Hospital Investment Decisions and the Cost of Capital

This study addresses two issues conceptually and empirically. How does hospital ownership type affect hospital investment choices? How do differences in the way hospitals are paid--cost- versus charge-based reimbursement--affect hospital investment? The authors compute cost-of-capital measures for both for-profit and not-for-profit hospitals. Whether or not hospital dependence on cost-based payment stimulates investment depends on the generosity of such payment relative to the economic cost of capital. Empirically, they find that for-profit hospital exit/entry decisions are guided by the generosity of payment to a greater extent than the not-for-profits.