Competition for effective leaders has motivated both for-profit and nonprofit hospitals to adopt profit-based incentives in setting executive compensation. A new paper co-authored by Leslie Eldenburg, Deloitte & Touche Professor of Accounting in the University of Arizona's Eller College of Management, is the first to examine the effect of profit-based incentives on charity care.
The paper is forthcoming in The Journal of Contemporary Accounting Research.
"Because charity care reduces profits, such incentives should lead for-profit hospital managers to reduce charity care levels," Eldenburg said. "Nonprofit hospital managers, however, may respond differently to the same incentives because they face a different set of institutional pressures and constraints."
In 2011, nearly 5,000 community hospitals provided $41.1 billion in uncompensated care as part of the $759 billion total hospital economic output.
"Hospitals have many ways to manage charity care," Eldenburg explained. Government and teaching hospitals provide the most charity care. For-profit hospitals minimize charity care by constraining the services they provide, she said.
"Typically for-profit hospitals don't offer trauma care," Eldenburg pointed out. "They also try to keep the care that they provide simple and straightforward – more complex cases tend to be less profitable."
But because nonprofit hospitals are mission-driven and tax exempt, managers cannot minimize charity care without facing scrutiny from donors, regulators and other stakeholders, Eldenburg said.
Performance-based incentives normally consider three areas: financial performance, patient satisfaction, and clinical quality. In for-profit hospitals, when managers miss financial targets, they still get some bonus based on performance in the other areas. "In nonprofit hospitals, managers won't receive any bonus when they don't hit their financial benchmarks," Eldenburg said.
"What we found is that as the weight on financial performance in compensation increased in for-profit hospitals, charity care decreased," she added. "However, there was no relationship at all in nonprofits. The weight on financial performance just did not influence charity care decisions."
Eldenburg and her co-authors – Theodore Goodman of Purdue University and Fabio Gaertner of the University of Wisconsin – point out that this evidence should partially alleviate concerns over the pay-per-performance model that nonprofit hospitals have adopted to compete for effective managers with their for-profit peers. More broadly, she said, "We also provide insights for accounting researchers about organizational influences that affect managerial responses to financial incentives in compensation contracts."