Shrinking government reimbursements, managing overhead costs and other short-term operating challenges are enough to keep any hospital CFO busy today. Adding non-operating revenue, such as investments and other asset management, and some may feel like they are sinking in a ship riddled with holes.
In fact, last year, the Commonfund Institute — a financial research organization based in Wilton, Conn. — released a report saying those challenges are actually forcing hospitals to invest in riskier alternative portfolios to make up for that potential drop in operating income.
Hospitals and health systems have various asset pools to manage as part of their investment portfolios. Many have defined benefit pension plans, long-term investment pools, professional/malpractice insurance pools and more. According to Lisa Schneider, managing director of healthcare systems and non-profits at Russell Investments, it can be a lot for one organization to handle on its own. "Managing multiple investment pools with increasingly limited resources is a complex challenge," she says.
Take, for example, Mayo Clinic. The Rochester, Minn.-based health system had total liabilities and net assets of more than $11.3 billion in fiscal year 2012, which included securities, long-term debt, accrued pension benefits and other investments. It's an extreme example, to be sure, but Mayo financial analysts are tasked with managing billions of dollars in investments every year.
Ms. Schneider says if health systems are becoming bogged down with their fiduciary responsibilities, investment outsourcing — in which another organization assumes full fiduciary and discretionary responsibility for portfolio construction, investment manager selection and investment strategy — may prove to be beneficial in both the short and long term. Here, she provides some tips on how health systems can more effectively manage their investments today.
A typical hospital investment committee is made up of the hospital CFO, treasurer and other board members, but they may be able to meet only once every quarter. This could be problematic, Ms. Schneider says, because a health system's investments usually warrant more time and focus.
"Over time, investment committees [may be] drawn more and more to financing issues and other discussion topics, so consequently they have less time to focus on investment strategies," Ms. Schneider says. "Couple that with the fact that the markets have been increasingly volatile in the past four to five years, and if the only time they can make decisions is once a quarter, that may not be sufficient going forward to manage things like market volatility and how it impacts long-term investment pools."
Ms. Schneider recommends hospitals and health systems routinely evaluate their investment committees to see how they can more efficiently manage their investment pools and, if necessary, delegate the more day-to-day, time-intensive work and tactical decisions to an outside provider.
Defined benefit pension plans have been on the decline for several years now at health systems, but many organizations still have them and must be funded every year. Although investor returns have been strong on DB plans, Ms. Schneider says declining interest rates have left systems with higher unfunded pension liabilities.
Ms. Schneider believes, however, that the challenges a low interest rate environment presents can be managed. She has worked with health systems to set up liability-responsive asset allocation strategies for their DB plans — in other words, an asset allocation strategy that responds to improvements in funded status by shifting the risk-reward balance away from aggressive, return-seeking strategies to long duration fixed income, ultimately with the goal of preserving funded status gains
For health systems that outsource all or a portion of their investment and asset portfolios, Ms. Schneider says there must be one key idea in mind: Hospitals and investment management firms should not just have a vendor-client relationship. They should have a strategic partnership.
"Choosing a provider is a major strategic decision, so making a good selection from the outset is critical," Ms. Schneider says. "It's important to have a clear understanding of the services offered by the provider and to specifically outline their discretionary responsibilities. You want a provider that will have strong advisory capabilities, but that can also take on more tactical asset management decisions. Ultimately, if a health system is concerned about volatility and its impact on the company financials and credit rating, then investment outsourcing could be a good fit."
In fact, last year, the Commonfund Institute — a financial research organization based in Wilton, Conn. — released a report saying those challenges are actually forcing hospitals to invest in riskier alternative portfolios to make up for that potential drop in operating income.
Hospitals and health systems have various asset pools to manage as part of their investment portfolios. Many have defined benefit pension plans, long-term investment pools, professional/malpractice insurance pools and more. According to Lisa Schneider, managing director of healthcare systems and non-profits at Russell Investments, it can be a lot for one organization to handle on its own. "Managing multiple investment pools with increasingly limited resources is a complex challenge," she says.
Take, for example, Mayo Clinic. The Rochester, Minn.-based health system had total liabilities and net assets of more than $11.3 billion in fiscal year 2012, which included securities, long-term debt, accrued pension benefits and other investments. It's an extreme example, to be sure, but Mayo financial analysts are tasked with managing billions of dollars in investments every year.
Ms. Schneider says if health systems are becoming bogged down with their fiduciary responsibilities, investment outsourcing — in which another organization assumes full fiduciary and discretionary responsibility for portfolio construction, investment manager selection and investment strategy — may prove to be beneficial in both the short and long term. Here, she provides some tips on how health systems can more effectively manage their investments today.
It all starts with the investment committees
Ms. Schneider says Russell Investments manages the investments and assets of 15 major health systems in the United States, totaling roughly $5 billion in assets, and has provided these services for more than 30 years to health systems, corporate plan sponsors and other non-profits. As a first step, she suggests hospitals and health systems shore up their investment committees' governance practices and ask themselves if they can devote the time and effort needed for dynamic oversight of these pools of capital.A typical hospital investment committee is made up of the hospital CFO, treasurer and other board members, but they may be able to meet only once every quarter. This could be problematic, Ms. Schneider says, because a health system's investments usually warrant more time and focus.
"Over time, investment committees [may be] drawn more and more to financing issues and other discussion topics, so consequently they have less time to focus on investment strategies," Ms. Schneider says. "Couple that with the fact that the markets have been increasingly volatile in the past four to five years, and if the only time they can make decisions is once a quarter, that may not be sufficient going forward to manage things like market volatility and how it impacts long-term investment pools."
Ms. Schneider recommends hospitals and health systems routinely evaluate their investment committees to see how they can more efficiently manage their investment pools and, if necessary, delegate the more day-to-day, time-intensive work and tactical decisions to an outside provider.
Pension plan problems
Pension plans and other employee retirement accounts are crucial to employee engagement and retention, but for many hospitals and health systems, unfunded pension liabilities have been inundating balance sheets and impacting organizational credit ratings.Defined benefit pension plans have been on the decline for several years now at health systems, but many organizations still have them and must be funded every year. Although investor returns have been strong on DB plans, Ms. Schneider says declining interest rates have left systems with higher unfunded pension liabilities.
Ms. Schneider believes, however, that the challenges a low interest rate environment presents can be managed. She has worked with health systems to set up liability-responsive asset allocation strategies for their DB plans — in other words, an asset allocation strategy that responds to improvements in funded status by shifting the risk-reward balance away from aggressive, return-seeking strategies to long duration fixed income, ultimately with the goal of preserving funded status gains
For health systems that outsource all or a portion of their investment and asset portfolios, Ms. Schneider says there must be one key idea in mind: Hospitals and investment management firms should not just have a vendor-client relationship. They should have a strategic partnership.
"Choosing a provider is a major strategic decision, so making a good selection from the outset is critical," Ms. Schneider says. "It's important to have a clear understanding of the services offered by the provider and to specifically outline their discretionary responsibilities. You want a provider that will have strong advisory capabilities, but that can also take on more tactical asset management decisions. Ultimately, if a health system is concerned about volatility and its impact on the company financials and credit rating, then investment outsourcing could be a good fit."
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