Health systems aren't rushing to cut back on financial liquidity

Even as the end of the COVID-19 pandemic comes into focus, many health systems are holding tight to the expanded arsenal of liquidity they built up when the crisis hit.

Healthcare providers rushed to add liquidity in early 2020 to ensure they could cover heightened staffing and supply demands even as revenue from procedures plummeted. Many drew on lines of credit or opened new lines, often at outsized prices. Some moved money from long-term investment portfolios into more accessible funds. And they cheered the arrival of accelerated Medicare payments from the federal government.

Even with worst of the pandemic apparently in the rear-view mirror, organizations are, by and large, keeping their guard up and their credit lines open.

“Now it’s about navigating the uncertainty going forward in the year ahead,” said Ash Shehata, KPMG’s national sector leader for healthcare and life sciences.

RWJBarnabas Health in New Jersey, for example, plans to keep a higher level of funding in its capital reserve fund, which is now at $1 billion. That money can be converted to cash within three days, said John Doll, the health system’s chief financial officer.

“If the pandemic taught us anything, it’s that you have to be agile,” he said. “You have to be able to pivot.”

That’s on top of the system’s increased credit line and more than $550 million in accelerated Medicare payments. RWJBarnabas is also considering a debt offering this year, with size depending on the market.

On the other side of the country, reworking the balance sheet to meet the pandemic’s demands was a focus for Sutter Health in 2020, said Jonathan Ma, the health system’s vice president of finance and treasurer, adding, “It’s top of mind in 2021.”

Sacramento, Calif.-based Sutter had just under $800 million in cash and cash equivalents as of Sept. 30, 2020, or a cash-to-assets ratio of 4.1%. That’s part of a broader portfolio of $9.3 billion in current assets, including $6 billion in short-term investments.

Not-for-profit Sutter had considered raising money through a bond offering prior to the pandemic, but might access a new line of credit instead due to today’s lower bank fees and low interest rates.

Health systems paid a lot more money than usual last year to access credit lines and even more to draw on them because banks raised their fees in the face of demand from every sector, said Jeffrey Sahrbeck, managing director with Ponder & Co.

On a $100 million credit line, for example, banks’ annual non-use fees went from about $100,000 to between $250,000 and $750,000. The fee for drawing on that same line more than doubled, from roughly $700,000 to as much as $2 million, he said.

Now, almost a year later, bank fees are cooling off from their pandemic highs. As a result, many of Ponder’s health system clients are renewing those credit lines.

“The willingness of the banks to lower their fees back to more traditional levels will definitely lead to a lot of the systems maintaining their credit lines longer,” Sahrbeck said.

The inflated price of bank credit during the pandemic combined with the low long-term fixed rates steered many systems to expand liquidity using taxable debt, Sahrbeck said. More than 100 health systems issued over $34 billion in taxable bonds in 2020, including $1.7 billion issued by CommonSpirit Health, $1 billion by Mass General Brigham and $1 billion by Hackensack Meridian Health. Whereas just 33% of not-for-profit health system debt issuance was taxable in 2019, that jumped to 60% in 2020, he said.

Mayo Clinic last year roughly doubled the amount of money it keeps in a pair of “highly liquid” funds that can be accessed within a week, bumping those funds from a combined $1.5 billion to about $3 billion, said Dennis Dahlen, the Rochester, Minn.-based system’s CFO. Mayo’s total investment portfolio was worth about $13 billion as of Sept. 30, 2020.

Dahlen said the health system isn’t in a hurry to draw down those liquid funds, waiting instead until it has seen the last of the COVID surges.

“We’re thinking probably through 2021 will be the time when we’ll decrement that liquidity and put it to use in longer-term investments,” he said.

Health systems will continue to face a number of headwinds this year that will prevent them from completely unwinding their boosted liquidity trades, KPMG’s Shehata said. Labor shortages continue to be an issue, forcing hospitals to hire expensive travel nurses. There’s heightened pressure to upgrade information technology or invest in artificial intelligence or enhanced cybersecurity, pushing IT to as much as 15% of capital spending, he said.

They also have to support struggling clinical practices. Elective surgery suspensions during the pandemic resulted in an estimated $22.3 billion in lost revenue, a recent Annals of Surgery study found.

“Some of those capital measures are going to need to be made available to help prop up some of those providers,” Shehata said.

The balancing act of maintaining liquidity is that cash—while protective if something bad happens—isn’t producing much return.

That’s why financially healthier systems like Mayo, Ascension and Kaiser Permanente opt to keep relatively little actual cash on their balance sheets and instead invest the majority of their money, ensuring they keep a certain amount in short-term funds so it can be accessed quickly.

“Being in that market is better than it sitting in the top drawer earning zero interest,” said Kevin Holloran, senior director with Fitch Ratings.

Mayo is an extreme case, with just $51 million in cash and cash equivalents as of Sept. 30, 2020, or a cash-to-assets ratio of 0.2%, among the lowest in the country. Mayo’s cash was even lower at the same point in 2019.

“We don’t leave much in pure cash,” Dahlen said. “Most of it does go into our liquidity funds. Cash flow from operations is put to work almost immediately in our working funds.”

One of Mayo’s neighbors to the north, Children’s Minnesota in Minneapolis, also has one of the country’s lowest cash-to-assets ratios: just 0.3% as of Sept. 30, 2020. The health system had just shy of $5 million in cash and cash equivalents as of that date.

Brenda McCormick, CFO of Children’s Minnesota, said the health system maintains ample liquidity through its credit lines, federal relief grants and other means. Like Mayo, it strives to invest as much money as possible.

“We have such a low-interest environment right now,” she said. “Our investment office is looking at how we maximize those returns.”

St. Louis-based Ascension had $688 million in cash and cash equivalents as of Dec. 31, 2020, a cash-to-assets ratio of 1.5%. That’s a small portion of its $25.5 billion portfolio of cash and investments. Almost $25 billion of that is in long-term investments. Ascension declined to comment.

Kaiser Permanente also maintains a small cash balance relative to its size: $674 million as of Dec. 31, 2020, or 0.8% of its total assets. The Oakland, Calif.-based health system also draws liquidity from its sizable current investments, which stood at $8.4 billion as of that date. Tom Meier, Kaiser’s senior vice president and treasurer, explained that as a pre-paid system, Kaiser also gets a monthly influx of revenue from membership dues, which lowers its liquidity needs relative to other systems.

Not every health system has the wherewithal to keep small cash reserves. Those with volatile operations and weaker margins typically need to keep more cash on their balance sheets, Holloran said.

“As a rough rule of thumb, the more stable your operations are, the more aggressive you tend to get with your investing and the weaker or more thready, the more conservative you get,” he said.