Hospital Financial Health and Clinical Choices: Evidence from the Financial Crisis

Abstract

Financial constraints can cause firms to reduce product quality when quality is difficult to observe. We test this hypothesis in the context of medical choices at hospitals. Using heart attacks and child deliveries, we ask whether hospitals shift toward more profitable treatment options after a financial shock—the 2008 financial crisis. The crisis was followed by an unprecedented drop in hospital investments, yet the aggregate trends show no discrete shifts in treatment intensity post-2008. For cardiac treatment (but not for child deliveries), we find evidence that hospitals with larger financial losses during the financial crisis subsequently increased their use of intensive treatments relative to hospitals with smaller losses, consistent with the effects of financing constraints. This paper was accepted by David Simchi-Levi, finance.

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