Capital Spending in Healthcare: A Missed Opportunity for Improvement?

by Adalsteinn D. Brown et al. | Jun 30, 2013

Adalsteinn D. Brown
Institute of Health Policy, Management and Evaluation
University of Toronto, Dalla Lana School of Public Health

David J. Klein
Department of Medicine, University of Toronto
Keenan Research Centre, Li Ka Shing Knowledge Institute, St. Michael’s Hospital, Toronto
Institute of Health Policy, Management and Evaluation

Tai M. Huynh
Centre for Complex Interventions in Care
University Health Network, Toronto

Gwyn Bevan
London School of Economics

Frank Markel

Steven D. Ottaway
GMP Capital

George Pink
University of North Carolina, Chapel Hill

Myles Zyblock
RBC Capital Markets

Key messages for decisions-makers

In order to create a stronger platform for using capital investment to improve health system performance, policy-makers and researchers will need to create new resources to support capital investment. A critical element of this platform is resources to analyze the need for capital, how it may be deployed to increase health system performance, impacts on operating costs of capital  investments, equity, and return on investment. More specifically, we suggest that governments and health system providers work together to:

  • Build a capacity planning model for the Canadian healthcare system. This model should recognize demographic shifts, trade-offs between different sectors (e.g. long-term care and home care), the effect of capital and capacity increases on health system efficiency and performance, and calculate the total capital requirements across our healthcare system. 
  • Set benchmarks on expected returns on capital investment to guide capital decisions in healthcare. Information comparing the cost of capital (and the cost of procurement) and the expected returns should be a component of any request for funding by healthcare organizations. This information could be made public in a way that supported the needs of individual healthcare corporations, researchers, and investors. 
  • Create a shared resource of skilled individuals and tools to share best practices in capital planning to be used by government, the private sector, and healthcare organizations. There are few individuals with the full set of skills and wide experience in innovative approaches to capital in the Canadian publicly funded healthcare system. However, extensive expertise exists amongst large Canadian pension funds, non-healthcare corporations, and other areas of the public service. Without this expertise, models and benchmarks will not be useful. 

Policy-makers should also work to increase the amount and availability of capital that can improve health system performance and shift capital financing methods to those that help increase the return on investment and the efficiency of the investment. Policy-makers wishing to increase access to capital could:

  • Expand the use private vehicles and the engagement of the Canadian investing community as a way of increasing access to capital for healthcare organizations. Attention to other structured finance tools such as bond issues by healthcare institutions where the total long-term costs are clear and predictable may provide the advantage of not requiring direct and immediate government contribution and may provide an extremely effective way to leverage current public sector assets.
  • Develop a regulatory framework where healthcare capital investment that is focused on improvement and value. This regulatory framework should encourage integrated capital planning and allocation across sectors of care to capture the potential cost and quality advantages of integration. Current models of allocation tend to focus on a specific set of sectors and do not necessarily encourage the delivery of the right care in the right place.
  • Support philanthropy as an important source of healthcare capital through additional tax and other incentives. This should include attention to focus on creating tax and other incentives to support philanthropy in healthcare and should be promoted to all levels of government. Better understanding of the impact of philanthropy and its variability on the healthcare system should be further studied.
  • Continue to build capacity in multi-disciplinary organizations focused on assessing capital expenditures and vetting returns on invested capital. Organizations such as the Ontario Health Technology Advisory Committee (OHTAC), the Canadian Agency for Drugs and Technologies in Health (CADTH) and other activities that provide evidence on the effectiveness and cost-effectiveness of different capital investments are models that should be further explored for healthcare capital evaluation.
  • Expand the use of hospital funding models such as patient-based payment that can reward quality and efficiency gains achieved through capital investment. These systems can provide the opportunity for management to develop revenue streams that will appeal to investors more than historically-based global budgets.
  • Create pilot projects in social finance that link financing to hospital and other healthcare organizations for improvements in quality to corresponding reductions in waste and improvements in financial position through capital investment. These projects (i.e. funds) should be careful not to substitute for philanthropy but rather should augment it. 

Finally, policy-makers and decision-makers should ensure a strong research and communications infrastructure around capital investments. Without stronger evaluation of capital investments and research into the determinants of strong capital investment, understanding of capital investment is unlikely to progress. Likewise, the explicit goal for innovations in capital should be to raise or maintain quality while reducing overall costs; it does not require privatization. Policy-makers and researchers should: 

  • Endorse the importance of increased capital investment that is more effective and value-driven at federal, provincial, and regional levels. Evidence suggests that quality and performance overall improves with better availability of capital. Certain capital expenditures may be better managed outside of government while others may benefit from increased control and rigorous evaluation. Further research, grounded in modeling and quantitative analysis, should carefully evaluate the merits of different approaches in different situations.
  • Identify and support the managerial capacity and cultural changes in the healthcare system necessary to manage new financing vehicles effectively and realize improvements in efficiency that can be provided by access to capital. This includes better training of managers and leaders in project finance and a cultural shift in the way managers vet capital investments. 
  • Require rigorous evaluation and public disclosure of all capital projects including “own funds” capital projects financed through philanthropy or other “in kind” contributions. Hospitals and other healthcare institutions in Canada generally face a requirement to provide to the Minister of Health data on their activities. 

In the near term, policy-makers and other decision-makers should focus on ensuring that current capital investments are appropriate and match needs, are as efficient as possible, employ the best and latest innovations in capital finance structures and that the available pool of capital is expanded first through unlocking of capital already in the system before allocating new dollars.