Risk Management

Leveraging investments to strengthen resilience: Key insights

October 31, 2023 5:13 pm

Healthcare organizations share a unique combination of highly complex operations, financing and investment characteristics. Yet the approach health systems take to balance sheet and treasury management varies significantly.

There is always value in tightly aligning a health system’s investment function with operations given the importance of a not-for-profit healthcare organization’s investment resources to its overall financial health and credit position. But today’s environment transforms this from a “nice to have” into a “need to have” management practice.

“Health systems are first and foremost an operating company, and everything else on the financing and investment side should be managed and positioned with that thought in mind,” Eric Jordahl, managing director, Kaufman Hall, said during his presentation for HFMA’s Academic Medical Center (AMC) CFO Executive Council this past May 17. This article is based on that presentation. The AMC CFO Executive Council, sponsored by Kaufman Hall, brings together healthcare executives who operate in like environments to discuss emerging issues.

As organizations continue to feel the effects of Medicaid disenrollment, increased labor costs and rising expenses on hospital operating margins — which averaged 1.3% in July 2023 — the tension between charitable mission, operating risk and complexity, and investment company scale “is one of the most important things to look at right now,” said Jordahl.

“As operations struggle, what do you do with the investment side? Do you use that side as a buffer against operating risk, or do you use it to try to offset lost earnings from operations?” asked Jordahl. “The way in which healthcare organizations answer this question can lead them to very different conclusions around how to position investment resources — making this a critical conversation for healthcare finance leaders.”

Ultimately, success comes from taking a highly intentional and disciplined approach to resource positioning, he said.

Building resiliency through investment

Effectively positioning investments as a resource anchor in financially turbulent times demands that leaders understand their organization’s unique operating risk profile. This enables finance leaders to determine when and how to dial up risk for the potential for higher returns and when and how to mitigate risk.

For instance, “if you’re taking more risk on the investment side of things, you should take this stance with your eyes wide open, and with a particular purpose to your approach,” said Jordahl. “You also should go into it with an idea of how to course correct, if needed.” 

Because 82% of healthcare finance professionals polled during the presentation said they were actively working on revenue diversification initiatives, CFOs also must consider:

  • What are the resources that are available and accessible to the organization?
  • What are the demands on those resources that come from operations, capital strategy and other areas of the organization?
  • What are the parameters our organization should use for risk and diversification?
  • Are we more considered about ROI or resiliency?
  • How important is our rating position to our leadership team — and how should this inform resource positioning?

“If we’re in an environment where we have a high-functioning business model, everything’s clicking and there are not a great deal of systemic risks across operations, the ability to dial up risk on a balance sheet and really try to drive return becomes an important possibility,” said Jordahl. “But if we’re in an environment like we are now, where there are both major core operating as well as transformational risks, then the question becomes, ‘Should you deploy your balance sheet in the same way, or should you position it in a fundamentally different way?’ This is where determining your organization’s risk resiliency and where you want to be on that risk continuum shapes the actions you take as you seek to optimize your organization’s balance sheet.”

Once leaders have a clear view of their organization’s risk profile, they can then begin to take a balanced-scorecard approach to investments. This involves separating investments into tiers:

Liquidity and risk management: Low volatility, low-return investments with a greater focus on preservation than growth.

Long-term funds: The piece of the portfolio that gives your organization freedom to pursue return in exchange for risk, with the proportion of long-term funds dedicated to growth versus preservation based on an acknowledgement of the operating stresses your organization is confronting.

The total portfolio then becomes the organization’s balanced scorecard. When this scorecard is imbalanced, it is typically imbalanced in one of two ways: too much risk relative to the organization’s balance sheet resources or too little risk in long-term investment pools amid a low-risk operating/strategic environment.

“This ‘balanced scorecard’ gives you an idea of whether you are in balance or out of balance related to the level of risk you are carrying relative to available risk management and mitigation resources,” said Jordahl. “It provides the opportunity to determine: Is this where you want to be as an organization? Do you want to tolerate imbalance and manage that position? What are the drivers of imbalance, and what are the levers you can pull to bring yourself back to the other side of the equation, when needed? Or, is there a desire to be more in balance, and what are the actions needed to get to that position today?”

The idea of intentionally pursuing balance or imbalance gives healthcare finance leaders a way to think about optimizing the hospital or health system’s balance sheet in response to what is going on across the entire organization.

“It takes into consideration what’s going on in operations, what’s going on with capital, the types of claims this [activity] creates on balance sheet resources, and whether the organization is positioned in the right way — or not,” said Jordahl.

Protecting resiliency for the long term

It’s no secret that many hospitals and health systems are under tremendous financial pressure as they face post-pandemic recovery. In fact, half of the healthcare finance executives participating in the discussion on balance sheet optimization say their days-cash-on-hand position is lower than it was a year ago. Putting a process discipline around risk quantification and developing a framework for determining how to allocate and leverage investments amid operational and market pressures are key. With the right framework in place, healthcare finance executives can more effectively guide their organizations in making decisions that strengthen agility and resiliency, now and for the long term.

Editor’s note: If you are a CFO at an Academic Medical Center and are interested in learning more about the council, please contact Andrew Donahue at [email protected].

About Kaufman Hall

Kaufman Hall is a trusted partner for organizations in dynamic, disrupted, and transforming industries. With a unique combination of consulting services, Kaufman Hall uses rigorous analytics to help organizational leadership achieve the transformative outcomes they need.

This published piece is provided solely for informational purposes. HFMA does not endorse the published material or warrant or guarantee its accuracy. The statements and opinions by participants are those of the participants and not those of HFMA. References to commercial manufacturers, vendors, products, or services that may appear do not constitute endorsements by HFMA.


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