Question

Explain how to analyze capital investment decisions for health care organizations.

Answer 1

Capital investment decisions are among the most important decisions made by firms. They determine the firm's capacity for providing services and commit the firm's cash for an extended period of time. Interviews with chief financial officers of leading health care systems reveal capital investment strategies that generally follow the recommendations of modern finance theory. Still, there is substantial variation in capital budgeting techniques, methods of risk adjustment, and the importance of qualitative considerations in investment decision making. There is also variation in delegation of investment decision making to operating units and methods of performance evaluation. Health care systems face the same challenges as other organizations in developing and implementing capital investment strategies that use consistent methods for evaluation of projects that have inconsistent aims and outcomes.

Accepted for publication in the Journal of Health Care Management: Several surveys have been performed over the last forty plus years to learn about capital budgeting practices of healthcare firms. In this paper, we analyze and synthesize these surveys in a four-stage framework of the capital budgeting process—identification, development, selections, and post-audit. We examine three issues in particular: a) efficiency of for-profit hospitals relative to not-for-profit firms, b) capital budgeting practices of healthcare industry vis-à-vis other industries, and c) effects of healthcare mergers and acquisitions on capital budgeting decisions. We find indirect evidence that multihospital systems have made capital budgeting decisions more efficient. For-profits’ acquisitions of non-profit hospitals are credited as the primary reason for the growth of multihospital systems. It might then be argued that for-profit hospitals are better decision makers than non-profit firms. The expansion of multihospital systems has also narrowed the gap in capital budgeting practices between the healthcare industry and industries unrelated to healthcare.