Assessing Similarity in Production from Organizational and Department-Level Financial Accounting Statements

Abstract

Hospitals are complex organizations which provide a wide array of health care services. This complexity creates challenges for stakeholders who wish to use financial accounting statements to make inferences about the productive choices made by a hospital's management. These challenges are especially salient when using data reported at the department (or cost center) level, or where the provision of care is coordinated across hospital departments. This study applies information entropy-based comparability analysis techniques to overall and department-level hospital financial data to identify hospital peer groups. Hospitals peer groups not only exhibit similar financial positions overall, but are also likely to exhibit operational similarities at the department level. Data for this analysis are drawn from the financial statements of Washington State critical access hospitals in the fiscal year 2019. The medical laboratory and pharmacy departments were specifically assessed because their services impact or support virtually every other revenue-producing department in the hospital. Findings suggest both departments significantly impact the formation of peer groups, with the pharmacy department contributing the largest impact.

Keywords: Financial statement comparability; G32; I11; M41; hospital cost centers; information entropy; medical laboratory; pharmacy; resource dependence theory.