Financial Distress and Bankruptcy Prediction: A Comparison of Three Financial Distress Prediction Models in Acute Care Hospitals

Abstract

The purpose of this study is to examine and compare the accuracy of three financial distress prediction models: modified Altman Z score (1993), Ohlson O score (1980) and Zmijewski score (1984) and their ability to predict bankruptcy for US acute care hospitals. We pose two research questions: 1) What is the more accurate model in predicting financial distress resulting in bankruptcy, and 2) What financial ratios in each of those models differentiate bankrupt hospitals from financially healthy hospitals?

We analyzed 106 hospitals (53 hospitals that filed for bankruptcy and 53 that were financially stable) between the years 2006 and 2017 to compare the accuracy of the three models in predicting bankruptcy. We found that the modified Altman Z score (1993) was more effective in predicting financial distress resulting in bankruptcy of US acute care hospitals when compared to the Ohlson O score (1980) and Zmijewski (1984). However, we did not find significance regarding the financial ratios among the three models in differentiating bankrupt hospitals from non-bankrupt hospitals. In other words, a single financial ratio was not found to be consistent that separated bankrupt hospitals from non-bankrupt for all three years prior to a bankruptcy. Thus, managers should not rely on just one financial ratio as an indicator of financial distress.