Hospital free cash flow

Abstract

Hospital managers may find it difficult to admit their investments have been suboptimal, but such investments often lead to poor returns and less future cash. Inappropriate use of free cash flow produces large transaction costs of exit. The relative efficiency of investor-owned and tax-exempt hospitals in the product market for hospital services is examined as the free cash flow theory is used to explore capital-market conditions of hospitals. Hypotheses concerning the current competitive conditions in the industry are set forth, and the implications of free cash flow for risk, capital-market efficiency, and the cost of capital to tax-exempt institution is compared to capital-market norms.