Insights on how U.S. healthcare organizations are dealing with the internal and external pressures that are changing the industry landscape.
Just about every industry is facing disruption and U.S. healthcare is no exception. BNY Mellon recently invited Joe Kirchmeier, Manager of Investment Operations at New York–Presbyterian Hospital (NYP), and Greg Korte, Partner at Aon Hewitt Investment Consulting, to discuss the internal and external pressures that are changing the way healthcare organizations think about everything from capital investments to cash management. Below are some of the highlights of the conversation.
The operating model in the healthcare industry is transforming from a traditional fee-for-services model to a value-based-care approach—with the emphasis of care shifting away from simply reimbursing health care professionals on tests and services ordered to one where those professionals are incentivized to provide appropriate, coordinated care that keeps patients healthy.
This shift has resulted in a record number of mergers and acquisitions of hospital systems and physician practices to facilitate the coordination of such care in a cost-effective yet high-quality manner. In 2017 alone, there were more than 100 M&A transactions—with at least five deals valued at more than $5 billion in revenue.
When hospitals merge or get acquired, the transaction brings together different portfolios with various asset allocations and complexities. As part of a larger pool of assets, these portfolios will now often have access to more sophisticated investment managers and investment approaches through an investment committee that acts as a fiduciary yet also focuses more on alpha-generating strategies. This consolidation not only helps with the formalization of the investment approach, but also helps with improved operational efficiency achieved through consistent reporting, accounting and auditing across all entities.
When the hospital pension pools are brought together into a larger portfolio, the pensions often still need to be able to maintain recordkeeping at the individual fund level, so the ability to unitize, or configure smaller units of information from large coordinated units is important. A strong accounting platform combined with competitive fees becomes a requirement for service providers such as BNY Mellon to serve the healthcare industry as it continues to consolidate.
In addition to more sophisticated investment strategies, industry consolidation creates new opportunities to access securities lending strategies that help enhance returns. Generating incremental revenue or enhancing portfolio returns by lending securities can serve as a profitable option for healthcare organizations to use otherwise idle portfolio assets.
Much of the healthcare industry operates on a non-profit basis, so special attention is paid to cash flow. Many hospital systems have a strong private donor base and operating principles that ensure excess liquidity to increases endowment assets and funding for any potential shortfalls. When needed, these organizations can draw from that pool of assets to help fund operations and capital investment. Hospitals look at capital planning and cash forecasting from a long-term perspective, an outlook of anywhere from five, seven, or even ten years out. This forecast drives a lot of the organization’s capital planning, including operating cash flow, interest expense, new philanthropic commitments, investment income, and any capital expenditures. Capital planning must account for a comfortable “days cash on hand,” the number of days that an organization can continue to pay its operating expenses, given the amount of cash available, dependent on the forecast.
Consolidation in the healthcare industry allows for more efficiency, not only in patient care, but also on the investment side of such organizations. When these organizations come together and pool their assets, they can often manage their investments more efficiently, and optimize their cash flow as well.
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