Expert answer:Assess Capital Decisions

Expert answer:Week 7 – Assignment: Assess Capital Decisions InstructionsWrite a blog that addresses the following:Reflect upon the key points of healthcare financial management regarding capital budgeting.Discuss the importance for management to comprehend capital budgets and formulation in testing the sensitivity of the forecasts regarding alternative scenarios, such as slowdowns in collections and declines in revenues.Justify your assessment with specific examples where appropriate.In addition to creating your blog, you will also submit a copy of your blog, along with the link to your blog, as with all other written assignments.Length of blog: 5-7 pages, not including title and reference pagesYour blog must be effectively designed and meet the following criteria:Locate a website that your professor can easily access. It is suggested that you use a free website such as http://www.wordpress.com/.Contains text that is readable (e.g., appropriate size of font, type of font, contrasts with background, contains sufficient white space),Include information within the blog that supports the assignment.Ensure all of the links are active and work.Contains at least one graphic.Contains the same template throughout with a consistent design.Your blog should demonstrate thoughtful consideration of the ideas and concepts presented in the course by providing new thoughts and insights relating directly to this topic. Your submission should reflect scholarly writing and current APA standards where appropriate.Please view video for additional information:Finance Basics presented by Evan Davis; produced by Robert Albury, British Broadcasting Corporation, in Working for Yourself (London, England: British Broadcasting Corporation, 2013), 30 minsCash Flow & Working Capital produced by TV Choice, in Accounting & Finance Clips, Episode 4 (Kent, England: TV Choice, 2011), 28 minsCriteria Content (12 points) Points Summarized key aspect of finance in the healthcare organization 2.Applied the stated key aspects to capital budgeting 3. Captured the difference between capital budgeting and operational budgeting 3.Illustrated the assessment of capital budgeting with examples.4.Organization (3 points) Blog is accessible via the provided website and is clearly worded with readable text. All links are active and working. Contains at least one graphic and uses the same template throughout. Blog is 5-7 pages long 3. Total 10
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Week 7 – Assignment: Assess Capital Decisions
Instructions
Write a blog that addresses the following:
Reflect upon the key points of healthcare financial management regarding capital budgeting.
Discuss the importance for management to comprehend capital budgets and formulation in testing the
sensitivity of the forecasts regarding alternative scenarios, such as slowdowns in collections and declines
in revenues.
Justify your assessment with specific examples where appropriate.
In addition to creating your blog, you will also submit a copy of your blog, along with the link to your
blog, as with all other written assignments.
Length of blog: 5-7 pages, not including title and reference pages
Your blog must be effectively designed and meet the following criteria:
Locate a website that your professor can easily access. It is suggested that you use a free website such
as http://www.wordpress.com/.
Contains text that is readable (e.g., appropriate size of font, type of font, contrasts with background,
contains sufficient white space),
Include information within the blog that supports the assignment.
Ensure all of the links are active and work.
Contains at least one graphic.
Contains the same template throughout with a consistent design.
Your blog should demonstrate thoughtful consideration of the ideas and concepts presented in the
course by providing new thoughts and insights relating directly to this topic. Your submission should
reflect scholarly writing and current APA standards where appropriate.
Please view video for additional information:
Finance Basics
presented by Evan Davis; produced by Robert Albury, British Broadcasting Corporation, in Working for
Yourself (London, England: British Broadcasting Corporation, 2013), 30 mins
Cash Flow & Working Capital
produced by TV Choice, in Accounting & Finance Clips, Episode 4 (Kent, England: TV Choice, 2011), 28
mins
Criteria Content (12 points) Points Summarized key aspect of finance in the healthcare organization 2.
Applied the stated key aspects to capital budgeting 3. Captured the difference between capital
budgeting and operational budgeting 3. Illustrated the assessment of capital budgeting with examples.
4.Organization (3 points) Blog is accessible via the provided website and is clearly worded with readable
text. All links are active and working. Contains at least one graphic and uses the same template
throughout. Blog is 5-7 pages long 3. Total 10
The Capital Budgeting Process of
Healthcare Organizations: A Review
of Surveys
Tarun Mukherjee, PhD, Moffett Chair in Financial Economics and professor of finance,
Department of Economics and Finance, University of New Orleans, Louisiana; Naseem
Al Rahahleh, PhD, assistant professor of finance, Department of Finance, King
Abdulaziz University, Jeddah, Saudi Arabia; and Walter Lane, PhD, associate professor
of economics, Department of Economics and Finance, University of New Orleans
E X E C U T I V E
S U M M A R Y
Several surveys have been administered over the last 40 plus years to learn about
capital budgeting practices of healthcare organizations. In this report, 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: (1) efficiency of for-profit hospitals relative to not-for-profit hospitals,
(2) capital budgeting practices of the healthcare industry vis-a-vis other industries,
and (3) effects of healthcare mergers and acquisitions on capital budgeting decisions.
We found indirect evidence that for-profit hospitals exhibited greater efficiency than
not-for-profit hospitals in recent years. The acquisition of not-for-profits by forprofits is credited as the primary reason for growth of multihospital systems; these
acquisitions may have contributed to the more efficient capital budgeting practices.
One unique attribute of healthcare is the dominant role of physicians in almost all
aspects of the capital budgeting process. In agreement with some researchers, we
conclude that the disproportionate influence of physicians is likely to impede effi­
cient decision making in capital budgeting, especially for nonprofit organizations.
For more information about the concepts in this article, contact Dr. Al Rahahleh
at nalrahahleh@kau.edu.sa.
58
C apital B u d g e t in g P rocess
INTRODUCTION
H ealthcare O rganizations
making up about 25% of hospitals; and
the remaining 16% are for-profit
organizations.
The coexistence of NFPs and IO
companies creates a challenge for
healthcare organizations. First, for-profit
businesses have a clear objective:
increase the monetary value of the
organization for owners. The interests of
an NFP, however, are not linked to
increasing its monetary value, but rather
to fulfilling its overall service mission.
Second, NFPs cannot raise equity by
issuing stocks or other forms of equity;
thus, they are limited to retained earn­
ings from operations, income from
investments, philanthropic contribu­
tions, government grants, and debt
financing. IO organizations can finance
investment opportunities by selling
stock to the public, as well as through
retained earnings and debt financing
(Reiter, Wheeler, & Smith, 2008). Third,
to protect their return on investments
(in the form of dividends, capital gains,
or both), shareholders of an IO organi­
zation demand a sound financial
statement; this is in contrast to the
owners of an NFP, who do not receive
dividends or capital gains and, therefore,
look to the organization to manage
surpluses to remain liquid and solvent.
Even when a hospital is investor
owned, it does not operate in the same
environment as that of a publicly held
corporation in another industry. The
latter can set its own competitive price
and receives payments directly from
consumers. For hospitals, however, “the
majority of payments for services made
to healthcare providers are not made by
patients, but rather by some third-party
payer” (Gapenski, 2006, p. 4). In
As early as the 1950s, surveys have
examined capital budgeting practices of
industries other than healthcare. Several
researchers have analyzed and synthe­
sized these surveys (e.g., Mukherjee,
1987; Mukherjee & Al Rahahleh, 2011).
Practitioners have learned how to make
more efficient capital budgeting deci­
sions, while academia has learned to
modify relevant theories on the basis of
feedback from business leaders.
Since the early 1970s, researchers
have surveyed healthcare organizations
to learn about their capital budgeting
practices. The purpose of this report is to
synthesize these surveys and draw
conclusions about how these organiza­
tions make capital budgeting decisions.
HEALTHCARE
of
FIELD
Is s u e s U n iq u e to H e a lth c a re
Unlike organizations in most industries
in which shareholders are typically the
owners, only a small minority of health­
care organizations in the United States
are investor owned (IO); the overwhelm­
ing majority are owned by one of two
types of not-for-profit (NFP) entities:
private, including churches, and govern­
ment organizations (GOs) (American
Hospital Association [AHA], 2013).
Figure 1 presents trends by ownership
for U.S. community hospitals for
1976-2006 (AHA, 2009). In 2011, there
were 1,025 IO for-profit community
hospitals, 1,045 GO hospitals, and
2,903 private NFP hospitals. In 2012, the
numbers of hospitals were 1,068, 1,037,
and 2,894, respectively (AHA, 2013).
For the period from 1976 to 2012,
NFPs dominate, making up 59% of
hospitals; GOs are a distant second,
59
J ournal of H ealthcare M anagement 61:1 January/ F ebruary 2016
FIGURE
1
O w n ersh ip Trends fo r U .S . C o m m u n ity H o s p ita ls , 1 9 7 6 -2 0 0 6
4,000
3,500
3,000
Total No. o f
2,500
Community
2,000
Hospitals
1,500
1,000
500
0
l Investor owned for-profit
i State and local government
Not-for-profit (nongovernment)
Reprinted from AHA Hospital Statistics, 2009, with permission. Copyright 2016, by Health Forum, LLC, an American Hospital
Association company.
(1992) compared their participation in
financial decisions to that of the produc­
tion staff and sales staff in industrial
companies. Many researchers (Berman
& Weeks, 1982; Kamath & Elmer, 1989;
Smith, Wheeler, & Wynne, 2006; Wacht,
1972) suggest that this phenomenon
strips hospital managers of the authority
that is intrinsic to comparable executive
roles in other businesses. The extensive
influence of one group of stakeholders
might lead to suboptimal capital
budgeting decisions.
Finally, hospitals have undergone
major structural changes over the last 3
to 4 decades. Watt, Renn, Hahn,
Derzon, and Schramm (1986, p. 1)
stated that “shifts in Medicare and
Medicaid reimbursement policies,
increasing private concern about
healthcare costs, technological change,
and the growth of organized delivery
addition, unlike their counterparts in
other industries, an lO hospital has to
compete with other IO hospitals, as
well as with NFPs and GOs. The envi­
ronmental differences are expected to
affect the way in which an IO hospital
makes financial decisions vis-a-vis a
publicly held firm in a non-hospital
industry.
Another element separating health­
care from other industries is the domi­
nant role of one group of stakeholders—
the medical staff—in hospitals. Kamath
and Elmer (1989) reported that 105 of
120 responding organizations stated
that the medical staff was directly
involved in capital budgeting decisions.
Kamath and Oberst (1992) found that
medical staff participated in the major
capital investment decisions of 91 of 94
responding hospitals. Kamath and
Elmer (1989) and Kamath and Oberst
60
C apital Budgeting P rocess
systems . . . have radically altered the
environment facing hospitals.”
Watt et al. (1986) concluded that
two primary ways in which hospitals
have responded to the above changes
are vertical mergers (i.e., diversification
in non-hospital healthcare areas such
as medical instruments), and (2) hori­
zontal mergers (i.e., multihospital
systems). The AHA Guide (2015)
provides evidence of the popularity of
multihospital systems; in 2013, 3,144
of 5,686 (55.3%) registered commu­
nity hospitals were members of multi­
hospital systems. A major reason for
the growth in multihospital systems is
acquisitions of NFPs by IO organiza­
tions. From 1972 to 2012, IO organiza­
tions grew at a 0.95% compound
annual rate, while GOs and NFPs
declined consistently during the same
period (Figure 1).
Both measures—vertical or horizon­
tal mergers—are likely to increase the
sophistication of financial decisions
pertaining to hospitals. Lynch and
McCue (1990) attributed expansion of
the multihospital system mainly to the
acquisition of independent NFP hospi­
tals by IO hospitals. Robinson (2000)
also pointed to the greater potential
efficiency on conversion of NFPs to IO
hospitals as investors demand account­
ability when extending external financ­
ing to for-profit hospitals.
of
H ealthcare O rganizations
• To what extent are capital budgeting
practices of healthcare organizations
different from those of other
industries?
• Do significant differences in objec­
tives, capital structure, and so forth
between IO hospitals and NFPs affect
the way in which the two groups
make capital budgeting decisions?
• Have structural changes and adapted
coping mechanisms made capital
budgeting decisions at healthcare
organizations more efficient? Conse­
quently, have the differences, if any,
narrowed between healthcare organi­
zations and other industries?
The surveys we examined did not
specifically break down responses into
NFPs and IO hospitals. Indeed, the study
samples in the majority of surveys were
almost entirely from NFPs; only a small
percentage represented IO healthcare
organizations, making it difficult for us
to directly compare the capital budgeting
practices of the two groups. However, we
posit that the growth in multihospital
systems (especially via acquisitions of
NFPs by IO organizations) has likely
increased the sophistication of capital
budgeting practices of the acquired NFPs.
METHODS
A n a ly tic a l P ro c e d u re
Pinches (1982) described the capital
budgeting process as a four-stage frame­
work: identification, development,
selection, and post-audit. Participants
generate ideas in the identification stage.
They then develop full-blown proposals
for the ideas with greatest potential. In
the selection stage, participants explore
investment opportunities and select the
Q u e s tio n s R e g a r d in g C a p ita l
B u d g e tin g P ro c e s s of H e a lth c a r e
O rg a n iz a tio n s
In view of the discussions presented
here, we focus on three main questions
pertaining to the capital budgeting
practices of healthcare organizations:
61
J ournal of H ealthcare M anagement 61:1 J anuary/ F ebruary 2 0 1 6
ones that meet the required criteria.
Implemented projects are monitored in
the post-audit stage, and feedback is
elicited to improve the budgeting process.
To understand how an organization
makes investment decisions, one needs
to ask many questions pertaining to
each stage. Borrowing from Mukherjee
(1987) and Mukherjee and A1 Rahahleh
(2011), we propose a list of similar
questions (available from the authors on
request). We attempted to scrutinize the
results of each survey to assess the extent
to which it broached these questions.
ownership-based differences exist, and
whether changes over time (positive or
negative) have occurred with regard to
capital budgeting practices of healthcare
organizations. The surveys we reviewed
have some of the same limitations as
those of most survey-based research,
including nonresponse bias, questions
that might be construed as leading,
ambiguous wording in the question­
naire, misinterpretation of questions by
respondents, and so forth. For these
reasons, our conclusions should be
viewed with caution.
Some specific study limitations are
as follows;
S a m p le
We reviewed 11 surveys from 1972 to
2007 (Campbell, 1994; Cleverley &
Felkner, 1982; Ho, Chan, & Tompkins,
2003; Kamath & Elmer, 1989; Kamath &
Oberst, 1992; Kleinmuntz & Kleinmuntz, 1999; Kocher, 2007; Reiter,
Smith, Wheeler, & Rivenson, 2000;
Smith et al„ 2006; Williams, 1974;
Williams & Rakich, 1973). Table 1
shows the survey year, method, response
rate, breakdown of usable responses by
ownership, and sample size.
• As Table 2 shows, the selection stage
was the main focus of most surveys.
Information in the other three stages
is less complete and, therefore, must
be viewed with caution.
• In administering surveys, the research­
ers did not set out to compare the
practices of IO organizations and
NFPs. In addition, IO businesses
participated at a very low rate (often
less than 5% of the study sample).
Therefore, many of our conclusions
are driven by inference (indirect)
rather than evidence (direct).
• We draw conclusions about the capital
budgeting practices on the basis of our
interpretation of the results of surveys
dating from the 1970s to 2007.
Because these surveys differ in terms
of authors, sample size and composi­
tion, questions asked, survey methods,
and the survey year, any attempt to
identify a trend is problematic.
• Because all of these surveys focused
on hospitals, our conclusions apply to
hospitals only.
D a ta
We obtained data for this review from
responses in the 11 surveys to the
questions pertaining to each stage. Not
all surveys asked all questions in each
stage, and some surveys may not contain
questions from all four stages. Table 2
shows the extent to which each of the
surveys addressed the questions.
S tu d y L im it a t io n s
Our main objective was to acquire
information from published surveys to
derive conclusions regarding whether
62
C apital B u d g e t in g P rocess
RESULTS
of
H ealthcare O rganizations
(1992) reported that 30% of respon­
dents formally evaluate all their propos­
als, while about 35% formally evaluate
about 50% or fewer.
Smith et al. (2006) interviewed chief
financial officers (CFOs) of nonprofit
hospitals and healthcare systems in
Michigan to determine how the budget
was apportioned between routine items
(e.g., equipment replacement) and
strategic investments (e.g., new prod­
ucts). They found that hospital and
health system leaders wished to allocate
two thirds to strategic investments and
one third to routine items. However,
actual allocations ended up being one
half to two thirds for routine projects
and one third for strategic investments.
Smith et al. (2006) offered two reasons
for the differences between proposed
allocations and actual allocations. First,
some respondents expressed difficulty
distinguishing strategic from operational
capital and were unable to provide
rough estimates. Second, 14 of the 20
CFOs interviewed gave rough estimates
in wide ranges (for example, the per­
centage of capital budgets allocated to
operations varied from 40% to 90%,
and the percentage allocated to strategic
investments varied from 10% to 60%).
Smith et al. (2006) also reported
that (1) more than 50% of respondents
established evaluation criteria before
receiving requests, and these criteria
were well-known to the managers
submitting proposals and stable over
time; (2) 71% of respondents classified
proposals according to clinical service
line or elements of the strategic plan;
and (3) 86% of respondents ensured
that proposals followed guidelines and
standardized formats. When decisions
Id e n tific a tio n S ta g e
The identification stage for healthcare
organizations is likely to be a bottom-up
process. Most surveys indicated that
the medical staff plays a central role in
capital budgeting, including the
idea-generation stage (Campbell,
1994; Kamath & Elmer, 1989; Kamath
& Oberst, 1992; Reiter & Song, 2013;
Smith et al., 2006). Smith et al. (2006)
reported that while board approval is
required for the capital budget and for
projects exceeding some amount (e.g.,
$100,000), the specific capital items
largely arose from medical staff,
department, or manager requests. They
described this process as one in which
“managers and physicians originate
requests, which are then evaluated”
(p. 120). Smith et al. (2006) found the
identification stage to be a bottom-up
process.
Reiter and Song (2013) also sug­
gested that in virtually all surveys of
healthcare organizations, physicians
play a key role in identifying capital
projects.
D e v e lo p m e n t S ta g e
We broke the findings with respect to
the development stage into two subcat­
egories: screening and cost-benefit
analysis.
S c r e e n in g
With regard to the extent to which
proposals go through a formal evalua­
tion, Kamath and Elmer (1989) found
that 26.8% of respondents formally
evaluate all their capital investment
proposals, while 42% formally evaluate
50% or fewer. Kamath and Oberst
63
J ournal of H ealthcare M anagement 61:1 January/ F ebruary 2 0 1 6
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