The nation's not-for-profit hospital operators have billions of dollars in reserves invested in stocks, bonds, private equity and hedge funds. And, like investors everywhere, they have seen recent volatility deliver eye-popping losses—and new investment opportunities.
Stocks swooned last fall as cheap oil and global economic uncertainty terrified investors. That volatility continued into the new year, with the markets tumbling 10% or more before a rebound last month. Hospitals reported sharp losses on investments in the latter half of 2015 that in some cases left hospitals with weaker net margins—or net losses—for the fiscal year.
Kaiser Permanente in Oakland, Calif., closed the books on its fiscal year on Dec. 31 with net income down by 39% ($1.2 billion) from the prior year. Scripps Health reported a more precipitous decline in net income for its fiscal year, which ended Sept. 30. San Diego-based Scripps ended the year with net income down by 72% ($212.2 million), compared with the prior year.
And Boston-based Partners HealthCare, the largest health system in Massachusetts, ended its fiscal year on Sept. 30 with a $92 million net loss, compared with a $120 million net gain the prior year, because of its investment losses.
Yet that volatility is expected. Long-term investment strategies and diverse portfolios help systems weather the lows in any one year. "At the risk of sounding a little too cavalier about it, it gets our attention, but there is no need to change anything we're doing now," said Robert Broermann, senior vice president and chief financial officer for Sentara Healthcare. "Markets ebb and flow," he said. "If you're going to be in those asset classes that generally give you a higher level of return over time, the tradeoff is, you have to be able and willing to feel a little bit of the pain that comes with short-term volatility.”
Memorial Hermann Health System avoided that volatility with very conservative investments until 2013, when its board decided to diversify into equities, hedge funds and other alternative investments. The Houston-based system did so with the understanding that its investments would be “on a long-term horizon,” said Dennis Laraway, the system's chief financial officer. The board anticipated higher returns and greater volatility under the strategy.
So far, they have seen both. “We had some early successes,” Laraway said. Investment returns in 2014 neared 12%. But investment losses in the last six months of 2015 dragged the system's net income into the red. “In the last three or four quarters, there's really been no place to hide in the market,” he said. Still, the volatility is not so great that the system plans to reconsider its investment strategy. “With our balance sheet and credit strength, we can afford to take a longer view,” Laraway said.
Many systems have the financial strength to withstand market swings that erase millions of dollars from financial statements as easily as they add them. Those with thin cash cushions, however, are potentially vulnerable to financial distress from fluctuating markets. “It depends on your starting point,” said Moody's analyst Lisa Goldstein.
That does not mean, however, that large and financially stable health systems do not feel the strain from investment losses.
Executives of Catholic Health Initiatives told investors in January that the system would scale back on capital spending after investment losses contributed to a drain on cash caused by recent weak operating performance. “We try to build our capital budgets to live within our means,” said Nick Barto, the Englewood, Colo.-based system's senior vice president of capital finance.
Still, there may be some benefit to the market tumult.
UnityPoint Health, a West Des Moines, Iowa-based health system, reported an investment loss of $75 million for the three months that ended on Sept. 30. The loss erased two-thirds of the system's profits for the first nine months of the year.
Defaults in the energy sector and falling oil prices were a major culprit behind recent market volatility. Now, UnityPoint Health is investing in the energy sector. “The thesis is that this is a dislocated market,” said Matthew Kirschner, vice president, treasurer for UnityPoint Health. And that dislocation is also an opportunity for investors, he said.
Other major health systems see the chance to gain from the market downturn.
“The recent market volatility has provided us with some attractive opportunities to rebalance our portfolio,” said Dina Richard, chief investment officer with Trinity Health Corp., based in Livonia, Mich. “So in the recent environment period where stock prices have fallen, we have bought stocks at lower valuations that will likely add value to our portfolio longer term.”