Emerging Opportunities
Healthcare providers face numerous challenges such as: tight labor market, margin pressure, and regulatory scrutiny. These challenges have continued post COVID-19 and have brought more attention on investment assets and business models.
As entities become more complex, astute providers are more closely reviewing the structure of various organizational asset pools and their potential role in accomplishing strategic objectives. When it comes to management of healthcare provider investment portfolios, industry leaders must not lose sight of their enterprises’ overall mission and the role investment volatility may play in total financial health.
A Holistic View Brings Unique Insights
Healthcare systems can benefit from taking a holistic approach to management of their investment assets. Many nonprofit providers today are placing greater focus on the strategic role of unrestricted assets and how the risk inherent in the management of these asset pools contributes to overall organizational risk. Furthermore, healthcare systems generally have more than one investment pool with distinct objectives, including retirement plans, operating reserves, foundations, and self-insurance pools. With a holistic approach to investment management, which our team refers to as enterprise financial modeling, the investment strategy for each pool is viewed in the context of the organization’s broader financial strategy.
Organizational Goals & Projections
The first step in a holistic approach is defining the investment objective of each portfolio and understanding the relationship of those portfolios to the organization’s financial health and mission. This initial step lays the foundation for an enterprise financial modeling analysis since it helps determine each pool’s return needs and risk tolerance, with consideration of the system’s unique financial position and requirements.
Additionally, the organization’s financial projections are gathered, which, when married with return and volatility expectations for the investment pools, set the stage for insight into the relationship between investment assets and the provider’s key financial metrics.
Enterprise Financial Analysis
The second step, the enterprise financial analysis provides insight into how market volatility or changes in the investment strategy may affect vital financial metrics, such as days cash on hand, leverage, and debt service coverage.
Customized Investment Strategy
Next comes a customized asset allocation strategy for all investment pools. The optimal asset allocation most efficiently balances return needs with the appropriate risk budget. This comprehensive approach highlights the probability of achieving targeted organizational results, such as having sufficient funds to initiate a capital spending project. Here investment decision-making is tied to the entity’s most important financial objectives.
Implementation & Oversight
The customized investment strategy is implemented and informs the Investment Policy Statement guidelines. Additionally, ongoing monitoring ensures the investment strategy remains appropriate. Changes in key financial metrics are tracked over time, as these measures remain benchmarks for organizational health and are influenced by financial market volatility.
More Empowered Decision-Making
A greater understanding of the organization’s ability to tolerate investment risk is the result of the financial modeling framework. In turn, this helps equip key individuals with answers to questions such as:
- How does increasing/decreasing risk of the operating reserve pools increase/decrease the volatility of debt covenant ratios?
- How does incorporating private alternative investments affect organizational liquidity?
- What is the correlation between the operating reserve pools and the employer-directed retirement plans? How would a decline in interest rates affect the two simultaneously?
- How does a decision to finance a capital project affect overall financial risk tolerance?
The financial modeling approach has helped a Southeastern health system position its long-term operating pools appropriately for its future capital spending plans. Specifically, the provider had a strong balance sheet, with days cash on hand above and debt-to-cap below its “BBB” category medians, respectively. However, operating performance had a less attractive history—recent operating losses and inconsistent debt service coverage hindered ability to bear financial market volatility, in our view. Knowing the importance of preserving capital in light of a major near-term spend-down of investment assets, we saw the opportunity to enhance diversification. We moved this organization out of illiquid alternative investments with a sub-par track record and opted for asset classes that would complement significant allocations to domestic large- cap equity and core fixed income, such as small- and mid-cap domestic equity, high yield, and emerging market debt. By focusing on maintaining a solid balance sheet and liquidity in the investment pools, this system was able to keep its sights set on improving operating performance without jeopardizing its strengths.
Balancing Financial Risk Can Yield a Sharper Focus
A holistic approach to managing asset pools can help healthcare leaders optimize investment programs, bolster financial standing, and provide key mission support. By assessing the relationship between investment risk and overall financial risk and position, a healthcare organization can adopt a collectively balanced risk posture, creating more capacity to focus on the many other matters pressing providers today.
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