Impact of Outsourcing on Hospital Financial Performance

The current debate on healthcare finances and the increasing healthcare cost lead healthcare organizations to apply innovative business models. The challenge facing healthcare facilities is to control costs while maintaining high service levels. Both theory and practice suggest that outsourcing of non-core business functions can affect firms’ probability performance through cost reductions and strategic benefits. We empirically examine whether outsourcing of non-clinical services improves the financial performance for a sample of hospitals with various ownership structures, locations, and affiliations. The overall results indicate that the managerial outsourcing decision has a positive and significant influence on hospitals financial performance. In particular, we find that the extent of outsourcing of non-clinical services improves the current and future performance of our sample hospitals. Whereas the positive relation between the rural factor and profitability is consistent with prior literature, the result for teaching hospitals is somewhat surprising. Additionally, the ownership structure of for-profit hospital adversely affects the profitability performance. This paper contributes to accounting research by examining the consequences of outsourcing decisions on hospitals financial performance. Specifically, the current study expands and complements the existing literature on hospital outsourcing, as it uses a comprehensive data sample with objective performance metrics.