Capital Finance

William F. Jarvis

The results for 2010 of an annual survey of the investment and governance policies and practices of not-for-profit U.S. healthcare organizations point to three trends worthy of close attention.

Ninety healthcare organizations participated in the ninth annual study, which covered calendar year 2010. The study findings draw attention to trends with respect to returns on investable assets, average debt level, and operating margins that are shaping the future for not-for-profit healthcare organizations.


Among key findings, returns on investable assets averaged 10.9 percent for the year ended Dec. 31, 2010, while returns on defined-benefit (DB) plan assets averaged 12.4 percent (both net of fees). For the past three years (2008-10), study participants reported average annual returns on their investable assets of 0.4 percent, and for the past five years (2006-10), they reported average annual returns of 4.1 percent. Returns on DB plan assets averaged 0.2 percent for the past three years, and for the past five years, they averaged 4.3 percent.

Observation. Although FY10's return was good, the reported three- and five-year returns are insufficient to cover a notional 5 percent annual draw plus assumed inflation of 2 to 3 percent and administrative costs of 1 percent. It is true that the past five years include the significant declines experienced during late 2007 through early 2009, but they also encompass the strong recovery of 2009-10. The challenge of regaining the real purchasing power of investable assets after this "lost decade" is significant, and although it is not possible to predict the future, it is unclear whether investment returns and giving will return soon to the levels they reached before the downturn. 


For the sixth consecutive year, participating healthcare organizations reported a higher average debt level. Overall, debt rose to an average of $1 billion in FY10 compared with $903 million in FY09 and $681 million in FY08. Against this increase in average debt must be balanced a growing trend toward deleveraging by individual institutions: 41 percent of participants reported increasing debt in FY10, and 43 percent reported a decrease.

Observation. There is no specific threshold where debt becomes excessive. But the steady rise in debt should be a cause for some concern as it may reflect an "arms race" mentality among the larger institutions that are driving the increase. Historically low interest rates have facilitated borrowing, but ultimately rates will rise. It gives some comfort that the 2010 study showed that fixed rate debt (including floating rate debt swapped into fixed) accounted for 79 percent of total debt while variable rate debt accounted for 21 percent of total debt.

Operating Margins

The ability of not-for-profit healthcare organizations to sustain their missions over time requires a consistent and growing stream of revenue to offset ongoing operating and maintenance expenses, as well as investments in capital improvements. Based on this year's data- as well as data from earlier studies-the future appears to hold genuine challenges, especially for smaller institutions.

In FY10, the median operating margin was 4.1 percent versus 4.2 percent in FY09, an insignificant change. Large healthcare organizations' margins, however, were nearly double those of smaller organizations in FY10-4.4 percent versus 2.3 percent. This differential has been seen consistently over a number of years.

Going back to the FY04 study, for example, organizations with assets over $1 billion reported average margins of 7.7 percent, while organizations with assets between $51 million and $100 million reported average margins of just 3.6 percent-less than half. The following year, FY05, was a rare year of equilibrium, with both the largest and smallest participating healthcare organizations reporting the same operating margin of 4.8 percent. But in FY06, the pattern resumed, as organizations with assets over $1 billion reported operating margins of 4.3 percent, whereas those with assets between $51 million and $100 million reported margins of just 2.6 percent.

Similarly, in FY07 the highest operating margin was 4.2 percent among organizations with assets over $1 billion, while the lowest, a slender 1.4 percent, was found among organizations with assets between $51 million and $100 million. And in FY08, the difference was 3.2 percent for large organizations versus 2.3 percent for their smaller counterparts.

Observation. Many factors influence a healthcare institution's operating margin, including the conditions prevailing in its regional market, the entities providing it with reimbursement, and patient demographics. The expanded margins reported in the FY10 report may reflect an increased dynamic of cost cutting that is likely to continue across the industry over the next several years. Large healthcare organizations appear to be making the most progress with cost containment, as their margins were nearly double those of smaller organizations in FY10. As demonstrated by several years' data, large-scale health networks appear to have the ability to control costs over a larger number of patients and sites. Smaller hospitals, lacking that scale, may well find that they face strategic and perhaps existential challenges unless they can raise both giving and investment returns while continuing to focus on costs.

Clear Trends

In each of its nine years, this survey's findings have been unique to the investment environment that prevailed in that particular year. But over the years, some data have been consistent enough to confirm clear trends. Increasing debt levels, especially among large healthcare systems, and shrinking operating margins, particularly among smaller healthcare organizations, are two such trends. Investment returns, volatile from year to year, show no clear trend, but over the nine years of 2002-10, total investment returns have averaged 5.64 percent-not enough to cover spending, inflation, and costs. Metrics such as these will continue to define the challenges facing large and small healthcare organizations in the coming year.

William F. Jarvis is managing director, Commonfund Institute, Wilton, Conn. (


About the Survey  

The 2011 Commonfund Benchmarks® Study of Healthcare Organizations , administered by the Wilton, Conn.-based Commonfund Institute, surveyed 90 participating healthcare organizations that, together, represented aggregate financial assets of $144.9 billion as of Dec. 31, 2010, comprising $102.6 billion in investable assets and $42.3 billion in defined-benefit (DB) plan assets. Investable assets include endowment/foundation funds, funded depreciation, working capital, and other separately treated assets. The average size of participants' investable asset pools was $1.1 billion, while the average size of their DB plans was $755.9 million. 


Publication Date: Thursday, September 01, 2011

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