3 Ways Hospitals Can Maximize Their Capital Expenditures

Quick hypothetical: Your hospital or health system just completed its major capital initiative, raising hundreds of millions of dollars, perhaps even billions. The plan is to spend those funds strategically over the next five years across a spectrum of needed projects. With a larger set of potential projects than the budget will allow, where should a hospital or health system allocate that money to generate the biggest bang for its buck?

That single question will undoubtedly lead to more. "What is the optimal approach to getting the maximum value out of a network's physical footprint from a location standpoint?" says Matt Montgomery, senior vice president and head of the healthcare division at Buxton, a consumer analytics firm. "And in a related sense, how do you program those facilities? What services should be provided in what locations based on relevant factors (market demand, competition, etc.)?"

Health information technology requirements, acquisition strategies, building new outpatient facilities, establishing new service lines — a hospital can be pulled in several different directions to spend the capital, and before the management teams knows it, the funds are gone and are invested in a slapdash array of projects.

Maximizing capital expenditures is a tough task for any hospital executive team, especially today as every spent penny is expected to lead to better healthcare and better long-term financial health. Here, Mr. Montgomery of Buxton explains three specific strategies that hospital CFOs and the financial management team should utilize if they want to get the most out of their capital campaigns.

1. Gain market share through implementation of an ambulatory strategy.
Mr. Montgomery works with several large hospitals and health systems, and he says one capital spending trend is vividly clear: Invest in the development of a robust ambulatory network. This includes everything from primary care practices and urgent care centers to ambulatory surgery centers and other specialty-oriented facilities.

"Healthcare reform and other competitive factors are forcing healthcare executives to employ a retail-like approach," Mr. Montgomery says. "Hospitals need to be convenient for the populations that they are ultimately tasked with serving."

Acquiring or building new ambulatory facilities is a crucial strategic decision for every hospital.2. Decide between acquisitions and new developments. Once providers know they need to invest capital in their ambulatory network, Mr. Montgomery says executives will encounter a crucial fork in the road: Should they hop on the consolidation bandwagon and acquire existing facilities into their larger system? Or should executives build structures from scratch using a de novo strategy?

Acquiring existing ambulatory facilities and physician practices is incredibly popular right now among hospitals, as the past two years have recorded some of the highest merger and acquisition activity since the early 1990s. Acquisitions also could be cheaper than building new facilities from the ground up. However, building from scratch could help a hospital or health system lower its average age of plant and provide the community with the most up-to-date healthcare facility. Mr. Montgomery says every hospital should look at their ambulatory and physician strategy within their specific market and use data to see what would be a more cost-effective solution now — and for the future.

"As a CFO, you want to know from an acquisition perspective: Where is the greatest value in terms of investments we are going to make?" Mr. Montgomery says. "Then you have to take those resources and physicians by specialty, and position them throughout the market."

Just like a bell curve, there are capital spending targets that will benefit a hospital's fiscal strategy. It's only a matter of finding the right data and knowing the right questions to ask. "It's a function of knowing what business questions a healthcare provider has and then developing a model that will allow them to have confidence in identifying those 'sweet spots' in the market that are prime for placement of their new locations," Mr. Montgomery says.

3. Use analytics to find optimal placement of physician practices. When hospitals begin their capital ambulatory projects and decide to either acquire or build new facilities, management can then focus on more basic elements, such as practice location.

Revenue, referrals and the general healthcare paradigm is driven by the physician and his or her ability to deliver high-quality care. However, hospitals that have the right physicians need to know where they should be physically located within their market to make their investments worthwhile.

"For example, let's say there is a physician practice that has 2,000 annual visits," Mr. Montgomery says. "But maybe you look five minutes to the north, and there's a greater density of the right types of patients. You could see double or triple the visits by utilizing science to see where the gaps are in the market. That five-minute difference can make all the difference in the world."

"For an industry that leverages science in everything they do in terms of care, more can be done to leverage science in support of these market planning decisions," Mr. Montgomery adds. "By leveraging a data-driven approach, the science serves as a due diligence function that enables executives to know the risks, or potential risks, of allocating capital toward these various decisions."

More Articles on Hospital Capital:

Hospital and Health System Strategy in 2012: 6 Key Initiatives

5 Observations on the State of Hospital Credit Markets

Financial Fitness: A Well-Rounded Credit Profile Improves Access to Capital

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