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.
NEXT: Other suggestionsOther 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.