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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Please do not quote or cite findings: they are preliminary.Contact: kimth@vcu.edu

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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

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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

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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

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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

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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?

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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

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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)

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Measurement

Dependent variable: capital purchase for buildings, fixtures and moveable equipment during a fiscal year

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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

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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

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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

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Methods

Multiple regression

Hospital & year fixed-effect model

itititittiit FINaOPERaMKTaCI 13121

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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.

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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

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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

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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

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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