Academic journal article Academy of Accounting and Financial Studies Journal

The Effect of Ownership Structure on Performance of Hospitals

Academic journal article Academy of Accounting and Financial Studies Journal

The Effect of Ownership Structure on Performance of Hospitals

Article excerpt

ABSTRACT

The purpose of this study is to investigate the effect of ownership structure on the financial performance of. We compare three groups of hospitals, classified by ownership structure: government, not-for-profit, and for-profit. Our sample is based on the data from the State of Washington hospitals over the period 1980 to 2003. Using factor analysis we summarize a large number of financial and non-financial performance measures across five dimensions: non-financial performance, profitability, capital structure, fixed assets efficiency, and liquidity. Then we apply linear mixed models analysis to investigate the effect of the ownership type on the factor scores of hospital performance. The results show that the ownership structure is associated with the level of performance, and that there are significant differences in the financial performance among the three groups of hospitals.

INTRODUCTION

The health care sector represents an important segment of the service oriented U.S. economy. As the cost of healthcare continues to rise, communities are faced with the choice of which organizational structure provides the most efficient service. Several empirical studies address the relative efficiency of hospital ownership and organizational structure. Eldenburg and Krishnan (2003) investigate the incentives and performance differences in municipal district hospitals versus private not-for-profit hospitals. They argue that the municipal district hospitals executives are paid less than those of the private not-for-profit hospitals. As a result, a selection problem arises leading to poor financial performance of district hospitals. Carter, Massa, and Power (1997) compare the operating efficiency of proprietary and non-proprietary hospitals. As a performance measure, they use the level of expenses as a function of ownership structure. They find that administrative expenses are greater for proprietary hospitals compared to non-proprietary hospitals. Many of the studies in this research area compare between two types of ownership structures of hospitals (e.g., for-profit vs. not-for-profit or private vs. public) and use limited number of financial performance measures (e.g., operating margin and expense level). In this study, we compare the performance of governmental, for-profit, and not-for-profit hospitals using a comprehensive set of financial and nonfinancial measures over a period of 23 years.

The purpose of the study is to investigate the association between the ownership structure and the financial performance of hospitals. The Washington State Department of Health (WSDOH) provided us with financial and non-financial data on about 125 hospitals. These hospitals are classified into three main groups: governmental, for-profit, and not-for-profit. In turn, the governmental hospitals are classified into state, county, and district hospitals. The for-profit hospitals are classified into individual, partnership, and corporate hospitals. Finally, the not-for-profit hospitals are classified into church operated and other. The sample used in this study covers the period between 1980 and 2003. Drawing on prior research on the financial and non-financial performance of heath care organizations (e.g., Watkins, 2000 and Zeller et al., 1996), we identify and calculate annual financial and non-financial performance measures for hospitals in our sample. Then factor analysis is used to create factors that summarize the underlying characteristics of these performance measures. Five factors were identified that represent profitability, capital structure, fixed assets efficiency, liquidity, and non-financial performance. Linear mixed models analysis is used in order to properly account for the correlation structure of the data and the annual performance nested within each hospital data. Our research approach has two particular distinguishing features: 1) we use factor analysis to combine highly related variables into constructs with clearer meaning than can be obtained by using multiple measures to represent a construct and 2) we use linear mixed model to control for hospital and year effects. …

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