Measurement of Hospital Perfor^iance and Implications for Acccounting

Do for profit hospitals (FPs) perform better than non profit hospitals (NPs) and will continued growth of FPs help contain the alarming increases in U.S. health care costs? Three hospital performance dimensions that need to be considered to address these questions are identified: quality of care, cost of care, and pricing. Existing studies provide ambiguous and conflicting evidence about relative hospital performance partly due to inadequate output mix and volume data and partly due to incomplete and non-comparable accoutning data. A research design is proposed to provide more definitive conclusions about the relative performance of FPs vs. NPs. Specific changes in hospital accounting methods disclosures are also proposed to make accounting data useful in managing and containing health care costs. Acknowledgment I thank Jon Chilingerian for his assistance in completing earlier research that gave rise to many of the ideas reflected in this paper. Valuable comments and suggestions from participants in the University of Illinois at Chicago Government and Non-prof j.t Research Symposium and, particularly. Professor James Chan are most deeply appreciated. 1 . INTRODUCTION Rising health care costs and the increased presence of for-profit health service organizations have motivated frequent comparisons of for-profit (FP) and non-profit (NP) hospitals. Does the profit motive result in better managed, more efficient, lower cost hospital services of comparable quality to those offered by the more altruistic non-profit hospitals? Alternatively, do the for-profit hospitals sacrifice quality to achieve profit and return on investment objectives? FPs have performed well from an investor perspective (Frost and Sullivan, 1982). (Sandomir, 1981 ). FPs continue to be highly recommeded investments by security analysts in spite of increased competition and rate regulation (Hull, 1985). Can NPs improve their performance by adopting management practices of the FPs? Are the tax advantages and government subsidies to NPs warranted? These issues concern Federal and State governments, which regulate aspects of health care and which fund the cost of Medicare services to the elderly and Medicaid services to the poor. Legislators must periodically reconsider whether tax subsidies provided to NPs are well placed, or whether these advantages should also be made available for FPs. Employers and insurers have also expressed great concern about rising medical costs. For example, Chrysler Corporation reported that its health insurance costs were $6,000 per employee in 1983, which was double the 1979 cost