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The importance of capital planning is increasing as the healthcare industry moves toward value-based care. Replacing unwieldy and inflexible traditional capital planning processes with a rolling capital planning approach can result in: Greater standardization, facilitating better strategic planning across the whole system. Reduced labor intensity in the planning and budgeting process. Reduced costs through being able to plan better for replacement purchases and take advantage of group purchasing and bundling opportunities. Increased transparency in the decision-making process.

At a time when, with less capital funding available for purchasing high value hospital equipment, NHS board-level and financial personnel may be tempted to sign off purchase of equipment that, while meeting minimum HTM and other standards, may offer compromised performance, especially over time, two key sales and product personnel at leading medical gas equipment supplier, BeaconMedaes, told HEJ editor Jonathan Baillie that "investing a little more" initially would reap considerable longer-term dividends, in payback, lifespan, and patient safety terms.

In part 1 of this series about problems of financing capital goods the multiple and partly diametric economic effects of financing instruments were presented using the leasing procedure as an example. The result indicated that due to the complexity of these effects the choice of a specific financing instrument requires an individual consideration. Therefore, part 2 of the series introduces the method of dynamic capital budgeting which allows the instruments discussed in part 1 to be compared with each other and helps to evaluate their economic benefits. More precisely this paper focuses on a comparative analysis of the most common alternatives, leasing, credit financing and investment financing by the state. In this context, after having identified the total costs of ownership of anesthesia devices, the final asset values of the three financing instruments can be compared with each other using the method of dynamic capital budgeting. In contrast to the prevailing opinion, the results show that from a purely fiscal perspective leasing anesthesia devices is the most expensive alternative. Given the fact that no financial support is available from the state, the option of credit financing turns out to be the most preferable alternative from a relatively limited pool of possibilities. However, it still remains to be answered whether credit financing can defend this position against further, innovative forms of debt financing (e.g., factoring, asset-backed securities, hedge funds, mezzanine capital, etc.).

Background: The return on investment for information technology (IT) has been the subject of much debate throughout the history of management information systems research. Often referred to as the productivity paradox, increased IT investments have not been consistently associated with increased productivity. Understanding individual IT factors that directly contribute to business value should provide insight into the productivity paradox., Purpose: The effects of 3 different firm-level IT characteristics on financial performance in the health care industry are studied. Specifically, the effects of IT budget, IT outsourcing, and the relative number of IT personnel on firm-level financial performance are analyzed., Methods: Regression analysis of archival survey data for 914 Integrated Healthcare Delivery Systems is performed., Results: IT budgetary expenditures and the number of IT services outsourced are associated with increases in the profitability of Integrated Healthcare Delivery Systems, whereas increases in IT personnel are not significantly associated with increased profitability. Each one tenth of a percentage increase in IT expenditures is associated with approximately $100,000 in increased profit, and each additional IT service outsourced is associated with approximately $950,000 in increased profit for an average-sized Integrated Healthcare Delivery System., Implications: To increase profitability, IT administrators should increase IT budgetary expenditures along with IT outsourcing levels. IT administrators in the health care industry can use such findings during budgeting cycles to justify increased investments in IT personnel as being budget neutral while increasing organizational capacity.

Background: Adoption rates for electronic health records (EHRs) have been slow, despite growing enthusiasm. Cost is a frequently cited obstacle to implementing an EHR. The body of literature citing a positive return on investment is largely anecdotal and infrequently published in peer-reviewed journals., Study Design: Five ambulatory offices, with a total of 28 providers, within the University of Rochester Medical Center, participated in a pilot project using an EHR to document the return on investment. A staged implementation of the Touchworks EHR (Allscripts) was undertaken from November 2003 to March 2004. Measurements of key financial indicators were made in the third calendar quarters of 2003 and 2005. These indicators included chart pulls, new chart creation, filing time, support staff salary, and transcription costs. In addition, patient cycle time, evaluation and management codes billed, and days in accounts receivable were evaluated to assess impact on office efficiency and billing. The savings realized were compared with the costs of the first 2 years of EHR use to determine return on investment., Results: Total annual savings were $393,662 ($14,055 per provider). Total capital cost was $484,577. First-year operating expenses were $24,539. Total expenses for the first year were $509,539 ($18,182 per provider). Ongoing annual cost for subsequent years is $114,016 ($4,072 per provider). So, initial costs were recaptured within 16 months, with ongoing annual savings of $9,983 per provider., Conclusions: An EHR can rapidly demonstrate a positive return on investment when implemented in ambulatory offices associated with a university medical center, with a neutral impact on efficiency and billing.

The utilization of interest rate derivative instruments in US for-profit companies has grown exponentially since the early 1980s. International Swaps and Derivatives Association, Inc. (ISDA), reported that the amount of outstanding standard swaps grew by 25 percent during the first six months of 2003. The growth rate of all interest rate derivatives, which includes single-currency interest rate swaps, cross-currency interest rate swaps, and interest rate options, grew by 24 percent during the same period. The total outstanding amount of interest rate derivatives now totals $123.9 trillion compared to $99.9 trillion at the end of 2002 (Dodd, 2003). This explosion in usage is a testament to the efficacy and flexibility of the instruments and the increased appreciation by financial managers of the importance of financial risk management in a volatile interest rate environment.

With many types of financial investments, the hospital financial community has long-established, and relatively straightforward, practices for projecting and measuring returns. Not so with health IT investments, however, where returns can be difficult to identify and quantify and even harder to track. Yet the success of such an investment depends on measuring the returns--whether they be tangible or intangible, short-term or long-term--because effectively tracking returns is the only way to be sure of achieving them.

Three out of four acquisitions fail; they destroy wealth for the buyer's shareholders, who end up worse off than they would have been had the deal not been done. But it doesn't have to be that way, argue the authors. In evaluating acquisitions, companies must look beyond the lure of profits the income statement promises and examine the balance sheet, where the company keeps track of capital. It's ignoring the balance sheet that causes so many acquisitions to destroy shareholders' wealth. Unfortunately, most executives focus only on sales and profits going up, never realizing that they've put in motion a plan to destroy their company's true profitability--its return on invested capital. M&A, like other aspects of running a company, works best when seen as a way to create shareholder value through customers. Some deals are sought to help create better value propositions for the business or to better execute current strategies--or to block competitors from doing these things. But most deals are about customers and should start with an analysis of customer profitability. Some customers are deliciously profitable; others are dismal money losers. The better an acquirer understands the profitability of its own customers, the better positioned it will be to perform such analyses on other companies. In this article, the authors show that customer profitability varies far more dramatically than most managers suspect. They also describe how to measure the profitability of customers. By understanding the economics of customer profitability, companies can avoid making deals that hurt their shareholders, they can identify surprising deals that do create wealth, and they can salvage deals that would otherwise be losers.

Providers investing in a clinical information technology (IT) system should consider their organization's specific needs and those of the surrounding community. Assessments of clinical IT value should take into account factors beyond cost savings. Providers should be aware of related tangible benefits, such as reductions in length of stay and enhanced administrative and clinical services. The capability of a clinical IT system to help prevent medical errors and improve operational efficiency should weight heavily during a provider's assessment of whether to invest in the system.

Not-for-profit hospitals benefit from special tax rules that allow state authorities to issue tax-exempt bonds on their behalf, which may affect their investment and financing choices. Hospitals may respond by increasing their investment in physical assets; however, they may also engage in tax arbitrage by using the tax-exempt debt while maintaining endowment assets. The paper combines data from tax (information) returns and the annual survey of hospitals by the American Hospital Association for 1993-1996. Overall, the results are consistent with substantial tax planning by not-for-profit hospitals. Of the US$ 55.9 billion in tax-exempt liabilities of hospitals in 1996, as much as US$ 32.6 billion could have been eliminated if hospitals spent their endowments instead of borrowing. Furthermore, controlling for hospital size (in terms of revenues and operating assets), endowment assets are associated with a higher ratio of tax-exempt (or total) debt to operating assets. In contrast, endowment assets are not related to taxable debt suggesting that the effects of the endowment on borrowing are motivated by tax incentives. Investment and endowment accumulation regressions suggest that increases in debt increase both physical investment and endowment accumulation but these effects are concentrated among cash-rich hospitals for which the effects on endowment accumulation effects are larger than the effects on physical investment.

Investment in information technology (IT) is costly, but necessary to enable healthcare organizations to improve their infrastructure and achieve other improvement initiatives. Such an investment is even more costly, however, if the technology does not appropriately enable organizations to perform business processes that help them accomplish their mission of providing safe, high-quality care cost-effectively. Before committing to a costly IT investment, healthcare organizations should implement a decision-making process that can help them choose, implement, and use technology that will provide sustained business value. A seven-step decision-making process that can help healthcare organizations achieve this result involves performing a gap analysis, assessing and aligning organizational goals, establishing distributed accountability, identifying linked organizational-change initiatives, determining measurement methods, establishing appropriate teams to ensure systems are integrated with multidisciplinary improvement methods, and developing a plan to accelerate adoption of the IT product.

A study of hospitals' best practices regarding capital investments in information systems indicates that (1) the process may need more input from IT professionals to cover the technical aspects of planning; (2) the most successful projects are highly aligned with the organization's overall business strategy; and (3) disappointments could be avoided by conducting a better analysis of the organization and its technology, evaluation of past IS performance, and assessment of IS staff capabilities.

If you want to be successful, you need to spend money on improvements. As soon as you anticipate the need for a capital investment, start planning and exploring your financial opportunities.

Health care executives are increasingly frustrated by Information Technology (IT). Although our industry is often accused of underinvesting in technology (hospitals average 2-3 percent of their costs in IT, compared to other industry's 8-10 percent), when IT investments are made, they fail to reflect demonstrable return to the bottom line. Yet the effective deployment of technology is so critical to the success of the organization and can in itself cause the failure of a health care system. While being forced to invest significant amounts of resources in the past two years preparing for Y2K, health care organizations have come under increasing financial pressures due to other industry developments.

For the future survival of the rural hospitals in the U.S., there is a need to make sound financial decisions. The Activity Based Cost Accounting (ABC) provides more accurate and detailed cost information to make an informed capital investment decision taking into consideration all the costs and revenue reimbursement from third party payors. The paper analyzes, evaluates and compares two scenarios of acquiring capital equipment and attempts to show the importance of utilizing the ABC method in making a sound financial decision as compared to the traditional cost method.

Many healthcare organizations treat their real estate as liabilities rather than assets and overlook opportunities to generate significant additional revenue and reduce costs. An Ernst & Young Study found that to maximize the return on investment in their real-estate holdings, healthcare organizations need to include property management in their strategic plan, manage construction and expansion effectively, adapt and reuse their facilities where possible, and pursue innovative real-estate strategies. Managing real-estate assets effectively can free up capital to use for other core business needs.

An analysis of primary care groups' investment plans revealed their main concerns were premises, IT and workforce issues. About a quarter of plans did not address out-of-hours care or community nursing. The plans lacked detail of the process guiding resource allocation. The plans showed little indication of services being organised around the priorities of the local health improvement programme.

The real value of PACS is not realized until widespread adoption exists among physicians other than interpreting radiologists. Referring physicians at the office level, in the operating room and in other departments must be willing to embrace the reading of images on monitors. That takes time. The payoff for a PACS system is therefore not realized until sometime in the future. Given the huge up-front capital expenditure required of PACS solutions, it is no wonder that the decision has historically been a difficult one to make. Enter the application service provider (ASP). The marriage of the ASP model to PACS seems to be one of the true "killer apps" currently available in the healthcare technology space. An ASP can host and maintain the software inherent in PACS solutions. Images are centrally archived over the short-, medium-, and long-term timeframe, utilizing state-of-art data management facilities. Some ASPs also provide the necessary bandwidth to office sites and the small amount of hardware that is required onsite, such as viewing stations or monitors. Costs for Internet-based image management under the ASP model rely on a pay-as-you-go formula, which may include all software, support, required hardware and bandwidth as part of the service. There may be a minor up-front fee for installation. The ASP pricing model eliminates the huge gamble an organization takes on "big iron" PACS purchases. Those benefits rely on the first rule of finance: a dollar today is worth more than a dollar tomorrow. PACS and ASPs were made for one another. Because the financial benefits of PACS are realized over time, the timing of cash flows is extremely important. Other benefits inherent in the ASP model such as scalability, diminished need for IT personnel, software version integrity and better pricing because of economies of scale are attractive also.

As the healthcare market continues to evolve, technology will play an increasingly important role in an integrated delivery system's ability to provide high-quality, cost-effective care. Healthcare leaders must be proactive and forward thinking about their technology investments. The financial investment for technology innovation can be significant. Therefore, it is important that healthcare executives deliberately design the role of technology and develop a consistent method for evaluating, identifying, and prioritizing technology investments. The article begins by describing technology's role in a healthcare organization as a window to the organization, a key driver of business strategy, and a high-performance enabler, and it develops a seven-step process for building a business case to ensure that an organization's technology investments are wise, well-reasoned, and will provide value to its customers. In addition, the article discusses the importance of combining people and process reengineering with new technology to exponentially increase the value to an organization. Healthcare leaders must understand the multiple roles of technology and consistently develop a business case when making technology investment decisions. Organizations driven by such an understanding will have a robust infrastructure of enabling technology designed to integrate people and process elements with technology to achieve the goals and initiatives of the organization. These organizations will lead the healthcare industry into the next millennium.

Healthcare providers faced with increasing pressure to provide high-quality, cost-effective care have implemented clinical decision-support programs to drive the appropriate process improvement activities needed to achieve successful care outcomes. Each of these activities requires the commitment of the necessary technology and human resources. To measure the return on investment (ROI) of decision-support activities, providers need to establish a methodology for capturing the costs and benefits of implementing decision-support-directed process-improvement activities.

Healthcare providers can get the most from their real estate investments if they manage them strategically rather than view them as a cost of doing business. Organizations that develop strategic real estate plans can optimize the cost-effectiveness of their assets, reduce operating costs, and create cash through disposition strategies. The cost-effectiveness of assets can be optimized by using off-balance-sheet financing structures, such as outright sale, sale-lease-back arrangements, synthetic leases, and beneficial occupancy agreements. Opportunities for cost reduction can be found by conducting operations, administrative, and maintenance reviews and cost-segregation studies. Cost-reduction efforts also should focus on ensuring space is used in the most productive manner possible and that the organization pays no more than the minimum required property tax. Disposition strategies should begin with inventorying real estate assets to identify surplus assets. Such assets then can be moved off the balance sheet or converted into commercial or public uses.

As providers consider creating health plans to offer services to Medicare beneficiaries, some are discovering that the required investment in information systems could make profitability tough to achieve.

Traditionally, economic evaluations in terms of cost-effectiveness analysis are based, explicitly or implicitly, on the assumption of constant returns to scale. This assumption has been criticized in the literature and the role of cost-effectiveness as a tool for decision making has been questioned. In this paper we analyze the case of increasing returns to scale due to fixed capital costs. Cost-effectiveness analysis is regarded as a tool for estimating a cost function. To this cost function two types of decision rules can be applied, the budget approach and the constant price approach. It is shown that in the presence of fixed capital costs the application of these two decision rules to a specific patient group will give different results. The budget approach may lead to suboptimizations, while using the price as a decision rule will give optimal solutions. With fixed capital costs and when an investment can be used for treating several patient groups, these groups are no longer independent. Therefore the cost-effectiveness analysis has to be performed simultaneously for all patient groups that are potential users of the investment.

At the heart of the traditional approach to strategy lies the assumption that by applying a set of powerful analytic tools, executives can predict the future of any business accurately enough to allow them to choose a clear strategic direction. But what happens when the environment is so uncertain that no amount of analysis will allow us to predict the future? What makes for a good strategy in highly uncertain business environments? The authors, consultants at McKinsey & Company, argue that uncertainty requires a new way of thinking about strategy. All too often, they say, executives take a binary view: either they underestimate uncertainty to come up with the forecasts required by their companies' planning or capital-budging processes, or they overestimate it, abandon all analysis, and go with their gut instinct. The authors outline a new approach that begins by making a crucial distinction among four discrete levels of uncertainty that any company might face. They then explain how a set of generic strategies--shaping the market, adapting to it, or reserving the right to play at a later time--can be used in each of the four levels. And they illustrate how these strategies can be implemented through a combination of three basic types of actions: big bets, options, and no-regrets moves. The framework can help managers determine which analytic tools can inform decision making under uncertainty--and which cannot. At a broader level, it offers executives a discipline for thinking rigorously and systematically about uncertainty and its implications for strategy.