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Recognizing the unrelenting demand for capital, finance leaders have made their capital planning processes more rigorous, more strategic, and in some cases, more centralized.
Capital planning for health systems has evolved beyond a process used to add a bed tower or to green-light a physician's pet project. In recent years, health systems' capital planning has become increasingly complex, particularly as these organizations aim to make more strategic investments across the enterprise. And as the demand for capital continues to outstrip access to capital, health system finance leaders often need to weigh the merits of funding one strategic project versus another.
These finance leaders therefore have developed new processes aimed at making their organizations' capital planning more rigorous and effective. The following insights were offered by four finance leaders at mid-sized to large hospitals who spoke at HFMA's 2016 Capital Conference in Chicago.
Allocating Capital for the Greater Good
Two years ago, Gaithersburg, Md.-based Adventist HealthCare, which operates four hospitals and other health services with $750 million in total annual operating revenue, changed how it allocates capital to its hospitals, says James G. Lee, FHFMA, FACHE, executive vice president and CFO. Today, approximately 50 percent of each hospital's earnings before interest, taxes, depreciation, and amortization (EBITDA) margin is retained by the hospital for capital projects such as replacing equipment or renovating the facility. The remaining 50 percent is directed into a systemwide pool, half of which is allocated for IT and other systemwide investments, such as urgent care. The remaining half of that pool helps improve the health system's balance sheet. Lee says.
It is a change that Lee wishes the organization had made sooner. "We had conceived the concept years ago. but we put it off because we had major investments across the system," Lee says. For example. Adventist HealthCare recently rolled out a new electronic health record (EHR). and it plans to replace a 100-year-old facility with a new $330 million hospital, slated to open in 2019. "We thought, what is the point of having this model if we have such large capital projects that don't apply?" Lee says. "But when we rolled out the model, it brought clarity to executives at each hospital."
For example, executives at one facility wanted to convert...