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Moody’s: Considerations for the Board’s Investment Committee

Balance sheet strength, measured on both an absolute and relative basis, as well as liquidity, significantly drives not-for-profit and public hospitals’ credit quality. Stock market growth over the last several years has been impressive. However, in keeping with historic trends, volatility—temporary market fluctuations or a short-term downturn—will trouble institutional investors in the near term, according to analysts.


Major prolonged market downturns that result in sustained investment losses can affect a hospital system’s liquidity and credit quality, relative to other credit factors, noted Moody’s Investors Service analysts in a recent Sector In-Depth publication.


However, short-term and temporary market fluctuations will likely have minimal effect on credit quality. The Moody’s analysts wrote that they anticipate “some amount of investment volatility and market swings, such as we have seen in recent months, given the long-term horizon of many hospitals’ portfolios.” (From FAQ: Effect of investment market returns on hospital credit quality, Moody’s Investors Service Sector In-Depth, May 15, 2018)


The Sector In-Depth report presented a series of frequently asked questions. They appear below.


  • How does market volatility, including investment losses, affect hospital credit quality?

A limited period of market volatility is not likely to affect long-term credit quality. However, longer term investment market declines and a system’s inability to manage liquidity during this period may affect credit quality. Moody’s analysts evaluate a system’s investment allocation on the basis of its liquidity, short-term and long-term goals, risk- versus-reward appetite and diversification, relative to the demands on capital.


  • How do not-for-profit and public hospitals typically allocate their investments?

Asset allocation can vary widely based on a system’s size, the amount of investable assets, ownership, risk appetite and cyclicality of capital spending. Most invest in fixed income and equities with a smaller subset who invest in alternatives.


  • How liquid are hospitals’ investments?

Hospital portfolios are highly liquid. Over the past five years, monthly liquidity as a percentage of total cash and investments has remained very high at 97 percent in fiscal 2016.


  • How do you assess a system’s liquidity relative to its debt burden?

Moody’s compares a system’s liquidity to its debt burden. Greater liquidity indicates a greater ability to meet short-term needs, such as demand debt, and is viewed favorably.


  • Why do higher rated systems have less liquid investment strategies?

Many higher rated hospitals have lower liquidity levels because they tend to employ more illiquid investment strategies. A system’s credit quality may be affected if short-term liquidity needs outweigh the amount of available funds.



(From FAQ: Effect of investment market returns on hospital credit quality, Moody’s Investors Service Sector In-Depth, May 15, 2018.  iProtean, now part of Veralon thanks Moody’s Investors Service for its permission to excerpt portions of this Sector In-Depth.)




Coming next week: The Volume to Value Paradox featuring Nate Kaufman, Marian Jennings and Dan Grauman. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.



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For more information about iProtean, now part of Veralon, click here.