Centralizing capital budgeting, purchasing via software generates more than $5 million in annual savings

After several years of consolidation and underfunding, healthcare providers were once again planning to invest in capital spending to meet the need for increased bed capacity and technology upgrades. However, with recent economic events, many of those plans are on hold. According to HFMA’s Healthcare Finance Outlook 2008-2013 Report, the capital spending growth rate remains behind the growth rate for total operating expense, suggesting the need for capital investment spending may grow while actual spending shrinks. In this tightening financial situation, hospitals must find an effective and efficient process for ensuring they have the funds they need in the short term while they also plan for the long-term.

Controlling ongoing capital spending against a planned budget requires a reconciled view of overall capital spending that many organizations lack. Manual processes for tracking planned and actual expenses don’t deliver a real-time view of the spending process, allowing unplanned expenses to crop up. These unplanned expenses consume up to 20 percent of capital expenditures in many healthcare organizations.

Take, for example, Kingsport, TN-based Wellmont Health System, which serves northeast Tennessee and southwest Virginia. The organization spends $30 million to $40 million each year on its facilities, which include eight acute-care facilities that encompass more than 1,300 inpatient beds. With three comprehensive cancer centers and two major trauma centers, the organization also manages 53 physician offices and serves 140 physician partners. Wellmont’s building portfolio spans approximately 1.3 million square feet.

Due to the extensive capital needs across the Wellmont system, we faced several challenges in the capital planning group. Wellmont lacked a defined process for validating and tracking the spend related to capital projects, as well as the ability to compare budgeted dollars to the actual amount spent. Construction and renovation projects – particularly multi-year projects – frequently exceeded budget without a clear explanation. And with information residing in a variety of spreadsheets and databases across the system, there was no visibility or oversight.

Capital spend management systems can facilitate the day-to-day tracking of planned and actual expenses and variances, providing visibility to the various groups involved in the process and promoting accountability. The ability to get a comprehensive picture of capital needs, consistently prioritize those needs and monitor capital spending against plan are some of the significant benefits healthcare organizations can achieve by implementing software for capital spend management. But to fully leverage these capabilities, the organization must begin with both a clear view of its strategic goals and with the realization that a strategic capital plan is a fluid document that needs ongoing review against those objectives.

To transform the hodge-podge of databases and paper-based reports that historically made effective capital spend management an unmanageable task, Wellmont set out to obtain more accurate, reliable and readily available information. In addition to comparing budget to actual spending on projects, Wellmont also wanted real-time reporting on project dollars spent versus available project dollars on a project-by-project basis. This would help the system see the impact of different funding scenarios and create optimal long-term capital plans. Having data in multiple systems made it difficult to easily and accurately report on spending related to a project as well as to track and report on outstanding invoices.

Visibility into the general replacement budget for facilities was also a concern. Dozens of spreadsheets with budget and spend information made it difficult to run accurate, reliable reports. Another challenge was to overcome an antiquated paper approval process in which requisitioners never knew the status of their request – who had already given their approval or whose desk it was on at any given moment.

Finally, there was no real opportunity for supply chain employees to engage in the process, and they were left out of the loop on most projects. Wellmont saw the benefits that effective supply chain management could bring, such as negotiated cost savings, better forecasts for spending and combined projects for bulk savings.

Sophisticated supply chain management is critically important to every aspect of Wellmont’s success. For the system, having the right tools in the right place at the right time and at the right price enhances the safety of patients and staff, clinical outcomes, physician and staff satisfaction, and overall financial strength of the system.

With this in mind, Wellmont selected Boston-based VFA Inc.’s VFA.spendManager as a capital spend management solution. The hosted, Web-based solution provided the organization with a convenient and structured environment so that all stakeholders may document, forecast and track activities related to capital expenditures.

Wellmont’s finance department implemented a new systemwide finance information system, bringing about changes in the revenue cycle and supply chain management. System integration and process improvements focused on centralizing financial data and utilizing the VFA.spendManager budget creation, budget allocation and spend tracking capabilities to the fullest.

Now, Wellmont is realizing the benefits of having a system-based structure rather than one spread out among individual hospitals. Wellmont’s budget and spend data is now located in a centralized database that allows everyone from end-users to managers access to real-time information about the status of their projects. As a result, Wellmont is able to plan, execute and accurately budget for large multi-year projects and has a clearer view into all aspects of the capital budget cycle.

All of these successes are inviting greater participation from supply chain managers. The centralization of purchasing allows for product/vendor standardization, grouping of similar projects and an emphasis on producing quality, reliable data that can be used for informed decision-making. As a result, Wellmont’s supply chain has been able to implement cost reduction projects totaling $6.5 million in annual operational savings.

With the utilization of VFA.spendManager, Wellmont is seamlessly executing its multi-year capital projects, has complete visibility into overall capital spending and has gained a defined review and approval process. Wellmont is ultimately realizing annual capital cost savings of more than $5 million per year.

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