The Association between Activity-Based Costing System Adoption and Hospital Performance

70 Pages Posted: 1 Aug 2006

See all articles by Annie S. McGowan

Annie S. McGowan

Texas A&M University - Department of Accounting

Sarah A. Holmes

affiliation not provided to SSRN

Melissa Martin

University of Illinois at Chicago

Date Written: July 31, 2006

Abstract

This study explores the relation between activity-based costing (ABC) information use and four measures of hospital performance - profitability, revenue enhancement, cost containment, and societal commitment. Specifically, we address the issue of whether, relative to non-adopters, hospitals enhance revenues, reduce costs, increase profitability, and display a greater commitment to the community after the implementation of activity-based costing strategies. We further explore whether the adoption of ABC affects performance and utilization differently depending on ownership type (for profit, non-profit, or government). The empirical evidence suggests that activity-based costing procedures produced mixed results in the two ownership groups. The presence of an advanced cost management strategy in the for-profit sector was associated with increased profitability (return on beds). In contrast, activity-based costing procedures in the government/non-profit sector were associated with enhanced revenue-producing activities, such as increased inpatient admissions and outpatient visits. While no evidence of improved cost controls was uncovered, government/non-profit adopters maintained pre-adoption levels of direct medical care, while non-adopters reduced costs by eliminating value-adding medical personnel. Society does not appear to benefit, however, from the adoption of ABC in the government/non-profit sector through the purchase of larger amounts of productive assets or the provision of added amounts of charity care. Indeed, adopters and non-adopters, alike, displayed positive changes in their community involvement in the post-adoption period. To sum, healthcare providers in both sectors utilized advanced cost management strategies in different ways to adapt to adverse changes in their unique environments.

Keywords: Activity-based Costing, Hospitals

JEL Classification: M41

Suggested Citation

McGowan, Annie S. and Holmes, Sarah A. and Martin, Melissa, The Association between Activity-Based Costing System Adoption and Hospital Performance (July 31, 2006). AAA 2007 Management Accounting Section (MAS) Meeting, Available at SSRN: https://ssrn.com/abstract=921471 or http://dx.doi.org/10.2139/ssrn.921471

Annie S. McGowan (Contact Author)

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-845-2055 (Phone)
979-845-0028 (Fax)

Sarah A. Holmes

affiliation not provided to SSRN

Melissa Martin

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

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