[In 1983, Medicare changed its method of reimbursement for hospitals from an all-charges-paid basis to a flat-fee-per-diagnosis basis. Managing the cost of treatment became increasingly important. In an effort to influence physicians to reduce the amount of resources used, hospital controllers began providing cost information about patient treatment to physicians. Several questions were being asked at the time: (1) Although society affirmed that cost containment is necessary, should physicians ethically consider costs in making treatment decisions? (2) Would a group of professionals incorporate a new set of information provided by the accounting system into their decision-making process? (3) What design of management accounting system would best facilitate physician decision making around cost containment? This research examines the effects of providing cost reports, as a new information set, in this complex professional environment which is characterized by implicit contracts. An economic analysis explores the conditions necessary to align hospital and physician goals around cost management. An appropriate set of accounting information may help detect overtreatment. In addition, the reputation cost of being known as an overtreater may provide the necessary incentive for success in containing costs. A cross-sectional analysis of hospitals was undertaken to determine the response of physicians to this new information set. Differences in their practice patterns were analyzed in relation to the types of accounting information received. Average charges were used to measure practice patterns. The study population was partitioned according to the types of information provided and frequency of reporting. The results of the empirical analysis suggest hospitals providing physicians with their own case costs and some comparison information had significantly lower average charges, statistically, than those hospitals that did not. The comparison information may be reports of other individual physicians' case costs or on-the-average practice patterns within the hospital or within the state. This study contributes to current research in several ways. First, a theoretical framework has been developed that links incentives to manage costs with the type of accounting information provided in organizational environments characterized by a reliance upon implicit contracts. Second, from an accounting perspective, disaggregate information gathered by the accounting process and some sort of benchmark are necessary to induce this reputation effect that appears to influence behavior. Third, a linkage between total cost management and the use of accounting benchmark information in an implicit contracting environment is documented.]

[Under hospital accounting guidelines, contractual adjustments are an allowable deduction from revenue that reflect the difference between gross charges and reimbursement amounts. This study explores the use of contractual adjustments to shift costs among payors and increase revenues within a regulatory environment that attempted to limit cost shifting and set revenue constraints. Throughout the regulatory period, we find that hospitals overestimated budgeted contractual adjustments in a systematic manner which allowed cost shifting among payors and increased revenues. In addition, budgeted patient volumes and variable costs were manipulated in an attempt to relax the revenue constraint. After deregulation, we find that volume and cost biasing behavior decreased while overestimation of contractual adjustmentss increased. Further, we examine the interaction of this regulation with cost-containment regulation at the federal level.]

Examines the effects of providing cost reports in a complex professional environment like Medicare which is characterized by implicit contracts. Details of the institutional environment; Linkage between incentives to contain costs and the type of accounting information provided; Linkage between behavior of medical professionals and cost accounting information reporting.

This study explores incentives and performance in organizations governed by publicly elected boards of directors and subsidized by taxes. Such organizations are likely to underpay Chief Executive Officers (CEOs), resulting in selection and incentive problems and hence poor operating performance. We compare municipal district hospitals to private nonprofit hospitals. CEO compensation in district hospitals is significantly lower than in the nonprofits. Operating margins in district hospitals are lower and deteriorate more rapidly over time. We rule out a number of other factors that could explain differences in performance. We conclude that the weak governance structure hampers district hospitals.

After 1983, Medicare paid hospitals for inpatient services at fixed rates, but continued to reimburse outpatient services based on reported cost. Using data from Washington State we find that hospitals responded by increasing outpatient services to Medicare patients compared to non-Medicare patients-the ratio of Medicare outpatient revenues as a percentage of total Medicare revenues increased after 1983 to a significantly greater extent than for non-Medicare patients. We also find that allocations of overhead costs to outpatient departments increased after 1983. These findings suggest that hospitals change their patient mix and cost allocations to maximize hospital cash flows.

This study tests an implication of the real‐options theory of investment, that uncertainty leads firms to prefer technologies with low fixed and high variable costs. In 1983, a change in Medicare reimbursement increased the uncertainty of revenues for hospitals. Using a sample of 831 departments in 59 Washington State hospitals over the 1977–1994 period, we find that the ratio of variable to total costs increased after 1983. This increase is not attributable to a gradual increase in the ratio over time: We estimate a significant increase after 1983 even after controlling for a time trend. Further, we find a greater increase in the variable‐to‐total cost ratio for hospitals that had higher percentages of Medicare patients, increasing our confidence in the conclusion that the change in cost behavior is attributable to Medicare's change in reimbursement.

This paper analyzes the association between ownership, top management incentives, and expenditures on accounting information. We argue that organizations with privately appointed boards of directors such as for-profit and non-governmental nonprofit organizations use incentive pay practices which encourage managers to use accounting information to improve performance. In contrast, government organizations are publicly governed and are constrained in their compensation practices because hospital CEOs are administrators of government provided services. However, these hospitals must prove their efficiency to continue to receive adequate budgetary funding. Therefore government hospitals are more likely to use accounting information to gain legitimacy with stakeholders and regulators. Accordingly, we predict a positive relationship between expenditures on accounting information and contracting intensity in privately governed organizations, whereas we expect no such association for publicly governed organizations. We analyze data from California hospitals to determine differences in these roles across ownership types. We find a positive association between contracting intensity and expenditures on accounting information in privately governed hospitals, but no relation in publicly governed hospitals. Finally, we find differences in the use of accounting information within the privately governed hospitals, based on ownership. While for-profit hospitals expend resources on accounting information that helps improve their revenue positions, nonprofit hospitals expend resources on accounting information that facilitates decision-making related to operating efficiency and cost containment.

Under hospital accounting guidelines, contractual adjustments are an allowable deduction from revenue that reflect the difference between gross charges and reimbursement amounts. This study explores the use of contractual adjustments to shift costs among payors and increase revenues within a regulatory environment that attempted to limit cost shifting and set revenue constraints. Throughout the regulatory period, we find that hospitals overestimated budgeted contractual adjustments in a systematic manner which allowed cost shifting among payors and increased revenues. In addition, budgeted patient volumes and variable costs were manipulated in an attempt to relax the revenue constraint. After deregulation, we find that volume and cost biasing behavior decreased while overestimation of contractual adjustments increased. Further, we examine the interaction of this regulation with cost-containment regulation at the federal level.

Recent accounting research provides evidence that similar profit‐based compensation incentives are used in for‐profit and nonprofit hospitals. Because charity care reduces profits, such incentives should lead for‐profit hospital managers to reduce charity care levels. Nonprofit hospital managers, however, may respond differently to the same incentives because they face a different set of institutional pressures and constraints. We compare the association between pay‐for‐performance incentives and charity care in for‐profit and nonprofit hospitals. We find a negative and significant association between charity care and our proxy for profit‐based incentives in for‐profit hospitals, and no significant association in nonprofit hospitals. These results suggest that linking manager pay to profitability does not appear to discourage charity care in nonprofit hospitals. Apparently, the nonprofit mission, institutional pressures, and ownership constraints moderate the potentially negative effects of profit‐based incentives. Because this evidence partially alleviates concerns over nonprofit compensation arrangements that mirror those used in for‐profit hospitals, it should be of interest to regulators and policymakers. In addition, this study provides insights into accounting researchers about institutional and organizational influences that affect managerial responses to financial incentives in compensation contracts.

In a sample of California hospitals, we find that the composition of the board of directors varies systematically across ownership types. For all ownership types, except government-owned, we find that poor financial performance is related to board and CEO turnover. However, different ownership types place different weights on levels of charity care and administrative expenses. Our overall findings support the proposition that ownership type reflects heterogeneity across consumers and producers, and that differences in these groups lead to differences in the organization's objectives and governance.