Capital Expenditure as a Cause of Future Health Care Costs

Today’s Managing Health Care Costs Indicator is $3.2 billion

I attended the Connected Health Symposium sponsored by Partners HealthCare at the end of last week.  It’s a great mix of futurists, gizmo-geeks, and health policy wonks – with more keynotes than seem possible in a two day conference.  The twitter hashtag was #chs11 to see comments that were posted by participants during the conference.

Most of the companies exhibiting at the Symposium aren’t ready to reinvent health care – they are looking to add another layer onto an already expensive and fragmented system.  For instance, one company had an elegant portal that it hopes insurance companies will sponsor to let patients track many biometrics and communicate with their physicians.   But there are no connections built to any electronic medical record.  What would make physicians use this tool?   I have no idea.

As I head into a new semester of teaching Managing Health Care Costs, the comments that caught my attention were from Kevin Shulman, MD MBA of Duke. During the closing panel, he pointed out that while we’re focused on the variable costs of health care – growing fixed costs are driving future health care costs.

Kevin said that when he talks to medical students, he asks them to look out the window at the construction cranes – and points out that when they graduate they will be variable costs in the future, while the gleaming new building will be a fixed cost.  When the finances go awry, the variable costs get cut first.  

Capital expenditure limits (such as certificates of need) have never been especially effective, perhaps in part because of ‘regulatory capture,’ where the government is so heavily influenced by providers that it doesn’t adequately restrict new investments.   Hospitals were paid on a ‘cost plus’ basis by Medicare until 1982 –and Hill Burton and other funding further encouraged overcapacity.   Hospitals that are successful tend to make capital investments in technology associated with high margins, and this helps promote the cycle of ever-increasing costs. 

How expensive is it to build a new hospital bed? 

Assuming that it costs $2 million for a new hospital bed, and a hospital is able to sell tax-exempt bonds at 5% for 25 years, the interest cost for each new hospital bed is over $150,000 a year.    That’s $150,000 regardless of whether that bed is needed or not.  Partners Health Care will be making $3.2 billion in capital investment through 2013.  The cost of servicing this debt will be over $20 million a month – costs that are locked in for 25 years.   

New investment in hospitals is certainly necessary.   Old 4-bed “semiprivate” rooms are not only undesirable, but it’s hard to maneuver new equipment in them, and these rooms compromise privacy and can spread hospital-acquired infections. Infusion pumps that prevent medical errors cost tens of thousands of dollars, and are worth it.   Hospitals will always be capital intensive, as the existing physical plans depreciate and new technology including IT doesn’t come cheap.

What can be done?

·        Hospitals can reengineer their processes to remove steps. Virginia Mason discovered that by decreasing distances traveled, wait times and downtimes for ambulatory cancer patients, it could build fewer square feet of clinical space, and even avoid building new parking garages. 
·        Collaborations among providers can avoid the need to create excess capacity.  Many cities have a plethora of cardiovascular surgery programs competing to perform a shrinking number of bypass surgeries.  Of course, the line between collaboration and collusion is often hard to draw.  Competition should lower prices in a functioning market – but duplicative services in a community force excess capital investment increase our health care costs
·        Payment reform to bundle payments encourages hospital CEOs and CFOs to think about how to lower resource costs, rather than how to crank up the revenue.  Fee for service is a substantial cause of the cap-ex arms race – and even the threat of moving to bundled payments can help decrease counterproductive investment

Hospitals that over-invest and create unsustainable future fixed costs, will ultimately need to fail. This will be painful for the community, for patients, and for clinicians – and for hospital bondholders.  In many instances, state agencies are insuring these bonds, so it won’t be cheap for government either.