Hospitals are working harder than ever to enhance returns on their investments, according to various money management experts.
With patient-care and other operating revenues under constant pressure, hospital finance departments are paying closer attention to yields on pension funds, funded depreciation, self-insurance funds, debt-service reserves, excess cash, and foundation and endowment assets, they said.
"If they're losing money treating patients...they need to go out there and seek higher returns on their investments," said Stuart M. Goldstein, vice president of Wharton Management Group, a New York-based investment adviser that manages $50 million in investments for healthcare clients.
"The economics are forcing them to look at their investments," he said.
As opportunities to squeeze out excess costs and boost revenues are exhausted, hospital chief financial officers are looking to enhance nonoperating revenues. Hospitals are becoming "a little more sophisticated" about investment management, said Warren Hern, senior vice president and CFO of Park Ridge Health System in Rochester, N.Y.
Park Ridge recently reallocated $8 million in defined-benefit plan assets. Now, 70% of the money is invested in equities and 30% is in fixed-income instruments, up from a 60-40 ratio of equity to bonds. The new allocation is expected to increase yield with little added risk.
Theory of evolution.Over the past five years, there's been an evolution in healthcare investing practices, said Terry Bilkey, a principal at Yanni-Bilkey Investment Consulting, a Pittsburgh-based firm that manages $5 billion in investments for healthcare clients.
When revenues from operations began to decline, hospital CFOs started looking to maximize nonoperating revenues, he said.
The average hospital has $60 million to $80 million in total investment income, half of it in defined-benefit pension plans, according to Jordan Foster, senior relations manager at SEI Corp., a Wayne, Pa.-based asset management and advisory company that manages some $500 million in investments for healthcare clients.
Mr. Foster added that 50% to 75% of hospitals' profits come from investment income.
Historically, hospitals have been conservative investors, relying heavily on such credit-sound vehicles as U.S. Treasury bills, certificates of deposit and commercial paper rather than higher-yielding equities.
During the 1980s, when Treasury-bill rates ranged from 12% to 14%, there was no need to shop around for better investment opportunities, Mr. Goldstein said. But the T-bills that were yielding 8% five years ago are only returning 4% to 4.5% today, so hospitals still using that vehicle have experienced a 50% drop in investment income.
Great expectations.There's no reason a hospital can't have the same expectation as any other corporation to maximize the performance of its assets, Mr. Bilkey said. "It's the asset allocation that's going to be more conservative," he said.
For example, a corporate pension plan might have 60% in equities and 40% in debt instruments. The high equity exposure will provide greater returns over time.
By comparison, a hospital that plans to make capital expenditures in three to seven years may decide to invest just 30% of its funded depreciation account in equities and the rest in fixed-income instruments with short- to intermediate-term maturities.
If hospitals are too conservative, they could be leaving money on the table, said Alan G. Seidner, president of Alan Seidner & Co., a Pasadena, Calif.-based investment management and consulting firm. With a prudent investment strategy, many hospitals can realize a 1% to 1.5% increase in return "with very little increase in risk," he said.
But in their zeal to improve nonoperating income, hospitals can inadvertently assume too much risk if they don't seek expert investment advice.
"Like everything else, it's a two-edged sword," Mr. Seidner warned.
He knows of one profitable hospital whose controller invested $40 million in "interest-only stripped mortgages," a risky derivative instrument. When interest rates declined last year and mortgages were prepaid, the "IOs" dropped in value, causing the hospital to lose some 15% to 20% of the purchase price. He declined to identify the hospital.
"I think in terms of maximizing risk-adjusted total returns," said Frank Ashby, director of finance for Norfolk, Va.-based Sentara Health System's Treasury services section. In today's environment, "you've got to make money work harder than ever before," he said.