A University of Iowa accounting professor studied spending patterns at U.S. Army hospitals. The award-winning study confirmed existing suspicions that managers spend down their budgets at the end of each fiscal year. Their aim is to spend the whole allocation, and avoid a surplus.
The study also revealed that the spending is not wasteful.
The study was co-authored by Ramji Balakrishnan, an accounting professor at the Tippie College of Business, Naomi S. Soderstrom of the University of Colorado and Timothy D. West of the University of Arkansas.
The team looked at spending patterns at 31 Army hospitals over five years, from 1998 to 2002, including the Walter Reed Army Hospital.
According to the published paper, spending spiked considerably in August and September, the final two months of the federal fiscal year. It was obvious that managers were spending down their budgets so they would not be left with a surplus.
The researchers did not find wasteful spending. The money was being spent mostly on pharmaceuticals and health care equipment, things the managers would need to buy anyway. In addition spending patterns showed a significant dip in October and November, because the hospitals used the supplies they purchased in August and September.
As Balakrishnan explained it, “They eat off what they’ve stored.”
The researchers discovered the departments in the hospitals they studied spent an average of $5.3 million in October, the first month of the fiscal year, and $5.6 million in November. Spending then leveled off at between $6.1 million and $6.9 million a month until September, when it jumped up to $7.7 million.
“A ‘saving-dissaving’ model appears to be at work, where managers simply shift expenses from the start of the next fiscal year to the end of the current fiscal year,” said Balakrishnan. “The study also showed the managers were not burning through money on things like furniture or computers. They’re not hiding their expenses, so it suggests they were good managers within the constraints of their system.”
Balakrishnan’s paper was named “Spending Patterns with Lapsing Budgets: Evidence from U.S. Army Hospitals.”
The study received the Best Paper Award for 2009 from the Journal of Management Accounting Research, which honors the best paper published by the JMAR from 2006 to 2008.
Balakrishnan also won the award in 2002. He and his co-authors will be honored at a conference in January.
Balakrishnan said he plans to use the data from the Army hospital study to determine what impact, if any, the current erratic spending patterns have on efficiency and if a flattened out pattern might be more effective. He said the current study doesn’t show whether those patterns have any negative impact on the hospital’s bottom line.
Balakrishnan and his co-authors did not say whether they asked any of the administrators why they used this spending pattern. This seems rather strange, because I have used this spending pattern in my business, because it allows a buffer to fund unexpected needs.