Shay Pratt, Marketing and Planning Leadership Council
A member health system executive recently asked us, “what percentage of the capital budget do other hospitals typically devote to strategic capital?” This question is not surprising in light of recent reports that capital spending this year will continue to be restricted.
Defining "strategic capital"
We define strategic capital as novel investments—premium technologies that expand treatment capabilities and service offerings. Strategic capital does not include replacement capital. For example, for most organization a hybrid OR would be considered strategic capital as it reflects a premium upgrade to existing capacity.
Estimates from around the membership
While we haven’t conducted a formal survey, we have conducted hundreds of interviews with hospital capital planning committees in recent years. Based on those conversations, I would estimate that most organizations typically allocate 5 to 15 percent of the capital budget to strategic capital.
Of course, such a benchmark estimate requires several footnotes:
- The estimate does not include IT—of course, including IT would make the strategic capital budget a LOT bigger
- The amount dedicated to strategic capital will depend on several factors, including innovation philosophy, the degree of market competition, and the hospital’s position on the technology life cycle curve.
- Organizations that fall on the lower end are typically smaller community hospitals (many of them sole market providers) that cannot support the most advanced, often low-volume services. For these organizations, there is less pressure to invest in premium upgrades in the pursuit of comprehensive service lines.
- Hospitals with a mature service line organizational model and located in competitive markets tend to spend at least 10 percent on strategic capital. Of course, that number has declined in recent years due to the difficult economy and restrictions on capital availability. Many of these organizations are also buying IT systems and physician practices, which can crowd out the dollars available for strategic capital.
- We have interviewed some health systems that spend higher than 15 percent, although their strategic capital budgets have increased so they can upgrade hospitals they recently acquired.
Spending will follow strategy
While benchmarking strategic capital as a percent of overall capital can be helpful, the most important point here is that strategy should determine spending, not the other way around.
The “right answer” percentage for strategic capital should vary year to year depending on what the organization is trying to accomplish during the planning cycle. For example, if the organization’s strategic goals includes developing a neurosciences institute or expanding their regional reach, strategic capital will take a larger share of the budget as those strategies are implemented.
For more information on clinical investment decisions, Technology Insights members can access our Clinical Technology Compendium. For a quick review of strategic priorities for the top service lines, access the Council’s Service Line Forecast Compendium.