Hospital spending lags behind depreciation

Nearly half of the nation's hospitals haven't spent enough on capital investments to stay ahead of the depreciation of their facilities and equipment, jeopardizing their overall quality and their potential ability to meet future demand for services, according to a new report.

A study by the Healthcare Financial Management Assn. found that 41% of medical institutions were not investing enough capital to keep ahead of asset depreciation, posing a threat to their viability in the future.

"As we think about that, it can mean hospitals will have to increasingly spend their capital resources on replenishing and repairing their plants and equipment as opposed to spending on new technologies. That potentially has an impact on a hospital's ability to perform the way they want to," said Richard L. Clarke, president and chief executive of the Westchester, Ill.-based HFMA.

The report, "Financing the Future," was the second installment to be released in a yearlong series of six reports on capital spending in health care. The first report found that the number of hospitals with broad access to capital was dropping.

The latest report found that capital spending on fixed assets, such as buildings or equipment, increased only about 1% from $23 billion to $23.7 billion between 1997 and 2001. At the same time, demand for inpatient services increased by 7.7% and demand for outpatient services grew by 19.6%.

It also found that, although construction spending as a total dollar amount was increasing, it was decreasing as a percentage of total health care spending.

The hospitals spending the most on capital improvements were large, urban, nonprofit facilities. The report also found some geographic disparities in spending.

Overall, the association said hospitals have been forced to focus resources on short-term margins as a result of growing demands from aging baby boomers, reimbursement pressures, heightened patient expectations and technical innovations. That has been to the detriment of the long-term capital investments needed to maintain facilities.

Don May, vice president for policy of the American Hospital Assn., said financial constraints have forced some hospitals to set aside plans for capital investments and focus on immediate needs.

"They are worrying about their day-to-day operations," said May. "It's not that they're not planning for the future. I think a lot of them know what they have to do in the future. Having financial resources to do it with is another story."

May said the report lends statistical support to what he has heard anecdotally from hospital leaders.

He said the finding about capital spending failing to keep up with depreciation at so many hospitals is particularly troubling.

"You wonder if it's almost a vicious cycle," he said. "They can't get ahead because they don't have the financial position to get capital improvement financing. And they can't improve their position because they don't have capital improvement financing."