Healthcare borrowers trying to hold onto cash and wary of continued volatility are parking more of their money in highly liquid investments.
Hospitals, systems move out of stocks
The stock markets agonizing decline in 2008, particularly in the final three months, as the economy sharply contracted, drained cash from many hospital and health system balance sheets and left some with losses that could put lending at risk (Feb. 16, p. 12). As the economy and markets continue to falter, some have moved to limit exposure to equities, in some cases exiting their investments, said healthcare finance insiders. In general, systems have been increasing liquidity and reducing stock exposure, a move that curbs volatility and protects cash, said Jonathan Evans, director of the healthcare practice for investment consultants Hammond Associates, in an e-mail. As of last week, the Dow Jones industrial average was down more than 50% from its total record high.
University Hospitals, based in Cleveland, sold off stocks the last week in December 2008 after market losses began eroding its cash cushion despite strong operations. Bradley Bond, the eight-hospital systems vice president of treasury, said the system made the change based solely on our assessment of our risk and to protect our balance sheet.
After the sale, 13% of University Hospitals investment portfolio remained in equities compared with 42% in December 2007. Now the hunt is under way for investments that allow University Hospitals to offset losses and access cash without more risk than the system can tolerate, he said. The system did benefit slightly after markets rebounded from Novembers lows, though Bond stressed he did not seek to time the market. Im not as smart as we are lucky, he said.
Market concerns in late 2007 prompted the Cleveland Clinic Health System, which owns 11 hospitals in Ohio and Florida, to temporarily halt new stock market investments, said Steven Glass, the systems chief financial officer. The system began to direct cash into highly liquid and safe investments, equivalent to cash, and other assets, known as alternatives, to diversify risk. Glass said the move did not stem from any premonition of the chaos that erupted in 2008, but rather the belief that market values had climbed too high.
Officials stuck with the strategy, which proved fortunate as the economy worsened and financial markets faltered last year, draining cash from hospital and system balance sheets. At the end of February, cash accounted for 41% of the clinics assets, compared with 20% at the close of 2007. The change reflects not only the priority placed on cash, but also the drop in value to the systems equity investments, he said.
Glass said the more conservative posture does not mean the Cleveland Clinic has abandoned its investment strategy, which calls for its portfolio to be divided equally between equities, fixed income and alternatives. As of last month, the portfolio held roughly 22% equities, 11% fixed income and 25% alternatives, in addition to cash investments. Moodys Investors Service analysts noted in October 2008 that the systems plan to increase its alternative investments would leave the Cleveland Clinic with more assets that cannot be quickly converted to cash. Glass defended the move as a long-term strategy to diversify its portfolio.
Once stock markets improve, the system will adjust its investments to meet its strategy, Glass said. Ultimately, thats where we would like to be.
The Texas Medical Center, a not-for-profit that operates ancillary services for 13 hospitals and two medical schools on five campuses, moved twice in three months to shelter its assets from plunging stock markets.
The Houston not-for-profit lost money by walking away from lagging stocks, but protected its assets from further declines, said Denise Castillo-Rhodes, executive vice president and chief financial officer for the Houston not-for-profit. In November 2008, the center adjusted its investment portfolio to hold 35% equities and 65% fixed income, from 45% and 55%, respectively, Castillo-Rhodes said. In January, the center opted to boost fixed-income investments to account for 85% of its portfolio.
The centers investments fell 13% in 2008, which Castillo-Rhodes described as not so bad relative to others with more exposure to last years plunging markets. The sale of treasuries helped offset losses from Januarys sale, she said, leaving assets down 2.9% through the end of last month.
Ascension Health told analysts in February that the giant Catholic health system based in St. Louis would not move as quickly to adjust its portfolio to meet investment targets of 40% equities, 30% fixed income and 30% alternative assets in order to preserve its liquidity.
The 77-hospital systems portfolio holds 23% equities and 60% fixed-income investments. Alternative assets account for the remaining 17%, and Ascension is expected to limit such investments, Moodys said.
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