Expense preference offers an alternative to profit‐maximization theory in explaining firms' operating strategies (Williamson, 1963; Rees, 1974). Expense‐preference theory suggests that when disctretionary behavior is allowed, corporate managers may choose to maximize individual utility instead of corporate profit. Expense‐preference behavior tends to be evidenced by higher expenditures on items for which managers have a positive personal preference than would be justified by profit maximization. Conditions under which significant managerial discretion can emerge include weak competition, strictly controlled entry, a high degree of regulation, separation of ownership and control, and existence of a strong public interest character for the firm or industry (Awh and Primeaux, 1985; Edwards, 1977). The hospital industry may be characterized as operating under all the above conditions. Hospital ownership can be classified as being either not‐for‐profit or proprietary. Profit‐maximization influences are generally not present in not‐for‐profit hospitals, thus further increasing managerial discretion with respect to operating expenses. This study provides support for the contention that expense‐preference behavior exists in not‐for‐profit hospitals as compared to proprietary hospitals. Specifically, we present evidence of considerable managerial discretion in the allocation of resources in not‐for‐profit hospitals.