Spending Patterns with Lapsing Budgets: Evidence from U.S. Army Hospitals

Abstract

We explore how the practice of reverting unused funds (budget lapsing) affects intra- and inter-year spending patterns. Data from 31 army hospitals over a period of five years provide strong support for a saving-dissaving model. Hospital administrators appear to stockpile pharmaceuticals and other supplies toward the end of a fiscal year, leading to a significant spike in spending that potentially exhausts their budget. Interestingly, data show a decline at the start of the next fiscal year that is larger than the preceding spike, indicating that mangers build a reserve for later use. The magnitude of the reserve accumulated at the start of a year is reliably persistent across years and accelerates the upward trend in spending through the year. That is, managers increasingly expend the reserve as environmental uncertainty decreases.We conclude that risk-aversion plays a significant role in determining intra-year trends.