“It's definitely picked up in the last few years,” said Lisa Schneider, managing director of not-for-profits and healthcare systems at Russell Investments, an asset manager that provides investment outsourcing services. Schneider estimated that 25% of Russell's new clients have been hospitals, and in May the firm promoted her to run its healthcare business, citing the growing demand for investment outsourcing.
The typical healthcare system, she said, has a defined pension plan, long-term asset pools, a professional liability pool and a foundation or endowment. And while they require different investment strategies, “they're all interdependent,” she said, adding that they jointly affect a system's credit rating and days of cash on hand.
But staffing levels haven't kept pace with the new demands and level of sophistication required. The Commonfund paper found that not-for-profit organizations have the equivalent of just 1.3 to 1.6 full-time employees dedicated to investment management—with many employees splitting their time with other obligations.
In the healthcare space in particular, “most hospitals don't employ an investment staff like you might see at a large university,” Schneider said. “There's a limit on how much day-to-day attention they can put on the investments.”
Moreover, while a charitable foundation might have a managing committee of six to eight members, only about half will have any investment experience while the rest are dedicated to the mission of the organization, according to Commonfund.
Schneider said some firms that outsource investment management are seeking to manage market volatility while others want to customize an investment approach for each asset pool.
One area where systems have struggled is in funding their pension liabilities; the median funded status of hospital pension plans in fiscal 2012 was just 69.4%, according to Standard & Poor's.
Moody's found that systems are using a number of strategies to deal with their pension burdens—from terminating the plans to issuing debt to cover their pension obligations to changing their investment strategies.
Baptist Health in Jacksonville, Fla., is one system that worked with investment consultant SEI to create a “holistic” investment strategy that took into account not only its pension obligations, but also its long-term goals including capital expenditures, acquisitions and future borrowing capacity.
“We have to look at the entire operation of the health system financially—not just how much cash we have but how we look at our investment needs in the future,” he said at the Healthcare Financial Management Association's annual meeting in June. “You can't just look at one aspect of trying to maximize investment returns; you've got to look at the impact across the entire balance sheet and operation statement of the health system.”
Follow Beth Kutscher on Twitter: @MHbkutscher