Importance of Management
As opposed to the physician’s influence in organizational decision-making and the pull on the capital budgeting process, a conflict of interest may present itself contrary to the stakeholders’ wishes, i.e., what is best for the hospital. According to Mukherjee et al., 2016, since physicians are not typically employees who would bear the cost of the investment, NFP’s possibly may not be accountable in a “social obligation” way, which would be the tax-exempt trade-off.
Managers could help with decisions to ensure NFP hospital firms are participating in other philanthropic involvements. In response to growth and risk exposure. Indirect support for the positive effect of efficiency of capital budgeting decisions due to the growth of larger hospital systems and privately owned typically are more efficient at making the capital budgeting decisions. When the hospital system utilizes the NPV as a superior method over IRR, it shows how the practice can relate to the theoretical (Mukherjee et al., 2016). Also, according to Payne (2015), healthcare is considered riskier than municipal debt; the credit spread is wider, even more than tax-exempt. Managers can help manage the risk of Capital budgeting, from large to small enterprises.
In the development stage, which is considered the most critical and challenging part of capital budgeting, research has shown they underestimate the routine item allocation in the budget in favor of what they perceive as strategic investments. Most hospitals will develop a long-range capital budget due to over-regulation, and those who participate in Medicare must have a 3-year capital plan. And finally, when it comes to evaluation of Cost-Benefit Analysis, defined in the context of cash flows and remembering cash flow is not the same as profit; the third-party payer makes estimation difficult. Firms must adjust cash flow for cost-reimbursement, and adding capitation payment systems presents even more challenges in predicting project-specific cash flow. Managers of business can and should help navigate these decisions better than the provider.
When looking at the process of Capital Budgeting, the following framework can serve as a general guide for your medical group or practice. The first step is Identification, where a bottom-up approach where providers do play a dominant role. Identify all the goals and strategies. Next, Development needs to occur. Formal evaluation of proposals and generation of forecasts are performed. Although third party reimbursement plays time complications on estimated cash flow, providers play a role in estimations. Selection should combine into one DCF technique, which not only is currently more widely used but is much more appropriate for healthcare. Even hospital plant and equipment decisions are mostly decided upon by physicians. The selection technique can be by Payback period (traditional), NPV, IRR, and profitability index (PI), all of which can be bundled and are more popular. Healthcare organizations, especially multi-hospital systems, also use discounted cash flow (DCF, typically range between 7% and 12%, usually 8%, bundle, which fall in line with industrial organizations and typically rank higher. Practitioners should try to shorten the payback period to decrease risk. Finally, the next step is to ensure lower-cost capital financing with a Post-Audit. Audits will benefit in both long-term viabilities and increased operating margins (Mukherjee et al., 2016).
A dominant role of the providers, regarded as the producers of business, in all aspects of the Capital Budgeting process and over-influenced of physicians is likely to impede efficient decision-making, especially in NFP organizations (Mukherjee et al., 2016). This discussion can help foster discourse on how managers function and how they serve without conflict in the healthcare organization. Payne (2015) noted that organizations use fixed-rate financing, which acts as semi-committed capital or demand debt, which, although it can be called-in due, is desirable to the healthcare borrowers due to its flexibility. These organizations need low-cost capital because it is suitable for operating margins and long-term growth. Key points discussed here can set up a framework for successful Capital Budgeting. Just as for-profit firms have clear objectives, your practice is your investor-owned in which you created your reality and your independence.
Mukherjee, T., Al Rahahleh, N., Lane, W., & Dunn, J. (2016). The Capital Budgeting Process of Healthcare Organizations: A Review of Surveys. Journal of Healthcare Management, 61(1), 58–77. https://doi-org.proxy1.ncu.edu/10.1097/00115514-201601000-00011
Payne, C. T. (2015). “Capital ideas” for health care in 2015. Hfm (Healthcare Financial Management), 69(5), 64–71. https://search-ebscohost-com.proxy1.ncu.edu/login.aspx?direct=true&db=bth&AN=102495323&site=eds-live.
Albury, R., & British Broadcasting Corporation BBC (Producers). (2013). Finance basics. [Video/DVD] BBC Worldwide. Retrieved from https://video-alexanderstreet-com.proxy1.ncu.edu/watch/finance-basics
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