Strategies for Overcoming Top Challenges in the Healthcare Capital Budgeting Process
April 22, 2021
In the midst of the most difficult financial crisis healthcare has ever faced, hospitals are being forced to cut their capital budgets. As a result, they are looking for the dollars that are available to go further and do more for their organization. To get the most out of the capital capacity that is available, an efficient, effective and agile capital planning process in healthcare is critical.
At Strata, we help over 2,000 hospitals and more than 400 healthcare delivery systems analyze, plan and perform. We navigate the complex capital planning process. Below, we’ll share some of the lessons we’ve learned and healthcare capital budgeting methods to help you diagnose and solve inefficient capital planning processes within your organization.
1. Diagnosing an Inefficient Capital Budgeting Process in Healthcare: “Is It Okay if Our Capital Capacity is Over 20%?”
A common symptom in diagnosing an inefficient capital budgeting process in healthcare is when an organization has over 20% of their budget going toward contingency. It raises a red flag.
To improve your organization’s capital budgeting process, develop a lookback process to improve on budget assumptions. Establish a regular cadence to compare and better understand the variance between budgets and actuals. Consider, what can be done better in the future?
If you want to get the most out of your capital budgeting process and healthcare capital budgeting methods, assess how and where this information will be used within your organization. Who does it need to be communicated with to make sure that similar projects are budgeted more accurately in the future? Thinking about your healthcare organization’s capital budget and encouraging others to think in this way will help to establish a culture of continuous improvement.
2. Diagnosing an Inefficient Capital Budgeting Process in Healthcare: “What to Prioritize?”
This is one of the most obvious symptoms you’ll find when looking for inefficiencies in the capital budgeting process at your organization. If your stakeholders don’t understand why projects are approved or denied, you may be creating a culture of confusion. Without supporting data to inform the business plan, it will be extremely difficult to know which projects to prioritize.
The solution to this challenge in the healthcare capital budget is to better define your scoring criteria. Organizations we see with the most success in their capital budgeting process use quantitative, standardized criteria. This way, the numbers speak for themselves, eliminating the chaos and confusion around prioritizing projects in the capital budgeting process.
To prioritize the capital requests of your organization’s stakeholders, consider hosting evaluation sessions. Here, you can review projects individually and assign a score based upon the standardized scoring criteria recommended before. Use these scores to rank projects and compare against the capital capacity for the year. This will ensure a more structured and trustworthy process for your capital planning.
3. Diagnosing an Inefficient Capital Budgeting Process in Healthcare: “What’s Left to Spend?”
You can identify this challenge to the capital budgeting process in your organization when you see funds released to projects but little to no spend reported. Projects may be beyond their estimated completion date with spend, but not closed as anticipated. There is obvious confusion around how much spend is left and available to use.
The solution to this kind of confusion around capital spend is to establish a quarterly funding release process. The capital budgeting process in healthcare needs to be able to adapt to large environmental changes (such as the COVID-19 pandemic) that can suddenly shift the organization’s priorities. It’s important that you review cash flows, project budgets and scope, as well as new priorities as often as quarterly in this process. Doing so ensures that all available cash is spent and establishes agility. Agility in this process is both how quickly you can pivot in a new direction, but also how quickly you can pause and restart a new project.
4. Diagnosing an Inefficient Capital Budgeting Process in Healthcare: “What About Emergency Requests?”
If you’ve noticed that your organization mostly spends the capital budget or replacement plan on emergency requests, that should be a fairly important indicator of an inefficient capital budgeting process. This illuminates other symptoms of a larger problem. Your organization likely lacks a more strategic, multi-year replacement plan. You probably are not using a tool to guide your project planning, as well.
To address this inefficiency in the capital budgeting process, design a process to evaluate the state of current assets. It’s important to understand the current health, risk and cost to maintain these assets, as well as crucial data like the end of life date, work order data and regulatory information. Once you’ve gathered and documented these data points, you can create a plan for what necessary maintenance lies ahead. Doing so will eliminate future surprises where possible. Understanding the future of your assets will also benefit your organization when larger, completely uncontrollable circumstances (like global events or natural disasters) occur.
With that in mind, develop a multi-year capital planning process at your healthcare organization. We recommend that hospitals and health system leaders think about capital investments as falling into one of two different categories:
- Strategic: Investments that advance the how, when, where and the way care is delivered or the business operates
- Maintained: Investments that keep the organization running the way it does today (keeping the lights on)
If you don’t already have a multi-year planning process, start small. Begin by adjusting your capital plan to consider the next year, then add on an additional year each year that you plan. Continue this process until you reach a 5-10 year capital plan, then maintain it. You will discover you are no longer spending your capital budget exclusively on emergency requests, but instead, preventing emergencies with a more thoughtful, somewhat long-term plan.
5. Diagnosing an Inefficient Capital Budgeting Process in Healthcare: “What About High Variability?”
If your organization often has high variability in achieving expected results, you can expect to see project plans that lack accurate estimates for ongoing operational impacts. You might also find frequent or high variances (in dollars or timeline) to the original capital project budget.
To avoid this inefficiency in the capital budgeting process at your organization, document clear budget or proforma sign-off expectations. Communicate errors and educate your team for future budgets or proformas. This will help you reduce variability in the capital budgeting process and project timelines or expectations.
Share your information below to connect with a member of our team. We can’t wait to talk about your organization’s capital budgeting process and healthcare capital budgeting methods that can help.