Liquidity constraints affect hospitals’ capital investment, and these constraints are more pronounced at non-profit hospitals, according to a new paper.
The authors analyzed ten years of financial data from California hospitals to examine how liquidity constraints affected general capital investment and capital IT spending. Although IT investment did not suffer from liquidity constraints, the same wasn’t true for general capital investment. And the effects were more pronounced at non-profit hospitals vs. private or government-owned hospitals.
From the paper, published in the August 2022 issue of Economic Modelling:
The results of general capital investment across hospital ownership indicate that for-profit and government hospitals have no liquidity constraints because for-profit hospitals have a wide range of capital access and government hospitals generally receive more generous funding from the state or federal government. Non-profit hospitals, on the other hand, are more likely to face financial constraints than for-profit and government hospitals because they prioritize quality of care over profit. In particular, as Cleary et al. (2007) suggest, the cost effect from additional investment is likely to outweigh the revenue effect because non-profit hospitals strive to optimize their financial reserves. This demonstrates that their investment is sensitive to cash flow in a positive way, implying that non-profit hospitals have liquidity constraints. In addition, the margin they are investing may not produce the observed MPK.
Non-profit hospitals consider quality of care more compared to for-profit hospitals (Lee et al., 2013) and hospitals with different ownerships have different degrees of access to finance. Thus, to discern if hospitals with different ownership are likely to affect capital investment differently, we extended this relationship to different ownerships and found that hospital ownership plays an important role in general capital investment. Specifically, general capital investment in both for-profit and nonprofit hospitals is affected by MPKg, whereas it is affected by cash flow-to-capital only in nonprofit hospitals. These results confirm that hospitals with different ownership have different capital sources for investment. However, unlike these outcomes, cash flow-to-capital and MPKh do not result in financial constraints on health IT investment.