By James Laskaris

The delivery of healthcare in the U.S. is rapidly evolving, driven by changing patient demographics, legislative initiatives, health systems mergers, and new clinical challenges. To adjust to a changing environment, healthcare has become reliant on new technology and devices to improve outcomes and stay relevant in an increasingly competitive marketplace. This has put added pressure on organizations to adopt a systematic approach to the budget process to address their evolving needs.

The U.S. medical technology market is estimated to be worth approximately $180 billion, with the imaging market alone accounting for more than $12 billion. Compared to labor (50%) and consumables (30%), medical technology represents only a small portion of a hospital’s entire budget (about 6%). But few diagnoses or therapies are delivered without the aid of some sort of technology. In addition, more informed healthcare consumers are seeking innovative solutions, which adds to the need for new technology. The bottom line: technology drives a hospital’s focus and allows it to be competitive in its space.

Traditionally, hospitals have relied on a static capital budget. With a static budget, C-suite leaders set aside how much they plan to spend at least a year in advance. The challenge is forecasting a hospital’s technology needs a year in advance. It is not a perfect science, especially as the healthcare environment changes. Another approach is the rolling budget, which is intended to be an agile process that allows the budget to be readjusted throughout the year. This enables the health system to strive toward the goal of continuous improvement by addressing new priorities more quickly and adjusting as the market changes with The downside: the budget must be readjusted every month or quarter and not just added to.

There are several categories of capital requests: strategic, routine, non-strategic, and non-routine. A strategic capital outlay is intended to allow a hospital to maintain its position in the market or to expand into new markets with new services. Routine capital expenditures involve budgeted purchases of a technology to maintain or replace existing assets. A non-strategic capital expenditure is an outlay that will replace or add to a provider’s assets without being critical to expanding into new markets. A non-routine capital expenditure is an item that has not been budgeted for. The challenge is to incorporate a process for routine purchases and still have flexibility for unbudgeted strategic purchases.

Last year Americans spent in excess of $3.5 trillion on healthcare, but few if any hospitals have an unlimited capital budget. This is especially evident as hospitals are challenged with the COVID-19 pandemic. Because of this, prioritizing projects can be a complex task. In a perfect world, the decision to purchase a technology should be driven with the goal to improve outcomes. But if the cost of providing the technology does not fit within a traditional reimbursement structure, it can limit other services within the organization. This can result in negative revenue generation and affect outcomes of other service lines within the organization.

With legislative initiatives such as “Never Events” and Preventable Readmissions, technology can be a directly related to direct costs savings. For this reason, quantifying the value of the combined outcomes, costs, and revenue generation requires a diverse team approach and access to solid benchmarking data.

Prioritizing the budget involves categorizing and ranking the proposed technologies. The goal is to determine what can fit within the limited capital budget while delivering the best patient care. In a simplified version, the capital budget committee should rank proposed technologies that are directed toward improving outcomes, technologies that generate positive revenue (make money), technologies that lower costs (save money), technologies directed to patient safety concerns, and technologies to replace older or obsolete systems. I recommend that key members of the capital budget committee assign a numerical value to each category. The project with the highest combined value should present itself as a priority that best fits the mission of the hospital.

It bears repeating that the healthcare environment is in a constant state of change. As costs increase, needs change, and new therapies become available, identifying technologies and guesstimating their costs as part of the budget process can be a gamble. To reduce the financial risk, the budget should be an educated process based on the science of value analysis. This approach allows hospitals to target the “Right Technology and the Right Box at the Right Price” to meet the needs of their patients and the mission of the hospital, while being good stewards of the budget.

About the author: James Laskaris is a clinical expert with TractManager, now a part of symplr.