CAPITAL BUDGETING FOR HEALTHCARE ORGANIZATIONS
Name
Course name / code:
Date submitted:
Columbia Southern University
Introduction
Capital budgeting is a process through which companies identify, evaluate and select their long-term investment opportunities. Capital investment appraisal uses discounted cash flows (DCF) techniques which apply the principles of time value of money to determine whether or not the opportunities are worth pursuing. A simplified model of capital budgeting for commercial organizations and examples of projects are listed below;
Capital budgeting process
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Examples of decisions
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1. Proposal origination: Screening environment for potential opportunities
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Whether to investment in new plant and machinery
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2. Project evaluation:Purpose, risks, strategic fit, resource requirements, duration etc.
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Lease or buy, in-house manufacturing or outsourcing
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3. Analysis and acceptance:NPV, IRR, Payback, ARR, PI, qualitative factors
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Investment in a marketing / advertising campaign
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4. Monitoring and review:Identify deviations and implement corrective actions
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Whether to carry out a takeover or merge with other companies
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Source: (Berger, 2014)
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However, capital budgeting process in healthcare sector differs from commercial organizations in a number of ways. This is because of the fact that earning financial return is not the sole objective of hospitals. Instead, their primary goal is to provide quality health care services. In addition, maximizing patient’s satisfaction, addressing community needs, compliance with safety policies and ensuring environmental sustainability are some aspects that are important to consider. Therefore, healthcare organizations need to balance a multitude of objectives which requires looking at their decisions from different angles (Smith, 2006).
Thesis Statement
Healthcare organizations need to develop an integrated framework to evaluate their capital budgeting decisions that incorporates a wide range of both quantitative and qualitative factors, ensures strategic fit, provide optimum quality services, maximize patient’s satisfaction, ensure compliance with regulations, achieve goal alignment between project’s and corporate objectives and engage all stakeholders’ in the decision making process.
Challenges and Problems
In healthcare industry, undertaking effective capital budgeting decisions is a far more complex exercise as compared to other business entities. As already mentioned above, satisfying multiple criteria requires an organization to make trade-offs between profitability and stability. Some major challenges and problems associated with the topic are as follows;
Ignores qualitative factors:Most capital budgeting techniques don’t allow decision maker to incorporate all qualitative factors into the analysis i.e., client satisfaction, service quality versus costs, effects on corporate image, adherence with legislative framework, relationships with third XXXXX XXXXXXXX XXX other XXXXX-XXXXXXXXX concerns (Smith, XXXX)Changing XXXXXXXXXX / XXXXXXXXXXXX: XXXXXXXXXXXX in XXXXXXXXXX XXXXXXX XXX XXXX to XXXXXXXXXX XXXXXXX the XXXXXXXXX XXX / or XXXXXXX XXXXXXXXXX but XXXXXXXXX usually have limited XXXXXX of XXXXXXXXX (capital) available XX XXXXXX in new projects (XXXX, XXXX).Conflicting objectives:Satisfying XXX requirements of different XXXXXXXXXXXX XXXXXXXXXX a significant challenge i.e., XXXXXXXXXX XXXX XXXXXX equipment while board XXXXXXX XXX concerned XXXXX XXXXXXXXXXXXX. This XXXXXXX XXXXX-departmental conflicts and XXXXX it difficult XX XXXXX project objectives with XXX XXXXXXXXX XXXXXXXXXX XX XXXXXXXXXXXX (XXXXX, XXXX)Budgetary constraints:Hospital administrators often find it XXXXXXXXX to allocate limited XXXXXX of XXXXXXX XX XXXXXXXXX XXXXXXXX because providing quality XXXXXXXXXX and minimizing patient cost XX the same XXXX usually comes at the XXXXXXX of XXX another (XXXXXX, XXXX).XXXXXX methods XXX informal decisions:XXXXX project XXX XXXX unique characteristics XXX XXXXXXXX XXX XXXXXXXXX for each scenario. XXXXXXXXX, using XXX same / XXXXXXX XXXXXXX to XXXXXXXX every XXXXXXX XXXXXXXXX XXXXXXXX is XXX an optimal XXXXXXXX (Murat, 1991).Limited access to equity XXXXXXX:Another problem affecting XXX healthcare XXXXXX XX that XXXX XXXXX XXXX limited access XX capital markets i.e., XXXXXXX is not XXXXXXX available XX XXXX the projects. This XXXXXX XXXXXXXXXX leading XXXXXXX XXXXXX XXXXXXXXXXX costs (Joseph, 2014).XXXXXXXXXXXX in XXXXXXXXXX cash flows and XXXX XX capital:XXXXXXXXXX XXXXXXXXXXX the cash XXXXX and determining an XXXXXXXXXXX project specific XXXX of capital XX XXXXXXX XXXXXXXXX because it XX difficult to XXXXXX a monetary value XX XXXXXXXXXX XXXXXXXX (Murat, 1991).
XXXXXXXXXX XXXXXX
The literature review XX divided into three XXXXXXXX. Section “X” Introduces XXX XXX XX different XXXXXXX and XXX XXXXXX XX their XXXXXXXXXX based XX XXX XXXXXXX from surveys. XXXX XXXXXXXXXX the importance XX qualitative XXXXXXX in the decision making process XXX XXXXXXXXX XXXX industry XXXXXXXXX. Section B explains how XXXXXXXXXXXX XXXX XX XXXXXXXXXX, XXXXX of XXXXXXXX, XXXXXXXXXX, patients etc. influence XXX XXXXXXX XXXXXXX XXXXXXXXX XXXXXXX. XXXXXXX “X” discusses XXX recent XXXXXX XXX XXXXXXXXXXXX in XXX healthcare XXXXXXXX.
XXX of XXXXXXXXXXXX and qualitative XXXXXXX
X variety XX methods XXX XXXXXXXXX to XXXXXX XXXXXXX investment XXXXXXXXXXXXX such XX Payback period (XX), Accounting XXXX XX XXXXXX (ARR), Net present value (NPV), XXXXXXXX XXXX XX return (IRR) and XXXXXXXXXXXXX index (XX). Organizations XXXXXXX XXXXXX XXXXXXXX XXXX XXXXX higher NPV, XXX XXX lower XX. XXX should XXXXXX the company’s required XXXX XX return XX be XXXXXXXXXX and PI of 1+ XX acceptable and below 1 XXXXXXXXX loss. XXXXXXXX these XXXXXXX have XXXXX own advantages and XXXXXXXXXXXX but NPV is usually XXXXXXXXXX a reliable and superior XXXXXXX as compared XX others (Kristin XX. XX, 2010).
XXXXXXX, use XX XXX XXXXXXXXXX XXXXXXXX that XXXXXXXXXXXX XXXXXX be able XX estimate the XXXX XX return and cash flows XXXX XXXXXXXXXX XXXXXXXX. XXXXXXXXXXXXX, XXXX of these tasks XXX XXXXXX XXX XXXXXXXX XXX XXX of judgment. Despite this, XXXXXXX XXXXXXXXX XX Kamath XXX Elmer (1989) reported that XXXXXXXXX XXXXXXXX XXX XX, ARR, XXX, IRR and PI methods to XXXXXXXX XXXXX XXXXXXX budgeting decisions. Cleverly and Felkner (1982) XXXXXXXXX XXXX XXXX XXX number of hospitals XXXXX XXXX methods XXXX XXXX 55% in XXXX to XX% in 1980. XXXXXXX (1982) XXXXXXXX that XXXXX XXXXXXXXXX XXXXXXXX XXXXXX XXX IRR and NPV but payback period XX XXX most popular XXXXXX used in healthcare XXXXXXXXXXXX (Murat, 1991).
Results of another survey carried out by Kamath XXX XXXXX (1989) revealed that XXX out of XXX respondents XXXXXXXX XXXX XXXXXXXXXXX factors XXXX XX XXXXXXXXX XXXX, XXXXXXX of healthcare, XXXXXX satisfaction, XXXXXX XX company reputation, XXXXXX issues, XXXXXXXXXX with XXXXXXXXXX XXXXXXXXX and relationships XXXX third XXXXX XXXXXXXX XXX XXX important XXXXXXXXXX that should XX XXXXXXXXXX XXXXX screening XXX XXXXXXXXXX opportunities (XXXXX, XXXX).
Role of stakeholders
X XXXXXX characteristic that XXXXXXXXX XXXXXXXXXX from XXXXX XXXXXXX XX XXX XXXXXXXX role XX XXX XXXXX of stakeholders i.e., the medical staff (physicians) in almost XXX aspects of XXX decision making XXXXXXX. Survey XX Kamath XXX XXXXXX (1992) XXXXXXXX that 91 out of 94 XXXXXXXXX said physicians XXXX XXXXXXXX XXXXXXXX in XXXXXXX XXXXXXXXX XXXXXXXXX and XXXX XXXX of XXXXXXXXXXXXX XXXX XXXXXXX staff XXX XXX an XXXXXXX negative impact on XXX XXXXXXX and process XX XXXXXXXX making (XXXXXXXXX, XXXX).
Meyer (2012) concluded XXXX XXXX XX XXXXXXXXXX XXXXXXXX XXXXXXXX in a disconnected process of XXXXXXX XXXXXXXXX. Focusing only on one XXXXX of stakeholders’ and disengaging XXXX others creates a sense XX XXXXXXXXXX and XXXX XXXX XX XXXXXXXXX XXXXXX XXXXXXX XXXXXXXXX XXXXXXXXXXXXXX XXXXXX. XXXX imposed a rigid structure on XXXXXXXX making process XXX XXX manner in which decision XXXXXX is XXXXXXXXX to operational XXXXX (John, 2015).
Emerging XXXXXX
XXXXXXXXXXXX of XXXXXXXXXX XXXXXXXXXX Act (XXXX) resulted in the XXXXXXXXXXX of XXX XXXX-level strategic trends XXX XXXXXXXX XXXX are likely XX impact XXXXXXXXXX XXXXXXXXXXXX XXX stakeholders XXXX the XXXX few years. These XXXXXXX (1) Patients XXXXXXXX XXXX XXXXXXXX XXXXXXXXX. Growth XX XXXXXXXXXX XXXXXXX XXXXXXXX,Revenue-driving XXXXXXXXXXXXX,XXX XXX alternative XXXXXXXX payment models,Specialty drug XXX driving XXX cost of care,Information technology innovations driving XXXXX stakeholder communications (John, XXXX).
Critical Analysis of Challenges/Problems
Evidence from XXXXXXXXXX review suggests XXXX XXXXXXX XXXXXX (XX) XX XXX most commonly used XXXXXXX XXXXXXXXX method XXXXX hospitals. XXXXXXXX makers argue that PP can be XXXXXXXX XX a XXXX of thumb when profitability XX not the XXXX XXXXXXXXX. XXXXXXXX XXXX XXXXXXXXXX XX consistent XXXX XXX XXXXXX XX healthcare XXXXXXXXXX decisions XXX it ignores XXXX i.e., XXXXXXXXX XXXX flows may XXXXXX from XXXXXX XXXXXXX because of XXXXXXX factors XXXX XX XXXXXXX in XXXXXXXX rates, XXX XXXXX and XXXXXXXXX (Murat, XXXX).
Although some XXXXX capital budgeting XXXXXXXXXX such XX XXX and IRR XXXXXX XXX XXX XXXXXXXXXX of risk but still, they don’t offer a satisfactory solution to the problem of XXXXXXXXXXX multiple criteria. XXXXXXXX XXXXXXXXXXX factors limits XXX performance measurement XXXXXXXX XX financial aspects only and XXXXX it difficult XX XXXXXXX an XXXXXXX balance between XXXXX XXXXXX, XXXXXXXXX XXX environmental XXXXXXXXXX (XXXXX, 1991).
Accurate XXXXXXXXXX of XXXX flows XXX XXXX of XXXXXXX is the key to obtain XXXXXXX XXXXXXX XXXX XXX techniques such as XXX. Weaver (1989) concluded that XXXX XXXX forecasting XX XXXX difficult than XXXXXXXXXXX a suitable cost of capital. Especially, healthcare XXXXXXXXXXXX receiving XXXXXXXXXX (XXXXX XXXXX) payments and reimbursements face additional problems which XXXXXX XXXX XXXX XXXXXXXXXXX into the XXXXXXXXXX process (Kristin XX. XX, XXXX).
Bureaucracy of top management’s, resistance to change, XXXXXXXXXXXX, medical staff XXXXXXXX XXX XXXXXX interests of different XXXXXX XX stakeholders’ XXXXXXX in clashing XXXXXXXXXX between departments XXXXX XXXXXXXX XXXXXXXXX XXXXXXXXXX of XXXXXXXX making (XXXX, XXXX). XXXXXXXXXXX, XXXXX XXXXXXXXX of one XXXXX of XXXXXXXXXXXX (XXXXXXXXXX) XXXXX XXXX XX suboptimal decisions at the expense of other XXXXXXXXXXX groups XXX makes it increasingly difficult to achieve a balance XXXXXXX profitable XXX XXXXXXX XXXXXX XXXXXXXXXXX (XXXXXXXXX, 2016).
Ownership XXXXXXXXX also XXXXXXX XXX XXXXXXX budgeting process of XXXXXXXXX. In XXX, only a XXXXX XXXXXX XX XXXXXXXXX are owned XX investors. The XXXX’s survey XX XXXX shows XXXX XXX for profit (XXX) makes XX 59% XX total XXXXXXXXXX organizations, XXXXXXXXXX XXXXX (XX) XXXXXXXXX accounts for 25% XXX only XX% XXX XXX-XXXXXX organizations (Joseph, 2014).
This directly impacts XXX competitiveness XX NFP’s XXX GO XXXXXXXXX. Especially after the XXXXXXXXX XXXXXX XX 2008, XXXXXXXXXXX XXXX significant XXXXXXXX cuts on healthcare XXXXX XXXXXX XXXXXXX constraints on XXX ability of hospitals XX arrange XXXXXXXXX XXX claim XXXXXXXXXXXXXX XXX XXXXXXX XXXXXXXXXXXX beyond a certain limit (Joseph, 2014).
XXXXXXXXXXXXXXX XXX XXXXXXXXXXXXX
XXXX XXX planning process more systematic XXX XXXXXXXXXXX by allowing XXX stakeholders to XXXXXXXXXXX in the XXXXXXXX making process. This XXX XXXX XXXXX gain their commitment XXX XXXX XXXXXXX XXX XXXX XX XXXXXXXXXXX position XXXXXX XXX XXXX-term success (XXXX, 2015).XXXXX a XXXX benefit approach XXXX incorporates a wide range of quantitative and qualitative performance measurement criteria for XXXXXXXXX new projects. The XXXXXXXX model XXXXXX evaluate XXXXXXXXXXX (technical capability), XXXXXXXXX (goal alignment), XXXXXXXXX (XXXXXX XX XXXXXXXXXX) and XXXXX (XXXXXXXXX with regulations XXX XXXXXXX) feasibility. This will ensure an optimum XXXXXXX between multiple objectives (Kristin et. al, XXXX).XXXXXXXXX non-core XXXXXXXXXX such XX repairs XXX XXXXXXXXXXX of equipment to third party contractors XXX lease support equipment XXXXXXX XX buying. This XXXX allow XXXXXXXXXXXXX to invest XXXX funds in customer XXXXXXXXX XXXXXXXX XXX employee training XXXXX will put a positive XXXXXX on its corporate reputation (XXXXXXXXX, 2011).Implement a bottom-XX XXXXXXXX to prepare capital budgets and use differentiated decision making XXXXXXXXXX by XXXXXXXXXXX XXXXXXXX criteria for XXXXXXXXX functional levels. This approach XXXX XXXXX more XXXXXXXX estimation of cash flows, cost XX capital and XXXX XXXXXXXX XXX problem of conflicting inter-departmental objectives (XXXXX, 1991).Resolve budgetary XXXXXXXXXXX XX creating an internal capital XXXXXX i.e., arranging XXXXXXX and allocating them to XXXXXXXXX XXXXXXXX XXXXXX be XXX XXXXXXXXXXXXXX of executive XXXXXXXXXX. The XXXXXXXXXXX units XXXXXX then work together XX select XXX projects XXXX offers adequate XXXXXXXXX XXXXXX, XXXXXXXX XXXXXXX’s XXXXXXXXXXXX, XXXX XXXX XXX XXXXXXXXXXXX’s strategic priorities, comply XXXX the regulatory XXXXXXXXX XXX match the resources XXXX hospital’s technical expertise. XXXX will facilitate effective XXXXXXXXXX XX authority XXX provides centralized control XXXX all XXXXXXX XXXXXXXXXXXX (XXXXXXX et. al, XXXX).An XXXXXXXXX capital XXXXXXXXX proposal should consider six XXXXX XXXXXXXXXX XX XXXXXXXXXXX XXXXXXXXX XXXX XXXXXXXXXX, technical XXXXXXXXXXX, qualitative factors, XXXX management, XXXX XXXXXXXXXXX and available XXXXXXXXXXXX (XXXXXXXX, 2011).
XXXXXXXXXXXXXX XX Solutions
Based on XXX recommendations XXXXX, a revised decision XXXXXX / XXXXX XX XXXXXXXX XXXXXXX budgeting XXXXXXXXX XXX XX presented XX follows;
Criteria
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XXXXXXXXXX
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XXXXXXXXXX / Impact / XXXXXXXX
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XXXXX
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Weight
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Weighted Score
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XXXXXXXXXXXX affected
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XXXXXXXX
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Investment required
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XXXX
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X.00
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X.XX
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X.00
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Management, XXXXXXXX, board XX XXXXXXXX
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Risk
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XXXXXXXX
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X.XX
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2.00
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X.00
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XXXXXXXX XXXXXX
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Moderate
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X.50
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1.75
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X.XX
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XXXXXX
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Quality XX healthcare
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XXXX
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X.XX
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3.XX
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XX.00
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Patients, physicians, insurers, management
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Patient's satisfaction
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High
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5.XX
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X.00
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15.XX
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XXXXXX on XXXXXXXXX XXXXX
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XXXXXXXX
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3.50
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2.XX
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7.XX
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XXXXX
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XXXXXXXXXX with regulations
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XXXXXXXX
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3.00
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2.XX
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X.00
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XXXXXXXXXX
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Government XXXXXXXXXXXX
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Low
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X.XX
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1.00
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1.XX
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Political
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Local XXXXXXXXX
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Moderate
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2.50
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1.25
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X.XX
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XXXXXXXXX, XXXXXXX public
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Community needs
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XXX
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X.75
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1.XX
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2.75
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XXXXXXXXXXXXX
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XXXXXXXXX expertise required
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XXXX
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3.XX
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X.XX
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X.38
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Management, board of trustees
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XXXXXXXXX XXX
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XXXX
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X.75
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2.XX
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X.XX
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Environmental
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Safety XXXXXXXX
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XXX
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1.75
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1.XX
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1.XX
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Patients, XXXXXXX public
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XXXXXXXXX XXXXXXXX XXXX
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Moderate
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1.50
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2.XX
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X.00
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XXXXX: 1 (low) - X (XXXX), Weight: X (Low), X (High)
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XX.50
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Conclusion
Despite the XXXXXXXXXX XX XXXXXXXX XXX XXXXXXXXXXX to satisfy multiple criteria, research suggests that XXXX XXXXXXXXXX XXXXXXXXXXXXX XX XXX use a XXXXXXXXXX XXXXXXXX XXXXXXXX XX capital XXXXXXXXX. The process of developing XXX implementing capital XXXXXXXXX strategies is significantly influenced by favoritism and often driven by XXXXXXXX. Therefore, XXXXX XXX XXXXXXXXX XXXXXXXXXXX and XXXXXXXXXX changing external XXXXXXXXXXX, XXXXXXXXX should XXXXX an integrated XXXXXXXXXXX measurement XXXXX to XXXXXXXX, XXXXXXX XXX select XXXXXXX XXXXXXXXXX XXXXXXXX XXXX XXXXXXXX return on XXXXXXXXXX XXX XXXXXXX’s satisfaction XXXXXXXXXXXXXX.
References
XXXXXX, S. (2014). Fundamentals XX XXXXXX care financial management: X practical XXXXX to fiscal issues and XXXXXXXXXX (XXX ed.). San XXXXXXXXX, XX: Jossey-XXXX.XXXXX, XXXX X, XXXX X, XXXXXXX and XXXXXX W. (2006), “XXXXXXX budgeting XXXXXXXXX in hospitals”, International XXXXXXX XX Healthcare XXXXXXXXXX and XXXXXXXXXXJohn S. & XXXXX X. (XXXX), XXX XXXXXXXXX Trends that XXXXXX XXXXXXXXXX XXXXXXXX-XXXXXX and XXXXXXXXXXX XXXXX in XXX New XXXXXXXXXXX, American XXXXXX & XXXX XXXXXXXXMurat, M., &XXX; Shahriar, X. (XXXX). Capital XXXXXXXXX in XXXXXXXX XXXXXXXXXX using the analytic XXXXXXXXX XXXXXXX. Socio-Econ Plann XXX. Vol XX. No 1, 27-34.XXXXXXXXX X., XXXXXXXX XX, XXXX X., (2016), The Capital Budgeting Process XX XXXXXXXXXX XXXXXXXXXXXXX: X Review of Surveys, Journal of Healthcare XXXXXXXXXX, XXXX Jan-FebXXXXXXXXX, X.O., Song, P.X., and Cleverley, X.O. (XXXX). XXXXXXXXXX XX Health Care XXXXXXX (7th Ed.). XXXXXXXX, XX: Jones XXX XXXXXXXX LearningJoseph White, (2014), The XXXXXXXXX XX XXXXXXXXX for healthcare XXXXXXXX, XXXXXXXXXXXX of Economic Cooperation XXX XXXXXXXX XXXXXXXXXXX (XXXX) Journal, Vol. XXXX/1