Allocating capital systemwide. Who gets how much and why

The maturing of multi-institutional healthcare systems has created a need for systemwide approaches to managing investment in capital expenditures. Historically, hospitals have allocated capital using traditional capital budgeting techniques, including discounted cash flow, net present value, and internal rate of return methodologies. Now systems can use a multifactored model to allocate capital among member hospitals. This approach uses historical and projected financial and statistical information to quantify the risks member hospitals face. At the system level, capital allocation decisions should start with the strategic and financial planning processes. Catholic systems face an additional caveat: The system's mission statement drives the planning processes. Conceptually, the capital allocation plan is an attempt to value each hospital as a going, or viable, concern. From this perspective, value is understood as a function of expected return, the certainty of the return, and the return offered by similar investments in other hospital markets. Despite the many determinants of business and financial risk, much of the variance in asset market value can be explained through five assessment criteria: market demographics, position within the market, historical and projected financial performance, historical utilization, and third-party reimbursement mix.