Sequestration and Business: What Factors Need to Know

Start planning now for the effects of sequestration on factoring and your business.

As far as sequestration goes, it feels a little like waiting for the other shoe to drop. Due to the failure of the government to come to a workable agreement on spending reduction, automatic across-the-board cuts were implemented on March 1st.

Many government programs and jobs will be impacted, as well as the businesses that work directly and indirectly with them. While exemptions from the cuts do exist, sequestration will have far reaching implications for industries like healthcare as well as business in general.

Sequestration and Healthcare

The healthcare industry has a lot to potentially lose from the $85 billion spending reduction due on March 1st. While Medicare cuts have been restricted to no more than 2% of the budget (unlike most programs at 4% or more), healthcare experts say that the slashes will cost the industry over 200,000 jobs.

Government officials say that coverage for those under Medicare will not change, but providers like hospitals are facing a potential 27.4% reduction in Medicare reimbursement. This puts them in a tough financial position– hence the job losses. The largest share of provider cuts goes to hospital inpatient care, at 32%, while group plans, outpatient care, home health agencies and skilled nursing facilities make up the brunt of the rest.

Certain portions of Medicare are exempt from cuts, such as the Part D low income subsidies, catastrophic subsidies, and Qualified Individual premiums. Medicaid and Social Security are exempt completely.

Sequestration and Business

While healthcare looks to be impacted greatly, business in general will be hurting even more so. George Mason University economist Dr. Stephen Fuller estimates that in 2013 alone, sequestration will put 2.14 million jobs at risk. This includes over 950,000 small business jobs from government supplier companies as well as mom-and-pop stores that deal indirectly with government contracts. Companies with 500 employees or less are facing up to 45% of job losses in the coming year. He also predicts a decrease in personal earnings of $109.4 billion as well as a GDP reduction of $215 billion. In an already struggling economy, this bodes ill for the coming months and years.

Specific Effects

Here are some examples of how sequestration will affect specific industries:

Defense: The active military remains untouched, however, civilian Defense Department pay is expected to decrease by around 20%. 46,000 temporary and term workers will be laid off, and furloughs will affect the rest. Defense Secretary Leon Panetta has said that national security could be harmed as a result.

Education: Special Education grants and Head Start funding will be reduced, as well as federal child care assistance. Thousands of teachers, aides, and speech therapists will be affected, and low income children are expected to suffer the most damage. For higher education, federal financial aid programs such as work-study will be cut by about 8.2%.

Air Travel: Federal Aviation Administration employees would be furloughed by 11 days, hampering air travel around the country as less air traffic controllers and technicians will be on duty. Security will also be affected, and wait times could increase dramatically.

Housing: Low-income families could potentially lose 125,000 housing choice vouchers, and about 100,000 formerly homeless people will lose their current housing and go to the streets once again. Foreclosure prevention advice will also decrease as HUD counseling grants will be reduced by 75,000 families.

Conclusion for the Factoring Business

Factors or factoring brokers that do business with institutions that deal with the government, such as medical facilities that bill through Medicare—heads up. Cash flow challenges for these businesses are likely on the horizon as purse strings tighten at government programs. Factoring businesses will be in a unique position to help ailing companies, and no deal should ever go unfunded. An extensive referral network or cobrokering agreement will soon be more important to have than ever.

While the “meat cleaver” approach seems like an inefficient way to reduce spending, hopefully it will serve as a wakeup call for the government to put aside differences in order to do what’s best for the country. Businesses should do what they always do in tough times- prepare for the worst while hoping for the best. After all, one thing that can never be “cut” is the indomitable American spirit of enterprise.

About the Author: Factor Finders specializes in finding factoring companies that can fund difficult-to-place deals. Our services help other factoring brokers capitalize on commissions that might otherwise be lost.

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