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What Lies Ahead for Capital Expense Budgets?

 |  By kminich-pourshadi@healthleadersmedia.com  
   March 07, 2011

Sometimes when you take a look back, you can see just how far you’ve come. Other times, you can see just how little progress you’ve made. Unfortunately, the latter may be more true in the case of capital expense budgets, as healthcare leaders continue to hold fast to their dollars--putting their money into only the most necessary of initiatives.

Last January I took a pulse on healthcare’s attitude toward capital spending in HealthLeaders magazine. The picture was grim at the time, especially in terms of facility expansion. With few funds to be found through investments, and banks unwilling to provide many hospitals loans, new construction and large capital purchases came to a near halt for most hospitals and health systems.

In fact, for the first time in nearly two decades, most facilities stopped building, and they waited for the economy to stabilize and the requirements for healthcare reform to become more clear.

At the time, I interviewed John Winfrey, chief financial officer at the 583-licensed bed DCH Regional Medical Center in Tuscaloosa, AL. Prior to the recession, they were poised to build a gleaming 80- to 90-licensed bed tower to help offset crowding and eliminate some of the semiprivate rooms at the hospital.

But that vision was put on hold in 2008 after the organization took its first ever financial loss due to the recession. Now 2011, I spoke with Winfrey again, and the same tower remains in limbo. “It’s almost permanently postponed. Now we’re finding our [inpatient] volumes are dropping,” he says. “We’re really concerned with taking on any major projects because of the uncertainty with the economy. We are a lot more conservative as we look at our big projects.”

Robin LaBonte, CFO at the 79-bed York Hospital, in York, ME, is facing the same sort of reality. “Expanding your footprint costs more money, and right now it’s about being tight and using your space better--making what you have now look better and working with your existing space,” says LaBonte,.

When healthcare reform legislation was passed last March, a flurry of proposed and pending changes arrived with it. The Patient Protection and Affordable Care Act, with its “health insurance for all” axiom called for larger numbers of insured patients—thus more Medicaid admissions—which at first blush sounded like a positive and potentially profitable outcome of the law. Alas, along with the newly insured came an edict that select reimbursement rates would be cut, forcing hospitals to once again concentrate on increasing efficiency and reducing expenses.

Regardless of the need for efficiency and expense reduction, CFOs are putting some necessary projects back in their budgets—like technology and large equipment—but adding a building or a wing is still lower on the priority list. In a report released in February by L.E.K. Consulting, a moderate percentage of respondents planned to increase their purchasing in terms of facilities (38%), with the purchase of large medical devices running a close second at 37%, and small medical device purchases at 21%.

However, while healthcare financial leaders may not be pursuing these purchases in large numbers yet, the L.E.K. Consulting report also found that nearly 60% of hospital executives expected their budgets to increase this year and over the next five years, and more than 70% of hospital executives foresee expanded budgets.

“Budgets are tight, but we all know we still need to advance clinical technology and balance that with our EMR technology needs,” says LaBonte.

While the L.E.K. Consulting report may indicate a shift toward budgetary growth in the future, healthcare leaders’ collective feelings toward capital spending may stay on pause for a bit longer. In an upcoming HealthLeaders Media Intelligence Report on Capital Planning survey respondents indicated they anticipate more capital budget decreases ahead. Nearly 52% of large-size healthcare facilities (500-beds or more) and 46% of small facilities (those with 199 or fewer beds) have cited decreases to their capital budgets in the past year; though only 27% of mid-size hospitals or health systems (those with 200–499 beds) experienced decreases in the past year, and 48% reported their capital budgets have remained the same over the past year.

Declining or stagnant capital budgets aren’t just a 2011 issue, either; it’s been an ongoing situation for all healthcare facilities over the past three years. More than half (52%) of large-size healthcare providers report their budgets have been declining over that period, as did 46% of small-size providers. Additionally, 28% of their midsize peers reported capital budget declines and 30% reported their capital budgets stayed the same during that time.

Larger facilities saw the largest cuts to their capital budgets with more than 88% of large-size facilities reported budget cuts of 11% to 20%. Small and mid-size facilities fared a little better with 38% of smaller facilities and 18% of mid-size hospitals reporting cuts of 1%–10%.

Nevertheless, invariably after several years without large medical equipment purchases and capital build projects, many hospitals and health systems can no longer wait to move forward. Those that do decide proceed, however, won’t necessarily be doing so in the same vein as years past.

Bob Lavoie, who heads the New York office of L.E.K. Consulting and co-leads their MedTech Practice, says while hospital leaders are increasingly looking for more than a strong return on investment. He explains that healthcare leaders making large medical equipment purchases now will want more than a promise that the item will save time or improve processes or outcomes—they’ll want proof.

“[Healthcare leaders] will want the vendor to show them a similar 135-bed hospital that has achieved the same kind of value-based outcomes the product claims to achieve and they are hoping for,” he says. “More forward-thinking vendors will be working toward quantifying the impact in terms of hard- and soft-costs on their products. And more forward-thinking hospitals are going to expect some risk-sharing if a product that touts certain efficiencies doesn’t produce.”

Whether vendors step up to provide more than just promises remains to be seen. However, at least for now, both the HealthLeaders and L.E.K. Consulting reports seem to indicate that 2011 won’t be a big year for capital spending—which means I’ll be revisiting this topic again in 2012 to see what the future holds for hospitals.

Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
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