How are hospitals financing the future? Capital spending in health care today

Healthcare Financial Management, Jan, 2004

Financing the Future is a year-long project to help hospitals take advantage of growth opportunities. Led by HFMA in partnership with GE Healthcare Financial Services, the project will provide information, insights, strategies, and tools designed to help hospitals finance their future. The findings of Financing the Future. The findings of conducted by HFMA and PricewaterhouseCoopers.

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Findings to date from HFMA's Financing the Future project suggest that many American hospitals may be poised to begin a downward spiral. The deteriorating financial condition of hospitals is limiting their sources of capital. Even more significant, the number of hospitals with limited capital access has grown substantially in recent years, according to the first Financing the Future report.

Add the findings of the second report--that capital spending has been flat despite rapidly increasing demand, and that 41 percent of hospitals are not spending enough capital to keep up with depreciation--and a downward spiral appears possible. The spiral would look like this: Hospitals increasingly struggle with deteriorating financial health, which makes them less creditworthy, which limits their ability to access capital, which requires them to devote a larger proportion of their capital to keeping up with today's demands, which undermines their ability to invest in the future. which causes their financial health to decline further.

Following are key findings from the second Financing the Fixture report To access the full report, visit www.financingthefuture.org.

HOW MUCH ARE HOSPITALS SPENDING, AND WHO Is SPENDING THE MOST AND LEAST?

Despite a double-digit increase in utilization, hospitals' aggregate capital spending increased only about 1 percent between 1997 and 2001. And a closer look at spending shows significant gaps between hospitals related to capital spending, with a clear picture emerging of the characteristics associated with higher capital spending (large, urban, not-for-profit, more profitable, broad access to capital) and the characteristics associated with lower capital spending (smaller, rural, for-profit, less profitable, limited access to capital).

Between 1997 and 2001, capital spending grew only 1 percent. Per--year spending on capital acquisitions that resulted in fixed assets, such as buildings or equipment, was $23 billion in 1997. It was $23.7 billion in 2001, the most recent year for which data are available.

The limited growth in capital spending in this period was far outstripped by growth in demand for hospital services. Between 1997 and 2001, there was a 7.7 percent growth in number of hospital admissions and a 19.6 percent growth in outpatient visits. Thus, aggregate capital spending appears not to be keeping up with demand as measured by utilization.

A closer look at hospitals' capital spending shows that hospitals with broader access to capital are spending significantly more per bed than those with limited access to capital. (These categories of access to capital are based on the kinds of financial indicators traditionally used to determine creditworthiness. See the first Financing the Future report for a full explanation of these categories.) Per-bed capital spending for hospitals defined as having broad access to capital is more than 13 percent higher than for hospitals defined as having limited access to capital:

> For hospitals defined as having broad access to capital, the five-year total spending per bed was $245,000 from 1997 through 2001.

> For hospitals defined as having limited access to capital, the five-year total spending per bed was $216,000 from 1997 through 2001.

For the five-year period between 1997 and 2001, the largest hospitals (400 beds) spent 63 percent more capital on a total per-bed basis than did the smallest hospitals (less than 100 beds). Of hospitals that spent more than $100 million on capital projects in a given year between 2997 and 2001, 54 percent had a bed size of more than 400.

Sponsorship, location, and teaching status also were linked to differences in capital spending, with large, not-for-profit teaching hospitals spending the most.

WHAT ARE HOSPITALS SPENDING CAPITAL ON?

Between 1997 and 2001, spending on buildings increased at a more rapid rate than spending on equipment, and as of 2001, spending for the two categories was growing at almost the same rate. Between 1997 and 2001, the cumulative increase in spending on buildings and fixtures was 3.0 percent, compared with a o.5 percent increase for moveable equipment.

These findings suggest that hospitals have been dedicating more resources to construction in recent years. And while that may be true as a percentage of capital spending, construction spending as a percentage of total healthcare expenditures has decreased substantially over the past 40 years and was at its lowest point in 2002.

The average age of plant has increased in the industry over the past five years, which reinforces the view of a relatively low level of spending on construction.