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Uncertainty, Real Options, and Cost Behavior: Evidence from Washington State Hospitals
Sanjay Kallapur and Leslie Eldenburg
Journal of Accounting Research
Vol. 43, No. 5 (Dec., 2005), pp. 735-752
Published by: Wiley on behalf of Accounting Research Center, Booth School of Business, University of Chicago
Stable URL: http://www.jstor.org/stable/3542455
Page Count: 18
You can always find the topics here!Topics: Hospital costs, Variable costs, Fixed costs, Medicare, Reimbursement, Nonprofit hospitals, Cost estimates, Health care costs, State hospitals, Financial investments
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This study tests an implication of the real-options theory of investment, that uncertainty leads firms to prefer technologies with low fixed and high variable costs. In 1983, a change in Medicare reimbursement increased the uncertainty of revenues for hospitals. Using a sample of 831 departments in 59 Washington State hospitals over the 1977-1994 period, we find that the ratio of variable to total costs increased after 1983. This increase is not attributable to a gradual increase in the ratio over time: We estimate a significant increase after 1983 even after controlling for a time trend. Further, we find a greater increase in the variable-to-total cost ratio for hospitals that had higher percentages of Medicare patients, increasing our confidence in the conclusion that the change in cost behavior is attributable to Medicare's change in reimbursement.
Journal of Accounting Research © 2005 Accounting Research Center, Booth School of Business, University of Chicago