Managing in a Complex World: Accounting and Governance Choices in Hospitals

Abstract

The healthcare sector has experienced significant challenges stemming from market demands, competition, and regulation, which pressures hospitals to change their operations and decision-making. In contrast to mainstream business enterprises, decisions to change accounting systems or to improve hospital governance occur in a complex institutional environment with multiple stakeholders. The hospital setting thus provides both opportunities and challenges for researchers. This overview paper uses recent studies in the field to illustrate how hospital choices are driven by the institutional environment in which hospitals operate. Incorporating the richness of this institutional environment into research may help researchers to make better predictions about: 1) why certain accounting systems or types of governance models are implemented or maintained; and 2) why certain intended outcomes are not always realised. The paper also sets out a research agenda that further capitalises on the impact of multiple institutional stakeholders within hospital decision-making structures. This area of research is relevant to academics, policy-makers, and the healthcare profession at large. It can offer valuable insights on the types of governance structures and accounting systems that are likely to be more effective and can help shape healthcare policy.

Acknowledgements

The authors gratefully acknowledge the helpful suggestions provided by reviewers, Chris Chapman, Laurence van Lent, Leslie Eldenburg, Margaret Abernethy, and Chris Ernst and participants at the EAA symposium in Rotterdam (2008) for their helpful suggestions.

Notes

¹While our discussion focuses primarily on hospitals, other healthcare organisations face similar issues and thus provide fertile settings for research. Indeed, the movement towards vertical integration of care, in which primary care physicians, specialists, and hospitals must coordinate care for a given patient or specific episode of care, provides additional opportunities for research.

²Oliver (1991) provides a typology of strategic responses to institutional pressures and identifies institutional factors that are likely related to the response. Abernethy and Chua (1996) and Grafton et al. (2011) use Oliver's typology as the theoretical basis for their studies.

³While we rely on institutional theory from the sociology literature (Scott, 2001), theories from the new institutional economics school often propose complementary arguments (North, 1990). For example, Balakrishnan et al. (2010) combine theories from transaction cost economics (from institutional economics) with institutional theory (from sociology) to explain how hospitals decisions to outsource respond to environmental pressures.

⁴Traditionally, healthcare providers (both hospitals and physicians) were paid on a fee-for-service basis, in which there is payment associated with each service or procedure. The more services provided, the higher the payment. DRGs are a funding mechanism in which payment depends on the nature of the patient's illness, not on the amount of resources used to treat the patient. This type of system shifts cost risk from the insurer to the healthcare provider, since use of incremental resources for treatment does not result in a corresponding increase in hospital reimbursement. DRGs are an example of a prospective payment system (PPS), where payments to providers are determined before treatment.

⁵Meyer and Scott (1983, p. 201) define legitimacy as follows:

… organizational legitimacy refers to the degree of cultural support for an organization – the extent to which the array of established cultural accounts provide explanations for its existence, functioning, and jurisdiction. … A completely legitimate organization would be one about which no question could be raised…

Legitimacy protects the organisation from external pressures and reduces the likelihood of having its conduct questioned. Legitimate organisations enjoy more advantageous positions with suppliers, regulators, and customers.

⁶We focus on the four major internal stakeholder groups identified by Glouberman and Mintzberg (2001) to illustrate institutional complexity and interactions among stakeholder. Clearly, this is only one way to characterise internal hospital stakeholders – another would be to consider clinical (physicians and nurses), clinical support (including areas such as laboratory, radiology, and pharmacy), management, and trustees.

⁷Studies of US hospitals have documented the use of pay-for-performance incentives as an additional mechanism to align incentives in nonprofit hospitals (Eldenburg et al., 2009, 2011; Lambert and Larcker, 1995; Leone and Van Horn, 2005).

⁸These types of centrally funded systems are increasingly being implemented across the world, including Asia, Europe, North America, and Central America (Mathauer and Wittenbecher, 2012).

⁹HMOs are a form of managed care and can vary in form and extent of control over physician treatment practices by physicians and physician and hospital payment mechanisms.

¹⁰Replacing board members from the original congregation, charity, or local community by more experienced directors reflecting the differences in expertise of the various professional groups might thus be beneficial. This expertise is most frequently drawn from the hospital's local community.