A new white paper, “Assessing the State of Healthcare” by William F. Jarvis, managing director at the Commonfund Institute, says nonprofit 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 paper explains that as revenues decline due to reduced reimbursements, the structural changes required by the Patient Protection and Affordable Care Act (PPACA) and other developments, health care organizations 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 health care organizations’ 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% of the average nonprofit health care organization’s portfolio, largely due to rating agency requirements that tie favorable ratings on bonds issued by the organizations to portfolio liquidity.
The paper argues that health care organizations are better off with more highly diversified portfolios, managed with prudent regard to liquidity, to support bond repayment. As organizations move toward implementation of more diversified portfolios, rating agencies will need to be more flexible in their liquidity requirements.
Building diversified portfolios will help health care organizations support their operations over the long term, replacing declining revenues from other sources.The paper is available at www.commonfund.org.