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Cost Shifting in Nonprofit Hospitals

48 Pages Posted: 3 Nov 2011  

Ashley N. Newton

University of Oklahoma - Michael F. Price College of Business

Wayne B. Thomas

University of Oklahoma - Michael F. Price College of Business

Date Written: November 3, 2011

Abstract

While managers of for-profit organizations are charged with maximizing profits, this is typically not the case for managers of nonprofit organizations. Specifically, managers of nonprofit hospitals are charged with fulfilling the hospital’s mission to the community (i.e., providing quality health-related services at affordable prices), while the hospital earns profits that are near (or perhaps just above) zero. Prior research shows that managers of nonprofit hospitals manage accruals and real activities to avoid earning profits below or well above this zero-profit benchmark. We extend this research by showing that nonprofit hospitals also engage in cost shifting by reclassifying expenses from non-patient-centered (hereafter, 'non-core') to patient-centered (hereafter, 'core') activities when reporting earnings that either fall short of or are well above the zero-profit benchmark. This result tends to be more pronounced for hospitals with greater normative pressures, lower regulatory oversight, and greater reliance on external financing through donations. We expect our findings to yield clarity on the quality of nonprofit hospitals’ earnings by looking beyond bottom-line net income.

Keywords: nonprofit hospitals, classification shifting, earnings management, earnings thresholds

JEL Classification: L31, M41

Suggested Citation

Newton, Ashley N. and Thomas, Wayne B., Cost Shifting in Nonprofit Hospitals (November 3, 2011). Available at SSRN: https://ssrn.com/abstract=1953837 or http://dx.doi.org/10.2139/ssrn.1953837

Ashley N. Newton

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States
405-325-5591 (Phone)
405-325-5491 (Fax)

Wayne B. Thomas (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

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