Capital Budget Replacement Tips

Manage Resource Group
News & Views
October, 2011

It is budget time again in the hospital world, as many prepare for the upcoming 2012 fiscal year. Healthcare leaders continually face an ongoing challenge regarding the replacement of capital equipment. Recent studies concluded that because of rising costs, hospitals are able to fund less than 50% of capital requests. As a result, hospitals must now have a more stringent process to evaluate the importance of capital equipment requests to determine what will be replaced.

In many hospitals, budgeting for capital assets is a four-step process:

1. Capital requests are prepared and submitted by each department
2. Requests are reviewed and assessed
3. List of expenditures is prioritized with budget that is available
4. Budget Committee which may consist of CFO, Clinical Engineering, Materials Management Department and others approve the capital budget

As far as purchasing new, be sure to work with your GPO for group-buy opportunities. It is best to consider the needs of your entire hospital system. Rather than purchasing just three items for one hospital location, it may make more sense to buy 10 of the same piece and distribute through several locations where there may be a need. Buying in bulk can mean discounted pricing, and also standardizing the equipment as well.

When making capital requests, even though various departments within the hospital provide basic information about the condition of the existing equipment, much more information may be needed. This is when the assistance of both the Materials Management and Clinical Engineering Departments becomes invaluable. Both are experts at verifying whether the department has a realistic need for new or replacement equipment and how it will best serve the department. There are many factors which must be considered when replacing equipment. Clinical Engineering will be in the know of the history, age, condition, operation, repairs, and whether there are still parts available for the current asset.

Once you have made decisions on your capital budget replacement plan, you may wonder what can be done with your current equipment. Challenges providers face are knowing if there is any value for the equipment they are replacing or what the best course of direction is for the decommissioned asset.

Consider the following options:

1. Trade in equipment toward the purchase of new assets
2. Resell it to the secondary market
3. Donate items to a charitable organization
4. Discard decommissioned assets
5. Hold or store equipment as a backup or for future use

As you evaluate your budget, please remember that there are many things to consider for medical system replacements and technology changeouts. The experience of Manage Resource Group, Inc. can assist on several levels:

• Identifying Fair Market Values (FMV) for systems and equipment that will be displaced with new purchases
• Negotiating higher trade-in credits and offering alternative revenue ideas
• Provide a proven sales method for system replacements and change-outs if your hospital decides to sell decommissioned assets.
• Providing hands-on experience and knowledge to manage projects, and help your departments to establish a proactive approach for asset management over time.


Find out the fair market values at Appraise Now!
“Helping to assess, inform, and empower healthcare providers with their
equipment management needs.” For more information on MRG’s services,
visit our website or contact us at (440) 289-6490.

Interesting facts about Hospital Budgets

Interesting facts about Hospital Budgets

Hospital budgets are changing. The days of each department creating a wish list and purchasing based on want instead of need are over. Healthcare facilities have felt the recession crunch as much as any business in other industries. Competition in the marketplace and declining reimbursements are additional factors forcing hospitals to be more efficient businesses. This push towards efficiency is causing each facility to get more out of each asset.

Now when hospitals are reviewing their capital budgets, they must have an action plan for each item that may be purchased. When will the asset be purchased? What will happen to the old asset it is replacing? Will the old item be traded-in or resold to the secondary market? What is the old asset worth?

These questions should all be answered during the budgeting process so the buyer can conduct an informed negotiation with the supplier and not just accept the OEM’s terms on the new piece.

Here are some statistics to consider:

What Healthcare Leaders Are Saying
39% say EMR systems will receive the majority of capital funds in the coming year.

27% say clinical equipment will receive the majority of capital funds in the coming year.

10% say building a new facility will receive the majority of capital funds in the coming year.

58% say between 1% and 10% of their overall budget will be devoted to capital expenses in 2011.

7% say their capital budget has increased 11% to 20% in the past year.

9% say their capital budget has decreased 11% to 20% in the past year.

48% say no clinical initiatives will be delayed or reduced in the coming year’s capital budget.

18% say they will use bank loans to fund capital projects.

9% describe their financial profile as not profitable, not liquid, and with significant debt burden.

43% anticipate that operating income and expenses will increase in 2011.

42% anticipate difficulty accessing funds for capital projects in 2011

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Tips for Offsite Facility Acquisitions

Healthcare reform and the economy have created a demand for facility acquisitions. From consolidation of hospitals to the purchase of physician practices, health systems acquiring facilities will continue in the near future. The key to any acquisition is to make sure both the buyer and seller have aligned expectations by utilizing accurate data. Fixed assets are one component of the acquisition process but can impact the total appraised value of a practice anywhere from 20% – 50% depending on what type of facility is being acquired.

Following are a few tips that Manage Resource Group, Inc. would recommend to both buyer and seller if an acquisition is being considered:

• Outline a strategy that will maximize the information you’re looking to obtain.
• Determine what information needs to be captured in order to make a fair offer.
• Medical equipment will have a significant impact on the total value of fixed assets.    Whoever conducts the inventory and appraisal should be well versed in all modalities of medical equipment.
• Establish mutually agreed upon timelines for the onsite inventory as well as receipt of deliverables.
• Acquisitions can place stress on the employees of the seller. Make sure discretion is used by the auditor.
• Demographics are an essential part of the inventory process.
• Deliverables should capture make, model, general description, and serial number if applicable. It will also be important to identify where each asset is located: building, room number, etc.
• A condition assessment should be applied to each asset outlining its market viability. This will help align the buyer and seller’s expectation for the asset as well as the value being applied to the asset when it is appraised.
• Have a clear definition of what fair market value (FMV) means. In most acquisitions, FMV can be defined as “installed and in use value between a willing seller and a willing buyer.”
• It is important that the appraisal be based and supported off current market conditions.
• A qualified appraiser should be able to determine the FMV by the demographics captured during the audit. If the appraiser is requesting past purchase requisitions, this can be a red flag that they are basing the appraisal on depreciation value rather than fair market value.
• If budget or time restraints prevent an onsite inventory, a desktop appraisal may be a more cost effective option to consider.
• Communication is key for any acquisition and collecting sound data during the due diligence process can assist with a smooth transaction.