Traditionally, capital budgeting in bealth care bas tended to focus on projected financial returns from investments. To justify the commitment of capital resources, a proposed investment must be sbown to provide sufficient benefits in the form of additional revenues or reduced expenses. A bospital, 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. Tbis approacb, bowever, discourages strategic investments in areas where long-term benefits are difficult to measure in financial terms, sucb as investing in bealtbcare technologies to improve quality of care or patient satisfaction. $U P$ grading diagnostic equipment, for example, may be seen as a way to enbance revenues over the long term based on the rationale that patients and physicians are drawn to bealtbcare organizations tbat demonstrate a commitment to providing bigh-quality care. The problem with sucb an investment from a traditional capital-budgeting perspective is that it is difficult to predict when this benefit will occur or bow 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 bard to justify solely in terms of short-term financial benefits.
soupce: Catherine E. Kleinmuntz and Don N. Kleinmuntz, "A Strategic Approach to Allocating Capital in Healthcare Organizations," Healthcare Financial Managenent (Apnil 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 measune 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?