Major Capital Projects and Hospital Cost Position
The lingering effects of the "great recession," the passage of healthcare reform, the increasing transparency around costs, and the growing prevalence of value-based purchasing payment methodologies augur greater scrutiny of hospital costs and outcomes by healthcare purchasers. This environment will create an increased focus on hospital cost position going forward.
Understanding how major capital projects impact hospital cost position and operating performance is a critical first step toward mitigating project risks. Replacement hospitals provide a useful means of study because performance before the project can be clearly delineated from performance after the project.
Of 26 replacement hospital projects included in a study of all replacement hospitals completed nationally since 2000, with valid data between year -1 and year 2 or 3, six experienced an absolute decrease in operating expense per adjusted discharge following completion of the project.a The median compound annual growth rate (CAGR) in operating expense per adjusted discharge for these 26 replacement hospitals was 3.81 percent from year -1 to year 2 or 3. Fifteen of the 26 replacement projects had a CAGR in operating expense per adjusted discharge beneath the national average, which was 5.0 percent, for years -1 to year 2 or 3. These 15 replacement hospitals were able to improve their relative cost position while replacing their facilities.
Looking at cost position in year 2 provides additional insight into the performance of replacement hospital projects. For this time frame, data were available for a total of 28 replacement hospitals. Assuming that the national average operating expense per adjusted discharge for community hospitals represents a 100 percent threshold, the study found that 20 of these replacement projects had operating expenses per adjusted discharge that were less than the national average during year 2. The median cost position for replacement hospital projects in year 2 was 80.8 percent of the national average.
In the new hospital operating environment, the ability to pass along costs to purchasers of hospital services will be greatly constrained. It therefore will be important for hospital strategists to make sure large capital projects enhance their organization's cost position. These projects should be sized correctly to meet market needs, operated efficiently to manage variable costs, and positioned correctly to generate adequate throughput to offset incremental capital costs. If these success factors are not present, the hospital will see its cost position erode and/or operating results decline.
This analysis was performed by Stroudwater Associates, Portland, Maine. For more information, contact Jeff Sommer at firstname.lastname@example.org.
a. Regardless of when a hospital was replaced, the year of replacement is labeled as year "0." Pre-replacement years are labeled years -3 to -1, and post-replacement years are labeled years 1 to 3.
Publication Date: Friday, October 01, 2010