The Impact of Medicare Capital Prospective Payment Regulation on Hospital Capital Expenditures

Abstract

Our study examines the impact of the capital prospective payment system (CPPS), implemented by Medicare in 1991, on capital expenditures and cost-effective behavior of non-proprietary hospitals. As noted in the paper, we use audited financial statement data for a large national sample of hospitals. Univariate analyses demonstrate a statistically significant decline in capital expenditures in the years following the CPPS regulation without significant changes in relative aggregate operating expenses. These preliminary findings suggest that CPPS induces some cost-effective behavior by hospital managers. Ordinary least-squares (OLS) regressions indicate that capital expenditures before and after CPPS are differently affected by the changes in most explanatory variables. Further OLS regressions indicate that high-cost (low-cost) hospitals decrease (increase) capital expenditures following CPPS, once other factors are controlled for. Managerial accounting implications for hospitals include the effect of the regulation on capital budgeting decisions. Greater accounting disclosure may be necessary so that alternative modes of coping with the regulation can be discerned. Policymakers and regulators should also be aware that although reductions in capital expenditures may have favorable short-term effects of reducing health care costs, a potentially negative public health impact may result if capital expenditures continue to decrease.

Keywords: Medicare Regulation, Hospital, Capital Expenditure

JEL Classification: H51, I18, L31