CFOs share key insights into their capital investment strategy

A panel of CFOs and a banking expert shared their thoughts on capital investments at Becker's Hospital Review 5th Annual CEO + CFO Roundtable on Nov. 9, 2016.

Ensuring a hospital gets the best returns on capital investment is among the most pressing issues hospitals face.

For Marilyn Tomfohrde, senior vice president and senior credit products manager at New York's Bank of America Merrill Lynch, and the banking industry, capital investment is not just about budget allocation. She shared insights into the underwriting process on capital investments.

"It's not just about the budget but the monitoring of the budget and who is involved in the process. We have discussions about the short term priorities, the long term priorities and of course the lending. We're always curious how it can all be funded," Ms. Tomfohrde said.

When banks are underwriting capital investment they consider two things: maintenance and discretionary cutbacks. For maintenance cutbacks, Ms. Tomfohrde said banks are looking to see if hospitals or healthcare organizations can keep up with the depreciation on an investment, as well as what the average age of plan is. Then they take an in-depth look at the funding for the capital expense and review the institution's finances.

Michael Allen, CFO for Peoria, Ill.-based OSF Healthcare, said a finance department always needs to get involved in the capital investment budgeting process early.

"It's a matter of dealing with the best process, and getting in front of it and giving it the best analysis that we can. We have to focus on 10 years out on our CapEx, but we have to be flexible enough to adjust that quarterly," Mr. Allen said.

Dealing with those quarterly adjustments can be tough, but by evaluating holdings and examining them through the scope of a hospital's entire portfolio, a CFO can paint a better picture of what it's spending its money on and adjust on a grand scale.

Mr. Allen also stressed the importance of making sure his hospital makes only AAA investments.

"Not all investments will have financial returns, but they have to have some benefit, and there are a lot of partners that come forward and say 'We want to do this because…' but we really can't nail down the business case for it, and it's really a point we stress around CapEx investments specifically," he said.

Small hospitals have a different take on these investments. Donald Longpre, CFO for North Ottawa Community Health System in Grand Haven, Mich., is in a unique position. Not only does Mr. Longpre represent a small hospital, but he represents a small hospital in a certificate-of-need state. When he is considering making a capital investment, he has to make sure his hospital's money is going towards a device that'll hold its value between CON cycles.

"A lot of people don't agree with me but we tend to look at leasing high tech items to transfer the risk to the leasing company on a device," Mr. Longpre said.

Devices and technological infrastructure have "gobbled up" a large part of Zachary, La.-based Lane Regional Medical Center CFO Mark Anderson's capital investment budget.

Lane Regional is spending $3 million a year in EHR and over the next 10 years he believes his hospital will invest more than $20 million into IT. When hospitals think of capital, he believes they often think of devices, but IT is particularly cumbersome to planning because of its short lifespan.

To address the IT pitfall, Lane Regional looks examines several factors when budgeting.

"We look at our service lines constantly. Do we have strategies we need to invest in and pour capital into?" Mr. Anderson said. "Secondly we examine the regulatory agencies to see if they're coming out with an inactive or equipment needs we need to consider?"

Although unexpected expenses arise, IT has far and away been the number one issue at his hospital, and he consistently finds himself attempting to stay ahead of the curve.

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