At a recent HFMA Region 7 Conference, which includes Wisconsin, Illinois, and Indiana, hospitals and health systems came together to learn, share, and understand the latest trends in healthcare finance. The conference featured a panel discussion, moderated by Michael Haines from First American Healthcare Finance, with CFOs from hospitals of varying sizes discussing their capital funding strategy, including Matthew Streeter, CFO at Black River Memorial Hospital, Black River Falls, Wis., a 25-bed critical access hospital. In this excerpt of the panel discussion, Streeter shares how his hospital has overcome the financial challenges typical of small, rural hospitals.
What is your approach to capital planning and any projects that have been recent priorities?
Streeter: My 25-bed critical access hospital is in west central Wisconsin and located in the sixth poorest county in Wisconsin, which is also the national home of the Ho-Chunk nation. Ten percent of our population are Native Americans. Capital for us is an interesting topic. A lot of people assume as soon as they hear “rural hospital” that we’re struggling. It seems to be the natural response. Honestly, we’re not struggling. We’re very fortunate. But I think it’s because we have a good capital plan.
What is your annual capital budget and how do you go about making allocations? How do you prioritize projects and purchases?
Streeter: We like to think of capital in two buckets, routine and non-routine. Routine being the regular replacement, upgrade, service enhancements, new service lines, and regulatory requirements. And non-routine being the big stuff, such as building projects and the EHR (electronic health record). These projects may be multiyear capital projects. We’re about a $60 million net patient revenue (NPR) facility, which is a bit misleading because we have very lucrative payer contracts. We’re really closer to like a $30 million NPR in size, but we’re fortunate to have great payer contracts.
Our annual spend is only about $1.5 million. It fits for us, and it allows us to continue to be state of the art, but also to be a bit more frugal. We determine the amount by developing the operating budget first. Once we know where the net operating income is going to come in for the year, at least anticipated, we look at a percentage of that being put toward capital funding for the year. We tend to run about a 3.5 percent margin, so we’re able to fund the $1.5 million annual spend. We don’t do an annual capital budget, per se.
To determine projects, we create a perpetual wish list. It’s open all year long and department managers can submit ideas throughout the year. We keep a master list which is rated by priority: level one, two, or three.
Level one is populated with items that are related to either safety, strategy, or regulatory requirements. Level two is routine replacement and service line enhancement. Level three items are defined as “nice to have,” and they typically are funded by donors. That way when a donor comes forward, or a grant opportunity comes up, we’re not scrambling to find how could we spend that money. We go to the wish list. This system avoids having those pet projects that come up but never actually happen. We also have the ability to really plan for replacement of items that come to end of life.
How do you determine how to fund each of your initiatives?
Streeter: I’ve heard other panelists say that it’s an art more than a science, and I’m really glad to hear I’m not the only one that doesn’t have a formula that answers this question for me every year. Determining funding requires feeling out the current situation and watching the balance sheet.
We are trying something different by leveraging the cost report reimbursement where we are looking at some operating leases. In rural hospitals, or at least in the three facilities where I’ve worked, there’s a tendency to purchase something and then keep it forever. Then you end up with a 14-year-old C-arm or equipment that shouldn’t still be in use.
By having an operating lease with a deadline for replacement, it really forces us to make sure that we’re not letting those things linger in our hallways. And we’ve just started dabbling in that. This process helps me out a little bit on my cost report reimbursement as well, speeding up Medicare payments.
Otherwise, we’re almost entirely cash, other than major building projects, which we fund with tax-exempt bonds.
With so many changes in the healthcare industry (i.e., more innovation, competition, changes in delivery payer mix) how do you see how you pay for things shifting in the next five years?
Streeter: We’ve been talking about change since I started in this business. It’s just constant. In a critical access hospital, we’re watching whether or not Congress eliminates that designation and the benefits that come with it. That’s probably the thing I have to watch the most and think about. Because if we lose cost-based reimbursement, the sixth poorest county in the state, it’s going to hit us hard. And that will probably be the end of a capital plan. Instead, it will become a survival plan at that point.
How do you evaluate the need to add additional human capital with specific expertise or specialization in a particular area?
Streeter: We really focus on the education piece with our human capital, by making sure people are armed with the right tools and that they have the right skills. However, there are times when we need specialties. For example, we hired a dedicated HIPAA compliance security officer to address cyber threats.
Overall, as we look at staffing and hiring specialists, productivity and labor management becomes incredibly important. Even in a cost-based reimbursed organization, we owe it to our communities to do a good job with their resources.
We didn’t have the expertise in our facility to be able to do this alone, so we partnered with an external organization that is helping us with the productivity and labor management piece. We needed better benchmarks and better data. We were driving blind, and we can’t do that.
It’s an eye-opening experience when you see those first reports come out and realize there’s some fat, even though you don’t think there is. The next challenge is convincing everyone in an organization who is busy and working hard that there is fat. And then you realize that not everybody can be busy working hard if these are the numbers.
Interviewed for this article:
Matthew Streeter is CFO, Black River Memorial Hospital, Black River Falls, Wis., and a member of HFMA’s Wisconsin Chapter.