Prediction of the financial performance of Ontario hospitals: A Test of Environmental Determinist and Adaptationist Perspectives

Abstract

While other industries for many years have been concerned with the problem of financial distress, it is only recently that this issue has become a matter of interest to hospital managers, policy makers, and the general public. However, the determinants of hospital financial performance are neither well studied nor understood. The objectives of this study were to identify factors that affect the financial performance of Ontario hospitals and to construct a model that could be used to predict financial performance in the future. A number of organization and environmental factors that could influence financial performance were postulated and then tested for their statistical impact and predictive ability. Cross-sectional data over the 3-year-period 1986–1988 for 223 Ontario public hospitals were used. The first 2 years of data served as a derivation sample for hypothesis testing and development of a predictive model. The third year of data was used as a holdout sample for cross validation. Information on the variables investigated came from secondary sources, in particular Statistics Canada's Annual Hospital Returns. Univariate analyses revealed distressed hospitals were more likely to earn more revenues from non-government sources, to be non-teaching institutions and have longer chronic lengths of stay, and to be found in areas with higher per capita incomes, number of females in the population, physician supply, and area wage rates. A five variable prediction model was developed which accounted for 25% of the variance in financial performance in the derivation sample and on cross validation dropped to 21%. The model identified greater hospital size, older plants, higher technological complexity, more intensive care services, and location in areas with more females to be significant predictors of financial distress. Overall, environmental factors (community and structural characteristics) were more important in influencing financial performance. The implication for hospital managers is to underscore that an important dimension of successful leadership requires they remain outwardly focused and involved in managing the external environment. For policy makers the need is to develop funding formulae which encourage efficiency and are also responsive to differences in community and structural characteristics across hospitals.