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An Evaluation of Hospital Capital Investment after Balanced Budget Act

An Evaluation of Hospital Capital Investment after Balanced Budget Act. Tae-Hyun “Tanny” Kim, MPH Michael J. McCue, DBA Virginia Commonwealth University Department of Health Administration. Please do not quote or cite findings: they are preliminary. Contact: kimth@vcu.edu.

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An Evaluation of Hospital Capital Investment after Balanced Budget Act

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  1. An Evaluation of Hospital Capital Investment after Balanced Budget Act Tae-Hyun “Tanny” Kim, MPH Michael J. McCue, DBA Virginia Commonwealth University Department of Health Administration Please do not quote or cite findings: they are preliminary. Contact: kimth@vcu.edu

  2. Background: Importance of hospital capital investment Major, multi-year dollar spending Building, equipment and fixtures Enhancing organizational strategic position - Expansion - Operating efficiency - Quality of care

  3. Background: Basic facts about recent trend Minimal growth rate of aggregate capital spending of hospitals during 1997-2001 (HFMA, 2004). Continuously increasing average age of plant for hospitals: 7.9 to 9.8 years during 1990-2001 (AHA, 2001) BBA 1997 may have an influence on slowing growth of capital expenditure by affecting financial performance of hospitals

  4. Background: Basic facts in the post-BBA period BBA 1997 reduced Medicare payment by $206 billion over five years (U.S. House, 2004) Hospital total margins and inpatient margins declined significantly over five years after 1997 (MedPAC, 2004) Bond rating downgrades of hospitals outnumbered upgrades between 1998 and 2002 by almost three to one (AHA, 2004)

  5. Importance of study Overall, hospitals might have difficulty funding capital projects in the post-BBA period Hospitals operating in different environment may vary in their capital investment The study contributes further understanding of capital investment in the hospital industry

  6. Research Questions What factors are associated with hospital capital investment in the post-BBA period? How do market conditions influence capital investment? Are operational characteristics associated with capital investment? How are financial factors related to capital expenditures?

  7. Hypotheses Hospitals located in higher market demand will be more likely to have higher amount of capital investment Hospitals with higher complexity and limited capacity will be more likely to have higher amount of capital investment Hospitals with higher amount of financial sources will be more likely to have higher amount of capital investment

  8. Methods Study design: a pooled cross-sectional time-series design Study period: 1998-2002 Data: CMS, AHA, and ARF database Sample: non-federal, short-term general U.S. hospitals (16,520 hospital-years)

  9. Measurement Dependent variable: capital purchase for buildings, fixtures and moveable equipment during a fiscal year

  10. Measurement Independent variables: Market factors (county level)- number of physicians, population size, % of population over 65, per capita income, and unemployment rate Operational factors - bed size, number of total services, case-mix index and occupancy rate Financial factors - days cash on hand, cash flow, and debt ratio

  11. Descriptive Statistics Variable Mean Std. Dev. Capital investment ($1000s) 5,614 13,700 Ln(capital investment) 10.932 6.603 Market factors MDs per population 1,000 2.201 1.960 Ln(population) 11.866 1.761 % Population over 65 0.135 0.037 Ln(per capita income) 10.141 0.271 Unemployment rate (%) 5.080 2.396 Operational factors Beds 189.32 179.78 Number of services 33.531 13.436 Occupancy rate 0.463 0.213 Case-mix 1.295 0.250 Financial factors Days cash on hand 41.457 74.669 Cash flow 13.661 249.83 Debt ratio 0.836 8.063

  12. Descriptive Statistics (cont.) Variable Mean Std. Dev. Control factors Herfindahl Index 0.289 0.267 Ownership Not-for-profit 0.618 0.486 For-profit 0.157 0.364 Public 0.225 0.418 System affiliation 0.562 0.496 Teaching hospital 0.280 0.450 Urban 0.600 0.489 Region North East 0.153 0.361 Central 0.266 0.442 South 0.384 0.486 West 0.181 0.385

  13. Methods Multiple regression Hospital & year fixed-effect model

  14. ResultsTable 2: OLS regression with robust standard errors R-squared: .1451 * Statistically significant at the 5 percent level ** Statistically significant at the 1 percent level.

  15. ResultsTable 2: OLS regression with robust standard errors

  16. Summary of results Overall, market factors were not significant (except % of elderly) Operational factors appear to be significant: number of beds, occupancy rate, case-mix index and number of services were positively associated with capital investment Cash flow was positively associated with capital investment

  17. Discussions/implications In the post-BBA period, internal aspects (e.g., operational factors) may have been more important than external factors (e.g., market factors) in hospital capital investment Hospitals may have not been able to or needed to incorporate market conditions in their investment decision However, operational characteristics reflect market demand to some extent The impact of market factors at the MSA level may be different

  18. Discussions/implications The results partially support a growing literature suggesting that availability of internal funds is a significant factor affecting investment activity Increase in debt may act as a monitoring device rather than a facilitating factor in the post-BBA period

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