Balanced Budgeting

Corporate-level planning can eliminate the political and emotional elements of capital budgeting.
By David A. Natale

Capital asset planning is an essential part of the IDN capital budgeting process. The way it is carried out, however, is as varied as the number of definitions that are applied to it.

To some, asset planning is as simple as fielding requests for new or replacement capital equipment and approving those submitted by the loudest, most influential, or most well-connected members of the hospital or medical staff. To others, however, it means consistently applying pre-defined criteria to identify and prioritize the organization’s needs over an extended period of time.

Clearly, the latter approach enhances the credibility and overall acceptance of the budget planning process. It also increases the likelihood that an IDN’s capital dollars will be properly allocated and its capital assets deployed in a manner consistent with its mission. It is particularly powerful when applied in centrally to a network of hospitals or other healthcare delivery venues.

Elements of planning
Many equipment planners begin the process by assessing their organization’s current technology in comparison to that of others. They collect most of this comparative intelligence through professional affiliations, peer-reviewed journals and networking with peers. By using these channels, they can determine whether or not the technology they own allows them to provide current standards of care to their patients.

However, more definitive comparative tools do exist. The following are five assessment criteria that IDNs can use to determine and prioritize capital replacement needs.

  • Age. Age is the most common determinant of when to replace a capital asset. Life expectancies vary, however, depending on the asset type. Design (mechanical vs. electronic), use (stationary vs. portable), frequency of use and other factors influence the level of “wear and tear” on an asset, which, in turn, affects its life expectancy. However, given the rapid rate of advances in the medical device industry, the life expectancy of a device tends to be driven more by clinical and/or technical obsolescence than by physical deterioration.
  • Clinical/technical obsolescence. As in the computer industry, advances in medical technology often drive the need for change far more than any signs of “old age.” In radiology, for example, fully functional CT scanners are routinely replaced only because they lack the latest advancements in data acquisition technology — not because they don’t perform as capably as they did when originally installed. Higher clinical expectations and accepted standards of care play significant roles in determining replacement cycles of different types of assets. For example, a 5-year-old CT scanner is much more likely to be replaced than a 15-year-old steam sterilizer. For this reason, contracting professionals should thoroughly understand the trends and developments in the medical device industry when evaluating requests for new or replacement capital equipment.
  • Demand-driven utilization. Another critical determinant of need is how frequently an asset is used. Devices that are used excessively not only deteriorate faster, but they also produce patient backlogs, physician dissatisfaction, and loss of revenue (if demand exceeds capacity). A knee-jerk reaction to such a situation may be to add pieces of equipment or to replace existing ones with faster-throughput devices. However, the IDN should consider other non-technology-related factors before taking this route, including number of staff and/or their training levels, workflow design, environment of care, scheduling practices and patient management. How about equipment that is seldom used? Capital equipment planners might conclude that replacing such equipment is unnecessary. However, they should carefully assess the reasons for low utilization before doing so. Is the equipment still acceptable to referring physicians? Would replacing it with a new or better piece of equipment result in increased patient referrals, or would it have no effect because other alternatives to its use now exist and are actually preferred?
  • Serviceability. Service issues cannot be ignored when attempting to identify and prioritize capital asset replacement needs. Equipment that cannot be adequately supported will experience downtime and high repair bills. As a result, replacing it will be a priority. The most obvious example is the factory “lemon,” which begins to show its true colors after its warranty has expired. Another common example is a platform discontinued by the manufacturer; without service support or parts, the IDN must either find alternate sources for support or upgrade to a more current platform.
  • Criticality. Another criterion is an asset’s criticality, which can be gauged by the impact its failure would have on the IDN. The impact can be clinical, resulting in patient harm or possible death; or financial, resulting in loss of revenue or additional expense. An example of the former is a life-sustaining device, such as a cardiac defibrillator or heart-lung machine; an example of the latter is a high-use, revenue-generating device, such as a CT or MRI scanner. Compounding the criticality would be the absence of a suitable back-up to turn to in the event of catastrophic failure.

To consider these five criteria, planners must be aware of national trends and practices. In fact, it would be irresponsible to designate a device as “old,” “obsolete,” “over-used” or “unreliable” without applying external benchmarks. Such benchmarks can be obtained from a variety of sources, but are best applied by those with access to data from many organizations and institutions. Equipment planners in large IDNs are well suited to apply this concept internally, because they can use data from each network institution for comparative benchmarking.

Having defined a broad sequence of priorities using these criteria, equipment planners can refine this sequence using internally focused criteria, including the following:

  • New program development objectives. Equipment planners should factor in plans to add new services in areas not previously offered, especially if they involve new construction. In the capital budget, they must include near-term technologies needed to support the planned services. At the same time, they must recognize longer-term implementation time frames, and factor them into the replacement decision-making process to avoid duplication or overspending.
  • Strategic vision. An organization’s strategic vision should also be used as a broad guideline for identifying new requirements and refining existing priorities. From the vision statements, planners can ascertain the medical specialties – and necessary technology — that an institution wishes to emphasize. In some circumstances, achieving the vision might require a major service line expansion or improvement, again necessitating the addition of new or improved equipment.
  • Business modeling. Acquiring new technology must make economic as well as clinical sense. What return on investment can the organization expect? The answer may be gleaned from demand forecasting, which calls for insight into patient demographics, local referral patterns, competitive challenges and reimbursement trends.

To move toward the broad vision, planners in the IDN must consider the network-wide implications of capital acquisition as well as the opportunities to exploit one institution, even at the expense of another. They can assign priorities on a network-wide basis to ensure that the maximum potential of business opportunities are realized, and that limited capital dollars are allocated to those sites best positioned to exploit each opportunity.

Benefits of planning
IDNs are uniquely positioned to benefit from capital asset plans that address the multitude of capital needs that arise at each of their delivery sites. Capital asset planning at the corporate level can eliminate the political and emotional elements of capital budgeting and provide a more credible, objective and universally accepted decision-making process. Indeed, contracting professionals in multi-institution settings enjoy a number of inherent advantages.

  • Volume discounting. Buyers are rewarded for purchasing larger quantities of goods in every industry, and healthcare is no exception. For example, most GPO contracts negotiated on behalf of multiple member institutions include discounts that increase in direct proportion to the quantity of goods ordered. IDN contracting professionals are well suited to apply this same model. By aligning similar requirements from multiple sites, they create higher-volume orders, greater negotiating leverage, and subsequently, lower purchase prices.
  • Supplier and/or product standardization. Committing to one supplier and/or one product can produce advantages that far outweigh concerns over placing all the eggs in one basket. Those advantages include discounts on clinical training, marketing support, biomedical service assistance, and replacement parts. Less tangible benefits include an increase in operator familiarity (and a potential reduction in operator-induced errors) as well as physician recognition, leading to opportunities to collaborate remotely between institutions over a common data platform.
  • Optimization of asset allocation and usage. By conducting a periodic IDN-wide asset assessment, capital equipment planners can identify situations where technology is under-utilized or no longer used at all. Such equipment can be found in most hospitals, collecting dust in a storage closet. Assets are sometimes purchased at the request of a physician who subsequently leaves, changes practices or retires. These assets can be moved to another site where their full potential and capabilities can be realized.

Capital asset planning continues to gain momentum in the healthcare industry. There are substantial advantages to applying centralized capital asset planning to a network of hospitals and other healthcare delivery sites. By utilizing these techniques, IDNs in particular have the potential to unleash fresh opportunities to improve capital asset planning and budgeting. The net result will be much more effective control of costs as well as an improved ability to meet patient and provider expectations for care delivery.

David A. Natale is a principal with Capital Lifecycle Solutions in the Premier, Inc., Supply Chain Performance Improvement unit. He manages strategic technology consulting services, focusing primarily on capital asset planning and procurement strategies as well as assessment of clinical technologies. He developed a clinical assets assessment methodology, which he has applied in more than 120 Premier consulting engagements. From 1991 to 2000, he was Premier’s director of technology assessment. Prior to that, he was a civil service biomedical engineer for the U.S. Air Force, where he managed several worldwide procurement initiatives for the Department of Defense.

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