THE USE OF INFORMATION IN TOTAL-COST MANAGEMENT

In 1983, Medicare changed its method of reimbursement for hospitals fr om an all-charges-paid basis to a flat-fee-per-diagnosis basis. Managi ng the cost of treatment because increasingly important. In an effort to influence physicians to reduce the amount of resources used, hospit al controllers began providing cost information about patient treatmen t to physicians. Several questions were being asked at the time: (1) A lthough society affirmed that cost containment is necessary, should ph ysicians ethically consider costs in making treatment decisions? (2) W ould a group of professionals incorporate a new set of information pro vided by the accounting system into their decision-making process? (3) What design of management accounting system would best facilitate phy sician decision making around cost containment? This research examines the effects of providing cost reports, as a new information set, in t his complex professional environment which is characterized by implici t contracts. An economic analysis explores the conditions necessary to align hospital and physician goals around cost management. An appropr iate set of accounting information may help detect overtreatment. In a ddition, the reputation cost of being known as an overtreater may prov ide the necessary incentive for success in containing costs. A cross-s ectional analysis of hospitals was undertaken to determine the respons e of physicians to this new information set. Differences in their prac tice patterns were analyzed in relation to the types of accounting inf ormation received. Average charges were used to measure practice patte rns. The study population was partitioned according to the types of in formation provided and frequency of reporting. The results of the empi rical analysis suggest hospitals providing physicians with their own c ase costs and some comparison information had significantly lower aver age charges, statistically, than those hospitals that did not. The com parison information may be reports of other individual physicians' cas e costs or on-the-average practice patterns within the hospital or wit hin the state. This study contributes to current research in several w ays. First, a theoretical framework has been developed that links ince ntives to manage costs with the type of accounting information provide d in organizational environments characterized by a reliance upon impl icit contracts. Second, from an accounting perspective, disaggregate i nformation gathered by the accounting process and some sort of benchma rk are necessary to induce this reputation effect that appears to infl uence behavior. Third, a linkage between total cost management and the use of accounting benchmark information in an implicit contracting en vironment is documented.