In light of the changing healthcare environment, organizations will increasingly adopt an enterprise-wide approach to managing the assets and liabilities of the system. This enterprise approach could be accompanied by greater emphasis on environmental, social and governance driven investing as systems seek to link their portfolio and mission.
Mercer, a global consulting leader in advancing health, wealth and career, and a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), has identified top investment considerations for not-for-profit healthcare organizations in 2018.
“Not-for-profit healthcare organizations face financial pressures from all directions—from the demands of an aging population, uncertainty around national healthcare reform and the mandate to attract and retain talented professionals,” said Michael Ancell, Chair of Mercer Wealth Healthcare Research Team. “In this era of squeezed margins, an integrated, aligned and thoughtful investment strategy can help hospital and healthcare systems position themselves for a strong future.”
Mercer’s Not-For-Profit Healthcare consultant team has prepared a list of key areas of focus for 2018 including:
Adopt Enterprise-Wide Risk Management: Healthcare systems have many discrete investment pools and debt obligations that should be assessed together, rather than in isolation. Organizations should adopt a holistic approach to managing their assets and liabilities to facilitate making more informed decisions that better support their mission. An internal enterprise risk committee is ideal to assess the combined results.
Align Investment Portfolio Posture and Plan: Healthcare systems could find themselves exposed by changes in the payer environment and major financial market corrections. In light of these potential downside events, it is important to stress test the investment portfolio and to ensure it is aligned with strategic plans.
Implement a Resilient Interest Rate Posture: Balance sheets are exposed to interest rate risk, but only investment portfolios are marked-to-market. Since debt is not marked-to-market healthcare systems typically favor long-term debt and short-term assets, thereby creating an interest rate mismatch. Healthcare systems should ensure staff, investment advisors, and liability advisors are working together to manage this risk.
M&A Affects Investment Strategy: M&A activity continues to be strong in the healthcare sector presenting challenges with respect to the investment strategy. The post-merger, asset and liability mix may be different. A stronger combined healthcare system may have a higher risk tolerance and will need to reassess portfolio structure. Due to the demands of the post-merger environment, it may be advisable to retain a third party to execute certain investment activities at greater efficiency and lower cost than performing them in-house.
Establish a Journey Plan, Eliminate Pension Risk: With the recent increase in funded status fueled by contributions and strong equity markets, many organizations have chosen to eliminate pension risk by terminating their plans. This can be done most effectively by working with advisors to implement an end-state strategy. Healthcare organizations should consider a range of options, including lump sum buyouts of terminated employees, limited annuity purchases, or liability spin-out options.
Manage Maturity Needs Across ‘Liquid’ Assets: With short-term interest rates now above 1%, investing excess cash can result in meaningful earnings improvement. Investing in shorter-term high-grade bonds, for example, could be preferable to keeping the cash on the balance sheet.
Assess Vulnerability to 403(b) Plan Lawsuits: Defined contribution plans are coming under increased scrutiny due to a wave of litigation over plan governance. Not-for-profit healthcare organizations should follow best practices and ensure plans are managed in strict accordance with regulations. Improved governance has an added advantage as it also benefits plan participants in the form of improved performance and lower fees, thus leading to better financial outcomes.
Align the Mission and Portfolio: More healthcare organizations are assessing whether their investment portfolios align with their mission. Divesting of companies whose business is not consistent with the healthcare system’s mission is a first step as it relates to Responsible Investing and has been shown to have minimal adverse effect on returns. For those organizations who want to prioritize stewardship further, the next step would be to establish robust beliefs related to ESG and how they should be reflected in the portfolio.
“Business, and not-for-profit healthcare in particular, is on the precipice of the unknown, with the future of the Affordable Care Act under debate and new fiscal and monetary policy unfolding,” Mr. Ancell continued. “In this environment, hospitals and healthcare systems will be only as resilient as their investment strategy. Strategic analysis, consensus and collaboration across silos will position organizations to weather the volatility ahead and succeed.”
The Top Investment Considerations for Not-for-Profit Healthcare Organizations in 2018 white paper can be found here.
Mercer delivers advice and technology-driven solutions that help organizations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 22,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With more than 60,000 colleagues and annual revenue over $13 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.
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