Evaluating the Health of Healthcare Organizations

Published on25 FEB 2020

The article below is from our BRIEFINGS newsletter of 25 February 2020

The hospitals and healthcare systems that are critical to managing our health are also, with more than $1 trillion in investments, a significant part of the institutional investor landscape. We sat down with Paget MacColl of Goldman Sachs Asset Management (GSAM), which recently released the results of its Healthcare Diagnostic, an annual survey assessing the investment approaches and practices of the nation’s largest nonprofit healthcare systems and hospitals. In our interview, Paget discussed the role of investments amid an increasingly challenging operating environment.

Can you describe the landscape facing healthcare organizations? What are some of the concerns you’re hearing from clients?

Paget MacColl: Hospitals and nonprofit healthcare systems—which happen to be the largest employers in 16 states across the US—are in the midst of a rapidly changing and dynamic landscape. Many are facing pressures on operating margins amid rising labor and pharmaceutical costs, while dealing with disruption from new entrants outside of traditional healthcare. For example, Amazon, J.P. Morgan and Berkshire Hathaway have teamed up to create Haven, a new healthcare provider for their employees, while Apple, which is leveraging its Apple Watch into an always-on diagnostic tool, may have bigger plans in the healthcare industry. CVS Health’s acquisition of Aetna will also bring more pressure on costs. Meanwhile, consolidation is forcing hospitals and healthcare systems to invest in technology to achieve scale and efficiencies in order to compete, even as they continue to invest in innovation to find new revenue streams. In 2019, for example, there were 92 M&A transactions, in which 80% of deals involved a nonprofit health system as the acquirer.

What’s unique about this sector compared with corporates, pensions or public plans? 

Paget MacColl: Hospitals and healthcare systems rely more heavily on their investment portfolios to fund growth than corporate and public plans—in fact, income from their investments can often be multiples of their operating income. Consider the Cleveland Clinic, one of the nation’s most prominent hospital chains. In 2017, the Cleveland Clinic posted investment income of $953 million, which was nearly three times the size of its operating income that year. The Memorial Sloan Kettering Cancer Center—one of the largest and oldest private cancer centers in the world—has also consistently posted investment income far greater than its operating income. Given the uncertainty in the healthcare industry, hospitals and healthcare systems have ramped up their focus on investment contributions as a means to shore up their financial strength.

If investments are so critical to the organizational strategies for hospitals and healthcare organizations, how are they managing their money?

Paget MacColl: Based on the findings from our Healthcare Investment Diagnostic—which surveyed hospitals and healthcare systems representing over $300 billion investments—many are increasing (or planning to increase) their allocations to private equity and private real estate, while decreasing their exposure to hedge funds, which have underperformed. In general, the larger the organization, the greater the planned allocations. And we expect those numbers to increase since the vast majority of mergers typically results in a change in investment strategies. More broadly, we’re also seeing a growing number of healthcare systems develop and invest in captive healthcare innovation programs. These programs, which are more prevalent in organizations with more than $5 billion in cash, seek to deploy capital to investments, technology and research that could help reduce costs, incubate new ideas or find efficiencies.





Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. It should not be assumed that investment decisions made in the future will be profitable or will equal the performance of the securities discussed in this document.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.
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