Taking stock of capital acquisition procedures

by David S. Kaczmarek

n some organizations hundreds of mil- lions of dollars can be spent on capital acquisitions each year. Because it does not affect the expense budget, the process for allocating the funds, releasing the funds, and making the purchase is very different from the normal expense process.


While the budget process is theoretically fairly simple — users identify what they want/need, a group of executives determine what on the list can be purchased with the available funds, and the purchases are made — in practice, it becomes very complex and fraught with problems. Among these are: • Decisions are often made without having all the facts.

• Funds are reserved based on inaccurate cost projections.

• Decisions are unduly affected by politically infl uential physicians or executive leaders. • Some departmental wants are purchased instead of other true needs.

• Equipment replacement is not approached from a long-term perspective.

• Replaced equipment gathers dust in a closet or storeroom.

Ultimately all these problems result in poor decisions and wasted money. Best-practice organizations have capital budget and acquisition processes that are fair and comprehensive. They include a forecasting process, a submission process that gathers all the information needed for a reasoned decision, a budget selection process that assures capital funds are used in the best way, and a procurement process that ensures that the maximum value is generated from the purchase.


I am continuously surprised by the number of organizations I fi nd that do not maintain a three- or fi ve-year capital projection. This is a relatively easy document to compile. The organization will have a list of capital equipment as part of its asset management program. The list is normally sortable based on department and will have the acquisi- tion date of the equipment. Annually each department gets a copy of their list and then updates the estimates for the life of each piece of equipment using normal asset deprecia- tion tables and professional judgment. This would include such factors as the service

history of the item, actual usage, potential functional obsolescence, etc. This list then becomes part of the justifi cation in the bud- geting process.

Budget process

The formal part of the capital budgeting process starts with the budget request. A well-composed request includes all the in- formation needed to accurately measure the immediate and long-term cost of the equip- ment as well as the other information needed by the selection group to make an informed decision. In particular, it should include: • Total estimated procurement and instal- lation cost. This should be a reasonably accurate estimate of the cost for the equip- ment, not list price or even a budget quote from a supplier. Procurement should help with this. The estimate should include all ancillary costs like delivery, installation, facilities changes like plumbing, systems customization, etc. • Sign-off by purchasing, facilities, biomed, and/or IT that they agree with the cost projections. They would also comment on any other concerns such as systems com- patibility.

• Estimated operating costs. This should include service, additional costs of dispos- ables, and additional cost of labor. • Projections of any new revenue. • Any costs that would be eliminated if the equipment were purchased.

• A detailed justifi cation. This often will in- clude a business case for the acquisition. As applicable, all aspects should be covered including things such as safety, patient satisfaction, increased revenue, planned replacement schedule, ability to attract new physicians, etc.

• For replacement equipment, what will be done with the existing equipment. Finalized requests then go through an ap- proval process. Fully approved requests end up with the selection group. This would typi- cally consist of senior executives, key physi- cians, and Supply Chain. The group would review the requests, prioritize them, and select those high-priority submissions that can be purchased with the allocated capital funds. This list goes to Finance, which will create a tentative month-by-month acquisi- tion schedule.

60 July 2016 • HEALTHCARE PURCHASING NEWS • Procurement process

For budgeted capital the process should be: • Upon publication of the approved capital list, Supply Chain will contact all managers who have capital items approved to discuss procurement procedures. They will make a preliminary decision as to the method of procurement (e.g., bid, RFP, negotiation, combination), competition, when to start the process and who will be on the negotia- tion team.

• Department managers will re-initiate capital requests far enough in advance of the planned acquisition month so that suffi cient time is provided to source, bid, and/or negotiate. These will go through Finance, which will confi rm the availability of the funds.

• Any signifi cant changes to the request must be re-approved.

• Procurement works closely with the re- questor to complete the acquisition.

• Any savings from the budgeted cost will be returned to the capital fund for use on other requests that were not approved due to lack of funds.

The process for unbudgeted capital is essentially the same except that the re- questing department will complete the normal capital request form and obtain all approvals. There will not be a preliminary plan in these cases.

New and emerging technology would not normally be part of this process. This requires a very different and more involved approval process and is a best practice in itself (see “Getting a handle on technology,” Healthcare Purchasing News, May 2006). Organizations that commonly consider the purchase of new technologies often have funds set aside for this purpose.

A great process does not guarantee con- stant success. But best practice organizations fi nd that their capital dollars go farther and that their requesters are more satisfi ed that the process is equitable. HPN

David S. Kaczmarek, FAHRMM, CMRP, is a se- nior director at Chicago-based Huron Healthcare. Kaczmarek has more than 40 years of experience in healthcare administration and supply chain, including director positions at several hospitals and systems. He can be reached via email at dkac-

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