Healthcare

Zach Buchwald:
I am delighted to open the session with Anne Marie Schultz, head of BlackRock's healthcare practice here in the U.S. Anne Marie is our foremost expert in how hospital systems invest their portfolios to support their long-term missions. Anne Marie, welcome to the Future Forum.

Anne Marie Schultz: Thanks for having me, Zach.

Zach Buchwald: Good to see you. Listen, I'd like to start with a level set on how the hospital networks are managing right now. We all see the COVID numbers go up and down, and we worry about hospitals having the capacity to treat the people that need their help from COVID and everything else.

So please tell us, how are they holding up?

Anne Marie Schultz: Zach, thank you. It's been humbling to hear our healthcare clients talk about how the pandemic has affected their people and their processes.

Frontline workers have been dealing with both the physical risk as well as the emotional toll of the pandemic. And strategies like shifting resources across hot spots or importing contract help just simply aren't as effective anymore with cases so widespread.

We've all heard about how PPE shortages have affected organizations, and it's really driven across as well as mandated for views of supply chains.

And then, lastly, we've had utilization drop, not only from cancellation of elective procedures, but folks just concerned about coming in for healthcare.

It's also been inspiring, though, to hear how hospitals have adapted. They have very quickly instituted strategies like telehealth services, in-home monitoring, creating field hospitals, and creating facilities that are either COVID or non-COVID so that we have safe healthcare settings.

Zach Buchwald: As you mentioned, there's also been a reduction in elective procedures and just sort of regular-way health visits.

And now I see these as the twin challenges to the economic health of the hospitals. You know, my question for you is, At what point does the model break down? Is there real danger to the stability of the system?

Anne Marie Schultz: Zach, there have absolutely been challenges. [Kaufman Hall] estimates that the gross operating revenue of hospitals for 2020 declined by about 3 percent. Now, I know that doesn't sound like much, but hospitals run on razor-thin operating margins. So when you layer on the cost impacts of staffing and PPE, it means that many hospitals have extreme declines in operating margins. In fact, Kaufman Hall estimates the operating margins came in by as much as 50 percent to just eke out positive results.

Now, that's without the benefit of the massive stimulus that came into these organizations. So you can imagine how important a lifeline that was for so many hospitals.

Operating results are going to continue to be challenged. That's going to start to pressure economics, it's going to start to pressure metrics like debt service coverage ratios and may start to weigh on ultimately credit ratings and the cost to raise capital in debt markets.

Zach Buchwald: Let's spend a minute talking about the investment portfolios that are there to support the hospital systems. And you work primarily with the stewards of healthcare capital. You know, their day job, we understand, is to manage the investment portfolios, but the role really is to help the hospital systems deliver on their mission.

So two questions here: First is, How have these portfolios evolved over the last year? And the second question is sort of, What should the future of these portfolios look like to balance the immediate challenges that we have today from COVID with the long-term missions of these organizations to serve public health?

Anne Marie Schultz: Zach, liquidity was the top priority of 2020. Between uncertain operating results, CARES Act funding, Medicare Advantage repayments, and debt issuance, there was a tremendous amount of cash infusion. And all that cash needed to get managed at the same time that rates were incredibly low. So for the year, a lot of systems ended up with elevated cash levels.

But I'll contrast that with the [long-term] flows, which are designed to support the mission of the organizations. Their objectives are balance sheet growth as well as sustaining purchasing power.

The good news is most systems did not need to tap into those long-term pools as a result of the operating pressure, which would have been like borrowing from the future to pay for today.

In fact, coming out of the initial shock, many organizations were able to resume their pre-pandemic risk appetite and investment strategies. But now they had to do so in an environment where interest rates are incredibly low.

So I expect to see, particularly on the growth side of portfolios, at least three changes coming into play. The first is on fixed income, just maximizing the tool kit of fixed income strategies that will allow it to do its job: to preserve capital; to diversify equity; and enhance carry.

We also expect very distinct allocations to assets in growth markets like China to tap into opportunities outside the US.

And, lastly, we expect diversification of inflation sources like not only the public markets, but private market real assets.

And then the last point I'll leave you with, Zach, is that healthcare organizations have been on the frontlines of issues like healthcare inequity and the social determinants of healthcare outcomes. Every CIO I've talked to over the last several months has talked about board-level conversations and down about how to strike a balance between their investments having some sort of impact while still trying to achieve their return objectives.

Zach Buchwald: Anne Marie, thank you. Those were great insights. And thank you for contextualizing that within the broader world that we're all living in.