Assessment of Assets for Capital Planning
Until recently, U.S. hospitals averaged an increase of only 1% annually on investment in fixed assets, such as buildings, infrastructure, and equipment for several years. Now, after nearly a decade of consolidation and underfunding of infrastructure, healthcare providers are again investing to increase bed capacity and upgrade technology. In fact, 75% of U.S. hospitals report they will increase capital spending by an average of 14% annually through 2010.
Even with this increase, however, few organizations will be able to fund all the capital requirements they have identified. So the difficult process of prioritization begins. Healthcare organizations have a particularly complex set of factors to weigh in evaluating the merit of various potential capital improvement projects: strategic business importance, urgency, impact on quality of care, affect on functional adequacy, and relation to code compliance, accreditation, or licensing, to name a few. For existing facilities, another consideration is the impact of an investment on the overall condition of a facility or system, generally measured by a condition index, which compares the cost of requirements or deficiencies to the total replacement cost of the building or system.
In addition to these factors, organizations must also consider how to allocate funds across competing areas, including operations and maintenance, strategic capital projects such as construction of a new facility, and mandated projects such as those involving regulatory compliance. Depending on the type of project, funding for a particular project may be restricted to certain sources.
Managing complexity in capital planning
The factors involved in these decisions are complex, and there are many stakeholders within healthcare organizations who bring varying perspectives and priorities to the decision making process. Therefore, healthcare organizations are increasingly relying on decision support capabilities within capital planning software to help them apply evaluation criteria to potential capital investments consistently and to understand the impact of different funding decisions. Such systems can provide many benefits, including built-in cost calculations that take local market factors into consideration, the ability to consistently apply evaluation criteria across multiple projects, and the ability to project the impact of investments made today on facility condition and costs over the long term.
It is important to note that capital planning software systems are ultimately only as good as the processes on which they are modeled. The benefits they provide are predicated on an organization's ability to build consensus among its various constituents about overall strategic values, as well as the evaluation criteria it will apply to capital projects. However, with this foundation in place, capital planning systems can provide healthcare organizations with visibility into the condition of all its capital assets, and give individuals involved in the many stages of the planning process—from functional heads to facilities directors to financial managers—valuable tools to facilitate decision making.
Understanding capital needs
A complete picture of the organization's current condition of capital assets and associated requirements—whether for upgrades to building systems such as roofs or HVAC, or for construction of a new outpatient clinic or research lab—is critical to effective capital planning. In many organizations with a history of undercapitalizing their assets, individuals responsible for determining such needs may understandably focus exclusively on the requirements that are most pressing or that they believe are likely to be funded. In organizations with multiple campuses or those that have grown through mergers and acquisitions, the organization may lack consistent data about major building systems across all its facilities.
For organizations lacking accurate and consistent data about the current condition or capital assets, a detailed assessment of the organization's facilities can provide a baseline for ongoing capital planning efforts. Such an assessment may be conducted by a third-party assessment firm or internal staff, as long as the methodology used for the assessments is consistent and comprehensive.
Employing capital asset management software as a repository of information gathered in assessments can provide organizations with a real-time view of its assets while facilitating the process of estimating cost. Software that uses industry-standard cost data to determine costs for each potential improvement helps healthcare organizations eliminate the subjectivity associated with estimates developed by individual facility managers.
Prioritizing capital requirements
With a complete inventory of capital requirements, organizations can begin the process of ranking these needs by urgency. For example, patching a crumbling stairway landing to comply with building code, a relatively small investment, may be rated most urgent at Level 1. Remediation of electrical panels/feeders might be a Level 2 improvement, while renovating ceilings in patient rooms a Level 3.
Using this urgency rating and further applying weights based on overall organizational criteria will yield a comprehensive picture of how projects should be prioritized for budget allocation. In this stage of the capital planning process, capital asset management software can help automate the complex prioritization process based on the evaluation criteria the organization has agreed on. After each capital request is scored individually, all requests for a given funding source can be ranked by score. The ultimate goal: a multiyear capital budget that will achieve the organization's facility and business objectives.
Realizing cost efficiencies
Capital asset management software can also facilitate the process of identifying projects that can be bundled to obtain better prices for materials and more competitive fees for labor. An organization may bundle projects based on the building system affected, the physical location, or similar goals, such as energy efficiency. For example, bundling multiple smaller requirements in one building or wing into a larger renovation project may enable a hospital to increase efficiency and minimize business interruption.
By providing life-cycle modeling tools, such software can also help identify assets that are at the end of their useful life and compare the cost of repair and maintenance to that of replacement in order to target those that are more economical to replace than continue to repair. One healthcare system, for example, developed a cost/benefit analysis for renovating versus building new to support its business case for combining two existing facilities providing rehabilitation care, complex continuing care and long-term mental health care into one newly constructed building. This demonstrated that, in this case. The most effective way to maintain the value of the portfolio was to invest in new construction.
Taking the surprises out of spending
With a capital budget in place, CFOs and financial managers must ensure that each department, facility, and business unit spends according to plan. When inevitable unexpected expenditures arise or new strategic priorities emerge, organizations need a consistent process for reevaluating planned project expenditures and determine how the change will and should impact them.
Controlling ongoing capital spending against the planned budget requires a reconciled view of overall capital spending that many organizations lack. Manual processes for tracking planned and actual expenses don't deliver a real-time view of the spending process, allowing unplanned expenses to crop up. These unplanned expenses consume up to 20% of capital expenditures in many organizations.
Capital spend management systems can facilitate the day-to-day tracking of planned and actual expenses and variances, providing visibility to the various groups involved in the process and promoting accountability. From the CFO's perspective, some of the most important features of such as system are the management of requisition processing—tying requisitions to budget allocations—and cash flow forecasting, enabling tracking of monthly and year-to-date forecasts and variances.
The ability to get a comprehensive picture of capital needs, consistently prioritize those needs, and monitor capital spending against plan are some of the significant benefits healthcare organizations can achieve by implementing software for capital management. But to fully leverage these capabilities, the organization must begin with both a clear view of its strategic goals and with the realization that a strategic capital plan is a fluid document that needs ongoing review against those objectives.
By identifying and monitoring a few key metrics—whether industry-standard measures such as condition index or proprietary benchmarks related to quality of care—organizations can monitor their progress toward effectively utilizing capital dollars to promote better patient care, minimize operational risk and cost, and serve the overall organizational mission. HD
Ray Dufresne is a Vice-President at VFA, Inc., a provider of solutions for facilities capital planning and asset management.