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June/July 2002

By Liz Finch

Managing the fiscal challenges of rehabilitation facilities is a daunting task, to say the least, and only becomes more so in the face of rising health care costs. Those in charge of managing capital expenditures not only must consistently build and maintain a facility's infrastructure, they must do so while taking into account their many clinical and service needs, effectively managing the hospital's assets, and weighing the advantages of pursuing a diverse array of financial resources. Earmarking the majority of dollars for direct patient care areas and creating fair, team-managed distribution practices have been effective strategies for two large rehabilitation facilities, National Rehabilitation Hospital (NRH) in Washington, DC, and Boston's Spaulding Rehabilitation Hospital.

From top: David Walsh, director of materials management and network logistics, Spaulding Rehabilitation Hospital, Boston, and John Rockwood, assistant vice president for contract services at National Rehabilitation Hospital, Washington, DC.

PRIORITIZING PATIENT NEEDS

"All of our capital is prioritized for the patients. If it comes down to an issue of patient safety versus clinical quality, we will opt for the former," says John Rockwood, assistant vice president for contract services at NRH, which offers inpatient and outpatient care, day treatment programs, and home care services in 34 locations. "In fact, over the last 15 years we have invested all our money in our patient care units, which focus on disabilities caused by spinal cord and head injuries, stroke, arthritis, amputation, multiple sclerosis, postpolio syndrome, and other neurological and orthopedic conditions."

Prioritizing patient needs is the same approach used at Spaulding, according to David Walsh, director of materials management and network logistics. Spaulding is part of Partners HealthCare, which was founded in 1994 by Brigham and Women's Hospital and Massachusetts General Hospital. Spaulding has eight locations and five ambulatory sites located throughout eastern Massachusetts.

"We approach our capital expenditures on a case-by-case basis, looking at the overall picture and analyzing both the clinical need and the return on investment," Walsh says. "As we go along, we take into consideration the needs of each patient care department, our ambulatory sites, and our service departments. Each department head makes an assessment of their individual needs and submits their request to the capital committee, which includes the hospital executive management team, chief medical officer, chief information officer, director of facilities, and myself."

An overall assessment takes into account actual product and manufacturer information, a cost analysis, benefits of the expense, and other compiled relevant research data. According to Walsh, the hospital spends approximately roughly 30% for movable equipment, 37% for information systems, and the remainder for the physical plant out of the budget for capital infrastructure improvements. The release of funds throughout the fiscal year is on a month-to-month basis. "There are projects and initiatives that we pursue through our system and we can draw from additional resources within the network," Walsh says. "These projects can vary in value, such as a ventilator unit expansion for $1.2 million and off-site renovation or expansion for $800,000. These projects can range from $400,000 to $1.2 million."

The capital process is similar at NRH, where the service directors submit their needs to a committee composed of the chief financial officer, the hospital administrator, one physician representative, a clinical services representative, a nursing representative, and Rockwood. Once those needs are reviewed, they are sent with comments to the corporate office for approval. NRH's fiscal year runs from July 1 to June 30, and the hospital's 3-year plan is updated each year.

While clinician input is crucial, capital projects at most rehabilitation facilities often benefit from the input of other personnel as well, drawing commentary from virtually any department that will see an impact from the proposed purchase. "We try to identify who needs to be part of the decision-making process," says Walsh. "We need to make sure that the unit's needs are met and that they are compatible with systems already in the network. Biomedical engineering might have to be involved to make sure the correct leads are there, for instance. Recently, the spinal unit needed power chairs, and for that we gathered the adaptive technology team for input on what we would need." In addition to clinician input, Spaulding has implemented a tracking system to determine exact equipment usage by patients.

"Simply put, if we run short of equipment, we can't meet patient needs," Walsh says. "That system can show us when we are renting products that we use often, and may point us toward purchasing these items instead."

PURCHASING DECISIONS

When purchasing items, both Spaulding and NRH take an uncommitted approach in terms of manufacturers, evaluating all potential sources. For specialty equipment such as high/low tables, recumbent bikes, or treadmills, Spaulding solicits bids from several manufacturers. NRH typically seeks three competitive bids for any item that costs more than $1,000. "Quality plays a role, of course, and in the end it is really the clinician's choice as to the equipment we purchase," Rockwood says. "Any vendor recommendation usually comes from the department that is requesting the equipment."

"We are always looking at technologies that will make departments more efficient, such as vital signs monitors. Time is valuable in nursing, so we want to make that department's work as easy and as efficient as possible," Walsh says. "The infrastructure likewise must be supported with technology, which means constantly upgrading and maintaining the facility."

As part of that upgrade, Spaulding recently added a new admission, discharge, and transfer system and new billing systems, and expanded its ambulance service. The facility also is in the process of looking at wireless technology and adding an automated phone attendant to better serve its customers.

Large investments in such services can crop up unexpectedly or be visualized a long way off, though being prepared is the mark of a successful budgeting strategy. In the case of NRH, the facility's next big expenditure involves replacing its boilers and chillers in 3 to 5 years, and Rockwood says the committee has long been planning for such a large capital undertaking. "NRH is relatively new-it was built only 18 years ago-so we haven't had any major capital expenditures up until now," Rockwood says. "In fact, even general services didn't receive a lot of attention until the ground floor flooded out about 8 months ago, essentially devastating the hospital's administration, patient records, and finance facilities. The subsequent renovation included installation of a new kitchen and dining room, a new materials management department, a prosthetics and orthotics lab, a library, an auditorium, support services, and a new loading dock."

"Recently we went through a process to put heavy lifts into the patient rooms," Walsh says. "That was a large investment, but in return we hope to see a reduction in back injuries and staff turnover."

FUNDING ISSUES

"The total loss [caused by the flood] has not been finalized yet, though we expect it to exceed $12 million," Rockwood says. "However, because the cost of renovation was covered by our insurance, it really did not impact our other expenditures. We needed to do that work regardless, though, of course, we didn't want to do it that way."

Nonetheless, the existence of an emergency fund is crucial, and Spaulding maintains a contingency fund for emergencies, with about 20% of allocated capital held in that fund annually.

In regard to longer-term capital planning and particularly any "sky's the limit" kind of propositions, Rockwood's strategy is to pare those requests down from year to year. For instance, the staff at NRH recently expressed a desire to get into more clinical research and requested an expanded laboratory to do so. As a result, the hospital is now funding a laboratory through philanthropy efforts.

"In fact, our largest current source of replenishment revenue comes from private foundation grants and fund-raising campaigns that net donations from grateful patients, board members, and corporations," Rockwood says. "The hospital recently built a new occupational therapy center with an outdoor exercise garden using such funds, and a neuroscience center that was simply a pipe dream 3 years ago is also opening soon on the first floor of the hospital." Spaulding also has its share of "pipe dream" requests, and Walsh says the committee works hard not to discourage such ideas.

"Sometimes folks come up with something they'd like to see versus what they really need, but a lot of good ideas start that way," Walsh says. "In fact, those kinds of ideas may cause us to turn back and look at our business plan. Therefore, when they submit their requests, each department ranks items by number. A ‘1' is a ‘have to have item,' while a ‘4' is a ‘like to have if possible' item. And 4s do graduate up to 1s sometimes."

Regardless of how appealing a suggestion is, the final decision still hinges on the dollars left in the facility's coffers. That often means a project is not necessarily out of the question, though it does necessitate creativity to become a reality.

"We often need to be creative on the financial side, whether through leasing or other financing planning," Walsh says. "For instance, sometimes we are able to move products around based on need, reallocating an item from one area where it is not being utilized very much."

And of course, the general capital planning process only gets more difficult with shrinking reimbursement rates. As a result of NRH's tightened budgets, Rockwood says the facility has begun investigating some options with asset management groups.

"Right now, we outsource our facilities management services to a large asset management group that has offered lots of help in terms of financing bigger purchases," Rockwood says. "I know a lot of hospitals have been opting for asset management as a solution to their capital planning problems. Boston University recently went through a major overhaul, and they did so by creating a long-term financing agreement. So that is certainly worth looking at for our big ticket items."

WARRANTIES AND SERVICES CONTRACTS

Further expense considerations such as equipment warranties tend to be flexible, according to both Walsh and Rockwood, and depend on the item being purchased. While much service and repair are handled in-house, both say that technical pieces that require annual maintenance merit a service agreement, an extended warranty, or an agreement for replacement parts for a reduced rate over a period of time.

"Work is always warrantied for a year, but sometimes we go ahead and buy the extended service agreement, as we did for our new $120,000 surveillance system," Rockwood says. "Such systems break down a lot. We also have service agreements on all the equipment that is critical to building maintenance and patient care. For instance, if we had a chiller go down, we have an emergency agreement that is funded out of our operating budget. So far, we have not had an issue where the cost of fixing our equipment was so large that we have not been able to afford to do so."

Being able to afford any necessary expenditure that arises is, of course, the key to successful capital planning, and Walsh sees a well-honed team as an essential to managing such a difficult task.

"In terms of clinical needs versus financial constraints, you really have to weigh both," Walsh says. "When need exceeds funds, we get our team together to determine the priorities. Capital is such a big part of the hospital and what we do, and at Spaulding we maintain it as a fun process that brings all the units together.

"It's educational as well, and it has helped me understand what the other departments do on a daily basis," he continues. "That builds the team atmosphere that we need to be successful in planning for the best use of the hospital's funds."

Liz Finch is a contributing writer for Rehab Management.

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