Now that the economy has started to get back on track, I have had several calls from hospitals asking about equipment replacement. In past years, the primary focus for new equipment was to increase revenue. Now that healthcare has started to emerge from the economic downturn and value legislation has kicked in, hospitals are faced with a new set of priorities.
Ms. Debbie Schimerowski, CFO at Provena Covenant Medical Center in Urbana, Ill., shared some great insights about how they prioritize their capital budget, Which project takes precedence depends on multiple factors. Like a lot of hospitals, we have a lot of assets that are at the end of life right now because money has been tight. So, replacing old equipment and patient safety tend to be our first priorities. Then, strategic dollars come into play.
Not that long ago, I spoke to Mr. Steven Berger, founder and president of Healthcare Insights in Libertyville, Ill., about equipment replacement and he described it as a cycle that combines capital and operating budgets. Berger said, I encourage paying attention to the operating margin; it is the best place to get money for capital. The best place to get capital is from your retained earnings and this grows from your operating margins. In order to grow your operating margins, not your net margins, you have to pay attention to your core business.
This brings up two concepts that go hand in hand: focus on technologies that are losing you revenue due to technical obsolescence and replacing systems that have increased operational costs due to high maintenance or service costs. Both of these concepts deserve special attention.