Do Tax Revenues Reduce Agency Costs and Increase Hospital Efficiency? Empirical Evidence from Washington State

In Washington State some hospitals have access to tax revenues as a means to reduce volatility in cash flows and others do not. To investigate the potential efficiency differences, and by extension differences in agency costs, between these types of hospitals, a panel of Washington State, acute care hospitals is examined. Based on a maximum entropy analysis, hospitals receiving tax revenues are at greater risk of inefficiency, and by extension experience higher agency costs, than hospitals that do not receive such revenues. While managerial efficiency may not be the primary objective of non-profit hospitals, the existence of inefficiency necessitates that policy makers re-examine the flow of public funds to these facilities to ensure tax revenues are being used in a socially responsible manner.