1
An Evaluation of Hospital Capital Investment after Balanced Budget Act
Tae-Hyun “Tanny” Kim, MPHMichael J. McCue, DBAVirginia Commonwealth UniversityDepartment of Health Administration
Please do not quote or cite findings: they are preliminary.Contact: [email protected]
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 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
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: 1998-2002
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 StatisticsVariable Mean Std. Dev.Capital investment ($1000s) 5,614 13,700Ln(capital investment) 10.932 6.603Market factorsMDs per population 1,000 2.201 1.960Ln(population) 11.866 1.761% Population over 65 0.135 0.037Ln(per capita income) 10.141 0.271Unemployment rate (%) 5.080 2.396Operational factorsBeds 189.32 179.78Number of services 33.531 13.436Occupancy rate 0.463 0.213Case-mix 1.295 0.250Financial factorsDays cash on hand 41.457 74.669Cash flow 13.661 249.83Debt ratio 0.836 8.063
12
Descriptive Statistics (cont.)
Variable Mean Std. Dev.Control factorsHerfindahl Index 0.289 0.267Ownership Not-for-profit 0.618 0.486 For-profit 0.157 0.364 Public 0.225 0.418System affiliation 0.562 0.496Teaching hospital 0.280 0.450Urban 0.600 0.489Region North East 0.153 0.361 Central 0.266 0.442 South 0.384 0.486 West 0.181 0.385
13
Methods
Multiple regression
Hospital & year fixed-effect model
itititittiit FINaOPERaMKTaCI 13121
14
Results
Table 2: OLS regression with robust standard errors
Dependent Variable: Log of capital investment
Independent Variables Coef. Std. Err. P>t
MDs/capita -0.043 0.046 0.349
Ln(population) -0.085 0.085 0.313
% Population over 65 -4.078 * 2.019 0.044
Ln(per capita income) 0.530 0.398 0.183
Unemployment rate 0.006 0.030 0.850
Beds 0.002 ** 0.001 0.000
Occupancy rate 1.733 ** 0.382 0.000
No. of services 0.033 ** 0.007 0.000
Case-mix index 1.100 ** 0.386 0.004
Days cash on hand 0.001 0.001 0.082
Cash flow 0.0002 * 0.0001 0.035
Debt ratio -0.086 0.052 0.098R-squared: .1451 * Statistically significant at the 5 percent level ** Statistically significant at the 1 percent level.
15
Dependent Variable: Log of capital investment
Control Variables Coef. Std. Err. P>t
Herfindahl index 0.313 0.245 0.201
For-profit -0.694 0.497 0.163
Public -0.549 ** 0.167 0.001
System affiliation 0.058 0.134 0.667
FP*SYS -0.371 0.541 0.492
Teaching -0.099 0.172 0.563
Urban 0.074 0.186 0.689
Northeast 1.089 ** 0.182 0.000
Central 0.753 ** 0.165 0.000
West 0.182 0.213 0.393
yr2000 -0.626 ** 0.091 0.000
yr2001 -2.267 ** 0.133 0.000
_cons 6.685 3.864 0.084
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