Investing in acute health services: is it time to change the paradigm?

OBJECTIVE: Capital is an essential enabler of contemporary public hospital services funding hospital buildings, medical equipment, information technology and communications. Capital investment is best understood within the context of the services it is designed and funded to facilitate. The aim of the present study was to explore the information on capital investment in Australian public hospitals and the relationship between investment and acute care service delivery in the context of efficient pricing for hospital services. METHODS: This paper examines the investment in Australian public hospitals relative to the growth in recurrent hospital costs since 2000-01 drawing from the available data, the grey literature and the reports of six major reviews of hospital services in Australia since 2004. RESULTS: Although the average annual capital investment over the decade from 2000-01 represents 7.1% of recurrent expenditure on hospitals, the most recent estimate of the cost of capital consumed delivering services is 9% per annum. Five of six major inquiries into health care delivery required increased capital funding to bring clinical service delivery to an acceptable standard. The sixth inquiry lamented the quality of information on capital for public hospitals. In 2012-13, capital investment was equivalent to 6.2% of recurrent expenditure, 31% lower than the cost of capital consumed in that year. CONCLUSIONS: Capital is a vital enabler of hospital service delivery and innovation, but there is a poor alignment between the available information on the capital investment in public hospitals and contemporary clinical requirements. The policy to have capital included in activity-based payments for hospital services necessitates an accurate value for capital at the diagnosis-related group (DRG) level relevant to contemporary clinical care, rather than the replacement value of the asset stock. WHAT IS KNOWN ABOUT THE TOPIC?: Deeble's comprehensive hospital-based review of capital investment and costs, published in 2002, found that investment averages of between 7.1% and 7.9% of recurrent costs primarily replaced existing assets. In 2009, the Productivity Commission and the National Health and Hospitals Reform Commission (NHHRC) recommended capital, for the replacement of buildings and medical equipment, be included in activity-based funding. However, there have been persistent concerns about the reliability and quality of the information on the value of hospital capital assets. WHAT DOES THIS PAPER ADD?: This is the first paper for over a decade to look at hospital capital costs and investment in terms of the services they support. Although health services seek to reap dividends from technology in health care, this study demonstrates that investment relative to services costs has been below sustainable levels for most of the past 10 years. The study questions the helpfulness of the highly aggregated information on capital for public hospital managers striving to improve on the efficient price for services. WHAT ARE THE IMPLICATIONS FOR PRACTITIONERS?: Using specific and accurate information on capital allocations at the DRG level assists health services managers advance their production functions for the efficient delivery of services.