Hospitals will likely reallocate their investment portfolios in order to provide capital stability and growth and build cash reserves in 2010, says a new report on not-for-profit healthcare systems.
The report, by Oldwick, N.J.-based credit rating firm A.M. Best, says investment income, which typically has been viewed as a source of capital expansion and an extra source of funding for various expenditures in a hospital's capital budget, now is being used to supplement cash generated from operations.
Focusing on healthcare system investment data through 2008, the report says cash collections and excess margins have been increasingly strained at U.S. hospitals. The median operating margin for hospitals in the study declined to 0.5 percent in 2008, compared with 1.7 percent in 2005.
The ratio of unrestricted cash and investments to long-term debt – an important financial measure for hospitals – saw a sizable decrease in 2008, and the cash flow to total debt ratio reached a five-year low.
As a result, A.M. Best analysts said hospitals have begun to structure their investments to be more liquid. The average allocation in cash and short-term investments rose to 40 percent in 2008, up from 32 percent in 2004.
The study discovered a slight shift in hospitals' investment allocation strategies from common equity holdings to mutual funds in an attempt to mitigate some risk, resulting in a steady decline over the previous five years to 14 percent from an average of approximately 23 percent in 2004.
A.M. Best analysts said hospitals increased cash reserves to bolster their number of "days cash on hand," which had decreased substantially and was at a five-year low with an average of 110 days.