Hospital Capital Budgeting Practices and Their Relation to Key Hospital Characteristics: A Survey of U.S. Manager Practices

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ABSTRACT

This paper presents the results of a survey of U.S. hospital capital budgeting practices. Capital budgeting allows managers to perform cost benefit analysis on proposed long-term investment projects. For hospitals and health care systems, such analysis may help organizations fulfill their missions while remaining financially secure. This paper extends the work of previous surveys on hospital capital budgeting by Kamath and Elder (1989) and Kamath and Oberst (1992) by including small as well as large hospitals and by analyzing the relationships between capital budgeting practices and key hospital characteristics such as managed care level, Medicare level, hospital size, and membership in a multi-hospital system. A key finding of this research is that multi-hospital system membership is associated with a sophisticated quantitative approach to capital budgeting.

INTRODUCTION

Hospital capital budgeting involves a cost benefit analysis of long-term investment projects. In addition, the capital budgeting process is an integral step in implementation of the hospital's strategic plan. This is where specific projects from the strategic plan are explored and the financial forecasts are developed and analyzed. In this paper, we present an overview of capital budgeting practices in U.S. tax-exempt hospitals. This overview, based on results of a nation-wide survey of hospital chief financial officers, suggests that hospital executives operating in the most complex environments use sophisticated quantitative techniques to evaluate long-term projects.

Hospital executives in the U.S. and around the globe are responsible for facilitating the provision of efficient, high quality health care with limited resources. Decisions on longterm investments must balance the hospital mission with financial resource availability. As economies become more global, hospital managers have opportunities to study management practices and search for innovative ideas beyond the boundaries of their own country. For example, Blendon, Schoen, DesRoches, Osborn, Zapert, and Raleigh (2004) contribute to a growing literature on international health care management with a comparative survey of hospital management practices and ideas across five countries - Australia, Canada, New Zealand, United Kingdom and United States. Lin, Xirasagar, and Tang (2004) examine the relationship between health care costs and hospital ownership for hospitals in Taiwan. This paper contributes to the literature on global hospital management by describing the process of evaluating long-term investment projects in U.S. hospitals and multihospital systems. Hospital executives in the U.S. and in other countries can compare their practices to the approach described here. Such comparison may yield ideas for change and opportunities for benchmarking.

BACKGROUND ON CAPITAL BUDGETING

Finance theory states that managers of investor-owned firms can maximize firm value by accepting all projects for which the present value of the benefits is greater than the costs. For tax-exempt hospitals, however, the goal is different. Managers of tax-exempt hospitals maximize value by accepting projects that fulfill the hospital mission while maintaining liquidity and solvency (Gapenski, 1996; Wacht, 1984). These managers may accept some projects with costs that are greater than their benefits, because they contribute to fulfillment of the hospital mission. However, they must be able to quantify the financial impact and compensate with profitable projects in order to survive. Thus, a sound capital budgeting process is crucial to the long-term viability of tax-exempt hospitals and health systems. Quantitative techniques for evaluating capital budgeting projects focus mainly on estimating the value of future cash flows and assessing and adjusting for risk. These techniques are useful to managers of both tax-exempt and investor-owned hospitals.

LITERATURE REVIEW

Several previous survey studies examine hospital capital budgeting practices. …