INSIDE THE CURRENT ISSUE

July 2008

Capital Gains

Where’s the pork?

8 steps on how to trim down "pork-filled" budgets during lean years

by Niklaus Fincher

Some of my favorite discussions during this highly competitive political season have been related to certain special projects or "pork barrel" spending on the part of our elected officials. What’s interesting are the interpretations of their constituents. If the project is for our state, then it’s necessary and worthwhile. But if the project involves spending in another state, then it’s definitely wasteful spending or pure "pork."

This invariably gets me thinking about the process, or lack of process, surrounding the development of a typical medical capital equipment budget. In many cases, the various departments competing for limited capital funds act as though they are from different states, i.e., one department’s capital requests are wasteful while another’s are necessary.

Here are some comments from a few administrators who deal with the ongoing dilemma of managing capital budgets that are riddled with pork.

• "60 percent of the equipment we purchased last year was not on the approved capital budget at the beginning of the year."

• "Our capital budget is basically an authorized wish list with little basis on fact-based needs."

• "Last year our staff requested $15 million in equipment, which I approved. They only spent $7 million. Now I’m worried about which of those must-have critical items didn’t get purchased."

There are a couple of major contributors to the typical capital budgeting process that serve to undermine the value and inflate the pork. Actually, there’s more than a couple, but in the interest of focus I’ll zero in on a couple.

The first contributor is the competitive nature of the budget development process. There’s usually a set amount of dollars, and all the various departments compete for their fair share. As in any competition, there are winners and losers. And, unfortunately, some folks play fair while others don’t. Some department managers play the game well by lobbying key physicians who generate significant amounts of revenue to the hospital’s bottom line, or they present their capital requests in terms of life or death needs, or they hyper-inflate the dollars requested so that if their budget does get cut, they’ll still have enough money to buy what they need. They may even enlist the aid of the vendor sales rep to generate quotes that include more than enough cost to buy what they need.

Department managers who are not as good at the budget competition may experience cuts to their budget because they didn’t play the game well. Over time, managers who don’t compete well in the budget development process may give up and decide to extend the life of their existing equipment longer than they should. Key and necessary equipment items, such as replacements for those 15+ year old defibrillators (that should have been replaced five years ago) may get cut or unfunded, leaving the hospital at risk.

The second contributor is access to good data or price benchmarks. Every budget is only as good as the information it’s comprised of or based on. Ideally, budget requests should be based on reliable and sound sources which indicate as close as possible what the equipment items will actually cost. The good news is there are excellent and reliable resources your staff can tap for good budget benchmark data. The bad news is there are a number of unreliable resources your staff can access that increase the amount of pork and undermine the overall budget.

Here are some examples of unreliable vs. reliable sources of budget development data.

Unreliable benchmarks:

• Last year’s pricing or outdated quotes

• A verbal price delivered by phone from the sales rep

• What your neighbor paid

• A "best guess" including contingencies in case of a reduction

• What you need plus enough to cover what was cut last year

Reliable benchmarks:

• Manufacturer catalogs and list price (current)

• Your group purchasing organization contract price, group buy or promo price (timing dependent)

• Actual, current quotations, per item

• Online database sources such as Attainia

• Objective resources such as MD Buyline who provide price benchmark info

Many healthcare systems have invested in enterprise financial software that includes modules to help manage their capital budgeting or approval process. However, a key weakness of most of these systems is their reliance on information from external sources. In other words, if you feed these systems bad budget data, they will process it and decisions will be made that may not help achieve your capital budgeting goals. As the saying goes "garbage in, garbage out."

There are solutions that can be implemented to get your capital budgeting process under control and trim the pork. Here are some recommendations:

1) Make sure you segregate your budget dollars by category. One category should cover the dollars required to replace or upgrade key equipment items, especially those that could put your system at risk. A second category would cover the cost of adding new equipment or technology necessary to maintain your clinical and competitive edge. A third category should include equipment which will be used in any new construction or renovation projects.

2) Maintain an up-to-date equipment inventory list or ledger. The inventory should include information related to the age, condition, and technological status. Create a replacement schedule forecasting which items will require replacement over the next five years and rate the priority for replacement. As an example, replacing a 15-year-old defibrillator would rate a higher priority than replacing a 10-year-old stretcher.

3) When equipments items are approved, tie the dollars requested to the specific items. Many managers view approved capital dollars as a cash account they can use to buy whatever they want. Don’t allow your managers to substitute items without approval and justification.

4) Build a cross-functional capital budget committee and charge them with creating an environment which reduces the competitive aspect of the budget development process. Make sure they participate in the approval process and that they know to move items that may not receive funding in the current year to next year’s request list.

5) Subscribe to an online service or resource like MD Buyline and/or Attainia to access objective and reliable price benchmark data. Provide passwords to your staff and require them to provide proof that they did access this information along with their capital requests.

6) Access GPO pricing as a benchmark for price forecasting. Many buyers will tell you they use their GPO price as a starting point, so for those buyers the GPO price is their list price. With discounts ranging in the 30 percent to 40 percent range, GPO pricing can significantly reduce the dollars forecast in your capital budget.

7) Require staff to attach actual supplier quotations, when available, to support the dollars being requested.

8) Keep your budget organic and plan for contingencies, such as an unexpected failure requiring the immediate replacement of a key piece of equipment.

As an industry, we can learn from government spending and begin to focus on creating realistic and effective budgets. Trimming pork is a good place to start. At the very least, it may help you get more of the equipment you really need.

Niklaus Fincher serves as senior director of capital asset services for VHA Inc. where he leads the strategy and program development for VHA member facilities. Fincher has more than 29 years of medical capital equipment experience as a clinician, consultant, RIS/PACS implementation manager, medical equipment planner, group purchasing contractor and strategic planning advisor. Fincher also serves as a member of Healthcare Purchasing News’ editorial advisory board.