No matter how fast or how high the stock market climbs, not-for-profit hospitals will remain bearish with their corporate assets. They have to, most say, because of the constant flux of the industry.
According to financial snapshots obtained by Pensions & Investments for eight not-for-profit hospital organizations, total investible assets averaged $1.3 billion per organization. Each organization averaged $373 million in retirement plan assets, while funded depreciation accounts - one of the handful of corporate asset pools most hospitals have - averaged $353 million.
According to HCIA, a Baltimore health-care information company, the 2,710 not-for-profit hospitals in the United States managed a total of $225.7 billion in retirement and corporate asset pools in 1996.
While these asset pools are comparable to what corporate pension plan sponsors manage, asset allocation and investment strategy for the hospitals' corporate assets are very different.
For example, Mercy Health Services, Farmington Hills, Mich., reported one of the largest pools of investible assets: $1.7 billion as of Dec. 31. The asset allocation for its $528 million retirement fund was 67% stocks, 28% bonds and 5% equity real estate (excluding real estate investment trusts and real estate stock). Mortgage-backed securities accounted for 5% to 7% of the bond portfolio. The allocation for corporate assets was 30% stocks, 60% bonds and 10% cash. Mortgages accounted for 12% of the hospital's corporate asset bond portfolio.
(Corporate assets generally cover four asset pools: funded depreciation, operating, endowment/foundation and insurance.)
"Their business is uncertain, and many of the uncertainties have to do with mergers," said Terry Bilkey, a principal with Yanni-Bilkey Investment Consulting, Pittsburgh. "Uncertainty breeds conservatism."
Mr. Bilkey added that up until a few years ago, funded depreciation accounts - which allow hospitals to build cash reserves tax free to fund plant and equipment needs - didn't have a lot of money in them. The assets that did exist were held for relatively short periods. But the business of health care has become so different and competitive, hospitals have to focus on asset management, he said.
Hospital system "portfolios represent more of a revenue opportunity than before," said Sandee Glickman, director of client services at Seidner & Co., a fixed-income manager in Pasadena, Calif.
According to Modern Healthcare (a sister publication to P&I), 768 hospitals were involved in mergers, acquisitions or similar transactions by the end of 1996, a 5% increase from one year earlier. So hospital financial officials need to be ready with cash on hand to rebuild and expand.
"One of the things we are concerned about is the use of our funds on a long-term basis and the bottom-line impact on fluctuations," said John Meehan, director of treasury services at Bon Secours Health System Inc., Marriottsville, Md. "We do look at (various asset classes) as long term, but we also know - with this business scenario - we have to be able to access our assets and not be subject to any exaggerated, negative impact."
Bon Secours, which had $400 million in assets under management at the end of 1996, reported the asset allocation for its $100 million retirement plan was 65% stocks, 30% bonds and 5% cash. The asset allocation for the corporate assets was 30% stocks, 65% bonds, 5% cash.
"For our pension fund, we know what we need to fund for and don't need to be concerned about period to period fluctuations," Mr. Meehan said. But in looking at the system's corporate assets and the need to access capital, "we are concerned about that volatility."
Bon Secours, a 15-hospital, six-nursing home system, started a new investment program in September 1994 when it switched to a diversified investment strategy, from a short-term strategy. Today, the $300 million in corporate assets are managed by eight investment managers: two for fixed income and six for equity, of which two are equity managers. The retirement fund is managed by four balanced managers who are given investment guidelines and sector limitations, but mostly have the ability to pick and choose where to invest.
Under its guidelines for the corporate assets, Bon Secours has the option to increase equity exposure up to 50%, but Mr. Meehan said the time for that is not right for this hospital system.
"While we do have the latitude to go up in equities . . . we want to experience this market cycle and see how it flows through operations," he said, before the system does a complete asset allocation study.
The system is working constantly with its consultant, Yanni-Bilkey, to evaluate each manager's position. Just like the retirement side, targets are set within each asset class. For example, its equities targets include 7% growth, 9% value and 8% a blend of both; 5% small-cap growth equities; and 5% international. Bon Secours looks at each manager quarterly and if any manager exceeds a target for a particular style by about five percentage points, the system rebalances the portfolio, Mr. Meehan said.
"As a target, we feel this is reasonable," he added.
Meanwhile, many hospital systems, like the $1.4 billion Holy Cross Resources Inc., Notre Dame, Ind., are grappling with shifting and consolidating control over the assets. A few months ago, Holy Cross' assets were managed by two oversight boards, said David Burk, president and chief executive officer of the insurance and benefit program. Now, there is only one board to manage the $1.4 billion in assets for the system's nine acute-care hospitals.
As of Dec. 31, Holy Cross' $500 million retirement fund was 67% in stocks, 28% in bonds, 3% in cash and 2% in equity real estate (excluding REITs and real estate stock). Meanwhile, the collective asset allocation for the $900 million in the other corporate asset pools was 36% bonds, 31% stocks, 29% cash and 4% mortgage-backed securities.
About a month ago, Holy Cross hired LCG Associates Inc., Atlanta, to help with an asset allocation study to figure out the best way to invest the assets.
Mr. Burk said he couldn't say how much the 29% cash position would decrease, but more than likely, it would. Currently each of the nine hospitals holds a portion of the cash assets; the goal is to centralize the assets under the one oversight board, then address the needs of each asset pool and see how they all fit in an overall investment strategy.
Many hospital systems hold far too much in cash and short-term investments, said Jim Morrissey, vice president at Miller Anderson & Sherrerd, West Conshohocken, Pa., who is responsible for the firm's health-care business.
Often, just as in Holy Cross' case, individual hospitals under a system might hold small amounts of cash or short-term investments; when the individual hospitals are linked together and looked at on a system level, cash holdings usually balloon, Mr. Morrissey said.
Systems "have to combine investment strategy with the operating needs of the hospital," he said. "The step has to be made, where systems are asking themselves, 'How much liquidity is needed?"
Mr. Morrissey said it's not uncommon to see large hospital systems with, for example, $600 million in money market and intermediate investments. While he does recognize the systems' need to access capital, he said they could handle more aggressive asset allocation strategies if they started thinking more as a business and applying all of their different objectives together to achieve a single goal.
"It doesn't mean they lose the mission (of a hospital), but if you don't start thinking like a business, you're going to lose," he said.
In the past, hospital systems used to invest their assets according to when funds would be needed to finance a project, for example. Today, in order to stay competitive, hospital systems need a reality check on the duration of their assets and liabilities.
"They need to be aware that they have an interest rate bet on the balance sheet," he said. "They need to be aware of the implications of having too much short-term."
Mr. Morrissey studies the duration of systems' assets vs. the duration of their liabilities, which systems then use to construct an asset allocation. This highlights options for the system.
"It doesn't necessarily mean you lengthen the duration of the assets," he said. "It could mean swapping out of long-term fixed-rate debt to variable-rate debt and shortening the duration of the liabilities."
There's no one-size-fits-all strategy for managing hospital system assets, Mr. Morrissey said. But in the end, a more comprehensive look at matching cash flows for any size system can be the first step in creating more opportunities.
"The greatest risk is not understanding what the risks are and where the dynamics are," said Seidner & Co.'s Ms. Glickman.
