Mercer Suggests Areas of Focus for Not-for-Profit Health Care Systems

Mercer’s Not-For-Profit Healthcare consultant team has prepared a list of key areas of focus for 2018.

The firm notes that with the recent increase in funded status fueled by contributions and strong equity markets, many not-for-profit health care organizations have chosen to eliminate pension risk by terminating their plans. This can be done most effectively by working with advisers to implement an end-state strategy, Mercer suggests. Health care organizations should consider a range of options, including lump-sum buyouts of terminated employees, limited annuity purchases, or liability spin-out options.

As for 403(b) plans, Mercer suggests not-for-profit health care organizations assess their vulnerability to lawsuits. All defined contribution (DC) plans are coming under increased scrutiny due to a wave of litigation over plan governance. Organizations should follow best practices and ensure plans are managed in strict accordance with regulations. Improved governance has an added advantage, Mercer points out, as it also benefits plan participants in the form of improved performance and lower fees, thus leading to better financial outcomes.

Other suggestions from Mercer include:

Adopt Enterprise-Wide Risk Management: Health care 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: Health care 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, health care systems typically favor long-term debt and short-term assets, thereby creating an interest rate mismatch. Health care systems should ensure staff, investment advisers, and liability advisers are working together to manage this risk.

M&A Affects Investment Strategy: Merger and acquisition (M&A) activity continues to be strong in the health care sector presenting challenges with respect to the investment strategy. The post-merger, asset and liability mix may be different. A stronger combined health care 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.

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.

Align the Mission and Portfolio: More health care organizations are assessing whether their investment portfolios align with their mission. Divesting of companies whose business is not consistent with the health care 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 environmental, social and governance (ESG) factors and how they should be reflected in the portfolio.

“Not-for-profit health care organizations face financial pressures from all directions—from the demands of an aging population, uncertainty around national health care reform and the mandate to attract and retain talented professionals,” says 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 health care systems position themselves for a strong future.”