Optimizing Capital Expenditures:
How Leading Providers Are Spending Wisely
In the era of value-based care, hospital boards and C-suite leaders are evaluating all key areas of enterprise-level organizational performance, including patient satisfaction, cost, quality and risk. These factors are top of mind for C-suite leaders and hospital boards that are evaluating multi-million-dollar investments across the continuum of care. More than ever, leaders are under significant pressure to ensure that these decisions will deliver on quality promises and deliver care in an ever-changing environment.
Chris Dunkerley, CFO at TRIMEDX, sat down with four leading healthcare executives at Modern Healthcare’s 2019 Leadership Symposium to discuss their best practices and challenges in evaluating and facilitating enterprise capital investments. This discussion explored how leaders are thinking about their two most important assets — workforce and technology — and unlocking return on their investments.
CHRIS DUNKERLEY: What is your organization’s process for capital planning? How do you decide where you’re going to spend your money on capital investments?
DEANN THELEN: We formed a capital budget committee two years ago that meets monthly. We developed a twostep process that is required for anything costing over $250,000. The request comes to this committee with safety and quality considerations, and is weighed against our overall financial status, long-term capital plan and strategic plan. If it’s approved in phase one, we get final pricing and other details, and the request comes back to the committee a second time to ensure it’s still financially viable to purchase. Finally, the request goes to our board of trustees. The whole process typically takes two to three months if the request is already a part of our capital plan.
DAVID KEITH: It’s helpful to get employee and physician perspectives. Our managers and our administrators see the capital process as an opportunity to move their initiatives forward. Because capital is so precious, we cannot afford to make any capital mistakes. That’s why our process takes a bit longer. We do have some interesting criteria — 50 percent of our capital has to
be tied to the bottom line because that’s what fuels the capital that isn’t necessarily tied to the bottom line. That creates some interesting dialogue about what that means exactly… we value anything that produces revenue, but we also value anything that reduces cost of the expected quality and customer service.
DONNA LYNNE: At the highest level, we do an annual budget preparation which we do both on the capital side and on the expense side. That’s a five-year projection on a very high level on major projects. We then get down into the individual departments, and using the same discipline ask, “What’s this expenditure going to do for us? Is it going to improve the quality of the care? Is it going to improve service? Is it going to allow us to expand in other areas?” By looking at capital expenditures by department, we can take a look at financial risk, as some departments are more financially successful. Obviously, we have to assess the risk that’s involved in spending capital in an area where perhaps their margin isn’t what we want it to be.
PAMELA SUTTON-WALLACE: At the University of Virginia, we have a similar process. For major projects which we consider that are greater than $5 million, including real estate, major renovations and construction, purchases are approved by our university board in addition to our health system board. The capital review process is a multiyear review, so we’re always keeping big projects on the radar and making sure everyone understands the strategic need and timeline. We also consider long-term replacement of major equipment and technology. That involves making hard decisions about whether we’re going to extend something beyond the typical, useful life.
CD: How do you ensure that your organization is optimizing ROI for your capital purchases once they are implemented? What we’re seeing more and more is the need to understand the utilization of assets, as well as upkeep costs.
DT: ROI can be difficult to track — if you think about strategic planning and what you’re trying to accomplish as a healthcare system, it’s often things that don’t have clear ROI, but rather are soft dollars.
An example of clear ROI would be robotic purchases. When we make a capital purchase of equipment, we expect utilization. We have three robots in our main OR and keeping up with new technologies is challenging. We have a robotics committee that includes many of the equipment users, and we track utilization of each one of our robots. It helps when the request comes in for a new robot and we can use our data to show utilization by device. It makes the response cleaner when you have to say, “I don’t think we need a new one at this time.”
DL: I’m not sure if there’s a good process to demonstrate what level of utilization is a success. When you’re making that decision, whether it’s investing in a new EMR or an equipment replacement, you’d like to have data analytics to justify the purchase, but sometimes you just can’t put your hands around it. That’s especially true with telehealth and software. Sometimes it’s about creating a competitive advantage.
DK: To your point, most of these have business plans that go with them as well as pro forma agreements and analytics. But if you have a business plan, even if you can’t get to the ROI, you are making commitments based on strategic initiatives. You have to look back and say, “Did it absolutely enhance our ability to recruit particular physicians? Did it better engage our workforce? Did we see a reduction in nurses leaving the organization?” You don’t do that for everything, but your big capital outlays must have that.
PSW: I don’t think you can underestimate the operating expense that’s going along with these capital expenses, especially the service agreements and license fees associated with software. Quite frankly, we are more likely to defer a capital decision because of the additional
“ROI can be difficult to track — if you think about strategic planning and what you’re trying to accomplish as a healthcare system, it’s often things that don’t have clear ROI, but rather are soft dollars.” Deann Thelen | CEO Jackson-Madison County General Hospital
operating expenses, including specialized staffing and infrastructure — such as storage solutions and interfaces — required to use and maintain these systems effectively.
CD: Is utilization a metaphor for the revenue a piece of equipment creates? For example, you could be using something 80% of the time and not have as much revenue because the procedures aren’t as expensive as something that’s only being used 40% of the time. Is utilization important or is it about the dollars that you get back?
PSW: It’s both. An MR-linac (an MR-guided linear accelerator) is a good example. You may use that 200 times a year — the utilization’s probably low on such a specialized machine. But if you knew going into the business plan that the annual utilization is about 200 times per year and there’s a high financial ROI, your expectation is that it’s going to meet the ROI of the business plan. But, you may have to make a hard decision that you’ve got a CT scanner that needs repairs, or you need a second one. That’s going to get a lot more use than the MR-linac, but with a lower ROI. You have to weigh both factors.
DK: In my mind, it’s not just having a business plan but it’s also keeping the plan in front of the service line teams, so that they understand the issues that they need to hit on to be successful and the metrics that they’re being held to. That’s especially important in cardiac and orthopedic. I think it helps you when you’re having that conversation about utilization, revenue streams and cost structure.
DT: Honestly, I think it’s about timing and even more about pressure on vendors. Our vendors have to come to the table and be better partners with us. If they’re going to claim that their device reduces blood loss, infection rates and other indicators, then they need to put their money where their mouth is, so to speak. I ask vendors to go at risk for the very benefits they claim our hospital will gain. That could be things like replacing product or supplies, or even offering refunds if there is a failure.
CD: It amazes me. I’ve seen sites where people have been offered donations of great equipment, but they can’t afford the ongoing maintenance that goes with it, so they turn it down. When requests do get declined, how do you explain your decisions to the stakeholders and have them feel that they’ve been given a fair shake?
PSW: I think you must have a strong and vetted strategic plan. One must be transparent and explain, “Here are the decisions we made, and this is why.” People may not agree, but they at least acknowledge that decisions are consistent with the strategic plan.
DL: You’re also forced to deal with interdepartmental issues regarding what departments get resources and those that don’t. While we are fact-based, not everything is black and white.
DK: I have worked with systems where we automated the system so that we’re getting everybody engaged, taking some of the emotion out of it. It’s not easily done. You
“I think you must have a strong and
vetted strategic plan. One must be transparent and explain, “here are the decisions we made, and this is why.” Pamela Sutton-Wallace | CEO University of Virginia Medical Center
have to develop criteria on which to build the automated system so people can score purchases.
DT: We have physicians at the table helping us with capital planning. That way, it’s not a surprise when things shift financially, which happens all the time. Last June, we acquired three hospitals, and that came at us rather quickly. Those unexpected needs change your whole capital planning process. Not all of the decisions are easy for all stakeholders to understand, but including them and being transparent about needed adjustments mid-year really helps with that conversation.
CD: How do you handle urgent, unexpected capital needs?
DL: There are opportunistic things that happen that you couldn’t build into your planning process. That should be acceptable, as long as you make the business case on why it is important and urgent. If you’ve got some other expenditure that was top of line, you may have to put it back into the queue for the next year. Communication is important — you have to let stakeholders know that it became a lower priority because of limitations on spending.
DK: As best we can, we don’t allocate all our capital. We know things are going to break, so we don’t allocate 100% of our strategic capital for that very reason. Some might say, “Well does it get reallocated if you don’t use it?” The answer’s no. We put that back into the budget and we go forward to the next year.
DT: We budget contingency funds to help with the unexpected. We also review our capital plan and reprioritize throughout the year as things change. We really try to use our annual allocation and readjust as much as possible and leave contingency for true emergency needs.
PSW: That’s the rigor of keeping a good inventory and knowing what’s scheduled for replacement, but I do think it helps to have some funds set aside for urgent situations. It doesn’t necessarily help with significant opportunistic purchases, renovations or acquisitions. But, it does buffer against the quality and safety emergencies that occur unexpectedly. Without such an emergency pool, you must make hard trade-offs with planned allocations.
“We know things are going to break, so we don’t allocate 100% of our strategic capital for that very reason.” David Keith | President and CEO McAlester Regional Health Center