Earlier this year, Cerulli Associates released a report1 on the investment needs and concerns of the healthcare sector. The report highlighted the increased focus on the effective management of investable assets in an increasingly complex
operating environment. Because healthcare providers tend to have multiple pools of assets—such as balance sheet pools, endowments and defined benefit pensions—finance professionals responsible for overseeing these investments must have a clear understanding of how decisions in one pool can and do impact other pools and the broader organization.
Here's my perspective on commonly asked questions about how healthcare finance executives can more effectively manage your organization's investable assets.
Why do you think there’s been an increased focus on investment management for healthcare finance executives?
Over the past decade or so, hospitals and health systems have seen margins come under increasing pressure, and investment returns continue to play a critical role in maintaining financial stability. Favorable investment markets over the longer term have helped to grow asset values, strengthen balance sheets and provide hospitals and systems with financial flexibility to make strategic investments. Last year, healthcare sector outlooks from all three rating agencies highlighted the role of investment returns and the importance of how unrestricted assets are managed moving forward. Beyond those operating assets, many healthcare providers also oversee other investment pools including endowments, self-insurance, defined benefit and defined contribution plans. Each asset pool has a unique purpose, return objective and risk profile, which makes the strategic asset allocation for the entire investment program much more complex and important.
To effectively manage the portfolio, the organization must make investment decisions that take into account all asset pools and make sure that the strategic allocation aligns with and supports long-term goals and objectives. With so many moving parts, investment management has become a major component of the broader financial strategy and risk management approach within healthcare organizations.
What components should be considered when trying to maximize investment management success?
The key to long-term success of any investment program is putting the appropriate strategic asset allocation in place and understanding the potential impact that investment performance across all organizational portfolios may have on the financial condition of a healthcare system. Each investment pool may have a specific goal or purpose; however, from an enterprise wide perspective, a cohesive strategy is necessary to control the impact of these portfolios on broader organizational goals and objectives.
It’s also important to identify, quantify and prioritize risks. The financial profile of health systems can be volatile due to their high levels of exposure to the capital markets. Profitability and overall stability can also be impacted by variables that are largely out of management’s control. Therefore, it’s important to evaluate portfolios based not only on traditional comparisons to a predetermined benchmark or peer group, but also on the impact that portfolio construction has on important financial and credit metrics (such as days cash on hand, unrestricted cash/debt, debt to capitalization and debt service coverage). Once the key risk factors are identified and quantified, healthcare providers are in a better position to make decisions regarding the level and types of risk factors they are willing to accept in various asset pools and across the broader strategic allocation. Also, it’s important to monitor performance relative to objectives at the portfolio level and progress toward stated goals at the organizational level.
Alternative investments have piqued the interest of many healthcare executives, but they undoubtedly bring additional complexity to the portfolio. How should these strategies be viewed or used?
We believe alternative strategies have a role in a well-diversified portfolio, historically providing uncorrelated sources of returns and, depending upon the strategy, reducing volatility. When healthcare executives consider adding alternatives to an asset allocation, the executives and board governance should examine a number of factors, including:
- The purpose of the particular pool
- The risk/return objectives for the pool and the broader investment program
- The organizational liquidity requirements and/or constraints that might be impacted by the illiquidity associated with a range of alternative strategies
While alternatives might be viewed as only being appropriate for larger healthcare organizations, many providers across the size spectrum use alternative strategies within their various asset pools. Ultimately, the growing number and complexity of alternative investments available to institutional investors—including healthcare providers—requires that they have the staff and expertise able to evaluate the options and clearly understand the risk/return trade-offs of the alternative investments they might include in their strategic allocation. The Cerulli report specifically mentions using outside expertise, such as an outsourced chief investment officer (OCIO), when considering adding alternatives to any portfolio.
With regard to outside expertise, how are healthcare organizations building a process that uses the right mix of partners and internal resources?
Since the implementation of the Affordable Care Act, hospital and health system finance teams have faced a myriad of challenges adapting to the new operating environment with time and resources stretched pretty thin. Healthcare CFOs are entrenched in daily operations, and finance teams are charged with managing multiple asset pools in a very complex investing environment, while also dedicating time to strategic planning. The recent Cerulli report mentions the challenges and stress that typical healthcare finance professionals face. "Regardless of who oversees the responsibilities of asset allocation, manager selection, etc., it is not an easy endeavor. As one consultant explained to Cerulli, 'I feel bad for finance people in the healthcare systems; they're just getting destroyed. When meeting a treasurer, their desk is completely covered and they're constantly fighting fires.'"1
Some healthcare organizations maintain full-time staff dedicated to managing the investment pools. However, primarily due to cost constraints, the vast majority of hospitals and health systems either rely on internal staff members with multiple job responsibilities (in addition to monitoring investments), or on external investment managers that can provide additional expertise and resources.
To overcome time management and lack of internal expertise issues, as well as satisfy the need for greater customization, investment outsourcing continues to be a growing trend in the healthcare sector. Discretionary managers allow healthcare organizations to delegate part of the investment management decision-making process to external experts. Plus, this delegation also frees up time for finance executives to focus on strategic issues and makes the overall investment management process more efficient and nimble.
1 Cerulli Associates, The Cerulli Edge, U.S. Institutional Edition: Health And Hospitals, 2Q 2016
This information is provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company. The material included herein is based on the views of SIMC. Statements that are not factual in nature, including opinions, projections and estimates, assume certain economic conditions and industry developments and constitute only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice (unless SIMC has otherwise separately entered into a written agreement for the provision of investment advice).
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