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The Role of Overbilling in Hospitals’ Earnings Management Decisions

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  • Jonas Heese

    (Harvard Business School, Accounting and Management Unit)

Abstract

This paper examines the role of overbilling in hospitals' earnings management choices. Overbilling by hospitals is a form of revenue manipulation that involves misclassifying a patient into a diagnosis-related group that yields higher reimbursement. As overbilling allows hospitals to increase revenues without altering operations, affecting costs, or having to reverse such behavior in the future, I propose and find that overbilling reduces hospitals' use of managing accruals or cutting discretionary expenditures. Next, I find that hospital managers prefer overbilling to managing accruals (cutting discretionary expenditures) when cutting discretionary expenditures (managing accruals) is constrained, and vice versa. Collectively, my findings suggest that overbilling is an important alternative manipulation tool in hospitals.

Suggested Citation

  • Jonas Heese, 2017. "The Role of Overbilling in Hospitals’ Earnings Management Decisions," Harvard Business School Working Papers 18-026, Harvard Business School.
    • Handle: RePEc:hbs:wpaper:18-026
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    More about this item

    Keywords

    Overbilling; accrual-based earnings management; real activities manipulation; for-profit hospitals;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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