Capital Budgeting in the Healthcare Industry

Healthcare reform is a topic that has been discussed at length over the past few years. Hospitals and other healthcare facilities are currently in a situation where capital budgeting is a necessity in light of the recent healthcare cost increases. Without a sound capital budget, hospitals could bear costs that they simply cannot cover. A decrease in revenue will negatively impact their bottom line and when they are already facing limited funding, it is critical that they have a plan in place for how to use funds that they do have access to.

Capital budgeting is simply a term used to describe analyzing investment alternatives that involve cash flows that have been paid or received over a specified period of time. The best solution for healthcare facilities is normally the one that offers the best cash flow rate over time. Capital budgeting can be very complicated because strict attention has to be paid to the selection of funds and when competition is present, politics can often play a major role in these choices.

As an example, imagine the human resources department for a hospital recommends a day care facility for nurses, doctors and other hospital staff. The turnover rate of staff can be significantly minimized when adequate day care is offered and many qualified healthcare professionals may be drawn to a facility that offers day care services. Turnover can be very costly and implementing a day care could help the hospital to save money. So, even though this project may not give the facility money or increase its revenue, it will benefit the facility by reducing the cost of employee turnover which could help to solve its funding needs over a specified period of time.

In order to choose the right alternative, the opportunity cost of capital will need to be assessed and be assessed very carefully. Not only will revenue need to be analyzed but helping the facility to retain funding will need to be assessed as well and there are a number of ways that this can be accomplished.

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