Healthcare Investment Management: Strategies for 2025

As healthcare organizations continue to face a volatile business environment, a thoughtfully designed investment program can provide a source of stability. In this publication, we delve into five key areas to help your organization evolve its investment strategy and prepare for what lies ahead in 2025.

1. Building liquidity and capital resilience for uncertain times

With an uncertain economic environment ahead, liquidity and capital resilience are paramount. Healthcare organizations should consider assessing their liquidity structures to prepare for potential fluctuations in revenue and legislative changes in 2025.

Implementing or calibrating a tiered investment pool structure

Tiering asset pools can help organizations maintain liquidity during volatile periods, while still benefitting from long-term asset growth. One example is an operating, reserve, strategic and long-term pool structure, illustrated in Figure 1.

Figure 1. Tiered Investment Pool Structure

Fuente: PNC. Para fines ilustrativos únicamente.

Ver la versión accesible de este gráfico.

Efectivo operativo: Cash needed to support ongoing operations. Funds are often held in bank accounts or money market sweeps.
Reserve cash and strategic reserves: Cash for unexpected large expenses or near-term capital expenditures. These funds can also act as a “buffer” for investment portfolios, potentially shielding these funds from being used for short-term operating needs. Funds may be invested in short-term fixed income securities to earn additional return, while preserving liquidity.
Long-term funds: Investment assets dedicated to preserving the organization’s financial strength, growing days cash on hand, and contributing to its mission and strategic objectives. Funds are generally invested in a multi-asset portfolio of equities, fixed income, and alternatives.

Key Takeaway: Healthcare organizations often experience fluctuating cash flows due to patient demand, elevated costs, regulatory changes, and reimbursement pressures. A strong liquidity and capital resilience plan can enable healthcare organizations to meet unexpected demands without disrupting long-term investment goals. Having a structure that prioritizes liquidity during periods of operational stress is crucial for navigating unpredictable environments.

2. Adapting to falling interest rates and their impact on investment pools

With market expectations pricing in a continuing normalization of the yield curve, healthcare systems may need to reassess the return potential of their portfolios and adapt to the changing dynamics of fixed income markets.

Cash yields expected to rapidly fall in 2025

As the Federal Reserve (Fed) loosens monetary policy with interest rate cuts, financial conditions should continue to ease. As such, cash yields are expected to meaningfully decline over the next year, as illustrated in Figure 2.

Figura 2. Cash Yields Expected to Rapidly Fall in 2025

A partir del 30/11/2024. Fuente: Bloomberg L.P.

Consultar la versión accesible de esta tabla.

Navigating a decline in deposit rates

Interest-bearing deposits and money market fund (MMF) yields, on which many healthcare systems rely for liquidity, may continue to decline as the Fed eases policy. For surplus operating cash, consider alternative short-duration fixed income strategies that may help enhance yield and provide diversification and total return opportunities — without compromising liquidity.

Lower interest rates directly impact defined benefit (DB) plans by increasing the present value of plan liabilities. Without a thoughtful investment strategy, this will likely result in a decline in the plan’s funded status. Healthcare organizations that sponsor DB plans should consider working with their investment managers to assess the best liability-driven investment strategies for a low-rate environment, to potentially insulate against future interest rate changes.

For issuers of public debt in recent years, money market funds have provided an attractive place to invest proceeds earmarked for capital spending. As the yield curve continues to normalize, opportunities may emerge to move away from holding bond proceeds in MMFs to investing them in cash-flow matching, laddered bond portfolios. A laddered bond portfolio, aligned with expected capital spending needs, may help your organization capture higher yields and provide protection in a falling interest rate environment.

Key Takeaway: A lower-rate environment requires healthcare systems to rethink fixed income strategies, focusing on both yield enhancement and liability management. Working closely with investment advisors to optimize these areas can provide both yield and ballast.

3. The rise of artificial intelligence (AI) and technology in investment management

AI and other technological advancements are reshaping the investment landscape, and in turn, may present business and investment opportunities for healthcare organizations. AI-driven predictive analytics can provide deep insight into market trends and help healthcare investors make more informed, data-driven decisions. Beyond analytics, there are a great number of venture capital and private equity investments focused on AI companies, especially those advancing healthcare technologies.

Key Takeaway: Consider embracing AI not only as a tool for decision-making but also as a potential area for capital deployment. As its presence in the healthcare industry continues to grow, healthcare organizations should evaluate ways to stay ahead of the curve in how they harness the power of AI.

4. Taking a strategic approach to alternatives

In a challenging market environment, alternative investments can offer diversification for healthcare portfolios. Many healthcare investors continue to look to alternatives such as real assets, private equity, and mission-driven investments to meet their unique objectives.

As inflation concerns persist, real assets such as infrastructure or real estate can provide an advantage. Healthcare systems that invest in such assets may see benefits both from an income and inflation-protection perspective.
Alternatives such as private equity and private credit allow for diversification beyond public markets, adding less correlated sources of return. For healthcare systems, these investments can yield financial benefits that support growth and operational stability.
Healthcare-focused venture capital and direct investments in early-stage companies can offer positive ROI while also supporting impactful innovation. Investing in the technology that will drive the future of healthcare can serve as both a financial and strategic asset.
Purpose-driven investing has grown in popularity within healthcare organizations. Aligning investment portfolios with a healthcare organization’s mission can reinforce its commitment to community and sustainability. With the growing demand for mission alignment, healthcare investors have adopted alternative investment opportunities intended to help align portfolios with the organization’s mission.

Key Takeaway: Evaluating the use of alternatives in your organization’s portfolio is no longer just a question of returns; it can also help safeguard against market volatility and increase community impact. Alternative investments that align with an organization’s goals can help reinforce the system’s financial and mission objectives.

5. Reimagining advisor engagement

Investment advisors are no longer just asset allocators; they can be strategic partners that add value beyond traditional portfolio management. For healthcare organizations, increased engagement with their investment advisors and managers can lead to more tailored solutions to meet the distinct needs of health systems, their captive insurers and DB plans.

Consider if there are enhanced services your investment advisor can offer your organization. For example, ask your manager to model investment decisions to better understand the impact of investment decisions on balance sheet metrics and debt covenants (e.g., days cash on hand, debt service coverage ratio, etc.). This can illustrate whether your organization’s risk level is appropriate and help align investments with broader financial goals. Similarly, in an environment in which liabilities are constantly evolving, regular reviews of asset-liability matching strategies can protect funding adequacy for future claims and pension obligations.

Key Takeaway: Forge relationships with investment advisors and managers who understand the intricacies of healthcare finance and can bring a consultative approach. By doing so, your organization can be more agile in responding to financial challenges while maintaining alignment with broader mission objectives and bolstering risk management.

Navigating a complex and ever-changing healthcare environment

Prepare your organization for economic uncertainty, technological advancements, and evolving expectations. By strengthening liquidity, adapting to lower interest rates, leveraging technology, evaluating the use of alternatives and reimagining investment partner engagement, healthcare organizations can position their portfolios for resilience and growth in 2025 and beyond. The right investment strategies can not only strengthen your organization’s balance sheet but support your core focus on delivering essential healthcare services to our communities.

Versión accesible de los gráficos

Gráfico 1. Tiered Investment Pool Structure (view image)

In a tiered investment pool structure, unrestricted cash overflow streams into different pools, each with a subsequently longer time horizon, and higher return potential and risk tolerance from the one before. In this example, cash moves into four pools: operating cash, reserve cash, strategic reserves and finally, long-term operating pool(s).