CFOs Eye Brighter Financial Days Ahead

There's a barrage of data in healthcare – I'm not just talking about patient and billing data – I'm talking about the multitude of surveys that offer insights on the direction of healthcare and the economy. While there may be a lot of information coming at you, this research offers key insights as to the direction your peers see healthcare moving—so pay heed.

In the last few months several reports have echoed similar sentiments: Healthcare CFOs aren't optimistic about healthcare reform or the economy. Yet in spite of the pessimism, financial leaders think the future is looking up and capital expenditure plans are being dusted off.

Healthcare reform doesn't make CFOs feel all warm and fuzzy. There are a lot of costly directives in this legislation, so it's understandable that 61% of financial leaders have responded that they feel healthcare reform will have a negative impact on their business. The finding, from the recently released GE Capital CFO Survey, was part of a larger look at the opinions of CFOs across seven major industries including healthcare.

"It's not surprising that the majority [of respondents] expect this to have a negative impact," said Randy Waring, managing director, for GE Capital, Healthcare Financial Services. "There's still a lot of uncertainly around the implementation of healthcare legislation. Plus there is the weak economy and the prospect of cuts in Medicare and Medicaid… [all of these] are cause for genuine concern."

Interestingly, the GE Capital survey findings from its Q1 2011 survey nearly mirror the results gathered in the HealthLeaders 2010 Industry Survey (taken earlier in October 2010), in which nearly 60% of CFOs polled said that the financial position of their organization was being weakened by healthcare reform. The pessimism, however, isn't pervasive; many financial leaders also believe the future is looking up, according to both surveys. And another economic survey backs CFOs up on that assertion.

In May, Standard and Poor's Healthcare Economic Indices released data showing:

• The average per capita cost of healthcare services covered by commercial insurance and Medicare programs increased by 5.39% over the 12-months ending April 2011.
• Since May 2010, annual rates of growth of healthcare costs have been largely decelerating.
• Over the year ending April 2011, healthcare costs covered by commercial insurance increased by 7.13%, as measured by the S&P Healthcare Economic Commercial Index.

The rate of growth in healthcare inflation has been steadily decelerating since it hit a high of 8.74% for the 12-month period ending May 2010. S&P analysts note that hospital employment growth has correspondingly slowed significantly, falling from 2%-3% increases between 2008 and early 2009, to 1% since the middle of 2009. S&P analysts believe that slowing rate of inflation in healthcare is also tied to high unemployment in the overall economy, but they also warn that the slowing trend could quickly reverse.

Job growth in the healthcare sector continues to show gains, according to the Bureau of Labor Statistics preliminary data. In fact, the healthcare sector consistently has been one of the few job-creating sectors in the recovery. And, The Conference Board monthly review of online job postings consistently shows that there are three jobs available for every skilled healthcare provider.

The GE Capital survey also indicated that 81% of healthcare CFOs expect to hire more employees in the next 12 months, a 20% increase since they were last polled in Q3 2010. Employment isn't the only area in healthcare that's seeing positive changes. Many formerly shelved capital expenditure plans may be put back into action after several years of delay.

In March, I wrote about how hospitals are cautiously beginning to spend again on capital projects. Naturally, the main expense area is the EMR (perhaps another reason why those Tech CFOs are so giddy about the economy). However back in early January aside from the technology investment, nearly 40% to 50% of healthcare leaders still anticipated delaying or eliminating capital projects for 2011.

"The last 18 months there has been a rebound of the market and investment portfolios, and that's had an impact on the operating side [for hospitals and health systems]," said Greg Pagliuzza, vice president and CFO at Trinity Regional Health System, a four hospital system based in Rock Island, IL whom I interviewed for that article.

Earlier this month, however, Cain Brothers released its Industry Insights Report noting, "As the U.S. is now emerging from economic recession, hospitals will need an increasing level of capital, for both new and deferred capital projects, in an effort to remain competitive in an industry characterized by a high degree of capital intensity, constant innovation in equipment and information systems, and the rapid obsolescence of technologies."

Waring says the GE Capital survey reflects that idea with an uptick in capital expenditure expectation. "They pushed the pause button in 2009-10 and now there's a pent-up demand for capital investment. So … CFOs are less optimistic about the economy than other CFOs, but we are starting to see folks spending capital dollars again," he said.

And there's one more thing to be positive about. According the GE Capital survey, 33% of Healthcare CFOs expect profit margins to increase this year (up 3% since Q1 2010), with another 35% expecting profit margins to remain the same (up 6% since Q1 2010). Financial leaders may be pessimistic about healthcare reform, but it looks like the financial future of healthcare may be brightening.