Abstract
Objective: Revenue volatility-particularly in the form of sudden and significant reductions in funding-has been shown to negatively affect local health departments (LHDs) by impacting the amount and type of services delivered. This study examined the potential effectiveness of revenue diversification as a means of managing LHD financial risk. More specifically, we examine the relationship between revenue diversification and revenue volatility among LHDs in Washington State.
Design and Setting: We applied fixed-effects linear regression models with robust standard errors to revenue data reported during 1998-2014 by all LHDs operating in Washington State. We also assessed the robusticity of our results to alternative specifications for revenue diversification and volatility.
Main Outcome Measures: LHD revenue and revenue volatility.
Results: Between 1998 and 2014, LHDs in Washington State were exposed to considerable upside and downside fiscal risks. While average revenue volatility was close to 0 (0.2%), observed values ranged from -35% to 63%. LHD revenues were already highly diversified: as measured using a reversed Herfindahl-Hirschman Index, diversification values ranged between 0.56 and 1.00. There is little evidence to suggest the existence of a statistically significant relationship between revenue diversification and volatility.
Conclusions: Revenue volatility presents LHDs with important short- and long-term operational challenges. Our models suggest that revenue diversification did not reduce revenue volatility among Washington State LHDs in 1998-2014. Further research will need to examine whether revenue diversification reduces LHD financial risk in other settings.