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“Tanny” Kim, MPH Michael J. McCue, DBA Virginia Commonwealth University Department of Health Administration Please do not quote or cite findings: they are preliminary.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:

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 (HFMA, 2004).  Continuously increasing average age of plant for hospitals: 7.9 to 9.8 years during (AHA, 2001)  BBA 1997 may have an influence on slowing growth of capital expenditure by affecting financial performance of hospitals

4  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) Background: Basic facts in the post-BBA period

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:  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 VariableMeanStd. Dev. Capital investment ($1000s) 5,614 13,700 Ln(capital investment) Market factors MDs per population 1, Ln(population) % Population over Ln(per capita income) Unemployment rate (%) Operational factors Beds Number of services Occupancy rate Case-mix Financial factors Days cash on hand Cash flow Debt ratio

12 Descriptive Statistics (cont.) VariableMeanStd. Dev. Control factors Herfindahl Index Ownership Not-for-profit For-profit Public System affiliation Teaching hospital Urban Region North East Central South West

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

14 Results Table 2: OLS regression with robust standard errors Dependent Variable: Log of capital investment Independent VariablesCoef.Std. Err.P>t MDs/capita Ln(population) % Population over * Ln(per capita income) Unemployment rate Beds0.002** Occupancy rate1.733** No. of services0.033** Case-mix index1.100** Days cash on hand Cash flow0.0002* Debt ratio R-squared:.1451 * Statistically significant at the 5 percent level ** Statistically significant at the 1 percent level.

15 Dependent Variable: Log of capital investment Control VariablesCoef.Std. Err.P>t Herfindahl index For-profit Public-0.549** System affiliation FP*SYS Teaching Urban Northeast1.089** Central0.753** West yr ** yr ** _cons Results Table 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