What does the Congressional Super Committee's failure to come to consensus on a deficit reduction plan mean for healthcare financial leaders? For starters, CFOs will be taking a hard look at large capital spend projects in 2012 and beyond.
"You may not want to add that new wing because the cost of capital is about to go up," says Ken Perez, senior vice president of marketing and director of healthcare policy for MedeAnalytics, a performance management software vendor.
One week ago, leaders of the Joint Select Committee on Deficit Reduction, charged with finding at least $1.2 trillion in deficit reductions, failed to reach agreement on budgetary cuts. The stall triggers automatic cuts to a broad range of domestic programs, such as Medicare, starting in 2013.The committee's impasse is expected to reverberate through the economy. Economists and politicians agree that the lack of agreement on a debt reduction plan could slow economic growth significantly.
What's more, no swift solution is in sight. "There will be no easy off-ramps on this one," President Obama says. He has pledged to veto any legislation that would stop the automatic cuts.
The uncertainty at the federal level cascades down to individual hospitals. "I wasn't all that shocked nothing came out of the Super Committee. This [lack of consensus] just continues to make [CFOs] uncertain," says Robin LaBonte, CFO at the 79-bed York (ME) Hospital. "Not knowing what's going to happen [with the budget cuts] means we also don't know how to prepare our budgets for the coming year."
Although the full extent of the debt ceiling debacle will not be felt nationally until 2013, when the proportional cuts take effect, healthcare leaders could feel it sooner if capital lending rates increase.
Last week Standard & Poor's and Moody's affirmed their ratings of the United States' credit, but that can change at any time. Even without a credit downgrade, the committee's indecision could still result in interest rate increases, making it costlier for organizations to borrow money. Moreover, the heated and continual partisan rhetoric over the deficit creates a general economic anxiety which tends to cause financial leaders to pull back on capital spending projects.
For at least the last five years, healthcare CFOs have deferred large capital spend projects in an effort to reduce organizational debt. At many hospitals and health systems, the bare minimum of capital projects has been undertaken, with much of the capital going to technology, according to a 2011 HealthLeaders survey. Perez and LaBonte agree that the trend in capital spending for IT projects is likely to continue, but little other investment will likely be made over the next two years.
"We've been much more conservative with our capital project plans, and we try to fund them through donations, operations, or our own investments. Having debt makes you less flexible for the future, and right now with all the uncertainty, we need the flexibility to change when something comes our way," LaBonte says.
However, as equipment and facilities continue to age, could more delays jeopardize the overarching healthcare goal of improving features that impact patient quality of care?
"Hopefully organizations are prioritizing where they need to invest in order to achieve quality care," says LaBonte. "[But] organizations may have to be willing to put up with some risk in order to be very careful with capital planning."
Perez says secondary capital projects, such as adding another server or upgrading a boiler, are most likely to be put on hold. The need to optimize existing assets may spark a renewed focus on efficiency, he says.
"This becomes a re-engineering mission at the organization. You have to improve the efficiency of your existing assets—your people and your equipment. There are smart ways to improve operations and a lot of strategies available for organizations to use without having a massive infusion of capital," he says.
As the economic upheaval continues, it doesn't look like the coming year will bring opportunities for CFOs to loosen purse strings to upgrade aging facilities and equipment. Hope for the best, but anticipate the worst—that's what LaBonte is doing.
"We've been much more conservative with our capital project planning… and I think that's going to continue," she says. "I don't foresee any changes in the economy next year. CFOs are cautious with our plans." Caution is a good watchword for healthcare financial leaders heading into 2012.
Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
