Cash-strapped hospitals: What’s the best way to meet short-term needs?

Hospitals and health systems are under pressure from multiple fronts. On one hand, COVID-19 is straining many hospitals' resources and clinical staffs to the breaking point. On the other hand, hospitals are facing a sharp decrease in revenues due to the cancellation of elective procedures. This mismatch of increasing costs and drastically falling revenue may leave some organizations struggling to meet their financial obligations over the coming months. For cash-strapped hospitals, one option they may be forced to consider is tapping into their long-term investments.

Additional government funding specifically for hospitals

It's a bitter irony that even in some of the hardest hit areas—such as Detroit, where the pandemic healthcare needs are the highest—the same overworked hospitals are being forced to find ways to cut staff and reduce cost. But more government help is on the way, as part of the signed bill providing an additional $484 billion in funding for small business:

  • The bill provides an additional $75 billion for reimbursement to hospitals and eligible healthcare providers to support the need for COVID-19-related expenses and lost revenue that is not otherwise reimbursed from other sources.

  • This amount is in addition to the $100 billion provided in the CARES Act and other provisions. The language of the CARES Act remains the same.

  • In addition, $25 billion of the Payroll Protection Program has been earmarked to help smaller hospitals meet payroll and other operating costs through forgivable loans.

Options for cash

Another spot of hope is that elective surgeries are beginning to return to hospitals. Hospitals in Upstate New York are planning to begin slowly resuming such procedures by the end of April. And a similar schedule is appearing in other regions, such as Washington State. That said, the certainty around the return to normal is, frankly, uncertain. The pandemic progress remains unpredictable and market volatility continues, with at least a meaningful probability of further market selloffs. In our own conversations with health system clients, most who have said they don't need cash have qualified that by adding, for now.

For those hospitals in immediate need of operational cash, there are two primary strategies. One is to issue debt, and we've begun to see that happen among some of our clients with strong credit ratings. The other option is to tap into long-term investments.

Cash from long-term investments: A wise strategy or a last resort?

In a general sense, we believe in staying invested. Long-term investment strategies are not typically designed as cash delivery systems and may not be designed for immediate, efficient liquidity. Long-term investing also allows for volatile investments to recover their losses. Time covers a multitude of sins. However, there are moments and circumstances that simply demand immediate cash.

For those health systems that make that hard decision, here are three principles we believe can be helpful when accessing cash from long-term investments:

  1. Don't wait until the last minute. In the same way that long time horizons can be your friend, short timeframes can be just the opposite. Accessing cash effectively takes forethought to ensure that the right investments are being liquidated and that the overall health of the portfolio is maintained. In addition, pre-planning allows the liquidation of assets with more optimal market timing. With our recent extreme market volatility, imagine being forced to sell equities on an extreme down-market day. Systematically raising the cash needed or de-risking over a longer period of time can help prevent organizations from selling a large amount of equities on an extreme down-market day. Even if an organization is unsure that they will require cash from the long-term pool, it would be prudent to discuss that possibility and plan for it immediately. Depending on the risk tolerance, it could make sense to partially de-risk the portfolio before outflows are even certain.

  2. Remember that this is an asset allocation decision. Which investments should be sold? The choices may be limited by liquidity. But they should also be guided by the asset allocation strategy. Selling too much of a specific asset class or sector may provide the necessary cash, but may also unintentionally increase other risk factors, such as imbalanced exposures or reductions in diversification. Although there may not be the desire to sell asset classes that have recently experienced losses, the focus should be on the asset allocation that the organization looks to build after the cash is raised. The longer the planning period, the greater the ability to base these decisions on the long-term investment strategy rather than asset class liquidity.

  3. Don't go it alone. For all humans in all situations, pressing needs can lead to rash decisions. It's wise to seek outside counsel, in the form of skilled consultants, partner-oriented asset managers, or outsourced trading partners. We believe the best firms can play all of those roles, allowing them to have the perspective that comes from being separated from the immediacy of the situation, but still being intimately aware of the investment strategy. If your partner also has trading capabilities, they may be ideally situated to help make the security sales as efficient and effective as possible.

We've been reaching out proactively to many of our health organization clients about this issue and most of them are finding other approaches to solve their immediate cash needs. But for those with limited options, there are solutions available. And you don't have to go it alone. Remember, we're all in this together.