Determinants of Capital Acquisition By Nonprofit Hospitals (Investment, Regulation, Fixed Asset).

Abstract

This study employs data for forty-two short-term general nonprofit Maryl and hospitals over the period 1970-1981 to analyze determinants of investment in fixed assets, such as equipment and buildings. Hypothesized determinants of the amount and rate of investment are derived from an economic investment model that incorporates a hospital production function into a partial adjustment framework. Unlike other investment analyses, this study tests hypotheses regarding changes in the speed of adjustment, where various speeds are assumed to be functions of different hospital regulation programs. Thus, investment during each of four different Maryl and hospital regulation programs is shown to be a function of the ratio of existing to desired (or optimal) capital stock and the unique speed with which the hospital reduces their ratio under each regulation program. The primary research problem is to analyze the determinants of the time path of investment by nonprofit hospitals; i.e., the speed with which nonprofit hospitals acquire total fixed assets. It is hypothesized that regulated hospitals invest at a slower rate since regulation may be associated with higher adjustment costs. By focusing on determinants of the rate of investment in addition to output and factor price effects, this study provides important new information on crucial policy issues. Policymakers can distinguish effects of prior regulatory programs on both the rate and amount of hospital capital acquisition. Also, tests of the output effect address the relationship between hospital output (measured by casemix adjusted admissions) and actual investment, while tests of the factor price effect analyze the role of changes in the cost of capital and wage rates. The study shows that the speed of investment in fixed assets by Maryl and hospitals increased during Maryl and rate regulation; possible reasons include anticipation of regulation, guaranteed reimbursement by the State regulatory agency of capital expenses associated with approved capital projects; and efficiency of the regulatory review program. Positive output effects were also found, showing that investment in fixed assets increases as hospital casemix adjusted admissions increase. However, hospitals' investment was not sensitive to relative input prices, suggesting that other unmeasured factors (such as managers' or physicians' preferences for up-to-date equipment and facilities) may be more important determinants of investment than relative prices of capital and labor.