76. Traditionally, capital budgeting in health care has tended to focus on projected financial returns from investments. To justify the commitment of capital resources, a proposed investment must be shown to provide sufficient benefits in the form of additional revenues or reduced expenses. A hospital, for example, might invest in an automated drug-dispensing system if forecasted savings from reduced labor and supplies are greater than the initial outlay for the equipment.

Present-value calculations are used to weigh immediate costs against eventual benefits over the life of an investment.

This approach, however, discourages strategic investments in areas where long-term benefits are difficult to measure in financial terms, such as investing in healthcare technologies to improve quality of care or patient satisfaction. Upgrading diagnostic equipment, for example, may be seen as a way to enhance revenues over the long term based on the rationale that patients and physicians are drawn to healthcare organizations that demonstrate a commitment to providing high-quality care. The problem with such an investment from a traditional capital-budgeting perspective is that it is difficult to predict when this benefit will occur or how large it will be. Similarly, capital investments whose objectives are to attract physicians or boost an organization’s market share eventually may increase revenues or reduce costs, but are hard to justify solely in terms of short-term financial benefits.

SOURCE: Catherine E. Kleinmuntz and Don N. Kleinmuntz, “A Strategic Approach to Allocating Capital in Healthcare Organizations,” Healthcare Financial Management (April 1999), p. 52.

a. Assume, as the article states, that health-care entities tend to not invest in strategic investments in areas where long-term benefits are difficult to measure in financial terms. Should these firms invest in certain assets even if they cannot measure the outcomes financially? Explain.

b. As an accountant, how could you contribute to the quality of investment analysis of a health-care provider?