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Capital Allocation Challenges Facing Boards Grow as Financial Crisis Deepens
In September 2008, the American Hospital Association’s Health Research & Educational Trust and the Center for Healthcare Governance, along with our partners at Navigant Consulting, surveyed 294 hospital and health system CEOs about the role of each of their boards in the process of capital allocation.
Needed Competencies
At least 40 percent of respondents indicated five competencies related to capital allocation that were given at least “some emphasis” when selecting new board members. Financial aptitude and strategic planning abilities were given the most weight in the selection process, with more than 80 percent of respondents indicating at least “some emphasis.”
Other findings included:
• Non-rural hospitals with 100 or more beds were more likely to put heavier emphasis on financial aptitude and strategic planning abilities than were rural hospitals with fewer than 100 beds.
• Urban hospital boards were more likely to emphasize IT knowledge than were either suburban or rural hospitals.
The finance and the strategic planning committees were the board committees most likely to deal with capital projects. In general, freestanding, suburban and rural hospital boards were more likely to assign capital issues to their finance committee than were urban hospitals, subsidiaries of systems and system boards. Eighty-six percent of respondents indicated that their board performed a systematic review of the projected return on investment (ROI) of at least some new capital projects.
Engagement of Administrators
A majority of respondents identified seven administrators with whom their boards at least sometimes actively engaged when the organization was undertaking new capital investments. The most common administrators were the CEO and CFO, who were always utilized by almost all respondents. A large percentage of respondents with a COO or Vice President of Facilities also indicated that their board always engaged with these individuals.
Other findings included:
• Suburban hospital boards were more likely to engage with their Vice Presidents of Community Affairs than were urban hospital boards.
• Boards of hospitals with fewer than 300 beds were more likely to engage with their CFOs than were hospitals with 300 or more beds.
Retreats
Overall, half of all respondents indicated that within the last two years, their boards had conducted a retreat to review and/or analyze potential future capital projects. Rural hospital boards were more likely to have such board retreats than were non-rural hospital boards.
Challenges Boards Face
Overall, respondents indicated several areas where their boards have faced challenges during the last three years in relation to capital allocation for new construction, renovation and/or IT investment. This survey was done before the most recent financial crisis. Even then, the financial situation and a tight credit market were hitting hospital capital allocation projects hard. Hospitals are, in many cases, not able to access the needed capital to fulfill capital allocation goals, and therefore the board is being forced to reevaluate its overall strategic goals in relation to capital allocation for new construction and IT systems. Many hospitals have to issue second or third bonds in order to finish projects and many projects that have not yet started are being delayed or cancelled. Rising costs of energy and raw materials are making the cost of many projects far exceed board projections, further exacerbating problems.
The weakening financial markets in general are making the board planning process next to impossible. Many board members no longer have any confidence that resources will be available, and the cost of capital has become inordinately high. Many hospitals are also finding that the bond market is repricing investments made to require more capital for multiphase projects. Creating the necessary cash flow and ROI for new projects is becoming very difficult. Because of all these factors, some boards are understandably becoming risk adverse.
It is a challenge to find board members with needed competencies such as IT or construction knowledge in many rural areas. These hospitals also face challenges from declining populations and insufficient third-party payments.
This article 1st appeared in the January 2009 issue of Trustee Magazine.
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