How Hospitals and Health Care Systems Are Managing Their Financial Health

The article below is from our BRIEFINGS newsletter of 11 February 2021

The hospitals and healthcare systems that are critical to managing our health are also a significant part of the institutional investor landscape. We sat down with Paget MacColl, co-head of the Americas Institutional Client Business within Goldman Sachs Asset Management (GSAM), to discuss the results of GSAM’s 2020 Healthcare Diagnostic, an annual survey assessing the investment approaches and practices of 42 leading healthcare systems and hospitals across the U.S. representing more than $350 billion in investments.

Last year was certainly a difficult year for institutional investors as they faced the challenges of the pandemic and market volatility. How did healthcare organizations fare?

Paget MacColl: COVID-19 meaningfully impacted hospital systems both operationally and financially. Because hospitals and healthcare systems rely more heavily on their investment portfolios to fund growth than corporate and public plans, they were very focused on liquidity management early in the pandemic. But fewer respondents to our latest annual survey see liquidity shortfall as a top concern, possibly reflecting inflows from federal funding and credit facilities. More broadly, the pandemic has exposed challenges to hospital systems that are being addressed through a refined focus on liquidity management, dynamic investment decisions, as well as increased collaboration across the governance structure.

Given that the challenging operating environment is likely to continue for some time, what’s top of mind for healthcare organizations this year?

Paget MacColl: Based on our survey, healthcare organizations appear more bearish on the investment outlook, with at least 50% of respondents saying they were more worried about a greater number of risks—including operational pressures, geopolitical turmoil, recession and a failure to meet return objectives—than prior years. However, concern around a liquidity shortfall decreased slightly from last year, while concerns around the path of interest rates have increased.

Given the increased concerns, how are healthcare systems thinking about their asset allocation strategies?

Paget MacColl: Overall, organizations remain bullish on private markets and risk assets broadly as they seek to generate long-term investment returns. Similar to 2019, private markets remain a key focus and are one of the most likely asset classes to see increased allocations. Investors are notably more bullish on equities: 30% say that they plan to increase exposure in the year ahead, versus 18% in 2019. Allocations to cash and short-term securities are the most likely to decrease this year, potentially reflecting cash buffers and inflows following the CARES Act. Respondents also appear more bullish on hedge funds, with 76% indicating they will maintain or increase exposure, compared with 61% in 2019. What was interesting this year was that about half of respondents have implemented ESG into their investment program, a significant increase from 29% two years ago. The majority of those who have implemented ESG approaches chose to do so by integrating ESG factors into the investment process in search of better performance.