Capital Allocation and the Board

In September 2008, the Health Research & Educational Trust and the Center for Healthcare Governance, along with our partners at Navigant Consulting, surveyed 294 hospital and health system CEOs about the role of each of their boards in the process of capital allocation.

Needed Competencies

At least 40% of respondents indicated five competencies related to capital allocation that were given at least "some emphasis" when selecting new board members. Financial aptitude and strategic planning abilities were given the most weight in the selection process, with more than 80% of respondents indicating at least "some emphasis."

Other findings included:

• Non rural hospitals with more 100 or more beds were more likely to put heavier emphasis on financial aptitude and strategic planning abilities than were rural hospitals with fewer than 100 beds.
• Urban hospital boards were more likely to put emphasis on IT knowledge than were either suburban or rural hospital boards.

Board Committees Dealing with Capital Allocation

The finance committee and the strategic planning committee were the board committees most likely to deal with capital projects.

In general, freestanding, suburban, and rural hospital boards were more likely to assign capital issues to their finance committee than were urban hospital, subsidiaries of systems, and system boards.

Systematic Review of ROI of New Project

A large majority of respondents (86%) indicated that their board performed a systematic review of the projected return on investment (ROI) of at least some new capital projects.

Board Engagement of Administrators/Resources

A majority of respondents identified seven administrators or resources with which their boards at least sometimes actively engaged when the organization is undertaking new capital investments. The most common administrators or resources were the CEO and the CFO, which were always utilized by almost all respondents. A large percentage of respondents with a COO or VP of Facilities also indicated that their board always engages with these individuals.

Other findings included:

• Suburban hospital boards were more likely to engage with their VPs of Community Affairs than were urban hospital boards.
• Boards of hospitals with fewer than 300 beds were more likely to engage with their CFOs than were hospitals with 300 or more beds.

Retreat

Overall, half of all respondents indicated that within the last two years, their boards had conducted a retreat to review and/or analyze potential future capital projects. Rural hospital boards were more likely to have such board retreats than were non rural hospital boards.

Challenges Boards Face

Overall, respondents indicated several areas where their boards have faced challenges during the last three years in relation to capital allocation for new construction, renovation, and/or IT investment:

• This survey was done before the most recent financial crisis. Even then, the financial situation and tight credit market were hitting hospital capital allocation projects hard. Hospitals are in many cases not able to access the needed capital to fulfill capital allocation goals, and therefore the board is being forced in many situations to reevaluate their overall strategic goals in relation to capital allocation for new construction and IT systems. Many hospitals are being forced to issue second or third bonds in order to finish projects that have already started. Many projects that have not yet started are being delayed or cancelled. Rising costs of energy and raw materials are making the cost of many projects far exceed board projections, further exacerbating problems.
• The weakening of the financial markets is in general making the board planning process next to impossible. Many board members no longer have any confidence that resources will be available, and the cost of capital has become inordinately high. Many hospitals are also finding that the bond market is repricing investments made to require more capital for multiphase projects. Creating the necessary cash flow and ROI for new projects is becoming very difficult. Because of all these factors, some boards are understandably becoming risk adverse.
• It is a challenge to find board members with needed individual competencies such as IT or construction knowledge in many rural areas. These hospitals also face challenges from declining populations and insufficient third-party payments.