10 steps for nonprofit healthcare organizations in 2015

10 steps for nonprofit healthcare organizations in 2015

Mercer identifies 10 investment steps not-for-profit healthcare organizations should take in 2015

  • January 12, 2015
  • United States, New York

Many health care providers experienced modest improvement in 2014 as patient volumes improved and cost adjustments took hold. But they must navigate transformation in the delivery of care and how it is compensated, along with the ongoing effects of health care reform legislation (PPACA). In response to the changing industry landscape, health care organizations have engaged in M&As and other strategic activities, and have made difficult management decisions.

Mercer’s dedicated health care investment consulting practice, which partners with health care institutions to integrate investment strategy with operating and financial objectives, has identified 10 investment steps not-for-profit healthcare organizations should take in 2015.

“As healthcare organizations plan for 2015, Mercer advocates a process that incorporates the need for investment assets to enhance balance sheet strength, fund capital investment needs, support operating budgets, and maintain debt covenants,” said Michael Ancell, Mercer senior consultant and national segment leader for healthcare investments. “Based on experience working with many institutions in the healthcare industry, we believe ten areas should be the focus of attention in the year ahead.”

1.            Set a risk floor for the system.

Most not-for-profit health systems are subject to debt covenants that may restrict the amount of investment risk they can take with their investment portfolios. Institutions should quantify their risk floor and address it in the investment policy.

2.         Consider whether an improved operating environment boosts risk tolerance.

In 2014, some not-for-profit health care organizations have seen modest improvement in volumes and operating conditions. Improved operations may have increased your institution’s risk tolerance.

3.         Assess the governance structure of investment portfolios and whether a delegated solution offers potential time and cost savings.

Transformation in the delivery of care, coupled with existing operating pressures, require health care organizations to reduce costs while increasing the quality of care. Delegating certain elements of an organization's investment function can potentially reduce investment expenses and free up staff and committee time to focus on strategy.

4.         Consider the investment strategy in relation to strategic actions — needs may have changed.

Many not-for-profit health systems are currently engaged in or considering strategic actions such as a merger, acquisition, operating agreement, or joint venture. Some of these actions may materially alter an organization’s balance sheet and boards may be unwilling to tolerate a significant asset decline post-action. Finance/investment committees should consider how best to integrate investment strategy and whether these factors may necessitate a change in investment risk profile.

5.         Conduct a post-merger investment policy survey to facilitate the successful integration of investment assets.

The combination of organizations (and their corresponding committees) warrants revisiting key investment policy questions such as time horizon, risk tolerance, and return objectives, for the new combined entity. Mercer has prepared a survey designed to facilitate this process.

6.         Develop a strategy for getting a defined benefit plan fully funded to ensure you’re ready to act to de-risk a plan.

The recent increase in interest rates highlights the importance of developing a road map to de-risk a plan as funded status improves. This may include allocation adjustments based upon preset triggers, plan design changes, fixed income composition changes, and risk transfer methods.

7.         Recognize the growing importance of your defined contribution (DC) plan.

The trend away from defined benefit plans elevates the need to ensure that an organization’s DC plan is optimized to attract and retain talent. This includes an assessment of investment structure, fees, target date line-up, incentives for participation, communication strategy, and options for managing through retirement.

8.         Clearly define DC plan governance and consider whether this is an HR function or finance/investment committee responsibility.

Recent regulatory attention has focused on DC plan fees and is likely to expand to other areas. Boards may wish to reconsider which area of an organization is best equipped to ensure regulatory compliance and recognize that ultimate fiduciary duty resides within the organization, not its plan record-keeper.

9.         Review the fixed income allocation and evaluate whether unconstrained bond funds could be a component of a fixed income program.

Health care operating portfolios have generally been structured more conservatively than traditional endowment portfolios with larger allocations to fixed income. Operating revenue shortfalls may increase reliance on operating portfolio returns; however, historically low fixed-income yields present a challenge. In addition to ensuring that overall allocations are appropriate to support an operating portfolio’s multiple objectives, organizations should determine if the size and composition of fixed income holdings remain appropriate and understand their sensitivity to a rising rate environment. The fixed income portfolio could even be viewed as a partial hedge to variable rate debt on the balance sheet.

10.       Set an illiquidity budget as part of managing the overall risk profile. 

Some systems are increasing their allocations to private or illiquid assets. Yet rating agencies may count illiquid assets in days-cash-on-hand calculations. The investment committee should determine how illiquid investments are viewed by all constituencies and set an illiquidity budget as part of the overall risk profile.

About Mercer

Mercer is a global leader in talent, health, retirement, and investments. Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 42 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital. With over 53,000 employees worldwide and annual revenue exceeding $11 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @MercerInsights.