You want me to write a business plan? Capital budgeting fundamentals for the plastic surgeon

Abstract

As we enter the new era of medicine in which cost becomes as important as outcomes, clinicians struggling to treat patients frequently find themselves in uncharted territory. Gone are the days in which a new technology or treatment will be embraced by hospital administrators simply because a surgeon makes a cogent argument that it will raise the quality of care delivered at the institution. Administrators want to know how much the intervention will cost, whether it is revenue positive or, at the very least, revenue neutral, and what the long-term implications will be on the global budget. Think of administrators as investors: they want to know if there is value in the investment. The yearly process of allocating funds in the hospital falls under the umbrella of capital budgeting. Regardless of whether we agree with the direction of things, there is certain advantage to being able to ‘talk the talk’. Understanding the calculations behind capital budgeting enables a clinician to do just that. Imagine, if you will, a struggling telecommunications company. Money is tight. Shareholders are demanding; they want return on investment. All decisions must be considered in the context of their ability to generate revenue. Managers need money to invest in projects in their respective departments. The engineers want money for research and development, the marketing division wants money for promotion and the HR department wants money for new hires. The CEO must decide what investments are most likely to generate revenue moving forward. To attract investment, departmental managers make arguments using a universal business tool: the business plan. They typically base their business plan on one of two capital budgeting calculations: net present value (NPV) or the internal rate of return (IRR). The hospital is no different, with one exception: the goal is savings, not profit. Treatments change rapidly when evidence emerges favouring one modality over another. The rapid integration of BRAF inhibitors into the melanoma treatment armamentarium is a good example. Costly interventions will emerge that drain funds; money saved can be re-allocated, enabling programs to evolve with the dynamism of treatment.