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Reevaluating capital spending strategies

As U.S. hospitals prepare for value-based reimbursement, even capital investment is shifting away from traditional priorities

As healthcare reimbursement shifts from a system that rewards quantity of care to quality of care, the onus is on the CFO to determine where best to allocate financial resources and how best to pare them.
This emerging responsibility marks a new direction for hospital CFOs. Longstanding payment structures in healthcare organizations were hinged to incentives for physicians, hospitals and other care providers to deliver more services to patients. Research now suggests that more services and higher expenses do not guarantee better patient outcomes.
This factor along with others is propelling hospitals to a value-driven healthcare model. Piloting the change is the CFO, determining the optimum resource allocation, depending on current income flows and future needs.

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Many CFOs are pulling back on construction plans for more patient beds, instead investing dollars in data analytics, promoting more outpatient services and, as Warren Forgey, CFO and executive vice president of fiscal services and business development at the Schneck Medical Center puts it, “redoubling our efforts on the basics.”
These changes are still in their infancy, but they paint a picture of tomorrow’s reconfigured hospital environment, one that is focused not just on getting patients healthy but also getting them out the door. “Physicians are key in this transformation, but so are patients and their employers,” Forgey says. “Today’s clinically integrated network of healthcare is a coordinated effort involving the hospital, local physicians, long-term care facilities, and so on. This system must be efficient and navigable for both patients and their employers.”
Companies footing much of the bill for their employees’ healthcare “are absolutely concerned about the cost and how this expense affects their own profitability and the price of the products and services they sell,” he adds. “We’re the healthcare experts and have to help them find solutions.”
Reallocating capital
As the shift to a system that rewards quality of care progresses, it compels many CFOs already running a tight fiscal ship to pinch each penny. “We’re already a pretty disciplined operation,” says Brian Walton, CFO and vice president at BSA Health System in Amarillo, Texas. “It’s not like we buy another MRI just to have one more. We’re always checking to see we’re getting as many time slots out of it as we can.”
Such frugality will be needed as shorter patient stays become the norm. “When we end up in that position of paying for outcomes and value versus volume, we’ll probably have some assets that will ultimately become idle,” he says. “Consequently, we are backing off, from a capital perspective, at the main hospital. We have no plans to add a fourth or fifth MRI or more space for other diagnostic procedures.”
Rather, capital is being allocated towards acquisitions of physician practices and outpatient locations in the regional market. “The key to success in the future is to have a solid footprint to ensure a reasonable amount of access points, without having to invest heavily on the inpatient side,” Walton explains.

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In building this geography, BSA seeks to have relationships with the “right number” of high quality physicians in each high demand specialty, he says. This objective compelled the hospital last year, for example, to acquire an ENT (ears, nose and throat) specialty practice.
Schneck Medical Center faces different pressures, in that the Seymour, Indiana-based hospital not long ago completed a mass facility expansion project that increased its overall physical space by 30 percent. The organization originally occupied only 20 percent of this additional space, with the remaining 80 percent designated as flexible space to accommodate new and changing services. This space now is largely being occupied by outpatient facilities. “It turned out to have been a very strategically sound move for us,” Forgey says.
Approximately 70 percent of the additional space is set for outpatient needs. Walton says the hospital has no near-term brick and mortar plans. “With the exception of IT, our capital spending is less now than it has been in many years,” the CFO notes.

Technology Triumphs
Both hospitals have increased the dollars invested in IT initiatives, which has become a larger percentage of overall capital allocations. Schneck Medical Center, for instance, is partnering with its physicians to make population health management—the outcomes of a group of patients—a reality. “The physicians are key to any transactions we make towards developing clinically integrated networks of providers to manage patient health across this spectrum,” he explains. “Having that IT infrastructure in place to accommodate this new type of system is where we’re putting a lot of our IT dollars now.”
He adds, “By managing chronic conditions and focusing on preventive care, we can build a cohesive system that is less costly and more efficient.”
As part of this initiative, the hospital is investing in the design and development of a clinical registry system for patient data. The system would compile data from the hospital and individual physician practices and then integrate the results to track health outcome patterns down to the specific patient level. The overarching goal is to move the hospital closer to the day when more personalized patient care is the norm. “You do that and you can successfully reduce the possibility of patient readmissions,” Forgey says.
Walton agrees there are significant financial returns from investments in technology. “We’ve been spending upwards of $5 million a year on upgrading our IT infrastructure and systems to implement electronic health records come this October,” he says. “Would we be investing this money if we didn’t have to? Probably not in the short-term, but eventually I would think. The race to `meaningful use’ deadlines has meant more upfront capital expenditures when we would have rather drawn them out over a longer timetable.”
While these financial demands take a toll on other capital spending objectives, Walton says it has not stopped needed investments like a substantial upgrade of the hospital’s emergency room. Just in time, too. “Chances are a lot of newly-covered people with insurance still won’t have access to primary care and will come to the ER instead,” Forgey says. “We’ll be ready for them.”