Agency implications of debt in not -for -profit hospitals.

Mainstream finance theories hold that increased debt in corporations helps to resolve agency conflicts between managers and shareholders. This dissertation investigates whether such theories apply in not-for-profit hospitals, in which the community at large holds a position analogous to shareholders. I model agency conflicts between not-for-profit managers and shareholders and explore whether debt plays a more complex role, possibly misaligning not-for-profit managers' incentives in some respects. The dissertation is composed of three papers. The first, a conceptual piece, summarizes the relevant issues and theory. It then offers hypotheses for empirical research and develops a model of the objective functions of not-for-profit hospital managers and shareholders. The second and third papers, both empirical pieces, test the hypotheses raised in the first paper, using regression analysis of a national database of hospitals' audited financial statements. These papers also incorporate anecdotal evidence from interviews with hospital managers, state financing authorities, investment bankers, financial advisors, and other players in hospital debt markets. The second paper evaluates whether debt financing constrains hospitals' provision of uncompensated care. It identifies several mechanisms by which debt could crowd out uncompensated care and then tests for such a crowd out. The evidence does not support the hypothesized effect, as debt positively predicts total uncompensated care and bad debt expenses. The findings are consistent with the view, articulated by some not-for-profit hospital managers, that debt is essential to fund hospital activities, services, and projects with a charitable component. The third paper explores whether debt financing improves hospitals' operational and capital-investment efficiency. Although finance literature holds that increased debt motivates efficiency, investment bankers, credit analysts, and others involved in hospital debt markets believe the incentives for efficiency following debt issuance are less powerful in the not-for-profit sector because of less public (i.e., stock market and creditor) oversight. Furthermore, there is a greater possibility of governmental and community assistance for not-for-profit hospitals nearing default. This paper examines whether diverse measures of efficiency are higher in not-for-profit hospitals that have issued more debt than their peers. The findings suggest that debt predicts lower efficiency, especially capital-investment efficiency, in not-for-profit hospitals.Ph.D.Health and Environmental SciencesHealth care managementPublic policySocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/130044/2/3042123.pd