ABSTRACT: Revenues of hospitals in the state of Washington are constrained by an upper bound that is a function of budgeted costs, budgeted volume, and actual volume. Basically, allowable revenue is the hospital's total budgeted cost, with an adjustment for the difference between actual and budgeted volume. A hospital can increase its allowable revenue by biasing the budget data reported to the Washington State Hospital Commission. For example, when a hospital budgets for an increase in volume, it is to the hospital's advantage to overstate the impact of the increase in volume on the hospital's total budgeted cost. Conversely, when a hospital budgets for a decrease in volume, the constraint on revenues can be relaxed by understating the impact: of the decrease in volume on the hospital's total budgeted cost. Empirical evidence is consistent with hospitals biasing, in certain predictable ways, budget data reported to the regulatory commission.

[Revenues of hospitals in the state of Washington are constrained by an upper bound that is a function of budgeted costs, budgeted volume, and actual volume. Basically, allowable revenue is the hospital's total budgeted cost, with an adjustment for the difference between actual and budgeted volume. A hospital can increase its allowable revenue by biasing the budget data reported to the Washington State Hospital Commission. For example, when a hospital budgets for an increase in volume, it is to the hospital's advantage to overstate the impact of the increase in volume on the hospital's total budgeted cost. Conversely, when a hospital budgets for a decrease in volume, the constraint on revenues can be relaxed by understating the impact of the decrease in volume on the hospital's total budgeted cost. Empirical evidence is consistent with hospitals biasing, in certain predictable ways, budget data reported to the regulatory commission.]