Hfma Reports That Hospitals Are Falling Behind On Capital Spending

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January 14, 2004

Capital spending by hospitals is not keeping up with utilization growth, and in some cases a burgeoning capital crunch is jeopardizing facilities' quality and ability to meet future demand, according to the second Financing the Future report released January 5 by HFMA, in partnership with GE Healthcare Financial Services. This report, with research conducted by HFMA and PricewaterhouseCoopers LLP, addresses recent spending trends and examines the steps that hospitals take to make spending decisions .

How much capital are hospitals spending?

Between 1997 and 2001, capital spending for fixed assets, such as buildings or equipment, increased on average about 1 percent per year. This limited growth was far outstripped by demand for inpatient and outpatient services, which increased by 7.7 percent and 19.6 percent respectively, during the same time period. The hospitals with the highest spending were large, urban, nonprofit facilities. During that period, according to the report:

The largest hospitals (more than 400 beds) spent nearly 63 percent more capital on a total per-bed basis than the smallest hospitals (less than 100 beds).
Urban hospitals spent 32 percent more capital on a total per-bed basis than rural hospitals.
Total per-bed capital spending for hospitals defined as having broad access to capital was more than 13 percent higher than for hospitals defined as having limited access to capital.

Are hospitals spending enough to keep up with need?

Nearly 60 percent of hospitals appear to be spending enough capital to stay ahead of depreciation. These facilities tend to be larger, rural, not-for-profit hospitals that on average spend more than three times as much as their depreciation.

However, a significant group (41 percent) of hospitals are re-investing only 64 percent of their annual depreciation on capital. This disparity has created a divide among the haves and the have nots and has likely diminished some hospitals' ability to build or renovate facilities, expand products and services, or maintain profitable growth.

Research also suggests a geographical disparity among hospitals' ability to meet capital needs. For example, some hospitals in Hawaii, New Mexico, North Dakota, Florida, and New Jersey seem to be more challenged in keeping up with depreciation than hospitals in Idaho, South Dakota, Oregon, Iowa, and Minnesota. This trend may be due, in part, to the regulated, high-cost, low-margin, competitive landscape in each state.

Steps toward the future

Even hospitals in states with the most limited access to capital are replacing aging plant and equipment, although they may be doing so at a higher capital cost than others.

So, how does a CFO determine the "right" investment in capital assets for a hospital? Individuals interviewed for this report offered some suggestions:

Know the facility's financial vision. Each hospital should have a financial picture of its ideal future. The picture may be different for each hospital: some may focus on break-even cash flow or operating margin as a first goal, while others may focus on strengthening their overall balance sheet or targeting specific goals for a credit rating. Nonetheless, it is necessary to have a goal to determine how an individual capital initiative fits with your future.
Know how each potential capital initiative helps you meet your goal. There are many different ways of interpreting ROI: a project can generate a positive cash flow, avoid a potential loss of volume and revenue, or be a loss-leader that generates growth somewhere else. But if it doesn't generate a return that gets you to your ultimate goal, you need to reconsider the investment.
Assess the return on mandatory investments. Sometimes you need to invest in administrative or infrastructure initiatives that don't have a quantifiable ROI. The way to look at the return in those cases is to ask, what will the cost be if you don't make the investment? Will you be subject to government penalties? Will you be unable to communicate with insurers? Will the roof cave in? Most mandatory investments have a silver lining if you look hard enough, such as potential streamlining of billing operations as a result of certain HIPAA requirements.
Know the story you want to tell. Lenders and credit enhancers all spoke about the "story" behind the initiative as being the most compelling piece of information in accessing capital. If the business plan is sound and convincing- and you've convinced yourselves!-then you may have more access to capital than you think.

SOURCE:

Financing the Future Report 2: " How Are Hospitals Financing the Future? Capital Spending in Health Care Today. " HFMA members will receive a summary of the report with their January issue of hfm . Members can also access the full report for free, and nonmembers can purchase a copy, from the Financing the Future web site.

Additional Resources

Financing the Future web site
Capital: Comprehensive List of HFMA Products and Services
The Future of Not-For-Profit Healthcare Capital Financing
Black Ink - Capital Archives
Black Ink - Capacity Planning Articles
Internet Guide to Capacity Planning (members only)

If you have questions or comments about HFMA Wants You to Know, contact editor Laura Noble.

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