Capital Budgeting in Healthcare Organizations
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Authors
Bull, Jason M.
Issue Date
1993
Type
Thesis
Language
en_US
Keywords
Alternative Title
Abstract
Capital budgeting has become an increasingly important aspect of
operations for the healthcare industry in recent years. Escalated
competition, coupled with significant changes in third-party payer policies,
have augmented the nee~ for healthcare organizations to place more
emphasis on long-term financial stability. Since hospitals must
continually expand services to keep up with changing technology and
demand, this stability is accomplished primarily through the purchase of
new equipment, renovations of old equipment, or the development of
new service programs. Such asset acquisition yields future cash inflows,
so they represent a substantial form of investment for hospitals. Thus,
effective budgeting for capital expansion has a substantial effect on the
long-term financial status of healthcare institutions.
This Work Experience Senior Individualized Project (WESIP)
involved work on a capital budgeting project for Borgess Medical Center
(BMC). BMC is a 336 bed medical facility located in Kalamazoo, Michigan.
It is a not-for-profit healthcare institution, and the core of the Borgess
Health Alliance, a group of affiliated area hospitals.
The finance committee of BMC wanted to develop a Return on
Investment (ROI) model that it could use to consistently evaluate capital
requests. The model would be implemented for those requests subject to
evaluation- that is, any project not required of the hospital by a change in
legislation, and any project over $150,000. Prior to this, the hospital did
not have a specific model that was used for such evaluation. Departments
often conducted individual assessments of their proposals, using different
methods of evaluation. Additionally, each department used various
sources of information to carry out their ROI computations. This system
resulted in inconsistent and sometimes inaccurate evaluation of a
proposed project's investment value.
The WESIP project was an attempt to eliminate such inconsistency,
and establish a standard capital budgeting system to be utilized for all
pertinent requests. It was my specific task to design a spreadsheet on the
Lotus 123 software, that was capable of performing ROI computations such
as Net Present Value (NPV) and Internal Rate of Return (IRR). It was also
necessary that the model be able to incorporate special modifications into
its calculations due to some of the characteristics specific to the healthcare
industry that will be discussed subsequently. The program was to be
automated, so that a user need not fully understand Lotus to operate it.
Finally, the design of a standardized data form, containing the input
information necessary to run the program, was required so that the
information provided by departments about their requests was consistent.
This report will reflect information gathered while researching the
topic of capital budgeting in healthcare, as well as knowledge gained while
constructing the ROI model. Although research was initially important to
the study, much of the information came through direct work on the
model itself. Most of the research contained only the key principles (or
slight variations) of capital budgeting. However, I found that many
modifications to the traditional theories were necessary to apply capital
budgeting to the specific industry of healthcare.
The Research section of this study will briefly discuss the history
leading up to the current situation in the industry. It will deal primarily,
though, with some of the modifications involved in improving the
quantitative accuracy of capital budgeting in healthcare. Those factors that
will be presented include discounted cash flows techniques, the cost of
capital, new revenue reimbursement, cost reduction reimbursement and
additional, non-quantitative considerations. The Materials section of this
study will present the model, and briefly explain how it functions. This
will be followed by an example of the model applied to a past capital
request.to demonstrate how it improves accuracy. Finally, the Integration
section will contain my conclusions and personal reflections gained
through work on this WESIP.
Description
ii, 67 p.
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U.S. copyright laws protect this material. Commercial use or distribution of this material is not permitted without prior written permission of the copyright holder.