The Influence of Ownership Type and the Affordable Care Act on Earnings Management in U.S. Hospitals

Using a comprehensive sample from 2011 through 2016, we examine variation in earnings management in U.S. hospitals by ownership type, and before and after the implementation of the Affordable Care Act (ACA). We expect managers’ reporting incentives to differ between ownership type (for-profit versus non-profit), resulting in differing uses of accrual and real earnings manipulations. First, we document that non-profit hospitals exhibit lower levels of both income-increasing and income-decreasing earnings manipulations than for-profit hospitals do. Second, we find that compared to non-profit hospitals, for-profit hospital managers use discretionary accruals (in particular) to create larger reserves when pre-managed earnings are high and to increase reported earnings more when pre-managed earnings are low. Together, these findings suggest that, relative to non-profit managers, for-profit managers have incentives to report higher and more consistent earnings. Third, we find that post-ACA, both non-profit and for-profit managers use real earnings management to report lower earnings, while only non-profit managers appear to use discretionary accruals to bolster earnings. Our findings also show that for-profit hospital administrators manage their earnings downwards using real earnings manipulations more so than non-profit administrators do. It is plausible that for-profit hospital managers are less willing to disclose any increased margins resulting from the ACA implementation than non-profit managers are.