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Improved endowment management crucial for non-profit healthcare organisations, says white paper

A new Commonfund Institute white paper says that healthcare organisations should adopt a more diversified endowment model, reducing the heavy bond and cash allocations that dominate their investable asset pools. 

“Assessing the State of Healthcare” by William F Jarvis, managing director, Commonfund Institute, says non-profit hospitals must adopt the Endowment Model of investment management. The Endowment Model is defined as a highly diversified portfolio of assets with a higher than usual tolerance for illiquid assets.

“The healthcare business model is changing. Larger healthcare organisations and networks already have substantial endowments and possess the scale to manage costs efficiently,” says Jarvis. “But small and mid-size healthcare providers that lack scale will have to obtain greater investment income by adopting the Endowment Model used by higher education and other nonprofits, building more diversified portfolios and reducing their reliance on fixed income investments.”

The paper explains that as revenues decline due to reduced reimbursements, the structural changes required by the Patient Protection and Affordable Care Act and other developments, healthcare organisations are cutting their costs and making operational changes in order to avoid losses.

But their investment returns are not keeping pace. The experience of the 2008-09 economic crisis showed that healthcare organisations’ portfolios suffered losses that were nearly as severe as those of other types of nonprofits, and did not recover as quickly. Allocations to fixed income investments and cash total nearly 40 per cent of the average non-profit healthcare organisation’s portfolio, largely due to rating agency requirements that tie favourable ratings on bonds issued by the organisations to portfolio liquidity. The paper argues that healthcare organisations are better off with more highly-diversified portfolios, managed with prudent regard to liquidity, to support bond repayment. As organisations move toward implementation of more diversified portfolios, rating agencies will need to be more flexible in their liquidity requirements. 

Building diversified portfolios will help healthcare organisations to support their operations over the long term, replacing declining revenues from other sources.  Looking farther ahead, a prudently managed investable asset pool can inspire confidence in donors, leading to an increase in donations. The combination of more-diversified portfolios and increased donations will lead to a more robust operating environment for non-profit healthcare organisations.

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