Cash Reserves and System Membership: Does System Membership Improve Not-For-Profit Hospitals’ Access to Internal Capital by Reducing Optimal Cash Balances?

Abstract

Many not-for-profit hospitals hold far more cash than is required to meet working capital needs. One reason not-for-profit hospitals hold these reserves is that they face capital market imperfections that create barriers to raising external financing. These barriers are likely to be smaller for system hospitals than for independent hospitals. As a result, independent hospitals that join systems may have an opportunity to “free up” cash reserves that can then be used to fund investment in real assets. We test this theory using a sample of independent not-for-profit hospitals that joined systems between 1998 and 2007. We find that most acquired hospitals do not hold large cash balances before acquisition and that even acquired hospitals that do hold large amounts of cash before being acquired do not experience large reductions in cash balances after acquisition.