The Capital Structure of Hospitals and Reimbursement Policy

Empirical research has shown that hospitals have higher than average leverage, the extent of leverage is related to the extent of cost-based reimbursement, and not-for-profit hospitals are not as highly levered as their for-profit counterparts. Previous theoretical work does not unambiguously predict all of these results. This article develops a model of reimbursement policy and proves that, if reimbursement follows the indicated pattern, the Modigliani-Miller capital structure irrelevance theorem fails to hold and given reasonable restrictions upon the utility functions of not-for-profit donor/investors, each of the empirically observed results would be expected ex ante