Taking Investing to a New Level

Philip Betbeze, for HealthLeaders Media, March 31, 2008
Everyone knows that nonprofit hospitals have to invest to help make that all-important 3-to-4% (in a good year, 5%) margin. Most certainly don't make that margin on operations alone. In putting a hospital's investment pool to work, it helps to be able to make a good return, but it's also important to safeguard that principal.

Traditionally, that means mostly safe fixed-income investing, with a smattering of equities thrown into the mix just to keep things interesting. But increasingly, as hospitals are forced to operate on tighter and tighter budgets, bad debts from patients pile up, and reimbursements decline, it helps to make a little more money on the investment pool than fixed income will provide. But that, of course, requires more risk.

Depending on the size of the organization, some hospitals and health systems have gotten quite sophisticated about managing their investment pools for the right balance of safety and risk--hiring sophisticated investment managers or outsourcing that function--to better their return. Over the years, a few hospitals and systems have gotten into serious trouble by making big sector bets that didn't pay off. The results have been punishing to their bottom line and their investment pools.

But hospitals never got into venture capital investing--until now. If you can stand the mixed metaphors, more and more are upping the ante and swimming with the sharks in the deep end of the pool.

Honest, I'm not trying to toot my own horn here (okay, maybe just a little) but if you haven't seen it yet, take a look at my cover story for the March issue of HealthLeaders magazine. It details how some aggressive organizations are funding venture capital investments, no question one of the riskiest forms of investing out there. But despite the increased risk--at least to the portion of the investment pool that they invest this way--these hospitals are not betting the farm on one number of the roulette wheel.

I wrote this story because I kept running across more and more hospitals and health systems that were getting involved, in one form or another, in venture capital investing. By definition, venture capital investing requires heavy risk-taking in startup companies. It's kind of like fishing. Many of these early-stage startups will simply eat your bait, sucking down gobs of capital. The ones that hit and stay on the line, though, can be hugely profitable.

In reporting the story, I wasn't so much surprised that hospitals were taking bigger risks on venture capital firms. What I was a little surprised to learn was their point of view about the risks of this type of investing. They're not just investing on the belief that they will get a few quick hits from cashing in their stakes in successful companies that rise from their investment. They're hoping to be on the front end of testing and developing technologies and services these companies develop that will help their hospitals or systems run better--a return that might far outweigh any direct monetary return from investments in the companies themselves. In a sense, they hope they're investing in products and services that will help their organizations run more efficiently. That's an aspiration I think we all, as healthcare consumers, can cheer.

It's risky business, but for now, nonprofit healthcare's investment in venture capital appears here to stay. Here's hoping that healthcare lands a few whoppers.

Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at pbetbeze@healthleadersmedia.com.
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