Charity care measurement, political cost constraints and discretionary spending by hospitals

This study examines the valuation and reporting behavior of hospitals that are subject to charity care regulation. Value reported for charity care is subject to adverse selection: hospitals know about the cost of charity care they provide whereas the state governments cannot observe the actual resources used to treat "charity care" patients. Results of a pooled cross-sectional regression demonstrate that private not-for-profit hospitals (NP) increase prices to maximize the reported value of charity care. Consistent with Positive Accounting Theory, this study hypothesizes and finds evidence that NP hospitals facing greater political costs are more likely to choose accounting numbers which reflect a higher value of charity care spending. Other results of this study underscore prior research findings of reclassification of bad-debt to charity care. This study contributes to prior healthcare accounting research by emphasizing the role of political costs in assessing managers' incentives and choice of accounting numbers in NP hospitals. The study also provides explanations and predictions of the effects of the proposed accounting measure on charity care value as reported by NP hospitals. These results have implications related to healthcare public policy, to decision making, to tax-exemption qualifications, and to resources allocation by taxing authorities of state and local governments.