Investment Efficiency: A Comprehensive ROI.(Brief Article)

Executive Summary

The goal of an organization is to invest in projects that maximize enterprise-wide strategic objectives. It is desirable that the investment approval process be comprehensive, yet require minimal organizational resources. The relationship between a capital investment and its ability to move an organization toward its goals also needs to be efficient: Every dollar of investment should generate maximum leverage. A model for approving a comprehensive set of efficient investments in health care organizations is described.

Health care organizations have significant environmental challenges to generating revenues and controlling expenses while providing a high level of quality care:

* Home health agencies must collect outcome and assessment information set (OASIS) data. The OASIS initiative is a key component of Medicare's partnership with the home care industry to foster and monitor improved home health outcomes. The requirement forces investments in technology.

* Medical equipment wears out and needs to be replaced.

* The Health Information Accountability and Portability Act (HIPAA) is intended to reduce health care costs by establishing standards in a number of areas, and it allows patients more control over their personal health records. The cost of compliance is expected to exceed the costs of Y2K remediation efforts, and a substantial portion of the costs of compliance will be capital investments.

* The outpatient prospective payment system is a recently implemented requirement for coding and charging outpatient services. Once again, this may require a substantial investment in technology.

* Mergers, acquisitions, and divestitures in health care as in other industries have required facility and site changes: renovations, new buildings, and relocations.

* Improvements in medical diagnosis and treatment require increasingly sophisticated and expensive medical equipment. For example, a CT scanner costs close to a half-million dollars.

* Health care organizations invest in community-related projects to promote good will and civic responsibility: parking facilities, clinics in underserved neighborhoods, landscaping, and other initiatives that occur where the community intersects the health care organization.

Financial analyses are well understood and have been applied to capital investment decisions for decades. Net present value, internal rate of return, and payback period are easy to calculate and do not require much data. However, capital budgeting and the cost justification of assets have historically been difficult to formalize and quantify. The capital budgeting process in particular is often governed by multiple decision makers, competing objectives, multiple evaluation criteria, and tangible and intangible budget items.

Research in economics, accounting, finance, and operations has resulted in the development of many formulas, algorithms, and procedures to assist managers with capital budgeting and justification of capital investments. Still, difficulties with these financial approaches remain:

* Assumptions and estimates are required for analysis, even for formulas as simple and straightforward as net present…