Not Worried About the Fiscal Cliff? You Should Be

You don't have any control over whether it happens or not, but you might have to plan for a contingency that almost everyone said last year would never happen: the fiscal cliff. Of course, no one called it the fiscal cliff then. That term was coined as we edged closer and closer to the ticking time bomb that legislators settled on after failing to come to agreement on a package of federal spending cuts and tax increases in 2011. There are other big, possibly economy-damaging spending cuts that will go into effect Jan. 1, 2013, if Congress cannot agree on a budget deal, but the one that should concern healthcare executives is a 2% cut in Medicare reimbursements to hospitals.

I get it: It's almost Christmas, the holidays are here, and yet here's one more thing you have to pay attention to, and yes, plan for. And it's not good. Already faced with PPACA provisions that will force cost cuts over the next couple of years between 15% and 30%, senior executives at hospitals and health systems now have to worry about what will happen to their Medicare payments if Congress can't come to agreement on how to resolve the fiscal cliff.

Doug Fenstermaker, who was CFO of HealthEast in St. Paul, MN, for 10 years before becoming a consultant, says failure to resolve the fiscal cliff could be a serious problem in the short term for healthcare organizations, where the average margin is only 2-3% annually. Some do better and some do worse, of course, but that margin level has been pretty standard for about 25 years or more, since DRGs came into place.

"So if in 2013, starting January 1, they face a 2% cut, that could wipe out the calendar year budgets," Fenstermaker says. "The only way they can deal with that in the short term is make significant across-the-board cuts."

Now managing director and executive vice president of healthcare at Warbird Consulting Partners, Fenstermaker says it's understandable that many senior executives are ignoring the fiscal cliff negotiations because they have no control over them.

"But if the economy goes over the fiscal cliff, all of it goes over, including healthcare," he says.

Most hospitals would not face the Medicare cuts immediately, but would have to immediately plan for how to deal with them—even though Congress could reach a deal after sequestration has taken effect, and could retroactively deal with any cuts made to Medicare hospital payments, for example.

"They wouldn't act in a panic mode," Fenstermaker says of executives, "but they would have to take the loss and use 2013 to plan for dealing with it going forward."

That's because Fenstermaker says hospitals and healthcare systems shouldn't count on getting those Medicare funds back in a post-cliff deal.

"Let's assume for the sake of argument that they go over [the cliff] and Medicare gets cut by 2%," he says. "When they cut a deal, I don't believe hospitals will be compensated for that. It's an easy cut, Medicare payments to the hospital. The hospitals eat the cost, just like they will eat the $500 billion in costs from the ACA [Patient Protection and Affordable Care Act]."

No one believed this could occur. But now that it's pretty clear that Congress can't negotiate itself out of a wet paper bag, reality should be starting to sink in for those in charge of multimillion-dollar budgets.

"Even if they cut a deal, I have to believe if the Republicans are holding out for cost reductions, [thus] more is going to come out of Medicare," Fenstermaker says. "Maybe it was naïve that nobody was paying attention to it, but it could be their entire bottom line for next year."

So, what should you do?

Fenstermaker recommends putting on hold all capital expenditures in the near term that are already planned, and starting an aggressive operating expense planning process that has 90 days run time, beginning January 1.

Wait longer—say, until spring—and "because of severance and layoffs, at best, you'll only get six months' benefit out of it."

"If you have a budget that says you'll make a bottom line of 2%, you have to cut 4% by the middle of the year to retain that 2% margin," he says. "For planning purposes, there's a much more aggressive impact the longer you delay."

A deal before January 1 would remove the urgency, but cuts associated with the PPACA, set to be implemented in 2013–2014 are in effect already here for planning purposes. Many big systems have been working for quite a while on the conundrum of how they will restructure and maintain quality, but if the fiscal cliff stalemate isn't resolved, they will have to look even more aggressively at dropping overhead expenses.

"If it comes to a choice between a clinical staff person or nurse, and an administrative support person, it's a no-brainer on what job goes first," Fenstermaker says. Hard choices may have to be made soon.