This project will take modern finance theory concepts of arbitrage-pricing and its special case--the capital asset pricing model--and empirically apply them to the for-profit and nonprofit hospitals. The project also develops and applies property rights theory to issues of hospital philanthropy and optimal capital structure. These theories have never been empirically applied to the nonprofit sector of the hospital industry. The proposed research addresses four major policy concerns. (1) We measure the cost of capital by type of hospital and source of capital. In particular, we estimate the non-diversifiable risk associated with private nonprofit hospitals. (2) We estimate the responsiveness of philanthropy to various forms of in-kind returns. (3) We estimate the effects of Medicare, Blue Cross and state rate setting programs as well as corporate taxes and tax-exempt bond authorities on the cost of capital and upon the hospital's capital structure. (4) We estimate the effects of capital costs and capital structure on hospital industry structure: contract management, merger/acquisition and closure. These are significant due to DHHS's directive to develop a methodology for incorporating capital into prospective prices, legislative proposals to adopt all payer rate setting and/or to eliminate tax-exempt bond financing. All have important implications for hospital cost of capital and capital structure and for the organization of the industry. The analysis employs a variety of statistical techniques including regression analysis, Heckman's adjustment for selectivity bias and multinational logit. Only secondary data are used, principally AHA surveys including the new Capital Finance Survey. These data are provided at no cost to the project.
