Trends, Regulations Could Affect Not-for-Profit Health Care Investments

Mercer suggests areas of focus for not-for-profit health care organizations as costs may grow faster than revenues and possible post-election changes to the Affordable Care Act may have significant impact.

First, Mercer suggests not-for-profit health care organizations take note of recent 403 (b) lawsuits. Higher education institutions have faced a spate of lawsuits regarding their 403(b) plans. Not-for-profit health care organizations should take heed of this and ensure that their benefits and investment committees have reviewed vendor relationships and fees and optimized investment options so that their retirement plans are following best practices, especially not-for-profit health care organizations who have recently completed a merger and/or may have multiple defined contribution (DC) plans.

Mercer also suggests any not-for-profit health care organizations that are either undergoing or considering actions such as mergers and acquisitions (M&As), operating agreements or joint ventures should be aware that some of these actions may materially alter an organization’s balance sheet. Finance and investment committees should consider how best to integrate investment strategy and whether these factors may necessitate a change in their investment risk profile.

Interest rates have risen since the U.S. presidential election and may rise further, so not-for-profit health care organizations should assess their overall interest rate sensitivity, incorporating their investment assets, retirement plans and debt portfolio. Specifically, some organizations’ debt portfolios may benefit from higher interest rates as much of their debt portfolio is fixed rate. Those with a defined benefit (DB) retirement plan may see a reduced liability with higher long-term rates.

Though rates have recently risen, interest rates have been low for several years; in turn affecting not-for-profit health care organizations’ DB plans’ funded status. Funded status fluctuates based on interest rate activity, investment returns and plan sponsor cash contributions. Achieving a fully funded DB plan typically takes years, so it is important to develop a roadmap to de-risk a plan as funded status improves. This means not-for-profit health care organizations should review their current DB investment strategy and make appropriate changes as required, Mercer says.

Other suggestions from Mercer include:

• Assess impact of the election: The new administration may have significant implications for the Affordable Care Act. Organizations should reevaluate their risk tolerance and investment strategies, as operating results may be significantly affected by potential changes.
• Plan holistically: Not-for-profit health care organizations should take an enterprise-wide view of their investment risk posture and integrate their investment strategy with their financial plans. Organizations’ risk level should account for illiquid investment strategies that may be excluded from the days-cash-on-hand calculation.
• Acknowledge ‘country bias’: US markets have outpaced most others since the bottom of the great recession in 2009. After such an extended period of dominance, it is perhaps natural for U.S. investors to raise the debate of whether they should keep their globally diversified portfolio. Not-for-profit health care organizations should evaluate the pros and cons of their current asset allocation and determine if they should make their allocations based on global market weights or peer behavior.
• Evaluate inflation sensitive investments: Changes in global pricing dynamics need to be evaluated by investment committees. Nonprofit committees must balance the negative impact to inflation-sensitive investments in today’s low-inflation or deflationary trend with the potential for inflation surprises.
• Review governance structures: Not-for-profit health care organizations are being pressured to reduce costs while increasing the quality of care. In this environment, health care organizations may want to look at outsourcing some elements of their investment function to potentially reduce investment expenses and free up staff and committee time to focus on strategy.
• Adopt socially responsible investment principles: Socially responsible investment offers not-for-profit health care organizations the opportunity to align their investment values with their core mission to promote health by screening out investments with significant revenue from tobacco, alcohol and firearms products, among others. Socially responsible investment, which can be tailored to fit well with an institution’s core values, should be considered by not-for-profit health care organizations in 2017.

The not-for-profit health care 2017 priorities paper can be found here.