THE CAPITAL STRUCTURE OF HOSPITALS AND REIMBURSEMENT POLICY

Empirical research has shown that hospitals have higher than average l everage, the extent of leverage is related to the extent of cost-based reimbursement, and not-for-profit hospitals are not as highly levered as their for-profit counterparts. Previous theoretical work does not unambiguously predict all of these results. This article develops a mo del of reimbursement policy and proves that, if reimbursement follows the indicated pattern, the Modigliani-Miller capital structure irrelev ance theorem fails to hold and, given reasonable restrictions upon the utility functions of not-for-profit donor/investors, each of the empi rically observed results would be expected ex ante.