Optimize Cash Returns in 2020

Seven Investment Strategies for Healthcare Providers

Healthcare’s financial challenges remain substantial and persistent. On one side, organizations face “continued pressure on margins resulting from the shift to value-based/risk-based contracts,” as Fitch Ratings observes.1 Additional margin-constricting factors include greater price competition, slowing commercial rate increases and growth of lower-margin Medicaid care. At the same time, urgent attention is being directed to finding new sources of revenue that boost growth and offer alternatives to diminishing traditional insurance reimbursements.

Managing this financial picture is complex and multifaceted. Today’s healthcare finance executive must move on many fronts simultaneously to achieve both short- and long-term success. This article explores several proven investment strategies that are designed to optimize returns.

Challenges Present Opportunities for Healthcare Providers

When supporting healthcare providers, CommerceHealthcare® consistently uncovers a common trend: many organizations are not effectively or fully leveraging their available cash. An interrelated set of challenges are typically encountered, but when addressed can be turned into significant opportunities. 

  • Cash on hand balances that may be too high
  • Those balances are too conservatively invested
  • Investment perspective that does not consider cash and other unrestricted funds holistically
  • Not deploying an optimal range of investment strategies

graph showing the 4 common cash investing challenges

The challenge stems from the 2008-era recession. Rates plummeted, and financial leaders understandably turned very cautious. Cash accumulated and organizations were frequently content just to capture modest earnings credit rates to offset compensable fees. When rates did start to move up, many hospitals remained in this conservative mode. The result was considerable cash staying essentially idle with a main emphasis on keeping a significant cushion for operations as well as bond rating maintenance.

Currently, the coronavirus disease 2019 (COVID-19) is creating similar challenges. Given the impact the virus is having on fixed income markets, a potential trend is developing which could lead to a prolonged low-rate environment. A conservative investment strategy can create lost opportunities to maximize return without undue risk - even in a low-rate environment.

The challenges are particularly acute for mid-size hospitals and health systems that still form the backbone of the healthcare market. As consolidation continues, scale is becoming critically important. When these challenges are addressed, institutions can optimize financial outcomes resulting in a more competitive and agile state.

7 Investment Strategies for Healthcare Providers

Fortunately, there are many options healthcare organizations can leverage for varying needs and situations. These moves can form the basis of a beneficial return-maximizing strategy. 

Evaluate appropriate days cash on hand levels
Typical days cash levels range from 100 to over 300 days. The Moody’s ratio analysis report for 2018 found that non-profit hospitals had a median 200.9 days on hand and balances of $536 million. Each organization must determine its appropriate level at any given point, accounting for borrowing requirements and bond rating cushions. Nevertheless, many still maintain liquidity levels greater than needed for operating expenses and working capital. These significant balances represent an upside opportunity as they are often sitting in cash or low-interest money markets.2

Optimize use of lines of credit
With borrowing costs at all-time lows, deploying lines of credit can satisfy some liquidity needs, freeing cash on hand for investment at greater returns. Financial leaders should periodically investigate how much their organizations can borrow without impacting their institutional credit rating.

Extend money market account durations
It is frequently desirable to move some cash to longer duration interest-bearing cash accounts. A “ladder of durations” can easily be constructed. A structure that works for many is a AAA-rated portfolio carrying a two-year average maturity. This approach can generate an improvement of 50 to 70 basis points or more. On several hundred million dollars, that amounts to meaningful additional income. It is a strategy that has proven attractive to CFOs and rating agencies alike.

Adopt broad view of investable cash
Further return optimization is available by extending the strategies outlined here to encompass all unrestricted fund accounts.

Reassess investment portfolio allocations
Many organizations that move beyond just money market funds devote a high percentage of cash and unrestricted funds - often 100% - to fixed income investments.3 Greater return can be derived from a 50% allocation to domestic fixed income with the remainder in higher-return risk assets. If self-directed, the fixed portion sets a solid foundation while avoiding investment fees associated with the actively managed component.

Manage bond proceeds for maximum income
Since facility construction and other projects supported by bond issuance often take several years to complete, fund outlays occur over a time horizon that opens additional return-boosting cash investment opportunities.

Manage loan portfolio to protect rate risk
With fixed income rates now at all-time lows and consensus forecasts suggesting little rise in interest rates during 2020, the likelihood of an upward trend is greater looking out a few years. It is worth discussing with a banking professional whether some existing loans or bonds can be locked in today to maintain current rates for a longer duration and mitigate this risk.

An Essential Variable: A Strong Financial Organization

Achieving sustained success from these optimization strategies is greatly facilitated by support from the right financial organization. Experience shows that healthcare providers should seek the following characteristics in a banking relationship:

  • Customized programs rather than “one size fits all” formulas.
  • Deep healthcare experience and knowledge. For many financial institutions, bankers serve multiple industry segments. Thorough understanding of healthcare’s unique trends and concerns is needed to build the right investment strategies.
  • Backed by substantial financial resources and offering a full range of investment and lending solutions.
  • Ongoing surveillance of client needs. Cash requirements and investment opportunities change over time, and the right financial organization should proactively propose strategy adjustments.

 

Conclusion

The beginning of 2020 is an opportune time to evaluate and implement any of the seven cash investment strategies described in this report. The ability to optimize investment returns through proactive control of cash is substantial. These strategies can help organizations not only navigate today’s financial challenges, by potentially turning them into tomorrow’s financial opportunities.

Resources

  1. K. Halloran, “Market Outlook: Trends and Longer-Term Perspective,” HFMA Annual Conference presentation, 2019.
  2. Money Market funds are Mutual Funds and are sold through prospectus, please read the prospectus prior to investing.
  3. Money Market funds are Mutual Funds and are sold through prospectus, please read the prospectus prior to investing.

Fixed-income products and services provided by the Capital Markets Group of Commerce Bank (CMG). Investments in Securities are NOT FDIC Insured; NOT Bank-Guaranteed and May Lose Value. The CMG does not act as a ‘municipal advisor’ within the meaning of Section 15B of the Securities Exchange Act, and does not act in a fiduciary capacity. CMG is not an Investment Advisor nor a Portfolio Manager.

CMG products and services are provided by fully licensed personnel. For more information, you may contact 816-234-2691 or Mark.Hammett@CommerceBank.com.