Capital Budget Decisions At Superior Health System
Part I
The mission of Superior Health System (SHS) is to provide comprehensive, high-tech healthcare (all but about 1
percent of needs) and medical and nursing education for the citizens of Corinth, Highpoint County, and the two
adjacent counties, at a cost consistent with their ability to pay. (The counties are all in the "Northeast
Rust Belt”— while they are not impoverished, they are barely holding their own on jobs and population growth.)
Here are some representative decisions faced by the board that illustrate the dilemmas created by time, risk,
liquidity, unique assets, and unique community groups.
SHS has an operating budget of $200,000,000 per year. It has a cash flow of
$12,000,000 from depreciation plus profits, but last year’s operating profits were a negative $2,000,000. A
“rainy day” fund of $20,000,000 generates $1,000,000 per year non-operating income. Interest or principal could
be used to meet expenditures next year.
The following strategic projects are proposed to the board:
• Purchase the Henry Street School: The purchase cost is $4,000,000, plus annual fixed maintenance costs for
building security of $200,000, indefinitely. The school and its lot complete the north block of your main
property. If you don’t buy, they will probably be bought by some small business. The CEO proposes using the
building for childcare for 250 preschoolers, hospital workers, and others. Revenues will cover all direct costs
of child care but not the maintenance costs because of competition and the low income of the mothers. Employee
focus groups indicate the program will be popular and will aid recruitment, retention, and absenteeism. Surveys
suggest that the program can be marketed to other organizations; thus the risk of loss is small.
• Expand the ENT, Plastic, Gynecology, and Orthopedics surgical programs: This is feasible only as a package
because of renovations required in the surgery suite— the cost is $7,000,000. The combined programs will bring
300 complex cases that are now being referred to other cities (costing $6,000,000 per year in lost revenue) back
to Corinth. It will also protect against market share losses. The programs currently serve 15,000 cases, at a
cost of $4,000 per case
• Partner with a major supplier who will guarantee price, delivery, and product quality. The company offers a
comprehensive supply management service. As users order items, the company adjusts inventory, produces cost
reports, and delivers new supplies as their computer program indicates. SHS will save $500,000 per year in
materials management salaries, $100,000 per year in inventory carrying costs, as well as recover storage space
that would cost $2,000,000 to construct today.
• Develop a cost-reduction program. This program will reduce cost of care by 2 percent per year, over five years.
The program will require extensive training and a fund to purchase cost-saving renovation and equipment as
cross-functional teams develop patient focused care. A hiring freeze, early retirement incentives, retraining,
and reduction of part-time and temporary personnel will minimize involuntary terminations. These elements require
an investment of $1,000,000 per year. In the first year, the program will help operating personnel achieve their
budget target of breakeven, but it should contribute $4,000,000 to the bottom line in subsequent years.
• Spend $3,000,000 to expand primary care physician membership in Corinth Health Systems, SHS’s PHO. This will
establish a fund to start young primary care doctors in practice in selected shortage areas around Highpoint
County. It is estimated that the fund will support up to 20 physicians, and that expenditures will be at a rate
of about 5 per year.
In addition to the strategic opportunities, SHS faces a list of programmatic requests each year totaling about
$7,000,000. About two dozen of these will consume 80 percent of the money. The finance committee sets the limit
as part of the budget guidelines; this year it will be $6,000,000. Each item gets a programmatic review, and is
ranked by the budget committees within the organization.
The finance committee’s low programmatic recommendation is related to last year’s approval of a $20,000,000 plan
funded by public bonds for expanded outpatient services and doctors’ offices at the main site. "If you are
too careless, the bond rating may drop, costing you several hundred thousand dollars in interest penalties,"
the finance committees chair notes. He adds, "An additional factor is the $2,000,000 losses from operations
last year. We aren’t the federal government. We can’t do this indefinitely."
Assuming that next year’s budget is break even, there will be $6,000,000 available for the strategic projects
listed above, plus whatever is used from the “rainy day” fund and it’s earning.
Written Assignment:
a. Rank by order the list of five strategic projects.
b. Evaluate the finance committee’s recommendation for yourself, and decide how far down your list you will vote
to fund. The remaining projects will be deferred.
c. Summarize your reasons in great detail for supporting the proposals you will vote to fund.
d. Summarize what you will say to the advocates of the projects you deferred.
e. If necessary, summarize what you will say to expand the finance committee’s expenditure recommendations.
Part II
In addition to the strategic opportunities, SHS faces about two dozen important programmatic decisions each year.
Taking both strategic and programmatic opportunities they fund an average of 10 to 15 million dollars of capital
replacements each year. The finance committee sets the limit as part of the budget guidelines. Each item gets a
programmatic review, and is ranked by the budget committees within the organization. As a trustee, do you want to
go over this list? Why, or why not?
Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.
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