In Brief

• Health care asset pools have grown in size and constitute a more critical element of an organization’s operations, affecting its ability to achieve its mission. 

• We believe it is important to take a holistic approach rather than a siloed view of portfolio construction across asset pools.

• We assess strategic asset allocation across multiple pools and sets of investment constraints. Our goal is to optimize diversification benefits while simultaneously achieving the goals of each individual pool and the organization overall.

• Applying a market-sensitive approach gives us a comprehensive view of how risks interact in the context of asset allocation decisions and ultimately impact a health care enterprise’s financial flexibility.

• A case study illustrates an application of our framework.

By any measure, it’s a daunting list. The roster of challenges facing health care systems includes demographic shifts, pressure on operating margins, demand for greater transparency from rating agencies, increased regulations and reporting requirements, and intensified competition and M&A activity. And systems must also grapple with the complexities of managing risks across an organization’s various asset pools and their impact on the enterprises’ financial flexibility.

Against the backdrop of these varied challenges, health care asset pools have become larger and more critical elements of an organization’s operations, affecting its ability to achieve its strategic vision. Over the past few years, M&A activities and solid revenue growth have contributed to the growth of investment pools, both on average and in aggregate (EXHIBIT 1A).¹ Additionally, recent sponsor contributions and a continued bull market have led to even more dramatic growth rates in defined benefit (DB) pension assets (and, unfortunately, an even higher growth rate in pension liabilities as seen in EXHIBIT 1B). 

Given the larger size of asset pools, combined with emerging late-cycle market challenges, risk management, with an eye on enterprise-level implications, must be top of mind.

A holistic approach to portfolio construction across asset pools

While health care organizations have multiple asset pools, each pool has distinct characteristics and unique objectives, leading to divergent investment solutions (EXHIBIT 2). 

Source: Moody’s Analytics, J.P. Morgan Asset Management; data as of fiscal year 2017. For illustrative purposes only. The not-for-profit (NFP) hospital universe is based on Moody’s coverage of ~300 U.S. entities as of FY 2017 (number of entities covered for previous years shown in the chart may vary based on Moody’s coverage for that given year). “Other”  includes assets on hospital balance sheets outside of unrestricted cash and investments. This includes (but is not limited to) property, plant, equipment, receivables, etc.

However, these pools also have some important shared features. They are all contained within the same organization, jointly impacting both short-term operations and long-term planning; the pools are all exposed to similar market risks, from interest rate sensitivity to equity beta, albeit to varying degrees. Some health care organizations take a siloed approach to portfolio construction across pools. Given the interrelated risks and organizational impact, we believe it’s critical to take a holistic approach to portfolio construction across all asset pools, optimizing overall enterprise-level risk and return while incorporating the unique constraints and goals of each pool individually.

Defining the objectives and characteristics of multiple asset pools is the first step in setting an appropriate asset allocation

*QDIA: qualified default investment alternative 
Source: J.P. Morgan Asset Management. For illustrative purposes only.

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¹ As noted in an April 2019 Moody’s report, the revenue growth rate has edged ahead of expenses for the first time since 2015.
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