In recent months, proposed healthcare reform has been the subject of much discussion and the healthcare industry has come under intense scrutiny as a result of the administration’s efforts to reduce the rising cost of healthcare. As a consequence of the increase in the cost of medical care, now more than ever, hospitals have found themselves in a situation in which the capital budget has become a necessary tool; Not only for livelihood but mainly for survival. The absence of a sound capital budgeting policy could potentially spell disaster for hospitals because an increase in cost accompanied by a decrease in revenue negatively impacts the bottom line and when funds are limited it is essential to have a capital budgeting plan. game of how the funds are to be used. otherwise, the hospital could find itself in a precarious situation.

Capital budgeting refers to the analysis of investment alternatives that involve cash flows received or paid during a certain period of time. More often than not, the best alternative is usually the one that produces the greatest cash flow over time. This point can be disputed because other hospitals may place too much emphasis on non-monetary outcomes. In such cases, the best alternative is often the one that comes as close as possible to the results that catapult the hospital closer to its goals. Capital budgeting is a complicated process in the sense that great care must be taken in the selection process and the competing forces make it the most challenging. Where there is competition, the possibility of politics being a factor increases, and politics often has its drawbacks, especially when the minority voice is drowned out by the majority or higher voice.

To better understand how capital budgeting works in the healthcare industry, we’ll explore three different scenarios that occur from time to time in most hospitals across the country. For example, Human Resources offers a daycare center for employees with children. The rationale is: the employee turnover rate will be minimized and potentially more nurses will be attracted to the hospital because of the day care services offered. Rotation is expensive for the hospital. Therefore, even if the project does not increase revenue, the project will benefit the hospital through cost reduction.

The second scenario is that the Imaging Services Department proposes to purchase an additional CT scanner to alleviate the bottleneck and backlog in the department. Buying a scanner is quite expensive and so if the current one is functional, is a second one needed? It could be argued that high usage demand creates strain among employees, wear and tear on the machine increases maintenance costs, overtime pay for technicians increases overall costs, and the hospital is left vulnerable should the current scanner fail. get stuck to work. All of these are valid considerations. However, one wonders; Does the total benefit exceed the total cost?

The last scenario is a group of doctors working for the hospital who proposes the purchase of a special machine that eliminates the need for internal hospitalization of patients. With the new machine comes the benefit of reduced hospital stay. With a reduced hospitalization of patients, the hospital could be better positioned to reduce the variable costs associated with the use of the facilities and safety could be improved because the possibility of the hospital exceeding capacity will be greatly reduced by having fewer patients in the installations. The only drawback is the massive costs involved. The machine requires a large capital outlay up front. So, to the extent that the purchase sounds good, the other alternatives sound just as good, if not better.

Faced with all three alternatives, a financial manager in the healthcare industry must determine the opportunity cost of capital. The opportunity cost of capital is based on the fundamental law of finance that a dollar today is not the same as a dollar tomorrow. Therefore, when analyzing the three alternatives, the time value of money should not be ignored because the wrong conclusion could be reached if the time value of money is not considered in the analysis. Future cash flows are discounted to present value using a set interest rate. Once the present value of all the alternatives is established, then the alternative that produces the highest present value is considered the best option. This method of analysis is known as the discounted cash flow method and from a personal point of view; This method should be widely used in the healthcare industry because it is guided by the important finance law mentioned above. I recognize the fact that every hospital is unique and estimating future cash flow is difficult in other cases. In this case, other methods should be considered. However, the discounted cash flow method, while sometimes imperfect, should have first priority if everything else is clear and all variables are known.