Capital planning for the unexpected
I was enjoying my New Orleans’, 6-napkin roast beef po’boy, carefully avoiding the anticipated drip down my shirt and realizing how healthcare and this dripping sandwich have a lot in common. Healthcare is challenged from every angle and the constant, multi-front battle creates opportunity for waste, inefficiency and non-compliance. Improving in one area almost certainly leaves another vulnerable. If a provider gets caught up, legislation changes or reimbursements get slashed. The drips in the napkin are an acceptable casualty because we know we can’t possibly keep it all in the bread. But what about the drips down the chin? What about the drips on the shirt, embedded deeply in the fabric’s fibers and potentially causing permanent stain? As the pendulum shifts from doing more with more, to doing more with less, and finally doing less with less, are we finding healthcare on an unsustainable trajectory?
While healthcare has always been the most complicated business sector, we are without a doubt, witnessing more sweeping changes and challenges than in any other 5 year period, dating back to 1966 and the inception of Medicare. Keeping current with all the changes and updates to the changes will keep you busier than a long-tailed cat in a room full of rocking chairs. If you’re not keeping up, there’s no better time to attend a conference, local lunch-and-learn or educational forum of some type to find out where the gravy will drip next.
Healthcare is great about offering a steady supply of unexpected capital expenditures; from new legislation and federal mandates, to coding updates and compliance, they all have associated capital expenditures to meet the new standards. If your capx budget doesn’t include provisions for the unexpected, you better think fast, because some of the changes seem to sneak up on many healthcare providers and deadlines are fast approaching. With consequences that include lower reimbursement or rejected claims, it’s a serious matter.
Most providers have at least started their EHR, or are not far from finalizing the blueprint, but what about HIPAA 5010 and ICD-10? There is a surprisingly high cost associated with both from not only a hardware/software perspective, but also for additional fte’s and capitalized labor costs. The costs of each are relative and directly correlated to the size of the healthcare provider. A large hospital may be facing capital costs over $1,000,000 for the ICD-10 conversion alone; again, this is not only software/hardware expenses, but also additional costs such as capitalized labor, training…consider your total cost for conversion and prepare accordingly.
For those providers planning to push purchasing associated hardware out until early 2012, keep in mind 100% bonus depreciation runs out December 31, 2011. If you have profits to offset, it’s a great year to turn over that new leaf early and make your capital purchases before year end. Rather than depreciating 5 year strait line or under any MACRS, 100% bonus depreciation gives you all the benefit up front, for the 2011 fiscal year.
One of the latest unexpected changes in healthcare finance is the reluctance of banks to take your bond debt long term. Analyze your long term debt strategy, maturing bonds and your plans to roll those bonds over. The days of rolling all your purchases into your next bond issue, regardless of the useful life of the asset, are over. Inverted yield curves, increasingly difficult market conditions and the Moody’s negative outlook on the sector have all played a part in forcing change….positive change. Rolling over so much long-term debt, failing to service the principal and kicking the can until the next 10 year balloon comes due, is a dangerous strategy. Large providers can start chipping away at that long-term debt by approaching their capital needs in a more balanced manner. Utilize shorter term financing for assets with a clinical useful life of 5 years or less and take advantage of the historically low rates. Continue to use long-term financing, but with a more sophisticated approach and dedicate some of your free cash, that cash over and above your DCOH target, towards servicing principal on your long-term debt and servicing your newly balanced shorter term debt. This may mean you don’t pay cash for your $8mm cyberknife project, but that’s ok. Your cyberknife program will produce enough profitable revenue to cover the debt service needed for a 5-7 year loan or lease on that equipment and associated build out. Over a 10 year period you can have a significant, positive effect on the overall capital position of your hospital or system.
Healthcare providers and those servicing the industry from a product or professional services perspective are the only ones in a position to change healthcare in a productive and efficient manner. Let’s work together to share best practices, analyze new strategies and reduce costs from the inside out.