Several months ago, I related the sad story that resulted from the merger of the New England Deaconess and Beth Israel Hospitals in the mid-1990s. Fortunately, the troubled times are behind us, and BIDMC has been quite successful in providing clinical care, conducting research, and offering training to the medical professions. Along with that success has been financial progress. The millions of dollars in operating losses have been turned around to show operating surpluses. This trend is seen in Chart 3 above. (The numbers for fiscal year 2007 will be available in several weeks, after the annual audit is well under way.)
Since we are non-profit, these gains do not go to stockholders. They are plowed back into the hospital in the form of investment in buildings, facilities, and equipment to provide patient care and carry out research. Every year, we have to replace aged plant and equipment and also investment in new technology to provide the highest levels of care.
During the period of financial turn-around, we intentionally underinvested in the hospital because we needed money to meet the payroll and other operating expenses, and we knew we would not generate enough margin to cover all the capital needs. So we fell behind each year. One way of measuring this is shown in Chart 1, where I compare the amount spent on capital each year compared to annual depreciation. If you look at the bars below the line, you can see the cumulative amount we fell behind in the early years. Later, when earnings improved, we were able to increase capital investment and begin to catch up. By this year (fiscal year '07) we had caught up on the previous years' deficiencies, based on this metric.
But, as anybody in health care will tell you, if you just invest an amount equal to depreciation, you are falling behind. This is because depreciation is based on the original cost of plant and equipment, not replacement cost. If you consider the current costs of buildings and equipment, you need to invest much more than depreciation to stay even, much less get ahead. In Chart 2, I show how our cumulative capital spending during this period has compared to 130% of depreciation -- a number that is at the low end of desired investment for major facilities like ours. On this chart, you can see that we are still catching up for those bad years. It will take several more years of very good earnings to get current.
Our hope is to continue to make a healthy operating margin to renew and refresh old buildings and equipment and also invest in needed expansion both at BIDMC and our Needham affiliate. The demand for our clinical services continues to grow, and we need have adequate facilities to meet our obligations to the public. To answer the question posed in the title, that is where that money will go. But we are also very cognizant of the importance of balancing capital requirements against the very real needs of our staff -- in terms of salaries and benefits and career advancement opportunities and appropriate staffing ratios. It doesn't do you much good to invest in capital if you don't also invest in people. So, we do the operating budget first, based on staff needs and quality and safety requirements. It is the margin available after that which is available for capital investments.