From comprehensive risk management to leveraging rising interest rates, Mercer offers seven investment strategies that not-for-profit healthcare organizations should consider to ensure financial stability in 2019.
Not-for-profit healthcare organizations facing tighter margins and demographic and regulatory pressures should undertake an "enterprise-level" review of their investment strategies and risk management for the new year, according to a new whitepaper commissioned by Mercer.
"Healthcare systems are facing significant financial pressure. Americans are getting older, increasing the demand for healthcare, while reimbursements aren't going up in kind," the paper said. "Uncertainty regarding national healthcare policy, as well as the constant challenge of recruiting and retaining high-quality nurses and doctors, are adding to these formidable challenges."
With that in mind, Mercer offered seven investment strategies that not-for-profit healthcare organizations should consider to ensure financial stability. They include:
- Consider the "healthcare foundation" – With anticipated lower-returns from traditional investments, health systems should re-assess liquidity needs and should consider adopting asset allocations that are similar to those of healthcare foundations.
- Conduct comprehensive enterprise planning and risk management – Health systems may be holding back on aggressive investment allocations because of increased capital spending plans. Health systems should integrate their investment strategy with their long-term financial plan to gain a holistic financial picture of their organization.
- Recognize that governance may need to evolve – Transitioning to an enterprise-wide approach might require adjustments from health system oversight committees, which ideally, would see a roll-up of risk and how it impacts the system as a whole.
- Leverage rising interest rates – As interest rates rise, most health system debt service costs won't increase much, but yields on fixed income and cash may rise significantly. Systems should assess how much interest rate risk they carry and consider repositioning so that the next rate-cutting cycle won't hurt profitability.
- Consider how you are integrating environmental, social and governance, impact, community and innovation investing – Organizations should think about trending topics around governance. impact and community and how to integrate these programs into their investment portfolio.
- Pay attention to retirement plans – Recent lawsuits against higher educational institutions regarding governance of 403(b) plans have sent a warning to all plan sponsors that they have a fiduciary duty to obtain competitive services for their plans. The Retirement Enhancement and Savings Act is a bipartisan bill in Congress that may permit commingled investment trusts in a 403(b) plan structure, which could significantly lower plan costs. Fiduciaries must monitor this issue.
- Have a plan for corralling pension risk – Untimed contributions and the rising costs of overall pension plan management pose financial risks for some healthcare organizations, many of which have eliminated pension risk by terminating their plans, using lump-sum buyouts and limited annuity purchases.
John Commins is a senior editor at HealthLeaders.
With anticipated lower-returns from traditional investments, health systems should re-assess liquidity needs and should consider asset allocations that are similar to those of healthcare foundations.
Health systems should assess how much interest rate risk they carry and consider repositioning so that the next rate-cutting cycle won't hurt profitability.
Retirement plan sponsors must understand that they have a fiduciary duty to obtain competitive services for 403(b)plans.