Managed Care and U.S. Hospitals' Capital Costs‪.‬

Abstract This study examined the effects of managed care organizations (MCOs) on the yields paid by U.S. hospitals on newly issued debt. The analysis improved on existing studies by utilizing a two-stage method that compensated for both simultaneity and self-selection effects. A reduced form probit analysis was first used to identify the factors determining whether hospitals in a random sample of 717 issued new debt in the study period (1995 and 1996). Bond yields were then analyzed using a second stage reduced form regression, incorporating selection effects, for the subset of 58 hospitals that had issued fixed rate debt. The results demonstrated that MCOs had only a modest positive influence on hospitals' costs of capital. Of greater import were insurance status, length of stay, and teaching status, with investors demanding greater yields for bonds issued without insurance and from hospitals with either longer lengths of stay or medical residency programs. (JEL I1)