Hospital Quality of Care: Evaluation of Resulting Financial Risk for Disclosure in Annual Reports

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Abstract

Outside of healthcare, disclosure of non-financial information (e.g., environmental performance and corporate social responsibility) has been demonstrated to have a significant effect on both the cost of debt and the cost of equity capital (Dhaliwal, Li, Tsang, & Yang, 2010; Prumlee, Brown, Hayes & Marshall 2010; Sengupta, 1998). Hospitals’ quality of care ratings are a relatively new non-financial disclosure in the healthcare industry. As such, these ratings may provide insight into a hospital’s associated degree of risk to investors and financial analysts.
This study analyzed the association of hospitals’ cost of debt with hospital quality scores. This study anticipated that lower mortality scores would be observed by prospective patients who would move to the hospitals with the best quality scores thereby increasing revenues to the high quality hospital and reducing revenues to the lower quality hospitals. In such cases, lenders would recognize an increased value proposition at the high quality hospital and lower their financial risk expectation and require lower interest rates. Similarly low quality hospitals would be penalized in their interest rates for the increased risk. The results suggest that lenders neither reward nor penalize hospitals for their reported quality scores when lending to hospitals. Lenders and rating agencies apparently do not recognize the potential contribution to hospital’s value proposition that should result from superior quality of care. Nor do they recognize the financial risk implications of substandard quality of care.

Authors

• James D Byrd, University of Alabama-Birmingham

• Greg Carlson, University of South Dakota

• Larry Hearld, University of Alabama at Birmingham

• S. Robert Hernandez, University of Alabama at Birmingham

• Richard Turpen, Auburn University at Montgomery