Healthcare Systems can be capital intensive businesses. Between real estate, staff, equipment, and insurance health care cost can be high. In many cases, health care systems rely on debt issuance and asset appreciation to fund growth initiatives.
Healthcare Assets
Healthcare systems are integral parts of the communities they serve, regulated by Federal, State, and Local agencies.
Healthcare systems are often tax-exempt under 501(c)(3).
Healthcare systems rely on debt issuance and cost of capital is impacted by the rating agencies
Impact on Investment Strategy
Healthcare systems are not heavily constrained by regulated bodies.
Their ratings and therefore cost of debt can be impacted by volatility of assets. Often the strength is measured by Days Cash on Hand and Debt Service Coverage Ratio.
Cardinal’s Approach
Cardinal’s approach is to identify a diversified portfolio of assets that will grow assets enough to cover increasing cost without putting their ratings at risk.
Healthcare Assets
Healthcare System assets serve multiple functions. In the short-term the assets are required to run the day-to-day operations of the hospital and in the long-term the assets need to support the growth of the organization, both in the form of increasing cost and future capital requirements.
Impact on Investment Strategy
The difference in time horizon and liquidity creates different objectives within the investment strategy and requires unique investment strategies for each objective.
Cardinal’s Approach
Cardinal prefers to establish 3 layers to the investment strategy based on liquidity needs and time horizon.
- Tier 1 Operating Cash: Daily liquidity to support the daily expenses of the hospital
- Tier 2 Short-Term Liquidity: Buffer for the Tier 1 capital and bucket for assets with known liability and time horizon such as capital projects.
- Tier 3 Long-Term Investments: Meant to provide asset growth to cover the increasing cost of the hospital. Less liquidity required.
Healthcare Assets
Different assets serve different objectives. Short term assets support daily expenses and long-term assets need to achieve a return that keeps up with the inflation of hospital expenses.
Impact on Investment Strategy
Investments in the short-term need to be very liquid and have limited volatility. Long-term assets need to be diversified and maximize return without creating volatility that will risk debt ratings.
Cardinal’s Approach
Model investment portfolios that quantify the downside risk of DCOH and Debt Service Coverage.