Strategic Cost Management and Institutional Changes in Hospitals

35 Pages Posted: 22 Aug 2010 Last revised: 15 May 2012

See all articles by Sylvia Hsingwen Hsu

Sylvia Hsingwen Hsu

York University - Schulich School of Business

Sandy Qu

York University - Schulich School of Business

Date Written: November 9, 2011

Abstract

Accounting research raises the concern that firms in the health care and defence contracting industries, when facing a dual payment system with both cost-based and fixed-rate payments, have an incentive to reallocate overhead costs through increasing inputs used in cost-based operations. However, prior literature reports contradictory empirical evidence regarding such real activity manipulation. Drawing on the institutional perspective, we hypothesise that firms’ market power and interorganisational dependence affect their cost-management strategies and choice of overhead allocation in response to dual payment systems. Analysing the data of California hospitals from 1980 to 1991, we find that when facing a dual payment system, dominant (strong market position) hospitals adopt a cost-revenue-enhancing strategy, increasing direct costs for cost-based services without containing costs in fixed-rate services. In contrast, nondominant hospitals choose a cost-reduction strategy and improve operation efficiency on fixed-rate services. We also find that nondominant hospitals shift more overhead costs away from fixed-rate services to cost-based services by reclassifying the allocation bases across services; combining this cost shifting with the cost-reduction strategy, nondominant hospitals demonstrate the compliance with the regulation expectation of cost containment.

Keywords: institutional theory, strategic cost management, cost-based reimbursement, cost shifting, market power

Suggested Citation

Hsu, Sylvia Hsingwen and Qu, Sandy Q., Strategic Cost Management and Institutional Changes in Hospitals (November 9, 2011). European Accounting Review Forthcoming, Available at SSRN: https://ssrn.com/abstract=1662208 or http://dx.doi.org/10.2139/ssrn.1662208

Sylvia Hsingwen Hsu (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Sandy Q. Qu

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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