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“Tanny” Kim, MPH Michael J. McCue, DBA Virginia Commonwealth University Department of Health Administration Please do not quote or cite findings: they are preliminary.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

2. 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. 3 Background: Basic facts about recent trend  Minimal growth rate of aggregate capital spending of hospitals during 1997-2001 (HFMA, 2004).  Continuously increasing average age of plant for hospitals: 7.9 to 9.8 years during 1990- 2001 (AHA, 2001)  BBA 1997 may have an influence on slowing growth of capital expenditure by affecting financial performance of hospitals

4. 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. 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. 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. 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. 8 Methods  Study design: a pooled cross-sectional time-series design  Study period: 1998-2002  Data: CMS, AHA, and ARF database  Sample: non-federal, short-term general U.S. hospitals (16,520 hospital-years)

9. 9 Measurement  Dependent variable: capital purchase for buildings, fixtures and moveable equipment during a fiscal year

10. 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. 11 Descriptive Statistics VariableMeanStd. Dev. Capital investment ($1000s) 5,614 13,700 Ln(capital investment)10.932 6.603 Market factors MDs per population 1,000 2.201 1.960 Ln(population)11.866 1.761 % Population over 65 0.135 0.037 Ln(per capita income)10.141 0.271 Unemployment rate (%) 5.080 2.396 Operational factors Beds189.32179.78 Number of services33.53113.436 Occupancy rate 0.463 0.213 Case-mix 1.295 0.250 Financial factors Days cash on hand 41.45774.669 Cash flow 13.661249.83 Debt ratio 0.836 8.063

12. 12 Descriptive Statistics (cont.) VariableMeanStd. Dev. Control factors Herfindahl Index0.2890.267 Ownership Not-for-profit0.6180.486 For-profit0.1570.364 Public0.2250.418 System affiliation0.5620.496 Teaching hospital0.2800.450 Urban0.6000.489 Region North East0.1530.361 Central0.2660.442 South0.3840.486 West0.1810.385

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

14. 14 Results Table 2: OLS regression with robust standard errors Dependent Variable: Log of capital investment Independent VariablesCoef.Std. Err.P>t MDs/capita-0.0430.0460.349 Ln(population)-0.0850.0850.313 % Population over 65-4.078*2.0190.044 Ln(per capita income)0.5300.3980.183 Unemployment rate0.0060.0300.850 Beds0.002**0.0010.000 Occupancy rate1.733**0.3820.000 No. of services0.033**0.0070.000 Case-mix index1.100**0.3860.004 Days cash on hand0.001 0.082 Cash flow0.0002*0.00010.035 Debt ratio-0.0860.0520.098 R-squared:.1451 * Statistically significant at the 5 percent level ** Statistically significant at the 1 percent level.

15. 15 Dependent Variable: Log of capital investment Control VariablesCoef.Std. Err.P>t Herfindahl index0.3130.2450.201 For-profit-0.6940.4970.163 Public-0.549**0.1670.001 System affiliation0.0580.1340.667 FP*SYS-0.3710.5410.492 Teaching-0.0990.1720.563 Urban0.0740.1860.689 Northeast1.089**0.1820.000 Central0.753**0.1650.000 West0.1820.2130.393 yr2000-0.626**0.0910.000 yr2001-2.267**0.1330.000 _cons6.6853.8640.084 Results Table 2: OLS regression with robust standard errors

16. 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. 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. 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