The Effect of Changes in Regulation and Competition on Firms' Demand for Accounting

Information
Author(s): Ranjani Krishnan
Source: The Accounting Review, Vol. 80, No. 1 (Jan., 2005), pp. 269-287
Published by: American Accounting Association
Stable URL: http://www.jstor.org/stable/4093169 .
Accessed: 14/04/2011 12:23
Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless
you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you
may use content in the JSTOR archive only for your personal, non-commercial use.
Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at .
http://www.jstor.org/action/showPublisher?publisherCode=aaasoc. .
Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed
page of such transmission.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.

American Accounting Association is collaborating with JSTOR to digitize, preserve and extend access to The
Accounting Review.

http://www.jstor.org

THE ACCOUNTING REVIEW

Vol.80, No. 1
2005
pp. 269-287

The

in
Regulation and
Changes
for
Demand
Competition on Firms'
Accounting Information

Effect

of

Ranjani Krishnan
Michigan State University
ABSTRACT:This paper examines whether the type of competition in a marketinfluences the association between the intensityof competitionand demand for accounting
information.Empiricalanalysis using a sample of 1,578 hospital-yearobservationsfrom
hospitals in Californiafinds no association between the intensityof competition and
demand for accounting informationin the presence of qualitycompetition;however,
when firmscompete on price, the need to controlcosts leads to a positive association
between the two. In addition,the change in the unitof analysis in the hospital industry
fromthe payer to the ailmentincreased the demand for accounting informationfor all
Californiahospitals. This study suggests that competition intensityincreases the demand for accounting informationunderone type of competition(price),but not another
(qualitycompetition),and thereby contributesto our understandingof the reasons for
the mixed evidence in prior literatureon the relation between competition and the
demand for accounting information.
Keywords: competition;managerialaccounting;regulation.
Data Availability:Dataused in this study are publiclyavailablefromthe CaliforniaOffice
of State HealthPlanningand Development.

I. INTRODUCTION

his paperexamines how regulationinfluencesthe type of competitionthatprevails

in a marketand consequentlyaffects the associationbetween the intensity of competitionand firms'demandfor accountinginformation.'Despite persistentarguments
that an increase in competition increases the demand for accounting information(e.g.,
Cooper 1995; Kaplan 1983; Kaplan and Cooper 1998; Shank and Govindarajan1989),
empiricalresearchhas found mixed results. Some studieshave found a positive association
betweenincreasedcompetitionandthe use of morerefinedmanagementaccountingsystems
(Cavalluzzoet al. 1998; Hill 2000; Pizzini 2003), while others have found inconsistentor

1 The
empiricalanalysisuses expenditureson accountingas a proxy for the demandfor accountinginformation.
I thankRamjiBalakrishnan,RajivBanker,CarolynCallahan,MarkCovaleski,JosephFisher,SatishJoshi,Leslie
Eldenburg,Tom Linsmeier,JoanLuft, Mike Shields, Naomi Soderstrom,and two anonymousreviewersfor their
comments.I also thankworkshopparticipantsat the Bigl0+ ResearchConference;The Universityof Iowa;the
2002 ManagementAccountingResearchConference,Austin,Texas;MichiganStateUniversity;The Universityof
Texasat Dallas;and the Universityof Wisconsin-Madisonfor theirvaluablecomments.
Editor'sNote: This paperwas acceptedby TerryShevlin,SeniorEditor.
Submitted March 2002
Accepted February 2004

269

270

Krishnan

no association(Khandwalla1972; Libby and Waterhouse1996). Partof this inconsistency

arises because competitionis a multidimensionalconstruct,which has been empirically
operationalizedin a variety of ways. Competitioncan be characterizedin terms of either
the type, i.e., the parametersthatfirmscompeteon such as price, quality,or productvariety,
or the intensity,which is a function of the numberof firms in a marketand their relative
sizes.
Althoughsome empiricalstudiesexaminethe associationbetweenthe intensityof competition and the demand for accounting informationwithout controlling for the type of
competition(e.g., Hill 2000; Libby and Waterhouse1996), other studies suggest that the
typeof competitioninfluencesthe demandfor accountinginformation.For example,Hansen
(1998) analyzes firms competing under Cournot competition and finds a nonlinear,Ushaped relationshipbetween the level of competition (measuredas the number of firms
competing in a market)and firms' expenditureson cost data collection.2Krishnanet al.
(2002) use an experimentaleconomy, which is an operationalizationof Hansen's (1998)
model, and show that individuals'choices of the level of product-costingaccuracydepend
not only on the currentlevel of competition(marketstructure),but also on the priorlevel
of competition(markethistory).NeitherHansen(1998) nor Krishnanet al. (2002) examine
variationsin the associationbetween the demandfor accountinginformationand the intensity of competitionfor othertypes of competitionsuch as Bertrand.Moreover,both studies
focus on the level of competition,which is a function only of the numberof firms in the
market,ratherthan the intensityof competition,which is a functionof the numberof firms
and their relative sizes. Callahanand Gabriel(1998) provide theoreticaland experimental
evidence that the type of competition influences the value of more accurate product
cost information.Firmscompetingin a Cournotmarketbenefitfrom increasedproductcost
accuracy,whereasfirmscompetingin a Bertrandmarketdo not benefitfrom more accurate
cost information.While Callahanand Gabriel(1998) examine variationsin the association
between two types of competitionand the demandfor accountinginformation,they do not
vary the level of competitiveintensitywithin the two markets.
This paper demonstratesthat the association between the demandfor accountinginformationand the intensity of competitionis a function of the type of competition.Economic theory predicts that the regulatorystructureof the marketinfluences the type of
competitionthat prevails in a marketand that cost-plus regulationleads to quality competition, while fixed-price regulation leads to price competition. In addition, quality
competitionreduces firms' incentives to control costs, regardlessof competitionintensity
(Bajari and Tadelis 2001; Folland et al. 1997; Joskow 1980). Consequently,when firms
compete on quality,there is lower demandfor accountinginformationfor cost control,and
this demandis unlikely to vary as a function of competitionintensity.On the other hand,
when firmscompete on price, highercompetitionintensityincreasesthe incentivesfor cost
control (Shleifer 1985), increasingthe demandfor accountinginformation.
The Californiahospital market offers an attractivesetting to empirically test these
predictions.Prior to 1983, all hospitals in the United States were reimbursedfor their
Medicare patients and most other privately insured patients retrospectively, based on cost
plus a mark-up. Cost-plus reimbursement allowed hospitals to recover all their expenses,
regardless of whether these expenses were efficient or excessive, which provided no incentive to control costs. Hospitals could increase their profitability merely by increasing the
2

Cournot competition refers to a market where firms first commit to the quantity they plan to offer, and then
choose the price. Bertrand competition refers to a market where firms first commit to a price, and then choose
their quantities (Martin 1998; Varian 1992).

TheAccountingReview,January2005

The Effectof Changesin Regulationand Competition

271

numberof patientstreated.Since doctors preferredhospitals with higher quality and any

costs incurredin increasingqualitywas passedon to the patients,hospitalsofferedadvanced
technology,betterfacilities, and extensive services to attractdoctorsand more patients.The
higher the competitionintensity,the greaterwas the level of services provided(Keeler et
al. 1999). Consistentwith the predictionsof economic theorythatcost-plusregulationleads
to quality competition(Bajariand Tadelis 2001; Folland et al. 1997; Joskow 1980), considerableempiricalevidence demonstratedthatin the presenceof cost-plusregulation,competition in the hospital industrywas based on quality ratherthan price (see Gaynor and
Haas-Wilson[1999] for a review), which lowered the demandfor accountinginformation
for cost control.
Quality competitionled to an explosive increase in health care costs in the U.S.3 To
improve hospitals' incentives for cost control, beginning in 1983, the federal government
changed the regulatoryreimbursementstructurefor Medicare patients from cost-plus to
fixed-price.This fixed-pricewas based on the averagecost of all hospitals competing in
the market.During this same period, there was also an increase in the market share of
managed care plans, which provided negotiated fixed-price reimbursements.Both these
changes lead to what Shleifer (1985) refers to as "yardstickcompetition"where all the
firms in the marketcompeted against a marketaverage "shadow firm."Fixed-priceregulation shiftedthe basis of competitionin the hospitalmarketfrom qualityto price (Dranove
et al. 1993), which lowered the averageprice in marketswith higher competition.Fixedprice regulationencouragedcost-reductionbecause if a firmreducedcosts and its competitors did not, it could increase profits (Lambertand Larcker1995; Shleifer 1985). Hence
cost becamean importantcompetitiveweaponinfluencingmarketshareandprofit.Hospitals
located in marketswith greaterintensity of competitionhad greaterincentives to reduce
costs, because they needed to maintainpatient volumes to recover their fixed costs. This
increasedthe demandfor accountinginformationfor cost reductionin such markets.
In this paper, I empiricallyanalyze data from Californiahospitals and find evidence
that there is a significantpositive associationbetween the intensity of competitionand the
demandfor accountinginformationduring the price-basedcompetitionperiod usheredin
by the fixed-priceregulatoryenvironment;and no association duringcost-plus regulation
when competitionwas based on quality.
The remainderof the paper is organizedas follows. Section II uses regulatoryinterventionand contractingtheoryto motivatethe hypotheses.Section III containsa description
of the data and methodology. Section IV discusses the results and Section V discusses
conclusions,limitations,and avenues for futureresearch.
II. THEORY AND HYPOTHESES
Cost-Plus Regulation and Quality Competition
A fundamentalissue in contractingis determiningthe paymentterms.Economictheory
suggests that in the presence of asymmetricinformation(e.g., when the seller has information about production cost that the buyer does not), the buyer screens the seller by
offering the seller a menu of contracts from which the seller chooses one, thereby revealing
his private information (Laffont and Tirole 1993). Bajari and Tadelis (2001) show that in
practice, menus of contracts are seldom used and that most contracts are simple cost-plus
or fixed-price. They analytically show that cost-plus contracts discourage cost-savings efforts because the buyer or regulator is the residual claimant to cost savings and rent and
3

Healthcare costs grew at a rate of 12.60 percentper year from 1970 to 1983 (Letschet al. 1988).

TheAccountingReview,January2005

272

Krishnan

extracts all the benefits of the cost savings. Because the regulatorcannot determinetrue
costs, he can rarelyarguethat the firm is run inefficiently(Shleifer 1985).
Joskow (1980) offers a theory of how cost-plus regulationencouragedquality competition in the U.S. hospital industry.In Joskow's (1980) model, the presence of health insurancereducesthe price-sensitivityof patients.As a result, the relativeprices chargedby
competinghospitalsdo not have a significanteffect on a patient'shospital selection.However, patientsvalue the qualityof services offeredby a hospitaland are likely to preferone
that offers higherqualityservices. Similarly,physicianspreferhospitalswith higherquality
because it reduces theirrisk by offering access to advancedtechnologyand a full range of
diagnosticand therapeuticfacilities. Pecuniarymotives may also influencea physicianwho
is compensatedbased on a fee-for-service,to choose a high-qualityhospital because the
physician can order excessive services for patients, thus maximizing his pecuniary
compensation.
In Joskow's (1980) model, when reimbursementis based on cost, the hospital is motivated to maximize the quantityof services offered, much beyond the point where the
marginalcost of an additionalservice is equal to the expected value of the service to the
patient.Since price is not a variableinfluencinga patientor a physician'schoice of hospital,
the primarymechanismby which a hospitalcan attractpatientsis by increasingthe quality
of its services. The more intense the competition,the higherthe qualityof services offered.
Consistentwith Joskow's (1980) theoreticalargument,considerableempiricalresearchhas
found that priorto 1983, cost-plus reimbursementregulationin the U.S. hospital industry
encouragedquality competitionand resultedin a "medical arms race," wherein hospitals
competed by providingexcessive medical services, to attractphysicians who broughtthe
patients(Dranoveand White 1994; Gaynorand Haas-Wilson1999; Hughes and Luft 1991;
Noether 1988; Robinsonand Luft 1985, 1988; Zwanzigerand Melnick 1988).
Under cost-plus regulation,hospitals were guaranteedprofitabilityregardlessof the
intensity of competition,which createdvery little demandfor accountinginformationfor
cost control. In addition, accountinginformationwas of limited use for pricing because
payers/insurerscontractedbased on cost, or for product-mixdecisions because the costplus reimbursementsystem ensured that all services consumed by insured patients were
profitable.Oftenthe costs of unprofitableservices such as those consumedby the uninsured
could be shifted to the fully insuredpatients(Dranove 1988). Case-studyevidence shows
that hospital accountingsystems duringthe cost-plus regulatoryperiod were aimed at providing a reasonablyaccurateview of the financialpictureof the hospital, and providedno
details aboutthe costs associatedwith specific patients,procedures,or ailments(Narayanan
2000). The intensity of competitiondid not impact hospital behaviorwith respect to efficiency and cost-control,and was not likely to influencehospitals'demandfor accounting
information.Thus, during the cost-plus regulatoryregime when competition is quality
based, I predictthat there will be no associationbetween the intensity of competitionand
the demandfor accountinginformation.
H1: When firms compete on quality, there will be no association between the intensity
of competition and the demand for accounting information.
Fixed-Price Regulation and Price Competition
Bajari and Tadelis (2001) show that in the absence of costly renegotiation, the fixedprice contract gives the seller (producer) the strongest incentives to reduce cost. Under
fixed-price regulation, the firm is the residual claimant to the cost savings or rent that may
occur, which increases the firm's incentives to reduce costs, thus increasing its demand for
TheAccountingReview,January2005

The Effectof Changesin Regulationand Competition

273

accountinginformation.Recognizing this ability of fixed-priceregulationto improve incentives for cost control and in an attemptto reduce the explosive growth in health care
costs as a result of quality competition,the federal governmentintroduceda "Prospective
PaymentSystem" (PPS) for hospitalinpatientservices renderedto Medicarepatients.The
PPS, which was phased in over a four-yearperiodbeginningin October 1983, represented
a radicaldeparturefrom retrospectivecost-basedreimbursement,to a prospectivemethod
of paymentand a patient-(versus hospital-) level reimbursementscheme. The PPS began
paying hospitalson a prospectivelydeterminedfixed price for each Medicarepatientupon
dischargefrom the hospital. This fixed price varied depending on the type of illness as
definedby the Diagnosis RelatedGroup(DRG). DRG is a classificationsystem for hospital
inpatientsthatcategorizespatientsinto distinctgroupsaccordingto the natureand intensity
of the services.4
PPS fixed-priceregulationincreasesa firm's incentivesto be the lowest cost producer
becausethe firmretainsthe differencebetweenprice and cost. Firmsin marketswith greater
intensity of competitionhave greaterdifficultlyin obtainingsufficientnumberof patients
to break even, and hence have greaterincentives to reduce costs. As shown in Shleifer's
(1985) theoreticalmodel of yardstickcompetition,this lowers the shadowprice in markets
with higher competitionand leads to a negativerelationshipbetween competitiveintensity
and price.
In additionto fixed-priceregulationfor Medicarepatients,the regulatoryenvironment
for privatelyinsured patients also changed after 1983. Prior to 1983, insurancelaws in
Californiadid not allow insurancecompanies to influence patients'choice by using economic mechanismssuch as reducedco-payments,nor could they steer patientsto low-cost
providers(Dranoveet al. 1993). When these regulationswere lifted in 1983, there was a
considerableincrease in the marketshare of managed care organizations.Managed care
organizationsselectively contractwith hospitals,and contractsare typically awardedbased
on the hospital'swillingnessto acceptdiscounts(Dranoveet al. 1998). Selectivecontracting
influencedthe price elasticity of demandfor hospital services. Prior to the emergenceof
selective contracting,demandfor hospital services for commerciallyinsuredpatientswas
relatively inelastic with respect to price. However,under selective contracting,a hospital
that raises prices risks losing contractsto other hospitals,which makes the demandcurve
for hospital services more price-elastic(Zwanzigerand Melnick 1988). Hospitals located
in marketswith higher intensityof competitionhave to compete more vigorously on price
to obtainmanagedcare contracts.
The increase in marketshare of managed-careplans versus indemnity-basedplans in
the privateinsurancesector, therefore,had the same effect as the change in regulationfor
Medicarepatientsfrom cost-plusto fixed-price,and providedincentivesfor cost reduction,
especially in marketswith higher intensity of competition.The combined effect of these
two changeswas to reducethe averageprice in marketswith higherintensityof competition.
Indeed, empiricalresearchin health care finds that the shift from cost-plus to fixed-price
reimbursementchanged the nature of hospital marketcompetitionfrom quality-basedto
price-based (Dranove et al. 1993; Gruber 1994; Meltzer et al. 2002; Zwanziger and Melnick
4

For example,supposea patientis admittedto the hospitalfor coronaryby-pass surgery.Underthe cost-based

system, the hospitalreceives fundingfor each additionalday of care, diagnostictest, and medicalprocedure.
However,underthe PPS, the hospitalreceives a lump-sumpaymentequal to the marketaveragecost of all
patientswho have a coronaryby-pass (DRG 107). If the cost of treatingthe patientis less than the average,
then the hospitalearnsa profit.If the cost is greaterthanthe average,the hospitalsuffersa loss, whichis equal
andthe cost of treatment.Thus,PPS greatlyincreasesthe incentives
to the differencebetweenthe reimbursement
for the hospitalto reducecosts (Ellis and McGuire1993).

TheAccountingReview,January2005

274

Krishnan

1998). Thus, in the sample examined here, I expect to find that fixed-priceregulationis
associatedwith price-basedcompetition.
In response to the increasedpressuresto control costs underprice-basedcompetition,
hospitals began to explore approachessuch as product-linecosting, using a standardized
case as a benchmark,and providingphysicianswith costs as additionalinformationto use
while determiningappropriatemedicaltreatment(Coombs 1987; Eldenburg1994). Lambert
and Larcker(1995) also find thathospitalsincreasedthe use of bonus contractswith CEOs.
In addition, the increased diversity and complexity of the DRG system created intense
product-costmeasurementdifficulties.Undersuch circumstances,thereis a greaterincentive
for opportunisticbehavior(Demski and Magee 1992) and the demandsplaced on the accounting system and the pressuresit operates under are likely to vary as a function of
environmentalfeaturessuch as the intensity of competition.In a survey of 580 hospitals,
Hill (2000) finds that hospitals that reportedadoptingmore sophisticatedcosting systems
after PPS were more likely to be located in marketswith more hospitals.Thus, my second
hypothesispredictsthat duringthe period of price-basedcompetition,there will be a positive associationbetween competitionintensityand the demandfor accountinginformation.
H2: When competitionis price-based,there will be a positive associationbetween the
intensity of competitionand the demandfor accountinginformation.
PPS Fixed-Price Regulation and Unit of Analysis
The change in the regulationfrom cost-plus to fixed-pricealso had an independent
effect on hospitals'accountingsystems. Undercost-plusregulation,the payeror the insurer
was the unit of analysis; hence hospitals aggregatedaccountinginformationat the payer
level. Typicallya hospitalhad contractswith only five or six payers (Dranoveet al. 1993).
However,PPS necessitatedaggregationof accountinginformationat the level of the DRG.
Because it changedthe unit of analysisfrom aboutfive or six payersto 500 DRGs, it placed
greaterdemandson hospitals'accountingsystems."Hence, I predictthatafterthe institution
of PPS, firmswill have an increasein demandfor accountinginformationregardlessof the
intensity of competition.
H3: The change in regulationfrom cost-plus to fixed-priceis associated with an increase in the demandfor accountinginformation,independentof the intensity of
competition.
III. DATA AND METHODOLOGY
The empiricalanalysis uses data from 460 community-basedhospitalsin California,a
state with a large numberof hospitalsfacing varyingdegreesof competitiveintensity.Data
were obtained from the California Office of State Health Planning and Development
(OSHPD). I use data for 1979-1980 and 1980-81 for the cost-plus regulatoryperiod,6
which is at least two years prior to the introductionof the MedicarePPS.7For the fixedprice regulatoryperiod, I use data for 1996-97 and 1997-98 because this is severalyears
SReportingrequirementsfor regulatoryauthorities(such as Medicare)typicallyhave a majorinfluenceon the
design of cost accountingsystems (Cleverley1984).
6 For convenience,the discussionuses the ending years. Thus, 1979-1980 is referredto as 1980, 1980-81 as
1981 and so on.
7 The MedicarePPS was establishedby the Social SecurityAmendmentof 1983 (PublicLaw 98-21) andbecame
effectivefor hospitalsfor fiscal yearsbeginningafterOctober1, 1983 (Lattaand Keene 1990). This systemwas
phasedin over a four-yearperiodto ease hospitals'transition(Meltzeret al. 2002). Hence the first year that
hospitalswere fully reimbursedby the PPS system was 1988-1989.

TheAccountingReview,January2005

The Effectof Changesin Regulationand Competition

275

afterthe introductionof PPS when managedcare was firmlyin place.8By 1996, the market
share of managed care plans had stabilized to a fairly high level in California,whereas
duringthe late 1980s and early 1990s, managedcare plans were in the process of building
marketshare (Vita 2001). The sample includes only short-staygeneral hospitals and excludes psychiatrichospitals and long-term care hospitals because several of the services
these hospitalsoffer are exempt from the PPS.9
Variables and Empirical Model for Testing Price versus Quality Competition
As stated earlier,priorliteraturehas found that cost-plus regulationis associatedwith
quality competition,and fixed-priceregulationis associatedwith price competition.I empiricallytest this becauseit is importantto establishthatthis associationholds in my dataset
for testing H1 and H2. To test these associations,I use a fundamentalpredictionof economic theory,which states that if prices decreaseas the intensityof competitionincreases,
then firmsare competingon price, whereasif prices increaseas the intensityof competition
increases, then firms are competing on non-priceattributessuch as quality (Satterthwaite
1979; Schmalensee 1989; Stigler 1968; Weiss 1989). A number of empirical studies in
severalindustrieshave also concludedthat a negative associationbetween price and competitionintensityrepresentsprice competition,and a positive associationbetween price and
competitionintensityrepresentsnon-pricecompetition(see Weiss [1989] for a review).1'
Based on the above predictionsof economic theory and priorempiricalfindings,I use
the associationbetween the price received by the hospitaland the intensityof competition
to differentiatebetween price and quality competition.I use data from 1980 and 1981 to
examinethe associationbetweenprice and the intensityof competitionduringthe cost-plus
regulatoryperiod, and data from 1997 and 1998 to examine the associationbetween price
and intensity of competitionduringthe fixed-priceregulatoryperiod. The following paragraphssummarizethe empiricalmodel and variablesused to test these associations.
Dependent Variable:Price
I use Net Revenueper Patient Day as the measureof price received by the hospital.
This is the net revenue received by the hospital for medical services (after subtracting
discounts), divided by the numberof patient days and reflects the averageprice received
by the hospital. I use this measurebecause prior researchsuggests that the best measure
of price in the hospitalindustryis revenueafter adjustingfor hospitaldiscountsand length
of stay (LOS) (Keeler et al. 1999).
Independent Variable:CompetitionIntensity
Joskow (1980) acknowledgesthat it is very difficultto quantifythe intensity of competition. While the level of competitionin a marketcan be measuredby the numberof
Indusfirmsin a certainarea,measurementof competitiveintensityis less straightforward.
trialeconomicstheorypostulatesthatmerelyusing level-basedmeasuressuch as the number
of firms in a marketis not sufficientin the study of competitivebehavior,and that it is
also importantto examine the relative marketshares of firms in a market(Martin1993).
For example,considertwo markets,both of which have four hospitals.In one market,each
Financialdataover differentyears are deflatedusing the averageConsumerPrice Index (http://www.bls.gov),
and expressedin 1980 dollars.
9 This is also consistentwith priorresearchin healthcare, which typicallyexcludesthese hospitalswhile examining hospitalbehavior(e.g., Dranoveet al. 1993; Keeleret al. 1999; Lynk 1995).
o10A vast majorityof these studies use the Herfindahl-Hirschman
Index (HHI)to measurethe intensityof competition.A few othersuse the numberof firmsin the market.
8

TheAccountingReview,January2005

276

Krishnan

hospitalhas 25 percentshareand in the other,the marketsharesare 50 percent,30 percent,

15 percent,and 5 percent,respectively.The competitivedynamicsand intensityaredifferent
in each of the marketsbecause in the formermarketno firmplays a dominantrole, but in
the lattermarket,the firm with the 50 percentmarketshareis the dominantfirm,while the
firms with the 15 percent and 5 percent shares are likely to be price-takingfringe firms
(Martin1993). In additionto highermarketpower,the greatersize of operationsand market
share provides the larger firm with other associated benefits such as economies of scale
and scope, and monopsonisticpower over suppliers,which lowers its marginalcost and
enables the firm to obtain higher margins.
I use the Herfindahl-Hirschman
Index (HHI) as the primarymeasureof the intensity
of competition.The HHI is definedas the sum of the squaredmarketshares(expressedas
proportions)of all firms in the market.The HHI is one of the most popularmeasuresof
the intensityof competitionand is used by antitrustagencies such as the U.S. Department
of Justice and the FederalTradeCommission,and by economists (e.g., Keeler et al. 1999;
Kim and Singal 1993; Lynk 1995). Because it combines informationabout the numberof
firms in a marketand their size distribution,the HHI is regardedas a superiormeasureof
competitioncomparedto the four-firmconcentrationratio, or the numberof firms in the
market (Schmalensee 1989). For ease of interpretation,the HHI is reverse coded, i.e.,
measuredas (1 - HHI).The marketsharefor an individualhospitalis its numberof patients
as a percentageof total patientsdischarged.
Consistentwith prior studies in the health care literature,each county is defined as a
separatehospital market(e.g., Frankand Salkever 1991; Lynk 1995).
Control Variables
The U.S. hospital industryhas firms with differentownershipforms
Ownership-Type:
such as non-governmentnonprofits(includingchurch and community-runhospitals), forprofit(investor-ownedhospitals),and government(state,city, county,anddistricthospitals).
Most of the economics literaturehypothesizesthat nonprofithospitalshave differentobjective functionsthan for-profithospitals(see Needleman[2001] for a review). To examine if
there are differencesamongsthospitalsbased on ownershiptype, the analyses include two
dummy variablesto control for ownershipstatus:For-Profit,which takes the value of 1 if
the hospitalis a for-profithospitaland 0 otherwise;and Government,which takes the value
of I if the hospital is a governmenthospital, and 0 otherwise.The non-governmentnonprofithospitalis the omitteddummyvariable.If for-profithospitalsindeedmaximizeprofits,
then theirprices shouldbe higherthanthose chargedby nonprofitand governmenthospitals.
In addition,averageprices received shouldbe lower for governmenthospitalsbecause they
tend to attracta largerproportionof uninsuredand underinsuredpatients(Newhouse 1989).
StaffedBeds: Priorresearchsuggests thathospitalsize influencesits revenues,primarily
because largerhospitalshave greatermarketpower,which allows them to negotiatehigher
prices with insurers (French 1996; Robinson and Phibbs 1989). Therefore,the analysis
includes the numberof staffed beds as a control for hospital size.
Proportion of Medicare Patients: The cost-plus reimbursement system encouraged the
excessive provision of reimbursable services for Medicare patients. Hence, I expect that the
proportion of Medicare patients will be positively associated with prices under cost-plus
regulation. Under PPS, a hospital with a greater proportion of Medicare patients has a
smaller patient pool where prices are still negotiable, and is likely to have a lower average
price.
Proportion ofMedi-Cal Patients: Medi-Cal, the California Medicaid program, has common features with the Medicare program; hence it is expected to behave similarly.
TheAccountingReview,January2005

The Effectof Changesin Regulationand Competition

277

Proportionof Outpatients:Under the cost-plus reimbursementsystem, Medicareand

Medi-Cal outpatientswere also reimbursedretrospectivelybased on cost plus a mark-up,
and hospitals had incentives to provide excessive services to outpatients.However,under
fixed-price regulation,Medicare and Medi-Cal outpatientsusually generate less revenue
than inpatients.Moreover,non-Medicareand non-Medi-Caloutpatientsare more likely to
be uninsured(Almeidaet al. 2001). Hence, I expect that the proportionof outpatientswill
be positively associated with price in the cost-plus period and negatively associatedwith
price duringthe fixed-priceperiod.
OccupancyRate: Occupancyrate is not likely to influencethe prices duringthe costplus period. However, during the fixed-priceperiod, a hospital with a higher occupancy
rate may have a higher marketshare and hence be able to commandhigher prices from
insurersdue to its marketpower. Alternatively,if the occupancyis comprisedof underinsured or uninsuredpatients, then a higher occupancyrate may be associated with lower
prices.
Length of Stay (LOS):Priorresearchin health care suggests that LOS affects hospital
behaviorand performance(Lynk 1995). Thus, LOS is used as a control variable.Because
patients receive more intensive and reimbursableservices during the first few days of a
hospital stay, higherLOS is likely to reduce the averageprice receivedper day underboth
types of regulation.
Empirical Model
I use the following model to test the associationbetween regulationand competition
type:
Net Revenue Per Patient Day = oe + ~1(Competition Intensity)
+ J2(For-Profit)+ r3(Government) + 34(StaffedBeds)
+ P5(Proportion of Medicare Patients)
+ "6(Proportion of Medi-Cal Patients)
+ P,(Proportion of Outpatients)
+ P8(Occupancy Rate) + r9(LOS) + Ei.

(1)

This model is estimated separatelyfor the cost-plus regulatoryperiod and the fixedprice regulatoryperiod. A positive coefficient for CompetitionIntensity suggests that a
higher intensity of competitionis associated with higher prices, which is consistent with
firms competingon the basis of non-priceattributessuch as quality.A negativecoefficient
for CompetitionIntensitysuggests that higher competitiveintensitylowers prices, which is
consistentwith a marketwhere price is the basis of competition.The coefficientfor Competition Intensity should be positive during the cost-plus regulatoryperiod and negative
duringthe fixed-priceregulatoryperiod.
Variables and Empirical Model for Hypotheses 1, 2, and 3
Dependent Variable
Demand for Accounting Information: As stated in the introduction, I use expenditures
on accounting as a proxy for the demand for accounting information. The OSHPD database
provides data on general accounting and patient accounting costs. The General Accounting
cost center accumulates non-patient billing and accounting activities of a hospital (i.e.,
preparation of ledgers, budgets, etc.). The Patient Accounting cost center accumulates direct
TheAccountingReview,January2005

278

Krishnan

expenses related to the processing of patient charges (i.e., claims, bills, and patient-level
accountingactivities).
The primary dependent variable is Total Expenditures on Accounting, which is the sum

of general accounting and patient accounting.To control for hospital size, volume, and
operatingefficiency,total expenditureson accountingis dividedby total operatingcost and
expressed as a proportionof total operatingcost.
Independent Variables
CompetitionType:This is a dummyvariablethattakesthe value of 1 when competition
is price-based(i.e., during 1997 and 1998 when regulationwas fixed-price)and 0 when
competitionis quality-based(i.e., during 1980 and 1981 when regulationwas cost-plus).
Competition Intensity * Competition Type interaction: This variable captures the asso-

ciation between the intensity of competition, the type of competition, and demand for
accountinginformation.Because CompetitionTypeis a dummy variablewith the value of
0 when regulationis cost-plus,this variablewill have a zero value in the presenceof quality
competitionthat existed duringthe cost-plus period.A positive coefficienton this variable
implies that in the presenceof price competition,hospitalswith greatercompetitionintensity have greaterdemandfor accountinginformation.
Control Variables
In addition to the control variables mentioned in the previous section, this analysis
includes Data Processing Cost as an additionalcontrol variablebecause the time period
used for the study (1980, 1981, 1997, 1998) coincidedwith increasedspendingby hospitals
on data processing.This ensuresthat the increasein accountingexpendituresis not driven
primarilyby increased data processing costs. These costs include data collection, input,
storage,data processing,and distributingoutput.
Empirical Model
Hypotheses 1, 2, and 3 are tested using the following regressionmodel:
Total Expenditures on Accounting as a Proportion of Operating Cost
= a + P,(Competition Intensity) + 02(Competition Type)
+ 03(Competition Intensity * Competition Type) + f4(For-Profit)
+ P,(Government) + r6(Data Processing Cost) + 17(Staffed Beds)
+ N8(Proportion of Medicare Patients) + 39(Proportionof Medi-Cal Patients)
+ " o(Proportion of Outpatients) + P,3(Occupancy Rate) + 12(LOS)+ Ei.

(2)

The influenceof competitionintensity on total expenditureson accountingis equal to

p, during the cost-plus regulatoryperiod, and P, + 33during the fixed-priceregulatory
period. For results to be consistent with H1, P, should not be significantlydifferentfrom
zero. This would imply that the demand for accounting information is not associated with
the intensity of competition during the cost-plus regulatory period when competition was
quality-based.
Results are consistent with H2 if 33 has a positive sign, which implies that in the
presence of price competition, the demand for accounting information increases with increases in competition intensity. Because the variable Competition Type takes a value of 1
under PPS regulation and 0 otherwise, a positive sign on 32 implies that the PPS regulation
is associated with an increased demand for accounting information, as predicted by H3.
TheAccountingReview,January2005

The Effectof Changesin Regulationand Competition

279

For-profithospitals have more incentives to cut costs than nonprofitand government

hospitalsand consequentlyare likely to have a higher demandfor accountinginformation.
Hence, the coefficienton p4 is expected to be positive. It is not possible to unambiguously
predict the sign for the coefficient on governmenthospitals (P3). On the one hand, these
hospitalsoften obtainsubsidiesbased on financialneed, which lowers theirincentiveto cut
costs. This reduces the benefits they would obtain from detailed accountinginformation.
On the other hand, as Geiger and Ittner (1996) find, governmentorganizationsuse cost
system outputto satisfy externalrequirements(such as the city or county legislature)and
frequentlyimplementmore elaboratecost accountingsystems.
Because the accountingsystem uses the data processing system for generatinginformation and reports,data processing costs are likely to be positively associated with the
expenditureson accounting(i.e., P6 is likely to be positive). Largerhospitalsmay be able
to use their marketpower to negotiate higher prices, reducing the need for accounting
informationfor cost reductionpurposes.Moreover,to the extent that there are economies
of scale in collecting and disseminatingaccountinginformation,the expenditureson accountingmay not vary proportionatelywith hospital size. Hence, the coefficientP7 is predicted to be negative.Hospitalswith higher proportionof Medicareand Medi-Calpatients
are likely to require more accounting informationfor cost-shifting during the cost-plus
period, and for cost reductionduringthe PPS period, which predictspositive values for 38
and 39.Outpatientsgeneratemore accountingpaperworkper unit of revenue, thus P1ois
expectedto be positive. Occupancyrate may denote marketpower,which reducesthe need
for accountinginformationfor cost reduction.
Alternatively,if the hospital beds are filled with uninsuredand underinsuredpatients,
then a higher occupancyrate increases the incentives for cost reduction,which increases
the demandfor accountinginformation.It is also not possible to predictthe sign for length
of stay because contractsdiffer among hospitals and payer groups. If a hospital is reimbursedto a greaterextentbased on per-diemrates,then a higherLOSreducesthe incentives
for cost reduction,decreasingthe demandfor accountinginformation.On the other hand,
if the hospital is reimbursedto a greaterextent with per-ailmentor per-patientcontracts,
then a higherLOS is associatedwith greaterincentivesfor cost reduction,which increases
the demandfor accountinginformation.
IV. RESULTS
Table 1 containsthe descriptivestatistics.During the cost-plus regulatoryperiod,total
expenditureson accountingwere 1.34 percent of total operatingcost, which increasedto
2.81 percent during the fixed-price regulatoryperiod (difference = 1.47, t = 18.91, p
< .001). This increaseof 1.47 percentagepoints suggests that hospitalsare spendingmore
on accountingsystems in recent years. Expenditureson data processing increasedsignificantly,from 0.27 percentof total operatingcost duringthe cost-plusperiodto 1.76 percent
of total operatingcost duringthe fixed-priceperiod. The proportionof Medicarepatients
decreased from 0.42 to 0.37 while the proportion of Medi-Cal patients increased from 0.20
to 0.27. Average LOS increased from 7.50 days to 8.71 days; however, the median LOS
decreased from 5.48 days to 4.93 days. The proportion of outpatients increased significantly
from 0.17 to 0.30.
Recall that prior research suggests that cost-plus regulation is likely to be associated
with quality-based competition while fixed-price regulation is likely to be associated with
price-based competition. To test these associations, Net Revenue per Patient Day is regressed as a function of Competition Intensity and other control variables as shown in
TheAccountingReview,January2005

ch
cs
o

;s
o~o
3c~

TABLE 1
Descriptive Statisticsa

ch

c
xa
iv
oo

Variable
Total Expenditures on Accounting as a Percentage
of Operating Cost
Competition Intensity (1 - HHI)
(Market level mean for 55 hospital markets)
Expenditures on Data Processing as a Percentage of
Total Operating Expenses
Staffed Beds
Proportion of Medicare Patients
Proportion of Medi-Cal Patients
Proportion of Outpatients
Occupancy Rate
Length of Stay (days)

Cost-Plus Regulation
Quality-Based Competition
Mean
Median Std. Dev.

Fixed-Price R
Price-Based C
Mean
Medi

1.34%

1.23%

0.61%

2.81%

2.51

0.58

0.67

0.32

0.55

0.65

0.27%

0.16%

0.30%

1.76%

1.55

164.59
0.42
0.20
0.17
54.44%
7.50

116.50
0.44
0.15
0.15
57.78%
5.48

166.45
0.15
0.21
0.11
18.94%
8.72

153.76
0.37
0.27
0.30
55.64%
8.71

116.50
0.35
0.18
0.23
54.13
4.93

** ***p <
.10, p < .05, p < .01, respectively.
*,
Dollarvalues are deflatedusing the averageconsumerprice index dataobtainedfrom the Bureauof LaborStatistics(http:
dollars.

The Effectof Changesin Regulationand Competition

281

Equation(1). I conduct separateestimations for the cost-plus and fixed-priceregulatory

periods (Table2). In Panel 1 of Table2, CompetitionIntensityis positively associatedwith
net revenueper patientday. This implies that a hospitalcompetingin a marketwith higher
competitionintensitycommandedhigherprices. These resultssuggest thatcompetitionduring the cost-plus regulatoryperiod was based on non-priceattributessuch as quality.
Panel 2 of Table 2 shows that during the fixed-pricedperiod, hospitals with higher
competitionintensityhad lower prices, as indicatedby the negativesign on the Competition
Intensitycoefficient.This suggests that duringthe PPS period,hospitalmarketcompetition
is based on price. These results are also consistentwith earlierempiricalfindingsreported
in the health care literaturethat conclude that the basis of hospital marketcompetitionhas
shifted from quality to price (e.g., Dranoveet al. 1993; Meltzer et al. 2002; Zwanzigeret
al. 2000).
As predicted,governmenthospitals receive lower prices underboth quality and price
competition.Largerhospitals obtain higher prices under both types of competitionsuggesting thattheirgreatermarketpowerallows themto negotiatehigherpriceswith insurance
companies. The proportionof a hospital's Medicarepatients is associated with a higher
averageprice duringthe cost-plus period, implying that hospitalsprovidedmore reimbursable services to Medicarepatientsduringthis period. Because the change in the Medicare
regulationto fixed-priceadversely affected the averageprice received by the hospitals, a
higher proportionof Medicarepatients is associatedwith lower averageprices duringthe
fixed-priceperiod. The Medi-Calprogramhad similar changes in the reimbursementsystem; consequently,resultsobservedfor Medi-Calpatientsare similarto those for Medicare
patients. Hospitals with a greaterproportionof outpatientshad higher prices during the
cost-plus period, indicatingthat they were admittingmore profitableoutpatients.Hospitals
with higher occupancyrates obtainedlower prices duringboth periods,which could imply
that these hospitals attracteduninsuredand underinsuredpatients and that they were not
successfulat shiftingaway all the treatmentcosts duringthe cost-plusperiod.As mentioned,
patientsusually receive more intensive and reimbursableservices duringthe first few days
of a hospital stay. As a result, higher LOS is associatedwith lower averageprice received
per day.
Table 3 contains the results of estimatingEquation(2), which tests H1, H2, and H3,
and examines the demandfor accountinginformationas a function of the type of competition and the intensity of competition using Total Expenditures on Accounting as a Pro-

portion of OperatingCost as the dependentvariable.In the estimatedmodel, the coefficient

on CompetitionIntensityis not statisticallydifferentfrom zero. This suggests that when
competition is based on quality, the intensity of competition is not associated with the
firm's demandfor accountinginformation,which is consistentwith H1.
Table 3 also shows a positive and significantcoefficient on the CompetitionIntensity
* CompetitionTypeinteractionterm, which indicatesthat duringthe price-basedcompetition that existed after the PPS regulatorychange (when CompetitionType = 1), hospitals
in marketswith greaterintensity of competitionspent more on accounting.These results
are consistent with H2, which states that under price-based competition there will be a
positive association between the intensity of competition and firms' demand for accounting
information.
Evidence consistent with H3 can be discerned from the positive and significant coefficient on the Competition Type dummy variable in Table 3. Recall that this dummy variable
takes a value of unity under the PPS fixed-price regulation, and 0 otherwise. The results in
Table 3 suggest that hospitals had greater demand for accounting information after the PPS
was introduced.
TheAccountingReview,January2005

C`1
~sj
ch

O
X
;s

TABLE 2
Revenue Per Patient Day as a Function of the Type and Level of Compe
(Test of Quality versus Price Competition)

;s
oo
3P~

;s

Net Revenue Per Patient Day = o + P,3(CompetitionIntensity) + P2(For-Profit) + f3(Government)

+ f4(Staffed Beds) + P5(Proportion of Medicare Patients) + 36(Pro

+ P7(Proportion of Outpatients) + P8(Occupancy Rate) + 39(LOS)

O
O
~1

Predictor
Competition Intensity (1 - HHI)
For-Profit (1 = for-profit hospital, else 0)
Government (1 = government hospital, else 0)
Staffed Beds
Proportion of Medicare Patients
Proportion of Medi-Cal Patients
Proportion of Outpatients
Occupancy Rate
Length of Stay
n
Intercept (t-statistics, p-value)
Adjusted R2 (F-value of the regression)
*, ***, ***:p < .10, p < .05, p < .01 respectively.
t-statisticsare in parentheses.

Panel A:
Quality-Based Competition
(Cost-Plus Regulation)
Predicted
Sign
Parameter Estimates
+
+
+
+
+
+
+/-

171.21
20.63
-134.16
0.15
398.34
710.42
361.19
- 132.57
-8.29

(5.02)***
(1.43)
(-8.46)***
(3.95)***
(8.81)***
(23.88)***
(5.01)***
(-3.99)***
(-9.38)***
929
69.96 (1.42, p < .16)
0.45 (96.43)

Predic
Sign
+
+
+/-

The Effect of Changes in Regulation and Competition

283

TABLE3
Determinantsof TotalExpenditureson Accountingas a Proportionof OperatingCost
Total Expenditures on Accounting as a Proportion of Operating Cost
= o + P,(Competition Intensity) + 32(CompetitionType)
+ 35(Government)
+ 33(CompetitionIntensity *Competition Type) +
Medicare Patients)
+ 16(Data Processing Cost) + P7(Staffed Beds) + 34(For-Profit)
f8(Proportion of
+ 39(Proportionof Medi-Cal Patients) + 310(Proportionof Outpatients)
+ 311(OccupancyRate) + 312(LOS) + ,i.

ParameterEstimates

Predictor

PredictedSign

Competition Intensity
Competition Type (1 if price competition, 0 if quality

Not significant
+

0.0024 (0.41)
0.0061 (1.70)*

0.0057 (2.03)**

0.0026(4.07)***

competition)
Competition Intensity * Competition Type

(1 = for-profit
For-Profit
hospital,else 0)

Government (1 = government hospital, else 0)

Data Processing Cost
Staffed Beds
Proportion of Medicare Patients
Proportion of Medi-Cal Patients

Proportionof Outpatients
Occupancy Rate
Length of Stay

n
(t-statistics,
Intercept
p-value)
Adjusted R2 (F-value of the regression)

+/+
+
+

0.0002
0.3024
-7.17E-6
0.0066
0.0137

(0.31)
(9.11)***
(-3.08)***
(0.70)
(1.96)**

0.0189 (5.12)***

+/+/-

-0.0083 (-6.52)***
6.08E-5 (0.87)

1,578
0.011 (2.01,p < .05)
0.47 (76.36)

*, **, ***:p < .10, p < .05, p < .01 respectively.

t-statisticsare in parentheses.

As predicted,for-profithospitals spent more on accountingthan nonprofitor government hospitals.Governmenthospitals do not appearto behave differentlyfrom nonprofits
with regardto the demandfor accountinginformationbecause the coefficient on the Governmentdummy is not statisticallydifferentfrom zero. The positive coefficient on Data
Processing Cost implies that hospitalsthat spent more on dataprocessingalso spent more
on accounting.Notice thatthe coefficientson CompetitionTypeand the CompetitionIntensity * CompetitionType interactionare statistically significanteven after controllingfor
data-processingcost, which suggests that hospitals were not merely collecting additional
informationin responseto the PPS, but ratherusing the additionalinformationfor decision
making.
Hospital size, measuredby staffed beds is negatively associatedwith total accounting
expenditures,which could arise if largerhospitals enjoy scale economies in the collection
and disseminationof accounting information.Moreover,the previous analysis for price
showed that largerhospitalsenjoy higherprices, which is likely due to theirmarketpower;
thus they have a less urgentneed to cut costs, which reducestheir demandfor accounting
information.As predicted,hospitals with a greaterproportionof Medi-Cal patientshave
higher accountingexpendituresas these patientstypically generatemore paperwork.Hospitals with a greater proportionof outpatientsalso had higher accounting expenditures
The Accounting Review, January 2005

284

Krishnan

because of large amountsof recordkeeping. Similarto largerhospitals,those with higher

occupancyrates have lower accountingexpenditures.
RobustnessAnalyses
While the HHI is a standardmeasure of competitionintensity, it places a relatively
large weight on big firms.Additionally,the HHI declines very sharplyfrom one-firmmarkets to four-firmmarkets.Koller and Weiss (1989) propose a transformationof the HHI
(i.e., using the squareroot of HHI that addressesthese two problemswhile retainingsome
of its advantages).In the currentstudy,all the empiricalanalyseswere replicatedusing this
transformation.Results are substantivelythe same. In the tables, I presentthe resultsusing
the HHI because it providesa bettersummaryof the entireconcentrationcurve (Kollerand
Weiss 1989).
Results arerobustto the eliminationof influentialobservationswith a Cook's D statistic
greaterthan 1.0. Results are also robustto the exclusion of monopolymarketsand teaching
hospitals. As a sensitivity check, I replicatedall the analyses using the total expenditures
on accountingper patientas the dependentvariable.Estimationresults were substantively
the same.
V. CONCLUSIONS
Prior studies examiningthe associationbetween competitionand the demand for accounting informationhave not distinguishedbetween the type of competitionand the intensity of competition.The findings from this study highlight the importanceof making
this distinctionbecause the type of competitionthat prevails in a marketinfluences the
associationbetween the demandfor accountinginformationand the intensity of competition. Using longitudinaldata from Californiahospitals, I provide empiricalevidence that
when competitionis based on non-priceattributessuch as quality,there is no association
between competitive intensity and firms' demand for accounting information;however,
when competitionis based on price, there is a positive association.
This study has severallimitations.First,the analysesuse expendituresin accountingas
a proxy for the demandfor accountinginformation.I assume that greateraccountingexpenditureswill yield more detailed informationfor cost-reductionpurposes. Accounting
expendituresare only an indirectmeasureof the demandfor accountinginformation.However, the empiricalanalyses include controls for other factors that may drive the demand
for accountinginformationsuch as hospital size, patient-mix,capacityutilization,and operatingefficiency.
Second, consistentwith priorresearchin accountingand economics (e.g., DeFond and
Park 1999; Dranove et al. 1993), this study uses the HHI as a primarymeasure of competition. The HHI is a continuousvariable and assumes that a hospital marketwith two
hospitals each having a 50 percent marketshare is twice as competitive as a monopoly
hospital market.Marketswith the same HHI may have differentbehaviorsdue to strategic
interactionsbetween firms, which would alter the natureof competitionin differentways
than suggested by the HHI.
Third, the increase in accounting expenditures may be driven by the more elaborate
patient billing requirements imposed by Medicare and other managed care companies in
the 1990s. However, anecdotal evidence suggests that hospitals with more elaborate patient
billing systems typically integrate clinical, financial, and nonfinancial information with the
billing function and use the output for managerial decision making (Mendenhall 1998).
Furthermore, increased requirements for patient billing do not explain the change in association between competitive intensity and accounting expenditures.
TheAccountingReview,January2005

The Effect of Changes in Regulation and Competition

285

Fourth,I do not examine the specific componentsof an accountingsystem. Such informationis difficult to obtain from secondarydata sources and can potentially only be
obtainedthrougha survey.However,a surveywould only provideinformationon the current
state and may not providereliableinformationon the associationbetween competitionand
the demandfor accountinginformationduringa previousregulatoryperiod.
By demonstratingthatthe intensityof competitionincreasesthe demandfor accounting
informationunder one type of competitionbut not another,this study sheds light on the
potentialreasonsfor the priormixed evidencein the accountingliteratureon the association
between competitionand demandfor accountinginformation.In addition,this study contributesboth to our understandingof the association between competitive intensity and
firms'demandfor accountinginformation,and the effects of regulationchangeson the type
or basis of competitionthatprevailsin a market.The findingspotentiallygeneralizeto other
industriesthat have witnessed similarregulatorychanges such as electricutilities, telecommunications,and airlines.In such industries,the results from cross-sectionalstudies of the
associationbetween competitionintensityand the demandfor accountinginformationconductedduringa particularregulatoryperiodmay not hold afterregulatorychanges.Further,
cross-sectional studies of firms under different regulatoryregimes may be confounded.
Hence, it is importantfor futureresearchersto control for the type of regulatoryregime.

REFERENCES
Almeida, R. A., L. C. Dubay, and G. Ko. 2001. Access to care and use of health services by lowincome women. Health Care Financing Review 22: 27-47.

Bajari,P., and S. Tadelis.2001. Incentivesversustransactioncosts: A theoryof procurementcontracts.

RAND Journal of Economics 32: 287-307.

Callahan,C. M., andA. E. Gabriel.1998. The differentialimpactof accurateproductcost information

in imperfectlycompetitivemarkets:A theoreticaland empiricalinvestigation.Contemporary
Accounting Research 15: 419-455.

Cavalluzzo,K. S., C. D. Ittner,and D. F. Larcker.1998. Competition,efficiency,and cost allocation

in governmentagencies: Evidence from the Federal Reserve System. Journal of Accounting
Research 36: 1-32.

Cleverley,W. 0. 1984. Cost accountingpins a value to DRGs. ModernHealthcare14: 172-179.

Coombs, R. W. 1987. Accountingfor the control of doctors:Managementinformationsystems in
hospitals. Accounting, Organizations, and Society 12: 389-404.

Cooper,R. 1995. Activity based costing for improvedproductcosting. In Handbookof Cost Management,edited by B. J. Brinker.Boston, MA: Warren,Gorham,and Lamont.

Journalof
DeFond,M. L., and C. W. Park.1999. The effect of competitionon CEOturnover.
Accounting and Economics 27: 35-56.

Demski,J., andR. P. Magee. 1992. A perspectiveon accountingfor defensecontracts.TheAccounting

Review67: 732-740.
Dranove,D. 1988. Pricing by nonprofitinstitutions:The case of hospital cost shifting. Journal of
Health Economics 7: 47-57.

, M. Shanley,andW. White. 1993. Price and competitionin hospitalmarkets:The switchfrom

patient-drivento payer-drivencompetition.Journalof Law and Economics36: 179-204.
, and W. D. White. 1994. Recent theory and evidence on competitionin hospital markets.
Journal of Economics and Management Strategy 3: 169-209.

. 1998. Economies of scale in non-revenueproducingcost centers:Implicationsfor hospital

mergers. Journal of Health Economics 17: 69-83.

, C. J. Simon, and W. D. White. 1998. Determinantsof managedcare penetration.Journalof

Health Economics 17: 729-746.
The Accounting Review, January 2005

286

Krishnan

Eldenburg,L. 1994. The use of informationin total cost management.The AccountingReview 69:
96-121.
Ellis, R. P., and T. G. McGuire.1993. Supply-sideand demand-sidecost sharingin healthcare. The
Journal of Economic Perspectives 7: 135-151.
Folland, S., A. C. Goodman, and M. Stano. 1997. The Economics of Health and Health Care. Second

edition. EnglewoodCliffs, NJ: PrenticeHall.

Frank,R., and D. S. Salkever.1991. The supply of charityservices by nonprofithospitals:Motives
and market structure. RAND Journal of Economics 22: 169-209.
French, H. E. III. 1996. Competition and Monopoly in Medical Care. Washington, D.C.: The AEI

Press.
Gaynor,M., and D. Haas-Wilson.1999. Change,consolidation,and competitionin health care markets. The Journal of Economic Perspectives 13: 141-164.

Geiger, D. R., and C. D. Ittner.1996. The influenceof funding source and legislativerequirements
on government accounting practices. Accounting, Organizations and Society 21: 549-568.

Gruber,J. 1994. The effects of price shoppingin medical markets:Hospital responsesto PPOs in
California. Journal of Health Economics 38: 183-212.

Hansen,S. 1998. Cost analysis, cost reductionand competition.Journalof ManagementAccounting

Research 10: 181-204.

Hill, N. T. 2000. Adoptionof costing systemsin U.S. hospitals:An eventhistoryanalysis 1980-1990.

Journal of Accounting and Public Policy 19: 41-71.

Hughes, R. G., and H. Luft. 1991. Service patternsin local hospital markets:Complementarityor
medical arms race? Health Services Management Research 4: 131-139.

Joskow,P. L. 1980. The effects of competitionand regulationon hospitalbed supply and the reservation qualityof the hospital.Bell Journalof Economics11: 421-447.
Kaplan,R. S. 1983. Measuringmanufacturing
performance:A new challengefor managerialaccount-

ing research. The Accounting Review 58: 686-705.

, and R. Cooper. 1998. Cost and Effect: Using Integrated Cost Systems to Drive Profitability

and Performance.Boston, MA: HarvardBusiness School Press.

Keeler,E. B., G. Melnick,and J. Zwanziger.1999. The changingeffects of competitionon non-profit
and for-profithospitalpricingbehavior.Journalof Health Economics 18: 69-86.
Khandwalla,P. 1972. The effect of differenttypes of competitionon the use of managementcontrols.
Journal of Accounting Research 10(2): 272-285.

Kim, E. H., and V. Singal. 1993. Mergersand marketpower: Evidence from the airline industry.
American Economic Review 83: 549-569.

Koller, R. H., and L. W. Weiss. 1989. Price levels and seller concentration:The case of Portland
Cement.In Concentrationand Price, edited by L. W. Weiss. Boston, MA: MIT Press.
Krishnan,R., J. Luft,andM. D. Shields.2002. Competitionandcost accounting:Adaptingto changing
markets. Contemporary Accounting Research 19: 271-302.
Laffont, J. J., and J. Tirole. 1993. A Theory of Incentives in Procurement and Regulation. Cambridge,

MA: MIT Press.

Lambert,R. A., and D. F. Larcker.1995. The prospectivepaymentsystem, hospital efficiency,and
compensation contracts for senior-level administrators.Journal of Accounting and Public Policy

14: 1-31.
Latta, V. B., and R. E. Keene. 1990. Use and cost of short-stayhospital inpatientservices under
Medicare. Health Care Financing Review 12: 91-99.

Letsch, S. W., K. R. Levit, and D. R. Waldo. 1988. Health care financingtrends.Health Care Financing Review 10: 109-122.

Libby,T., and J. H. Waterhouse.1996. Predictingchangein managementaccountingsystems.Journal

of Management Accounting Research 8: 137-150.

Lynk,W. J. 1995. Nonprofitmergersandthe exerciseof marketpower.JournalofLaw and Economics

38: 437-461.
Martin,S. 1993. AdvancedIndustrialEconomics.Malder,MA: BlackwellPublishersInc.

The Accounting Review, January 2005

The Effect of Changes in Regulation and Competition

287

Meltzer,D., J. Chung, and A. Basu. 2002. Does competitionunderMedicareProspectivePayment

selectively reduce expenditureson high-cost patients?RANDJournalof Economics33: 447468.
Mendenhall, S. 1998. Integratingclinical, financial information:Improvingpatient management.
Healthcare Financial Management 42: 54-60.

Narayanan,V. G. 2000. CambridgeHospital CommunityHealth Network:The primarycare unit.

HarvardBusiness School Case Number9-100-054. Cambridge,MA: HarvardUniversityPress.
Needleman, J. 2001. The role of nonprofits in healthcare. Journal of Health Politics, Policy, and Law

26: 1113-1130.
Newhouse, J. 1989. Do unprofitablepatientsface access problems?Health Care FinancingReview
11: 33-42.
Noether,M. 1988. Competitionamonghospitals.Journalof Health Economics7: 259-284.
Pizzini, M. 2003. Cost system design and hospital financialperformance.Workingpaper,The University of Texas at Dallas.
Robinson,J., and H. Luft. 1985. The impact of hospitalmarketstructureon patientvolume, length
of stay, and the cost of care. Journalof Health Economics4: 333-356.
1988. Competition,regulationandhospitalcosts, 1982-86. Journalof theAmer, and -.
ican Medical Association 269: 2676-2681.

, andC. S. Phibbs.1989. An evaluationof Medicaidselectivecontractingin California.Journal

of Health Economics 8: 437-455.

Satterthwaite,M. A. 1979. Consumerinformation,equilibriumindustryprice, and the numberof

sellers. The Bell Journal of Economics 10: 483-502.

Schmalensee,R. 1989. Inter-industrystudies of structureand performance.In The Handbookof Industrial Organization,edited by R. Schmalensee,and R. Eillig. Amsterdam,The Netherlands:
North-Holland.
Shank, J. K., and V. Govindarajan. 1989. Strategic Cost Analysis: The Evolution from Managerial to
Strategic Accounting. Homewood, IL: Richard D. Irwin.

Shleifer,A. 1985. A theoryof yardstickcompetition.RANDJournalof Economics 16: 319-327.

Stigler, G. 1968. The Organization of Industry. Homewood, IL: Irwin.

Varian,H. R. 1992. MicroeconomicAnalysis. 3rd edition. New York,NY: W.W.Nortonand Co.

Vita, M. G. 2001. Regulatoryrestrictionson selective contracting:An empiricalanalysis of "anywilling-provider"regulations.Journalof Health Economics20: 955-966.
Weiss, L. W. 1989. Concentrationand Price. Cambridge,MA: MIT Press.
Zwanziger,J., and G. Melnick. 1988. The effects of hospital competitionand the MedicarePPS
programon hospitalcost behaviorin California.Journalof Health Economics4: 301-320.
and A. Bamezai. 2000. The effects of selective contractingon hospital costs and
-,
9-,
revenues. Health Services Research 35: 849-867.

The Accounting Review, January 2005