FACS - HOSPITAL AND HEALTHCARE 
Solutions to Improve Operating Margins

Continuous capital allocation is essential to hospital service. Two broad considerations influence the expenditures of capital by hospitals. They are typically, 1) capital expenditures made to increase types and amounts of products or services and 2) capital expenditures made to reduce operating costs. It is in both of these categories where CADAFIS has been successful in the integration of and planning for solutions with least cost combinations of capital and operating costs.

Capital is only a very small percent (5% to 6% for general, non-teaching hospitals) of the total cost of hospital services over the life of that capital facility. Once capital equipment or facility is locked into place, it will have a profound impact upon future policies, processes, and operating costs. The key is to cost it out before it is locked into place.

For example: In Fig. 1, existing facility conditions, functional adequacies and operations are analyzed. In Fig 2, process improvement initiatives gain staff consensus and a "what if" solution with a new capital configuration is proposed. The preferred solution seeks the least cost combination of capital costs and operating costs. A comparison is shown of the present operation Fig. 1, and the preferred solution Fig. 2.

In the Fig. 1, the subject, general hospital is operating at an annual cost of $90 million, with revenue of $90 million. In Fig. 2, process improvements are made which require capital expenditures of $20 million. These improvements result in an 8.3% reduction in operating expenses and a margin increase of $7.5 million per year, the first year. In the example of Fig. 2, cost and process improvements drive the solution. Payroll and non-payroll savings are sought. Any small savings in labor will result in very significant savings later on. That is because operating costs inflate over time while capital does not.