Printer Friendly

Hospital board effectiveness: relationships between governing board composition and hospital financial viability.

The purpose of this study is to examine whether or not insider board participation is associated with hospital financial viability. We utilize two economic theories--agency and managerialism--to help address whether the expertise and knowledge of insiders enhance or impair hospital financial performance. Multiple financial performance measures are used to assess the dimensions of profitability, liquidity, capital structure, capital intensity, and occupancy. We selected these financial indicators as study outcomes of board effectiveness because major decisions of governing boards (i.e., those involving resource acquisition and allocation) typically have a short-term and long-term financial effect on the performance of the hospital. Consequently, these measures of financial viability are hypothesized as relevant criteria for assessing the effectiveness of governing board decisions. Such an investigation of relationships between board composition and hospital viability is important for two major reasons: (1) hospital boards have been altering their composition by increasing the participation of insiders without any systematic assessment of these changes; and (2) as the composition of the hospital board is clearly within the control of the hospital, significant relationships between board composition and hospital viability can lead to board selection strategies capable of enhancing hospital performance.

The first section of this article presents a rationale for the study of governance and a discussion of alternative theoretical perspectives leading to the study hypotheses. Next the methodology and sample selection are described, followed by an examination of study findings and possible implications.


During the 1980s, prospectively set reimbursements from public and private third party insurers (Medicare and major commercial payers) significantly limited hospital patient revenues (Deloitte, Haskins, and Sells 1988). In addition, greater competition for patients resulted in increased financial pressures for many hospitals. Consequently, many institutions have undergone significant organizational changes to help them remain viable within an economically constrained environment. For example, horizontal integration strategies to provide access to economies of scale as well as other possible benefits have been vigorously adopted. This is evidenced by the 43 percent of hospitals that participate in multihospital arrangements (American Hospital Association 1988). In addition, by 1985 almost one-third (30 percent) of hospitals had diversified into related or unrelated business ventures in order to bolster revenues (Alexander, Morlock, and Gifford 1988).

As the general organization of the hospital has undergone changes, so too have the function and form of its governing board. Traditionally, the hospital board served as a "linkage" to the community (Pfeffer 1972). Its responsibility was to obtain needed resources for hospital operations. However, in the 1970s two court rulings held the hospital board legally accountable for the fiscal management and quality of services delivered. Hence, the function of the hospital board began to reflect greater concern for internal hospital decision making. For example, among hospitals participating in multihospital systems from 1979 to 1982, a significant increase in board participation by CEOs took place (Morlock, Alexander, and Hunter 1985; Alexander and Morlock 1985). In addition, a 1985 hospital survey indicated that boards of hospitals that had corporately restructured after 1980 were more likely to report board participation by insiders (CEO and medical staff) as well as board participation by outsiders from the business community (Alexander, Morlock, and Gifford 1988). With the advent of Medicare prospective payment as well as competitive price setting by commercial insurers, boards were exhorted (Delbecq and Gill 1988) to become more strategic--to look for financial ventures that would augment revenues and bolster shrinking hospital margins. Thus the hospital governing board role was expanding in terms of both operational and strategic decision making.

As the role of the hospital board has grown to include not only linkage with the community but also active involvement in internal decision making and monitoring (Alexander and Zuckerman 1989), the competence and composition of hospital boards have become increasingly important. Consequently, hospital trustees need to be accurately informed about hospital operations in order to fulfill their responsibilities. Because two-thirds of hospitals are under not-for-profit ownership, market-imposed discipline is often limited to the debt market, making external pressures less pervasive than among for-profit corporations, which are also affected by controls in the equity market. While the governing board may serve as the major monitoring and decision-making body in the hospital industry, the question of whether or not boards are carrying out their responsibilities in a manner that leads to improved hospital performance remains open for empirical examination. Of particular concern is whether insiders provide needed information to the hospital board, or whether they increase the board's vulnerability to making opportunistic, ineffective policies.

To explain how directors of governing boards affect corporate performance, Zahra and Pearce (1989) thoroughly reviewed corporate studies examining relationships between characteristics of governing boards and financial performance. They developed a topology of perspectives to help explain what directors should do. From the managerialist and agency perspectives, Zahra and Pearce (1989) posit that board composition represents variables of interest in explaining both financial outcomes and the decision-making processes associated with the board's role. Their review of the corporate governance literature supports an assessment of the research question: whether board composition influences hospital viability from both the managerial and agency perspectives. Specifically, this study is an attempt to address systematically the issue of whether participation by insiders and outside business community members on the hospital board is associated with hospital financial viability. We hope that such information closes the knowledge gap due to the lack of research examining ways in which board composition influences hospital performance.


To understand the possible effect of insiders (medical staff and CEO) and business outsiders on the financial performance of the hospital, it is useful to examine two theoretical perspectives from the corporate governance literature--managerialism and agency theory.

In the corporate governance literature there has been a divergence in thinking about who should sit on the governing board. Managerialism and agency theory are the two perspectives that offer different explanations concerning the role of insiders on governing boards. Traditionally it has been believed that participation by top-level management enhances board decision making and effectiveness. This managerialist perspective argues that insider board participation provides "informational advantages" necessary to keep boards informed and capable of making sound decisions. Some theorists, whom Eisenberg (1976) has labeled "corporate reformers," believe that insider board participation poses "informational asymmetries" (Moe 1984) that can lead to opportunistic board decision making. This potential for opportunism through insider board participation has been further articulated by agency theorists who argue that when there is a separation between owners (shareholders) and managers, a conflict of interests between management and shareholders exists (Fama and Jensen 1983). They posit that governing boards' legal responsibility to safeguard the interests and wealth of shareholders can be seriously impeded when insiders are active on the governing board. Consequently, agency theorists have advocated increased independent board participation by outsiders to protect shareholders' equity and financial interests. Thus, the major difference between these two positions involves the role of insiders.

Managerialists argue that part-time boards removed from the day-to-day operations of the firm need the knowledge and information of top-level insiders to guide board members in decision-making and governance activities. Thus, insiders' knowledge and experience enable the board to monitor and govern the firm more effectively (Baysinger and Hoskisson 1990). Alternatively, agency theorists postulate that insiders' control of information about their own performance and organizational activities can lead to the manipulation of information in order to serve the insiders' own personal interests (Alchian and Demsetz 1972; Baysinger and Hoskisson 1990).

Among hospital boards, insiders include top-level managers as well as medical staff members. The chief executive officer (CEO) is typically placed on the board to provide administrative information about the hospital. The medical staff's clinical expertise is also needed to keep the board informed about service and delivery issues. Thus, from a managerial perspective, board participation by both the CEO and members of the medical staff help the governing board accrue informational advantages. However, there are reasons why these insiders may desire to pursue their own more narrow interests rather than those of the hospital. First, since the annual turnover rate for hospital CEOs during the mid-1980s was 25 percent nationally and 35 percent in the western region of the United States (Sabatino 1987), it is plausible that hospital CEOs may put their own interests in safeguarding their positions above the financial interests of their hospitals. Thus, the potential for opportunism by hospital CEOs may take the form of risk-averse, fiscally conservative policies. Second, given physician interests in state-of-the-art diagnostic and therapeutic technologies, it is plausible that medical staff board participation may result in imprudent capital investments that impair the fiscal viability of the hospital.

It is argued that due to managerial expertise, participation by outside business persons will increase the hospital board's ability to make sound financial decisions. Independent from the hospital, these corporate outsiders are expected to keep their focus on the best interests of the hospital, thus leading to effective board decision making.

These alternative possibilities suggest the desirability of testing competing hypotheses that address whether board participation by insiders (CEO and medical staff) enhances board effectiveness as measured by hospital financial viability, or whether it poses the potential for opportunism thereby impeding hospital financial performance.


From a managerialist perspective it is expected that the effectiveness of the governing board will fall along a continuum in which boards with voting participation by the medical staff and the CEO are most effective, boards with participation by only one insider group are less effective, and boards without either are least effective. Therefore, it is hypothesized that:

H1. Compared to hospitals without any insider participant on the governing board, those with active board participation by both the CEO and the medical staff are expected to have the best financial performance, followed by hospitals with only one insider group represented on the board.


To assess the agency hypothesis that insider board participation increases the potential for "informational asymmetries" (Moe 1984) and opportunism, another variable was formulated to examine insider board participation in conjunction with the presence of business outsiders. Agency theorists claim that these outside board members' independence enables them to monitor insiders' behavior and thus reduces the potential for managerial opportunism. While outsiders' diverse backgrounds can impair the board's ability to adapt to changes in a turbulent environment (Goodstein and Boeker 1991), the acumen of outside business professionals is expected to help the hospital board oversee the information provided by insiders, thus enhancing the board's decision making. This reasoning leads to the next hypothesis:

H2. Hospitals with insider and business outsider participation on their governing boards will have better financial performance than hospitals with insider participation and no outside business directors on their boards.


Description of Surveys

Data for this cross-sectional study were obtained from two major data sources: (1) the Eleventh Year (1985) California Health Facilities Commission (CHFC) Financial Disclosure data set, and (2) the 1985 American Hospital Association (AHA) governance survey. The following describes each of these components and how they were merged to form the working data file.

The 1985 AHA survey used a written questionnaire addressed to hospital CEOs that covered a broad range of governance topics. The survey achieved a 55 percent response rate. Since the governance survey sample was composed of short-term general hospitals, this category of institutions served as the study population. The universe of short-term general hospitals in California in 1985 was 487, all of which reported financial data to the CHFC. However, 61 hospitals either did not have financial data that represented a one-year period (due to organizational changes such as mergers, acquisitions, restructuring, etc.) or were members of the Kaiser system. These were excluded for two reasons. First, it was deemed necessary to have financial data from the same time period as the governance survey to ensure comparability of data across hospitals; and, second, since Kaiser filed consolidated financial statements for its member hospitals, an examination of hospital level financial data was precluded.

Of these 426 short-term general (non-Kaiser) hospitals with comparable financial data 190 had matching governance survey data. The CHFC financial disclosure data were merged with the governance survey data to form the working data file.

Response Bias Analysis

Because participation in the AHA governance survey was completely voluntary, some response bias was assumed to be likely. An analysis of differences between the sample 190 hospitals and the remaining 236 nonsample hospitals found that a significantly lower proportion of for-profit hospitals were represented in the sample than in the nonsample group. However, this ownership difference applied only to independent hospitals. Differences in ownership for system-affiliated hospitals in the sample were not significantly different from those in the nonsample. In addition, differences in system affiliation and size for sample and nonsample groups were insignificant. Thus sample and nonsample hospital groups are comparable, except with respect to for-profit independent hospitals. Mean comparisons of eight financial ratios between the sample and nonsample groups indicated that only one ratio--the net income to patient revenues ratio--reached statistical significance. These findings support the contention that poor- or good-performance hospitals do not self-select into the sample.


Hypotheses were tested using the individual hospital as the unit of analysis. Variables were constructed in order to test associations between insider board participation and selected hospital financial performance outcomes. Definitions and descriptive statistics for the independent (governance and nongovernance) and dependent variables (financial outcomes) are listed in Table 1 and Table 2. The primary independent variable is the composition of the hospital board. Dummy variables were used to assess board participation by the CEO, medical staff, and outside members of the business community. Active board participation by members of the medical staff and members of the business community is defined as participation with voting privileges. Boards typically confer voting status on these board members. In contrast, there is greater variation concerning the status of the CEO on the governing board. However, to minimize small number problems that arose when these three occupational groups were examined separately and jointly, it was considered appropriate to define active CEO participation as either voting or nonvoting board status, in contrast to a role only as an observer.

While many approaches can be used to assess the financial performance of a hospital, the utilization of multiple measures to assess the various dimensions of financial performance is expected to be most reliable. For example, while profitability or surplus suggests that a hospital has generated excess revenues, information about how the surplus was achieved and at what level of risk is also important in the measurement of hospital viability.

In this study, the method of financial ratio analysis was chosen for measuring hospital financial performance. The major dimensions for which financial ratios were calculated included profitability, liquidity, capital structure, and capital intensity. Hospital occupancy rate was TABULAR DATA OMITTED also examined as a viability measure, since it is often used to evaluate the hospital's credit worthiness (Deloitte, Haskins, and Sells 1988).

Dependent variables included eight measures of hospital financial performance: hospital operating margin; net income to patient revenues; return on total assets; days in accounts receivable; bad debt; long-term debt to total assets; hospital occupancy rate; and net plant, property, and equipment per bed. The square root, natural log, and arcsine transformations were used to normalize skewed distributions for five of these measures' ratios in order to test for mean differences. In addition, transformations were also used in the multivariate analyses TABULAR DATA OMITTED to meet homoscedasticity (equal-variance) assumptions. To control for alternative explanations of differences in these hospital performance outcomes, four control variables (corporate restructuring, bed size, system affiliation/ownership,(1) and location in a rural or urban region) were included in the analysis.

Control Variables

The control variable strategy was based on identifying variables that might affect hospital financial performance and on an association with the board composition variables. As indicated in the hospital governance literature, system affiliation, hospital ownership, and corporate restructuring influenced hospital board composition. Given the global nature of the short-term and long-term financial outcomes used in this study to assess hospital viability, these, together with several other organizational factors of size and region, were also examined to help control for alternative explanations of differences identified in these financial outcomes.

(1) System affiliation, defined as two or more hospitals sharing a common management or ownership (American Hospital Association 1988), has become increasingly popular in the industry. As of 1986, 43 percent of all hospitals were either owned, managed, or leased by a multihospital system (American Hospital Association 1988). Among boards of hospitals affiliated with multihospital systems, board participation by the CEO and medical staff was significantly greater than was CEO and medical staff participation among boards of independent hospitals (Morlock and Alexander 1986). Theoretically, system-affiliated hospitals enjoy financial advantages derived from centralized administration and economies of scale. These potential cost savings have been found to influence profitability (Renn et al. 1985) and capital structure (Glandon et al. 1987; Coyne 1982).

(2) The major hospital ownership categories include for-profit, not-for-profit, and public. For-profit ownership involves individuals (shareholders) who invest capital in return for claims on future profits. Thus, for-profit hospitals have a responsibility to shareholders to generate short-term and long-term profits. In contrast, not-for-profit hospitals, while they need short-term surpluses to finance their operations (Chang and Tuckman 1990), have a primary responsibility to their communities to provide necessary, quality services rather than to generate long-term profits. Consequently, while for-profit and not-for-profit hospitals both attempt to generate short-term profit margins, for-profits' financial responsibility to shareholders is likely to result in higher long-term profitability than that enjoyed by hospitals in the not-for-profit sector.

The availability and cost of external funds for facility expansion and renovation is also expected to be affected by ownership. Among for-profit, publicly traded hospital corporations, access to the equity market may provide capital at a lower cost than debt financing. Their ability to generate low-cost equity for capital also can lead to lower debt costs because capital markets may view for-profits as better financial risks. Therefore, increased access to debt by for-profit hospitals, coupled with their lower debt costs, can result in levels of debt that exceed those of not-for-profits. Without access to the equity market, not-for-profit hospitals depend more heavily on the debt market, which tends to increase their capital costs. Consequently, for-profit hospitals are expected to have higher debt financing ratios because of their increased access and lower capital costs.

Because of the commitment by public hospitals to the indigent and uninsured as well as the steep discounts paid to them under California's Medicaid program (Holohan 1988), public hospitals' increased service to these populations is expected to result in the poorest financial performance when compared to for-profit and not-for-profit hospitals.

(3) To remain viable in the competitive health industry, hospitals may focus their attention on long-range strategic planning and diversification (Delbecq and Gill 1988) that involves corporate restructuring. During the first half of the 1980s many not-for-profit hospitals changed their corporate structures in order to pursue diversification strategies to supplement patient revenues without forfeiting their tax-exempt status (Gerber 1983; Ernst and Whinney 1982). According to an AHA survey (Alexander, Morlock, and Gifford 1988), by 1985 30 percent of not-for-profit hospitals had undergone corporate restructuring. Board composition among hospitals that restructured indicates increased participation by the CEO and medical staff (Alexander, Morlock, and Gifford 1988).

The empirical studies assessing the impact of corporate restructuring on hospital financial performance have not supported the claims of improved profitability. A study of not-for-profit California hospitals undertaking diversification activities during the pre-prospective payment period of 1978 to 1983 found that, while hospital financial performance was not impaired, it was not improved (Clement 1987). The effects of restructuring after enactment of prospective payment under Medicare in the mid-1980s, however, have not been empirically assessed.

(4) Based on the premise that fixed overhead costs (billing systems, administrative costs) ought not to increase in proportion to the size of the hospital, larger hospitals should realize lower overhead because they can spread costs across more beds and services. However, evidence is not consistent regarding these economies of scale for hospitals larger than 100-125 beds (Deloitte, Haskins, and Sells 1988).

(5) As noted by Cleverley (1988), significant urban/rural differences exist influencing profitability and capital structure ratios. In 1985, the average age of rural hospitals was 8.2 years compared to 7.2 for the industry (Cleverley 1988). The advanced age of small rural hospitals, in comparison to the rest of the industry, underscores the pressing need for capital funds to renovate and modernize their physical plants. In addition, lower profitability among rural hospitals suggests that these hospitals are less able to secure critically needed capital funds (Cleverley 1988). Their lower debt-to-equity ratios also confirm reduced access to capital markets by rural hospitals, which exacerbates fiscal problems associated with aging plants and weak profits.

The hospital governance literature led to expectations that system affiliation and corporate restructuring would influence board composition. System affiliation was expected to affect hospital profitability and capital structure. Although corporate restructuring during the preprospective payment period was not found to affect hospital profitability (Clement 1987), it was considered worthy of examination in this study because, since the introduction of prospective payment, hospital patient revenues have been further constrained. These patient reimbursement restrictions increasingly have led hospitals to generate revenues from nonhospital sources (i. e., diversification activities) in order to bolster their shrinking operating margins derived from inpatient services. Consequently, it has been hypothesized that corporate restructuring can have a significant influence on hospital financial performance, and thus should be included in the analysis. In addition, hospital size and region have also been used as controls for the financial outcomes.


The primary objective of this analysis was to assess the relationship between board composition and hospital financial viability. The first step in the analysis was to examine the bivariate relationships for each hypothesis to determine whether CEO, medical staff, and business community participation on boards was significantly associated with the various outcomes. Since these bivariate analyses involved multiple means comparisons, to control for type 1 error the conservative Student Newman-Keuls (SNK) test was used (Kolckars and Sax 1986).

Many of the outcomes were derived from common financial measures; therefore, correlations among the dependent variables were likely. If the outcomes are correlated, the examination of individual regression analyses may be misleading. Thus, prior to the examination of individual financial outcomes through multiple regression analysis, a preliminary multiple analysis of variance (MANOVA) was performed in which associations between insider participation and all outcomes were examined simultaneously, while controlling for the organizational control variables.

Since board composition categories were included as dummy variables, it seemed most appropriate to test for changes in the level of explained variation in the outcomes, as advocated by Pollisar and Diehr (1982). Thus, changes in the explained variation of each outcome (i.e., changes in the R-square) were examined to help interpret whether or not significant coefficients supported the importance of each construct in the model. Additionally, the lack of significance among individual dummy variables with significant changes in R-square levels in an outcome may suggest that the number of categories in the dummy variable is too large. Such a condition tends to dilute the statistical significance between categories, although the construct as a whole may explain differences in the selected outcomes.


Each financial outcome was regressed on the set of four control variables and the appropriate governance variables.


To test the managerialist perspective stipulated in hypothesis 1, comparisons of means for the selected eight performance measures were examined among the four categories describing various combinations of medical staff and CEO board participation. When compared to other categories of boards, those with active participation by neither the medical staff nor the CEO had significantly worse hospital operating margins; return on total assets; bad debt; and net plant, property, and equipment ratios.

For the multivariate analysis of variance (MANOVA), the hypothesis that insiders had no effect was rejected (Hotelling-Lawley Trace F = 2.38 p |is less than~ .01) when all of the eight performance measures were simultaneously examined after controlling for corporate restructuring, ownership and system affiliation, size, and region. Results from the separate multiple regressions indicate that for all outcomes, with the exception of occupancy rate, boards with medical staff and CEO participation had significantly better financial outcomes than boards without active participation by both types of insiders. When the categories with one type of insider on the board were compared to the reference group of no participation by both insiders, only the measures of operating margin, return on total assets, and bad debt ratios were significantly better.

In addition to the statistically significant relationships identified, changes in explained variation for operating margin, net income to patient revenues, long-term debt to total assets, bad debt, and days in accounts receivable indicate significant associations between the board composition variable and performance measures. While statistically significant relationships were found between categories of insider participation and the long-term outcomes of return on total assets and net plant, property, and equipment ratios, this compositional dummy variable did not significantly explain differences in these ratios. In contrast, the board compositional variables explained a significant degree of variation in hospital occupancy rates, although there were no significant differences among the various categories of board participation. The significantly higher profitability and liquidity ratios suggest that insider board participation is associated with better hospital financial performance especially in the short run.



Hypothesis 2 argues that the presence of outside members from the business community is needed to monitor insider participation. As previously noted, agency theory postulates that outsiders enhance the accuracy of information and balance the viewpoints provided by the insiders (CEO, medical staff), thus improving decision making and the hospital's viability. The primary occupation of each outside director was utilized as an indicator of his or her area of expertise. To examine whether board participation by members of the business community (i.e., bankers, lawyers, independent businesspersons, and corporate executives) is associated with hospital financial performance, bivariate analyses were performed in which means for the selected outcomes were compared between boards with and without each of these business occupations. In the bivariate analysis, the corporate executive occupational group had the most significant associations with hospital performance indicators. Consequently, this group of corporate executives, within the larger category of business community board members, was chosen to test the hypothesis regarding the role of outside directors in monitoring and balancing the information and perspectives provided to the board by insiders. Thus, to assess whether boards with both insider and corporate executive participation are less vulnerable to agency problems of "information asymmetries" and opportunism, comparisons were made and examined between these boards and those with insider and no corporate executive participation.

In the multiple regression analysis, the full board with active participation by the medical staff, CEO, and corporate executives served as the reference group. When all of the outcomes were examined simultaneously using a MANOVA, the hypothesis that the full board had no effect was not rejected. Similarly, the individual regressions showed that boards with active insider participation but without corporate executive participation were not significantly worse than the referent full boards for any of the eight outcomes. However, boards with less than full participation by both the medical staff and the CEO had significantly worse operating margins; net income to patient revenues; long-term debt to total assets; bad debt; days in accounts receivable; and net plant, property, and equipment ratios. These findings are supportive of the first hypothesis, that is, of the advantages of board participation by both insiders as compared to only one. The lack of significant differences between boards with active insider participation and corporate executives and those with active TABULAR DATA OMITTED insiders and no corporate executives does not support the agency hypothesis that outsiders are needed to reduce the likelihood of opportunism and ineffective governance associated with insider board participation. Furthermore, the significantly poor financial outcomes of boards with only one insider suggest that active participation by both insiders is more likely to provide informational advantages to hospital boards than to create information asymmetries. The significantly unfavorable outcomes for boards without involvement by both the CEO and the medical staff further support earlier findings from hypothesis 1 concerning the informational advantages of having both insiders on the board.


Knowledgeable, expert board members are deemed necessary for effective governance activities. This empirical examination of relationships between board composition and hospital performance provides help in understanding whether insider board participation offers informational advantages or disadvantages to the hospital board. Based on comparisons between boards with active insider board participation and those without, the findings suggest that insider participation by the medical staff and hospital CEO is significantly associated with improved hospital financial performance. These results provide support for the managerialist view that effective hospital boards should include insiders (CEO, medical staff). In fact, they are supportive of findings about the positive influence that insiders have had on corporate strategy and performance for California hospitals during the 1980s (Goodstein and Boeker 1991).

In addition, insider board participation may also enhance the medical staff's support and compliance with board policies, thus enhancing hospital performance. These results also suggest that medical staff board participation may serve to co-opt physicians into the decision-making process (Morlock, Alexander, and Nathanson 1988), and thus to increase their support of governing board activities.

While agency theorists hypothesize that hospital insiders are most effective in the presence of corporate executives because corporate executives can add expertise and provide oversight to the governing board, this study found that hospitals with insider participation and without corporate executives on their boards did not appear to be significantly less viable that those with both insiders and corporate executives. The lack of empirical support for the idea that insiders create agency problems for the board by manipulating inside information in order to further their own interests rather than those of the hospital suggests that the benefits of insiders' knowledge outweigh the opportunism potential.

While these results are limited in their generalizability to the state of California, the examination of one state with its local and regional resources and delivery systems helps to minimize extraneous factors that can affect hospital performance. As noted by Shortell (1988), the evaluation of hospitals and hospital systems within a defined market or region may be the most effective strategy for assessing the performance of the organization.

Although this study provides only preliminary empirical findings in support of board composition as an important factor influencing the effectiveness of hospital governing boards, nonetheless, it does support earlier work (Shortell and LoGerfo 1981) that found that medical staff board participation had a positive influence on hospital outcomes. As hospitals struggle to survive in a turbulent environment, these results provide an empirical basis for directing attention toward judicious composition of the hospital governing board as a strategic tool for hospitals to use in gaining a competitive advantage.

The temporal limitations of the cross-sectional design (which precludes identifying antecedent-consequence relationships) point to the need for future research in these areas: (1) an examination of additional years of hospital financial viability to determine whether the cross-sectional results are sustained, diluted, or enhanced over time; and (2) an assessment of changes in hospital board composition over time to identify more definitively the contribution to hospital performance made by governing board composition. Such future studies can lead to clarification about the role and function of the hospital board, and can systematically answer the question of whether changes in board composition are predictive of changes in hospital financial viability.


The authors would like to acknowledge the contributions of the members of the administrative staff at the University of Kentucky's Health Administration program: Bonnie Gay, Mary Baird, and Regina Lewis, and the helpful comments of the editor and reviewer of Health Services Research.


1. The system affiliation-ownership variable has five categories depicting the ownership for system-affiliated and independent hospitals. The categories include (1) for-profit chain, (2) not-for-profit chain, (3) public chain, (4) public independent, and (5) not-for-profit independent. Because of the lack of data on for-profit independent hospitals in this data set, this category has been omitted from the analysis.


Alchian, A., and H. Demsetz. "Production, Information Costs and Economic Organizations." American Economic Review 62, no. 5 (December 1972): 777-95.

Alexander, J., and L. Morlock. "Multi-Institutional Arrangement: Relationships between Governing Boards and Hospital Chief Executive Officers." Health Services Research 19, no. 6 (February 1985): 675-96.

Alexander, J., L. Morlock, and B. Gifford. "The Effects of Corporate Restructuring on Hospital Policymaking." Health Services Research 23, no. 2 (June 1988): 312-37.

Alexander, J., and H. Zuckerman. "Health Care Governance: Are We Keeping Pace?" Journal of Health Administration Education 7, no. 4 (Fall 1989): 760-77.

American Hospital Association. Hospital Statistics, 1986. Chicago: AHA, 1988.

Baysinger, B., and R. Hoskisson. "Organizational Performance and Adaptation: Effects of Environment and Performance on Changes in Board Composition." Academy of Management Journal 34, no. 4 (December 1990): 805-56.

Chang, C., and H. Tuckman. "Why Do Non-Profit Managers Accumulate Surpluses and How Much Do They Accumulate?" NonProfit Management and Leadership 1, no. 2 (Winter 1990).

Clement, J. "Does Diversification Improve Financial Outcomes?" Medical Care 25, no. 10 (October 1987): 988-1001.

Cleverley, W. "Hospital Industry Financial Report 1983-1987." Healthcare Financial Management Association Journal (1988): 117-35.

Coyne, J. "Hospital Performance in Multihospital Systems: A Comparative Study of System and Independent Hospitals." Health Services Research 17, no. 4 (Winter 1982): 303-29.

Delbecq, A., and S. Gill. "Developing Strategic Direction for Governing Boards." Hospital & Health Services Administration 33, no. 1 (Spring 1988): 25-34.

Deloitte, Haskins and Sells. The Sourcebook. Chicago: Deloitte, Haskins, and Sells, 1988.

Eisenberg, M. "Legal Models of Management Structure in the Modern Corporation: Officers, Directors, and Accountants." California Law Review 63 (1976): 375-439.

Ernst and Whinney. Corporate Reorganization: A Survey of Hospitals That Have Reorganized. Cleveland, OH: Ernst and Whinney, 1982.

Fama, E., and M. Jensen. "Separation of Ownership and Control." Journal of Law and Economics 26 (June 1983): 301-23.

Gerber, L. Hospital Restructuring. Chicago: Pluribus Press Inc., 1983.

Glandon, G., M. Conte, M. Holloman, and J. Kowalcyk. "An Analytical Review of Hospital Performance Measures." Hospital & Health Services Administration 32, no. 4 (November 1987): 439-53.

Goodstein, J., and W. Boeker. "Turbulence at the Top: A New Perspective on Governance Structure Changes and Strategic Change." Academy of Management Journal 34, no. 2 (June 1991): 306-27.

Holohan, J. "The Impact of Alternative Hospital Payment Systems on Medicaid Costs." Inquiry 25 (Winter 1988): 517-32.

Kolckars, A., and G. Sax. Multiple Comparisons. London: Sage University, 1986.

Moe, T. "The New Economics of Organization." Journal of Political Science 28, no. 4 (November 1984): 739-73.

Morlock, L., and J. Alexander. "Models of Governance in Multihospital Systems." Medical Care 24, no. 12 (December 1986): 1118-35.

Morlock, L., J. Alexander, and H. Hunter. "Formal Relationships among Governing Boards, CEOs, and Medical Staffs in Independent and System Hospitals." Medical Care 23, no. 10 (October 1985): 1193-1211.

Morlock, L., C. Nathanson, and J. Alexander. "Authority, Power, and Influence." In Health Care Management. Edited by S. Shortell and A. Kaluzny. New York: John Wiley & Sons, Inc., 1988.

Pfeffer, J. "Size and Composition of Corporate Boards of Directors: The Organization and Its Environment." Administrative Science Quarterly 17, no. 2 (1972): 218-28.

Pollisar, P., and P. Diehr. "Regression Analysis in Health Services Research: The Use of Dummy Variables." Medical Care 20, no. 9 (September 1982): 959-65.

Renn, S., C. Schramm, J. Watt, and R. Ruzon. "The Effects of Ownership and System Affiliation on the Economic Performance of Hospitals." Inquiry 22 (Fall 1985): 219-36.

Sabatino, F. "The Revolving Door: CEO Turnover." Hospitals 61 (5 October 1987): 80-84.

Shortell, S. "The Evolution of Hospital Systems: Unfulfilled Promises and Self-Fulfilling Prophesies." Medical Care Review 45, no. 2 (Fall 1988): 177-214.

Shortell, S., and J. LoGerfo. "Hospital Medical Staff Organization and Quality of Care." Medical Care 19, no. 10 (October 1981): 104-52.

Williamson, O. The Economic Institutions of Capitalism. New York: The Free Press, 1985.

Young, G., R. Beckun, and G. Ginn. "Governing Board Structure, Business Strategy, and Performance of Acute Care Hospitals: A Contingency Perspective." Health Services Research 27, no. 4 (October 1992): 543-64.

Zahra, S., and J. Pearce. "Boards of Directors and Corporate Financial Performance: A Review and Integrative Model." Journal of Management 15, no. 2 (1989): 291-334.
COPYRIGHT 1993 Health Research and Educational Trust
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Molinari, Carol; Morlock, Laura; Alexander, Jeffrey; Lyles, C. Alan
Publication:Health Services Research
Date:Aug 1, 1993
Previous Article:Corporate and philanthropic models of hospital governance: a taxonomic evaluation.
Next Article:Correspondence: to the editor.

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters