for-profit hospitals emphasize advertising whereas government hospitals emphasize accounting. We also find that expenditures on advertising, accounting, and administration are positively related to margins for some hospitals.

Abstract:
This paper tests whether cost allocations are manipulated in response to cost-plus reimbursement. After 1983, Medicare started reimbursing hospitals for inpatient services on the basis of rates set prospectively, but continued to reimburse outpatient services based on cost. Using data from Washington State, we find that hospitals responded by increasing outpatient services to Medicare patients -- the ratio of Medicare outpatient revenues as a percentage of total Medicare revenues increased after 1983 to a significantly greater extent than for non-Medicare patients. We also find that allocations of common costs to outpatient departments after 1983 significantly exceeded those to inpatient departments, compared to the allocation pattern prior to 1983. These results are robust to alternative controls and cost function specifications.

Abstract:
For the past few decades, transfer prices have been a major source of conflict between governments and multinational firms. During the late 1980s and early 1990s, many countries established regulations aimed at limiting firms' abilities to avoid taxes through transfer pricing policies that move income to low tax subsidiaries. This research examines the arguments made by governments and by firms with regard to intra-firm transfers among subsidiaries in high and low-tax domiciles. Two types of regulation are described and predictions about the effects of the regulations are discussed and then tested using an event study methodology. Empirical analysis of a sample of Australian and Canadian firms provides evidence of market reactions to two different types of regulations that limited the ability of firms to avoid taxes using transfer pricing policies.