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The Role of Overbilling in Hospitals’ Earnings Management Decisions

45 Pages Posted: 20 Sep 2017  

Jonas Heese

Harvard Business School

Date Written: September 19, 2017

Abstract

This paper examines the role of overbilling in hospitals’ earnings management choices. Overbilling by hospitals is a form of revenue manipulation that involves misclassifying a patient into a diagnosis-related group that yields higher reimbursement. As overbilling allows hospitals to increase revenues without altering operations, affecting costs, or having to reverse such behavior in the future, I propose and find that overbilling reduces hospitals’ use of managing accruals or cutting discretionary expenditures. Next, I find that hospital managers prefer overbilling to managing accruals (cutting discretionary expenditures) when cutting discretionary expenditures (managing accruals) is constrained, and vice versa. Collectively, my findings suggest that overbilling is an important alternative manipulation tool in hospitals.

Keywords: Overbilling, accrual-based earnings management, real activities manipulation, for-profit hospitals

JEL Classification: I11, I18, M41, M48

Suggested Citation

Heese, Jonas, The Role of Overbilling in Hospitals’ Earnings Management Decisions (September 19, 2017). European Accounting Review (Forthcoming); Harvard Business School Accounting & Management Unit Working Paper No. 18-026. Available at SSRN: https://ssrn.com/abstract=3039556

Jonas Heese (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan Hall 397
Boston, MA 02163
United States

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