Paper
Strategic Allocation and Management of Capital in Healthcare: A Guide to Decision Making
Published 2011 · Thomas E. McKee, L. McKee
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Abstract
Since the publication of the first edition of this book in 2007, the business model used in healthcare for more than a half century has started a profound transformation. Unsustainable national healthcare costs are driving legislation, regulation, and competitive market responses that are rapidly changing healthcare from a volumebased delivery and payment system focused on illness to a value-based system focused on managing population health. This transformation is placing unprecedented demands on the nation’s hospitals, health systems, and related provider organizations. More than at any time in the past, an organization’s long-term success and sustainability hinge on smart, strategic investment decisions being made today and in the time since the business model transformation began. Tightening margins increasingly conflict with an everexpanding list of high-dollar capital needs related to positioning organizations for success under the new model. Few healthcare organizations have sufficient capital capacity to meet their comprehensive strategic requirements. Their leaders must make choices. How much capital to spend and on which projects or investments are critical decisions with long-term strategic and financial implications. Executives in the nation’s hospitals, health systems, and other provider organizations frequently struggle with making these decisions. As a result, wide variations exist in the decision-making processes used to allocate scarce capital resources. Many organizations implement portions of the best-practice capital allocation and management process described in this book, and they are very adept at managing those aspects. Few organizations, however, address capital allocation and management comprehensively, likely because of the cultural and organizational challenges associated with developing and implementing a strategic capital decision-making process. Decision-making authority is often a key issue. At what level should capital decisions be made, and who should be involved in their review and approval? Issues surrounding appropriate decision criteria also are critical. Are criteria defined and consistently applied organization-wide? Technical challenges—such as calculation of capital availability, the qualitative and quantitative metrics required for project analysis and review, and the mechanics of integrating the capital allocation and management process with the organization’s strategic and financial planning—are numerous and can present significant roadblocks. Capital management as an integral component of an organization’s comprehensive decision-making process is vital to the organization’s ability to optimize both its
Smart, strategic investment decisions are crucial for healthcare organizations to achieve long-term success and sustainability in the value-based healthcare model.
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