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Considerations for capital spending to maximize returns

Evaluating capital expenditures is more complicated under a system focused on value.

Kerri Schroeder, Bank of America Merrill Lynch

Healthcare CFOs have a lot on their minds these days, but one of the most significant challenges hospitals face is the expected shift from a fee for service reimbursement model to value based payments.  While preparing for this shift is a consideration in many strategic and operational decisions for healthcare finance professionals, it impacts one area perhaps more than any other:  capital spending.

Healthcare has always been a capital intensive industry, requiring significant investments in brick and mortar, high-tech imaging machines and other medical equipment, and a strong reliance on human capital in the form of doctors, nurses and other professionals.  Under a fee for service model, organizations could justify capital expenses in a fairly straightforward way, by determining the revenue a machine might be expected to generate for instance.  But evaluating capital expenditures is more complicated under a system focused on value, which seeks to eliminate waste and focuses on quality and outcomes rather than the number of procedures.

As a result of this shift, there is greater scrutiny on evaluating capital spending initiatives, with healthcare CFOs balancing the cost of the investment against the need to maintain margins and preserve a strong balance sheet to see them through the uncertainty ahead. 

Smart Investments in Health IT can Pay Dividends in Many Areas

Health Information Technology spending is increasing, in part due to the mandated shift to electronic record keeping and the need to achieve meaningful use targets, but even more so, in an effort to eliminate duplication of care, minimize errors and reduce cost.  At the same time, growth of consumer directed plans and high deductible plans and competition among providers for patients means that patient satisfaction and retention is top of mind for many hospitals.  Health Information Technology has the potential to enhance patient satisfaction by expediting the flow of information among clinicians, patients and care facilities.  But in order to maximize the benefit, CFOs must be sure they are implementing the right system and the right features.  Areas to consider include:

  • Efficiency:  will these upgrades speed up treatment, avoid duplication of procedures and improve outcomes?
  • Interoperability:  will the system facilitate communication and sharing of data between the hospital and other providers to streamline care? Will the system easily track continuity of care and identify patterns and reduce errors?

At the same time, health IT can also speed revenue collection, by making it easier for patients to pay, and for patient accounts representatives to understand patient obligations.  Personalized patient portals not only allow patients to schedule appointments, access test results and communicate with their providers electronically, but if integrated with the patient accounting system, they can allow patients to access their invoices and provide ways to pay directly, via a credit card or bank account.   Systems that offer insurance validation and ready access to patient records can allow financial services reps to discuss obligations with patients at time of service, setting up payment plans or other arrangements rather than billing and collecting after the fact. 

Not every IT upgrade will provide all of these benefits, so finance executives must work closely with other departments and their vendors to weigh the costs and benefits and ensure they are getting the best return for their investment.

Take the Long View on Capital Projects

Expansion and new construction projects are less common today for hospitals and heath systems compared to a decade ago.  The drive for efficiency is pushing less acute patients to urgent care, outpatient centers, ambulatory based care, and rehabilitation facilities rather than expensive inpatient acute care settings.  Hospitals are contemplating and making investments in these facilities in order to retain patients, provide convenience, and create lower cost settings for patient care.  

Healthcare finance professionals must evaluate these capital investments with an eye toward ensuring they will be beneficial to patients, reduce costs, provide continuity of care, and maintain or improve quality, all of which are critical under a value based payment methodology. 

Looking forward, we know that many hospitals will look different, with fewer inpatient towers and more outpatient and ambulatory facilities.  Still, some hospitals are looking to invest in brick and mortar, adding space to address growing markets, expanding specialty programs; or repositioning older bed towers moving from shared to private rooms and increase patient satisfaction.

Ultimately, to operate effectively under value based payments providers must shift patients to facilities that will provide the best outcomes, the most convenience and the lowest cost. 

Invest in Human Capital

Healthcare CFOs must be sure that the physical updates to technology and infrastructure include training for the people who will manage the clinical and operational systems.  Overlaying new technology over an antiquated process is unlikely to result in the desired efficiencies.  Physician and staff adoption is critical to the success of an EHR implementation.  Hospital executives must invest time and resources to insure that protocols and procedures are designed, implemented and inspected to insure successful adoption. 

Retaining physicians and other staff is critical to success, and it's important for hospitals and health systems to offer competitive compensation and benefits to attract and retain the best staff.  According to the Bank of America Merrill Lynch 2015 CFO Outlook, nearly all (92%) of companies are offering retirement plans; three out of five (63%) are offering wellness programs, and more than half (54%) are offering education funding.  Healthcare finance officials must be prepared to offer at least those benefits and then some to drive long lasting value with a committed workforce.

Financing Capital Investments

Not only are capital investment decisions more complex, but the decision about how to pay for capital investments warrants due consideration as well.  For instance, IT investments are rarely "one and done," requiring regular updates and enhancements over time;  while facility investments have large price tags and may strain the balance sheet of the organization.  CFOs may choose to finance capital expenditures with long term debt, with liquidity reserves and cash flow, or using medium term capital financing that provides the benefit of asset / liability matching. 

Ultimately, it is important to weigh the cost of financing against the opportunity cost of breaking investments or diminishing liquidity reserves, as these decisions can have a significant impact on public debt ratings and ultimately on the cost of capital.  CFOs must take into account all of these variables in order to maximize their return on investment as well as financial flexibility going forward. 

Kerri Schroeder is Senior Vice President, Credit Products Executive, Global Commercial Banking at Bank of America Merrill Lynch.

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Considerations for capital spending to maximize returns
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