Do liquidity constraints affect the investment decisions of California hospitals?

Abstract

We explore how hospitals' liquidity constraints affect investment decisions for two types of hospital investments: general and health information technology capital investment. In the literature, only one dimension of the investment strategy, namely cash flow, has been examined empirically. Using the neoclassical model of investment and annual hospital financial data from California's Office of Statewide Health Planning and Development (OSHPD) from 1997 to 2007, we investigate the impacts of liquidity constraints such as cash flow and marginal profitability of capital on investment decisions across hospital ownership types. The system GMM estimation results reveal that hospitals face liquidity constraints for general capital investment, and these constraints are more pronounced in nonprofit hospitals than in for-profit or government-owned hospitals. However, they are not liquidity constrained for health IT capital investments. This represents that liquidity constraints are not the cause of the low health IT investment of California hospitals.