Challenges for not-for-profits this year include the potential for costs to outpace revenue; The potential post-election changes may also have significant impact
Mercer, a global consulting leader in advancing health, wealth and careers, and a wholly-owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), today announced areas of focus for not-for-profit healthcare organizations as costs may grow faster than revenues and possible post-election changes to the Affordable Care Act may have significant impact.
“Through 2016, many not-for-profit healthcare organizations experienced a time of stable operating improvement as patient volumes increased. That said, these organizations still face cost challenges as well as the potential effect of anticipated changes to the Affordable Care Act.” said Michael Ancell, Partner, Mercer. “Not-for-profit healthcare institutions need to adopt an enterprise-wide view of their investment program to understand total system balance sheet risk.”
Mercer suggests that not-for-profit healthcare organizations prioritize the following areas for considerations in 2017 with respect to their investments:
Take note of recent 403 (b) lawsuits: Higher education institutions have faced a spate of lawsuits regarding their 403(b) plans. Not-for-profit healthcare organizations should take heed of this and ensure that their benefits and investment committees have reviewed vendor relationships and fees and optimized investment options so that their retirement plans are following best practices, especially not-for-profit healthcare organizations who have recently completed a merger and/or may have multiple defined contribution (DC) plans.
Assess impact of the election: The new administration may have significant implications for the Affordable Care Act. Organizations should reevaluate their risk tolerance and investment strategies, as operating results may be significantly affected by potential changes.
Plan holistically: Not-for-profit healthcare organizations should take an enterprise-wide view of their investment risk posture and integrate their investment strategy with their financial plans. Organizations’ risk level should account for illiquid investment strategies that may be excluded from the days-cash-on-hand calculation.
Determine the impact of M&A on investment strategy: Any not-for-profit healthcare organizations that are either undergoing or considering actions such as M&A, operating agreements or joint ventures should be aware that some of these actions may materially alter an organization’s balance sheet. Finance and investment committees should consider how best to integrate investment strategy and whether these factors may necessitate a change in their investment risk profile.
Assess interest rate risk: Interest rates have risen since the US presidential election and may rise further. As such, not-for-profit healthcare organizations should assess their overall interest rate sensitivity, incorporating their investment assets, retirement plans and debt portfolio. Specifically, some organizations’ debt portfolios may benefit from higher interest rates as much of their debt portfolio is fixed rate. Those with a defined benefit (DB) retirement plan may see a reduced liability with higher long-term rates.
Manage pension funded status volatility: Though rates have recently risen, interest rates have been low for several years; in turn affecting not-for-profit healthcare organizations’ DB plans’ funded status. Funded status fluctuates based on interest rate activity, investment returns and plan sponsor cash contributions. Achieving a fully funded DB plan typically takes years, so it is important to develop a roadmap to de-risk a plan as funded status improves. This means not-for-profit healthcare organizations should review their current DB investment strategy and make appropriate changes as required.
Acknowledge ‘country bias’: US markets have outpaced most other since the bottom of the great recession in 2009. After such an extended period of dominance, it is perhaps natural for US investors to raise the debate of whether they should keep their globally diversified portfolio. Not-for-profit healthcare organizations should evaluate the pros and cons of their current asset allocation and determine if they should make their allocations based on global market weights or peer behavior.
Evaluate inflation sensitive investments: Changes in global pricing dynamics need to be evaluated by investment committees. Nonprofit committees must balance the negative impact to inflation-sensitive investments in today’s low-inflation or deflationary trend with the potential for inflation surprises.
Review governance structures: Not-for-profit healthcare organizations are being pressured to reduce costs while increasing the quality of care. In this environment, healthcare organizations may want to look at outsourcing some elements of their investment function to potentially reduce investment expenses and free up staff and committee time to focus on strategy.
Adopt socially responsible investment principles: Socially responsible investment offers not-for-profit healthcare organizations the opportunity to align their investment values with their core mission to promote health by screening out investments with significant revenue from tobacco, alcohol and firearms products, among others. Socially responsible investment, which can be tailored to fit well with an institution’s core values, should be considered by not-for-profit healthcare organizations in 2017.
The not-for-profit healthcare 2017 priorities paper can be found here: www.mercer.us/our-thinking/top-considerations-for-not-for-profit-healthcare-organizations.html
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and careers of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With annual revenue of $13 billion and 60,000 colleagues worldwide, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.
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