Category Archives: Capital Expenditure
Cartoon – Capital Budget Approval
Cartoon – Capital Budget
Sutter launches ‘sweeping review’ of finances after $321M operating loss
- Sutter Health is launching a “sweeping review” of its finances and operations due to the pandemic’s squeeze on the system in 2020, which led to a $321 million operational loss, the system said Thursday.
- The giant hospital provider in Northern California said it will take “several years to fully recover,” adding that it plans to restructure and even close some programs and services that attract fewer patients, and will reassign those employees to busier parts of its network.
- Sutter, which spent $431 million to modernize its facilities last year, is also reassessing its future capital investments due to its current financial situation.
The pandemic “exacerbated” existing challenges for the provider, including labor costs, Sutter said.
Expenses again outpaced revenue in 2020 and Sutter fears the trajectory is “unsustainable.”
In 2020, Sutter generated revenue of $13.2 billion which was eclipsed by $13.5 billion in expenses, which was actually lower than its total expenses reported in 2019.
Last year, the system invested heavily to prepare for the pandemic, buying up personal protective equipment and other supplies all while volumes declined. Sutter estimates it spent at least $121 million on COVID-19 supplies, which does not include outside staffing costs.
Sutter said labor costs represented 60% of its total operating expenses, blaming high hospital wage indexes in Northern California, which it said are among the priciest in the country.
Still, Sutter was able to post net income of $134 million thanks in part to investment income, which was also deflated compared to the year prior.
Volume has not rebounded to pre-pandemic levels, the system said.
Admissions, emergency room visits and outpatient revenues all fell year over year, according to figures in Sutter’s audited financial statements.
Other major health systems were pinched by the pandemic but were able to post a profit, including Kaiser Permanente.
Michigan Medicine to start building $920M hospital
Ann Arbor-based Michigan Medicine will start construction on its $920 million hospital in the coming months, after delaying the project last year amid the COVID-19 pandemic, according to a March 8 health system update.
Michigan Medicine said its planning team has resumed design work on the facility.
The 12-story, 690,000-square-foot hospital is expected to house 264 private rooms, 20 operating rooms and three interventional radiology suites.
Citing a financial loss exacerbated by the COVID-19 pandemic, the academic health system delayed the project in May 2020.
With the delay, the new hospital is slated to open in the fall of 2025.
Healthcare AI investment will shift to these 5 areas in the next 2 years: survey
The COVID-19 pandemic has accelerated the pace of artificial intelligence adoption, and healthcare leaders are confident AI can help solve some of today’s toughest challenges, including COVID-19 tracking and vaccines.
The majority of healthcare and life sciences executives (82%) want to see their organizations more aggressively adopt AI technology, according to a new survey from KPMG, an audit, tax and advisory services firm.
Healthcare and life sciences (56%) business leaders report that AI initiatives have delivered more value than expected for their organizations. However, life sciences companies seem to be struggling to select the best AI technologies, according to 73% of executives.
As the U.S. continues to navigate the pandemic, life sciences business leaders are overwhelmingly confident in AI’s ability to monitor the spread of COVID-19 cases (94%), help with vaccine development (90%) and aid vaccine distribution (90%).
KPMG’s AI survey is based on feedback from 950 business or IT decision-makers across seven industries, with 100 respondents each from healthcare and life sciences companies.
Despite the optimism about the potential for AI, executives across industries believe more controls are needed and overwhelmingly believe the government has a role to play in regulating AI technology. The majority of life sciences (86%) and healthcare (84%) executives say the government should be involved in regulating AI technology.
And executives across industries are optimistic about the new administration in Washington, D.C., with the majority believing the Biden administration will do more to help advance the adoption of AI in the enterprise.
“We are seeing very high levels of support this year across all industries for more AI regulation. One reason for this may be that, as the technology advances very quickly, insiders want to avoid AI becoming the ‘Wild Wild West.’ Additionally, a more robust regulatory environment may help facilitate commerce. It can help remove unintended barriers that may be the result of other laws or regulations, or due to lack of maturity of legal and technical standards,” said Rob Dwyer, principal, advisory at KPMG, specializing in technology in government.
Healthcare and pharma companies seem to be more bullish on AI than other industries are.
The survey found half of business leaders in industrial manufacturing, retail and tech say AI is moving faster than it should in their industry. Concerns about the speed of AI adoption are particularly pronounced among small companies (63%), business leaders with high AI knowledge (51%) and Gen Z and millennial business leaders (51%).
“Leaders are experiencing COVID-19 whiplash, with AI adoption skyrocketing as a result of the pandemic. But many say it’s moving too fast. That’s probably because of current debate surrounding the ethics, governance and regulation of AI. Many business leaders do not have a view into what their organizations are doing to control and govern AI and may fear risks are developing,” Traci Gusher, principal of artificial intelligence at KPMG, said in a statement.
Future AI investment
Healthcare organizations are ramping up their investments in AI in response to the COVID-19 pandemic. In a Deloitte survey, nearly 3 in 4 healthcare organizations said they expect to increase their AI funding, with executives citing making processes more efficient as the top outcome they are trying to achieve with AI.
Healthcare executives say current AI investments at their organizations have focused on electronic health record (EHR) management and diagnosis.
To date, the technology has proved its value in reducing errors and improving medical outcomes for patients, according to executives. Around 40% of healthcare executives said AI technology has helped with patient engagement and also to improve clinical quality. About a third of executives said AI has improved administrative efficiency. Only 18% said the technology helped uncover new revenue opportunities.
But AI investments will shift over the next two years to prioritize telemedicine (38%), robotic tasks such as process automation (37%) and delivery of patient care (36%), the survey found. Clinical trials and diagnosis rounded out the top five investment areas.
At life sciences companies, AI is primarily deployed during the drug development process to improve record-keeping and the application process, the survey found. Companies also have leveraged AI to help with clinical trial site selection.
Moving forward, pharmaceutical companies will likely focus their AI investments on discovering new revenue opportunities in the next two years, a pivot from their current strategy focusing on increasing profitability of existing products, according to the survey. About half of life sciences executives say their organizations plan to leverage AI to reduce administrative costs, analyze patient data and accelerate clinical trials.
Industry stakeholders are taking steps to advance the use of AI and machine learning in healthcare.
The Consumer Technology Association (CTA) created a working group two years ago to develop some standardization on definitions and characteristics of healthcare AI. Last year, the CTA working group developed a standard that creates a common language so industry stakeholders can better understand AI technologies. A group also recently developed a new standard to advance trust in AI solutions.
On the regulatory front, the U.S. Food and Drug Administration (FDA) last month released its first AI and machine learning action plan, a multistep approach designed to advance the agency’s management of advanced medical software. The action plan aims to force manufacturers to be more rigorous in their evaluations, according to the FDA.
Chicago’s Mercy Hospital has a potential buyer
Mercy Hospital & Medical Center in Chicago has secured a nonbinding purchase agreement with Insight Chicago just months before it is slated to close its doors, according to the Chicago Tribune.
Under terms of the deal, still being negotiated, Insight Chicago would operate Mercy Hospital as a full-service, acute care facility. Insight Chicago is a nonprofit affiliated with a Flint, Mich.-based biomedical technology company.
The deal is subject to regulatory approval, but if it goes through, it would keep the 170-year-old safety-net hospital open.
Securing a potential buyer is the latest in a series of events related to the Chicago hospital.
On Feb. 10, Mercy filed for bankruptcy protection, citing mounting financial losses and losses of staff that challenged its ability to provide safe patient care.
The bankruptcy filing came just a few weeks after the Illinois Health Facilities and Services Review Board rejected a plan from Mercy’s owner, Trinity Health, to build an outpatient center in the neighborhood where it planned to close Mercy. The same board unanimously rejected Livonia, Mich.-based Trinity’s plan to close the hospital in December.
The December vote from the review board came after months of protests from physicians, healthcare advocates and community organizers, who said that closing the hospital would create a healthcare desert on Chicago’s South Side.
Mercy said that until the pending deal with Insight Chicago is signed and approved by regulators, it still plans to close the facility. If the agreement is reached before the May 31 closure, Mercy will help transition services to Insight Chicago, according to the Chicago Sun-Times.
Insight Chicago told local NPR affiliate WBEZ that it has a difficult task ahead to build community trust and address the financial issues that have plagued the Chicago hospital.
“I think the big main point we want to understand between now and then is the community needs to build trust with the community, and I think to build trust we have to tell the truth and be sincere,” Atif Bawahab, chief strategy officer at Insight, told WBEZ. “And there’s a reality of the situation as to why [the hospital] is going bankrupt and why several safety net hospitals are struggling.”
In its bankruptcy filing, Mercy said its losses have averaged about $5 million per month and reached $30.2 million for the first six months of fiscal year 2021. The hospital also said it has accumulated debt of more than $303.2 million over the last seven years, and the hospital needs more than $100 million in upgrades and modernizations.
Kaiser’s net income grows 68% in Q3
Kaiser Permanente saw its net income climb more than 68 percent in the third quarter of 2020, according to its financial report released Nov. 6.
The Oakland, Calif.-based health system recorded operating revenue of $22 billion in the quarter ended Sept. 30, up 5.3 percent from the same period a year earlier. Kaiser also saw expenses rise about 5.9 percent year over year, to $21.5 billion.
“Although the pandemic continues to have an impact on Kaiser Permanente, during the third quarter we safely resumed in-person preventive and elective care, started to address the backlog of deferred procedures that were put on hold due to COVID-19, and continued to leverage and grow virtual care for members’ safety and convenience,” said executive vice president and CFO Kathy Lancaster.
The 39-hospital system spent $964 million on capital projects in the third quarter, up from $891 million in the third quarter of 2019.
A lot of the capital spend has been shifted into the IT arena to boost patient and member access to various digital health services such as telehealth, Tom Meier, corporate treasurer of Kaiser, told Becker’s. It also included ongoing multi-year projects and maintenance of its hospitals.
Compared to the third quarter of 2019, Kaiser’s operating income fell 25.9 percent to $456 million.
Largely due to the result of returns in the financial market, the system ended the third quarter of 2020 with a net income of $2 billion. In the same quarter last year, Kaiser recorded a net income of $1.2 billion.
In the third quarter, Kaiser saw its non-operating income reach $1.5 billion, up from $556 million in the third quarter of 2019, Mr. Meier said.
Kaiser also offers a health plan to members across the U.S. As of Sept. 30, Kaiser had 12.4 million health plan members, representing a loss of 11,000 members in the third quarter. The decline was largely attributed to members losing access to their employer-sponsored plan as unemployment went up in the state. However, this decline was offset slightly by members purchasing individual plans or being enrolled in a government-sponsored plan, Mr. Meier said.
For the nine-month period ended Sept. 30, Kaiser reported a net income of $5.4 billion on revenue of $66.6 billion. In the same nine-month period in 2019, the health system recorded a net income of $6.4 billion on revenue of $63.7 billion.
The health system continues to respond to the COVID-19 pandemic. Through the third quarter the system has cared for 185,000 COVID-19 patients and tested nearly 2 million people for the novel virus.
13 health systems opening hospitals
The following health systems have opened hospitals, advanced proposals to build them or announced plans for them in the last two weeks:
1. UT Health San Antonio to build $400M+ hospital
University of Texas Health San Antonio plans to build a 144-bed specialty and research hospital.
2. Conway Medical Center plans new 50-bed hospital
Conway (S.C.) Medical Center plans to build a hospital in South Carolina’s Carolina Forest area, the organization announced Sept. 8.
3. Tidelands Health plans new hospital in South Carolina
Tidelands Health plans to build a hospital in South Carolina’s Horry County, the Georgetown, S.C.-based organization said Sept. 8.
4. Atrium Health fights to open hospital in North Carolina county
Charlotte, N.C.-based Atrium Health is still fighting to open a $147 million, 30-bed hospital in Mecklenburg County.
5. Abrazo Health to open Arizona hospital this fall
Phoenix-based Abrazo Health plans to open a hospital in Surprise, Ariz., this fall.
6. McLaren Healthcare boosts funding by $150M for Lansing health campus
After increasing its investment by $150 million, Grand Blanc, Mich.-based McLaren Health Care said it will spend $600 million on its new health campus in the state’s capital of Lansing. The new campus will include a new 262-bed McLaren Orthopedic Hospital.
7. Ballad Health plans 2021 reopening for hospital closed 7 years
Johnson City, Tenn.-based Ballad Health plans to reopen a hospital in Virginia that has been closed since October 2013.
8. Ascension reopens Florida hospital ravaged by hurricane in 2018
Ascension Sacred Heart has reopened its hospital in Panama City, Fla., about two years after Hurricane Michael damaged the facility.
9. MarinHealth opens $535M hospital
MarinHealth in Greenbrae, Calif., has opened a new $535 million hospital.
10. HonorHealth to open 70-bed hospital in September
HonorHealth plans to open a 70-bed Phoenix hospital in September.
11. St. Louis University Hospital opens $550M hospital
SSM Health St. Louis University Hospital opened its $550 million facility to patients. The new facility is called the Grand New SSM Health St. Louis University Hospital.
12. Ascension Saint Thomas can build hospital in Tennessee county, beating out Vanderbilt
Ascension Saint Thomas has won approval to build a hospital in Tennesee’s Murfreesboro County, beating out a proposal from Vanderbilt University Medical Center.
13. Trustees approve OSU’s $1.79B hospital
Ohio State University’s board of trustees unanimously approved this week its new $1.79 billion inpatient hospital.
Industry Voices—6 ways the pandemic will remake health systems
Provider executives already know America’s hospitals and health systems are seeing rapidly deteriorating finances as a result of the coronavirus pandemic. They’re just not yet sure of the extent of the damage.
By the end of June, COVID-19 will have delivered an estimated $200 billion blow to these institutions with the bulk of losses stemming from cancelled elective and nonelective surgeries, according to the American Hospital Association.
A recent Healthcare Financial Management Association (HFMA)/Guidehouse COVID-19 survey suggests these patient volumes will be slow to return, with half of provider executive respondents anticipating it will take through the end of the year or longer to return to pre-COVID levels. Moreover, one-in-three provider executives expect to close the year with revenues at 15 percent or more below pre-pandemic levels. One-in-five of them believe those decreases will soar to 30 percent or beyond.
Available cash is also in short supply. A Guidehouse analysis of 350 hospitals nationwide found that cash on hand is projected to drop by 50 days on average by the end of the year — a 26% plunge — assuming that hospitals must repay accelerated and/or advanced Medicare payments.
While the government is providing much needed aid, just 11% of the COVID survey respondents expect emergency funding to cover their COVID-related costs.
The figures illustrate how the virus has hurled American medicine into unparalleled volatility. No one knows how long patients will continue to avoid getting elective care, or how state restrictions and climbing unemployment will affect their decision making once they have the option.
All of which leaves one thing for certain: Healthcare’s delivery, operations, and competitive dynamics are poised to undergo a fundamental and likely sustained transformation.
Here are six changes coming sooner rather than later.
1. Payer-provider complexity on the rise; patients will struggle.
The pandemic has been a painful reminder that margins are driven by elective services. While insurers show strong earnings — with some offering rebates due to lower reimbursements — the same cannot be said for patients. As businesses struggle, insured patients will labor under higher deductibles, leaving them reluctant to embrace elective procedures. Such reluctance will be further exacerbated by the resurgence of case prevalence, government responses, reopening rollbacks, and inconsistencies in how the newly uninsured receive coverage.
Furthermore, the upholding of the hospital price transparency ruling will add additional scrutiny and significance for how services are priced and where providers are able to make positive margins. The end result: The payer-provider relationship is about to get even more complicated.
2. Best-in-class technology will be a necessity, not a luxury.
COVID has been a boon for telehealth and digital health usage and investments. Two-thirds of survey respondents anticipate using telehealth five times more than they did pre-pandemic. Yet, only one-third believe their organizations are fully equipped to handle the hike.
If healthcare is to meet the shift from in-person appointments to video, it will require rapid investment in things like speech recognition software, patient information pop-up screens, increased automation, and infrastructure to smooth workflows.
Historically, digital technology was viewed as a disruption that increased costs but didn’t always make life easier for providers. Now, caregiver technologies are focused on just that.
The new necessities of the digital world will require investments that are patient-centered and improve access and ease of use, all the while giving providers the platform to better engage, manage, and deliver quality care.
After all, the competition at the door already holds a distinct technological advantage.
3. The tech giants are coming.
Some of America’s biggest companies are indicating they believe they can offer more convenient, more affordable care than traditional payers and providers.
Begin with Amazon, which has launched clinics for its Seattle employees, created the PillPack online pharmacy, and is entering the insurance market with Haven Healthcare, a partnership that includes Berkshire Hathaway and JPMorgan Chase. Walmart, which already operates pharmacies and retail clinics, is now opening Walmart Health Centers, and just recently announced it is getting into the Medicare Advantage business.
Meanwhile, Walgreens has announced it is partnering with VillageMD to provide primary care within its stores.
The intent of these organizations clear: Large employees see real business opportunities, which represents new competition to the traditional provider models.
It isn’t just the magnitude of these companies that poses a threat. They also have much more experience in providing integrated, digitally advanced services.
4. Work locations changes mean construction cost reductions.
If there’s one thing COVID has taught American industry – and healthcare in particular – it’s the importance of being nimble.
Many back-office corporate functions have moved to a virtual environment as a result of the pandemic, leaving executives wondering whether they need as much real estate. According to the survey, just one-in-five executives expect to return to the same onsite work arrangements they had before the pandemic.
Not surprisingly, capital expenditures, including new and existing construction, leads the list of targets for cost reductions.
Such savings will be critical now that investment income can no longer be relied upon to sustain organizations — or even buy a little time. Though previous disruptions spawned only marginal change, the unprecedented nature of COVID will lead to some uncomfortable decisions, including the need for a quicker return on investments.
5. Consolidation is coming.
Consolidation can be interpreted as a negative concept, particularly as healthcare is mostly delivered at a local level. But the pandemic has only magnified the differences between the “resilients” and the “non-resilients.”
All will be focused on rebuilding patient volume, reducing expenses, and addressing new payment models within a tumultuous economy. Yet with near-term cash pressures and liquidity concerns varying by system, the winners and losers will quickly emerge. Those with at least a 6% to 8% operating margin to innovate with delivery and reimagine healthcare post-COVID will be the strongest. Those who face an eroding financial position and market share will struggle to stay independent..
6. Policy will get more thoughtful and data-driven.
The initial coronavirus outbreak and ensuing responses by both the private and public sectors created negative economic repercussions in an accelerated timeframe. A major component of that response was the mandated suspension of elective procedures.
While essential, the impact on states’ economies, people’s health, and the employment market have been severe. For example, many states are currently facing inverse financial pressures with the combination of reductions in tax revenue and the expansion of Medicaid due to increases in unemployment. What’s more, providers will be subject to the ongoing reckonings of outbreak volatility, underscoring the importance of agile policy that engages stakeholders at all levels.
As states have implemented reopening plans, public leaders agree that alternative responses must be developed. Policymakers are in search of more thoughtful, data-driven approaches, which will likely require coordination with health system leaders to develop flexible preparation plans that facilitate scalable responses. The coordination will be difficult, yet necessary to implement resource and operational responses that keeps healthcare open and functioning while managing various levels of COVID outbreaks, as well as future pandemics.
Healthcare has largely been insulated from previous economic disruptions, with capital spending more acutely affected than operations. But the COVID-19 pandemic will very likely be different. Through the pandemic, providers are facing a long-term decrease in commercial payment, coupled with a need to boost caregiver- and consumer-facing engagement, all during a significant economic downturn.
While situations may differ by market, it’s clear that the pre-pandemic status quo won’t work for most hospitals or health systems.