When money managers and investment consultants look at the hospital industry, they see a gold mine of assets waiting to be excavated and turned into profit.
Overall, hospital assets available for investment total about $400 billion, said Russell K. Mason, president of the Investment Management Institute, a New York-based provider of investment and financial information. Yet, few hospital executives have focused on squeezing those assets for maximum return.
"Historically, hospitals have never really paid attention to the management of these assets because they never really had a need to," Mason said. In the old cost-reimbursement days, there were few incentives to shrink expenses and maximize returns on assets.
But as financial pressures mount, hospitals are investigating opportunities to make their assets work harder. Executives are paying more attention to returns on investment income to compensate for managed care's bite into operating margins.
"What is exciting about the hospital market from the hospital administrator's point of view is they have wonderful opportunities to enhance their portfolio returns," Mason said.
At an IMI conference this spring, Mason presented a broad overview of key findings from the institute's survey of chief financial officers, treasurers and comptrollers. The complete study sells for $25,000 and includes a three-hour presentation of the results.
"People told us it couldn't be done because hospitals wouldn't talk to us," Mason said. Through persistence, researchers managed to question executives at 408 hospitals. "We were exhausted doing this study," he said.
While the survey identified a total of 16 asset classes, hospital assets generally fall into three: pension and retirement money; endowments and foundation assets; and corporate funds, which include cash and short-term investments.
Despite a desire to boost assets, hospitals' asset allocations remain relatively unchanged from a year ago, he said. In 1995, hospital survey respondents invested 37% of their assets in equities, 48% in fixed-income securities, 13% in cash and short-term investment funds, and the remainder in other investment instruments.
Hospitals' heavy cash position is "unconscionable," Mason said. "Cash was one of the worst-performing asset classes in 1995," he said. By comparison, a typical pension fund allocates less than 3% of its assets to cash.
Mason said the only way to add value is to take and manage risk. Given the increased financial pressures facing hospitals and the unpredictability of future revenues, he said he wouldn't be surprised to see an increase in equities and a decline in cash and short-term investment funds next year.
Some 62% of survey respondents said they are using investment consultants, which may facilitate a change in asset allocation. When hospitals use investment consultants, performance goes up, Mason said. He said the use of a consultant translated into at least a 10% increase in returns among survey respondents.
Generally, consultants help hospitals determine the appropriate mix of stocks, bonds and other investment vehicles; select investment managers; and monitor and measure money managers' performance. Consulting fees generally range from $50,000 to $150,000 based on the assets to be invested, he said.
Mason also noted a movement by hospitals to outsource the treasury management function, which may include management of operating funds, pension funds and other investments. "(The amount of) assets managed externally is growing rapidly among hospitals," he said.
According to the survey, hospitals with $25 million to $100 million in assets available for investment use 2.8 money managers on average. Hospitals with more than $500 million to invest use 11.2 money managers.
"From a money manager's perspective, (the hospital industry) is the newest group that Wall Street is casting an exciting eye on because many hospitals do not have professional management today," Mason said.
At the IMI conference, numerous speakers addressed the industry's lack of sophistication when it comes to investment management. John M. Miller, an assistant vice president in charge of treasury, pension and capital markets activities for Washington-based Medlantic Healthcare Group, said the treasury function in healthcare comes in at least three forms: very important, not as important and nonexistent.
Because corporate treasury is neither a product nor an expense, it hasn't gotten a lot of attention. For Medlantic's fiscal year ended June 30, 1995, corporate treasury added $600,000 to the healthcare system's bottom line. "What we do is provide opportunity, or opportunity cost, as the case may be," Miller said.
Like many hospital finance executives, Miller has lots of investment professionals calling on him these days. In this industry, "there is inefficiency, and there is money to be made," he said.