Improving market conditions aid CFOs

Bolstering revenue with higher investment income makes sense given a bullish stock market and low interest rates

Since the recession began, credit rating agencies have generally held a negative outlook on not-for-profit healthcare providers in the U.S. The Affordable Care Acthas not helped. The squeeze on hospital and health system margins shows no sign of letting up.

In this difficult environment, many providers are looking to investment portfolios for some relief. The goal of bolstering revenue with higher investment income makes sense given a bullish stock market and low interest rates.

“With pressure on margins, we just don’t have the cash flow we had in the past,” said Charles Santangelo, CFO at not-for-profit Susquehanna Health, a four-hospital integrated health system based in Williamsport, Pa. “We’re not alone in this. Many organizations I talk to all comment on the operating margin pressures.”

A case in point is Essentia Health, in Duluth, Minn. “We just don’t know how much the Affordable Care Act will affect our revenue streams down the road, although there is cause for alarm,” said Tom Crook, vice president of treasury services, at the integrated health system serving patients in Minnesota, North Dakota, Wisconsin and Idaho. “The legislation is similar to disruptive technology, compelling us to change in diverse ways.”

The squeeze is on

The Affordable Care Act has altered the traditional income paradigm for healthcare providers from a model where the institutions were paid for services to now where they are rewarded for the value of these services – the patient outcomes. With all payers injecting quality scores into their payment formulas, the revenue predictability that hospitals once enjoyed has been replaced by income uncertainty and worse – lower revenues overall.

This is the conclusion of Standard & Poor’s. The ratings agency posted a negative outlook in December for the not-for-profit healthcare sector, attributing it to a multitude of factors, including top line revenue constraints leading to operating margin and coverage compression, the impact of healthcare reform readiness activities, soft demand for the financially important inpatient business and emerging changes in the payment environment to value-based payments from fee-for-service payments.

“While we believe that many hospitals and health systems will manage this period of change and reform effectively, it is our opinion that even the strongest hospitals and health systems are, at best, only likely to hold existing margin and reserve levels while weaker providers will likely see ongoing operating margin and cash flow erosion and, eventually, balance sheet weakness, leading to rating deterioration beginning in 2014,” S&P stated.

The rating agency summed up its analysis with a comment that the sector is at a “tipping point,” explaining that the industry’s accelerating cash flow and operating margin compression are fostering incremental balance sheet deterioration.

The cash flow disruption caused by the healthcare reform is causing these and other providers to comb their investment portfolios for greater income opportunities. “The more investment returns we can generate, the better we will be able to deal with the revenue pressures,” said Crook.

“We are certainly relying on our investments to supplement our capital needs,” Santangelo said, “relying more on investment income to help fund whatever changes we need to make as a result of the act, in addition to just being more competitive.”

Diversification Strategies

That said, neither Susquehanna Health nor Essentia Health has extensively altered their investment philosophies specifically because of the ACA. Both continue to pursue what they consider to be a balanced approach to investment opportunities and risks.

The core approach of finance administrators at Essentia Health is to use a combination of Harry Markowitz’s modern portfolio theory (developed in the 1950s) and frontier calculations. Crook said they also apply a Monte Carlo analysis to test standard deviation and produce hundreds of possible outcomes. (“It helps us examine truly worst case scenarios,” he said.) Finance administrators wrap up the investment examination process by determining how much cash the company needs on hand to efficiently run operations, which is then compared to the other analyses. “This may all sound like rocket science, but it really isn’t,” Crook said.

Other healthcare providers retain an equally careful, if not conservative approach to their portfolio investments. Despite bullish stock market conditions, the investment policy at Schneck Medical Center dictates that it never invest more than 60 percent of available reserves in equities. “It’s for the sake of safety and security,” explained Warren Forgey, executive vice president and chief administrative and operations officer at the one-hospital healthcare provider in Seymour, Ind. “And we typically stay well below that (threshold).”

Schneck relies on two external investment advisers to manage portions of its portfolio and make investment decisions for us, Forgey said. “They know that we need to be free from significant risk and default.”

Consequently, the advisors steer away from riskier investment options. “Our focus is hitting singles and doubles; we’re not looking to hit home runs,” he said. “We just want a good batting average.”

Susquehanna Health also retains the services of institutional portfolio consultants to advise the board of directors on investment decisions. “Like other providers, we have a written set of investment policies and guidelines addressing asset allocation and other portfolio requirements,” he said. “With that in hand, the consultants advise the board, which makes the decisions.”

The low interest rate environment and the seemingly bullish stock market conditions have conspired to slightly alter Susquehanna Health’s asset allocation.  Approximately 55 percent of the portfolio is now allocated toward equities, with a threshold limit of 65 percent. Roughly 35 percent is invested in fixed assets and the remainder is a variety of other investments like real estate, which accounts for about 5 percent of the total allocation. While not particularly aggressive, the ranges and limits are higher than they were in past.

The higher limit for equities promoted the hiring of additional investment managers. The company now has seven equity managers, each focused on a particular segment like international value, large cap value or small cap companies, and two fixed income managers, said Santangelo.

Overall, the tweaks have helped produce a banner year, investment-wise, for Susquehanna Health’s $180 million portfolio. “Our year end was June 30th and it was a good one, in terms of investment income,” said Santangelo. “It put a solid $25 million on the bottom line.”

That is the kind of success that many CFOs would welcome in the face of revenue pressures down the line.

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Connecting Quality Care to the Bottom Line

Mergers are just one avenue to achieving the changes required in the shift to value-based care.

Charles Santangelo has been a CFO long enough to appreciate the extraordinary changes in his responsibilities in the aftermath of the Patient Protection andAffordable Care Act and other healthcare reforms.

Where once he and other CFOs were essentially entrusted with overseeing the nuts and bolts of finance and accounting, today their roles have been dramatically transformed. “The healthcare model I came up in from a provider standpoint obviously is no longer,” says Santangelo, CFO at not-for-profit Susquehanna Health, a four-hospital integrated health system based in Williamsport, Penn.

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Cyber Insurance: Dare Leave Home Without It

Untitled-2When a mid-February report revealed that more than 100 banks were hacked in what appears to have resulted in over $1 billion stolen from these financial institutions, it was just another reminder of how ubiquitous cyberattacks have become.

From Sony’s systems shutdown to data breaches against Target, Neiman Marcus and Coca Cola last year, virtually every company has been the target of cyberattacks, the occurrence as daily as waking up with a stretch. Not all the illegal intrusions are successful, the combination of firewalls, encrypted transmissions and stern warnings to employees about phishing doing their duty. But, with hackers increasingly deft at ferreting out security weaknesses, no company is Fort Knox.

Finish reading the article at The Washington Examiner.

How a Teenaged Passion for Photography Turned into 500px, the World’s Largest Photo Sharing Community

Evgeny Tchebotarev was 17 years old and living in Toronto, Ontario, when his girlfriend chided him: If he loved photography so much, why didn’t he own a camera?

The year was 2002. Tchebotarev took the criticism to heart and bought his first camera, a Canon Elan 7e.

Today, he’s the Bill Gates of 500px, the world’s premier photo-sharing-and-selling online digital community, tallying more than 5 million registered members. Each month, 20 million people click on to peruse the photography, which is divided into multiple categories like portraits and landscapes. The company’s 58 employees are scattered at two offices in Toronto and Silicon Valley.

But 500px is more than just a fun place to hang out, look at pictures and chat with like-minded people. Its success illuminates the business value of online digital communities. 500px took the well-worn maxim, “If we build it, they will come,” and attached a suffix: “And once they come, we will take their money.”

Finish reading the article here.

Out on a limb: 9 tech predictions for 2015

“In 2015, there will be even more mobile apps in the cloud on cool-looking devices, and at least one of them strapped to the wrist.” Really? You don’t say! That’s like projecting dark skies and misty rain in Seattle tomorrow.

What about some truly risky, out-of-the-box technology predictions? We’ve come up with nine potentially prescient predictions. With some strategic thinking and bet-making, your company can carve competitive inroads as the year progresses, if even a few of these predictions come to pass.

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A VPN’s Crucial Role in Securing the Hub

As organizations leverage ways to connect the enterprise with wide-ranging internal and external sources of key business data, a VPN is seen as a necessary security component–the armed guard protecting this trove of enterprise insight.

Companies are just beginning to create the technology infrastructure that permits real-time access and analysis of wide-ranging performance data to enable more insightful business decisions. One scenario calls for employees at the edges of the enterprise—individuals “touching” customers, suppliers, banks, and other partners—to be given mobile devices with specific data analytics capabilities. The employees would access data relevant to their roles, assess the importance of this information using analytics systems, and then report it in real time to relevant decision makers.

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The New CFO

In the post-ACA world, financial leaders need to become more involved in improving patient outcomes.

The role of the modern hospital CFO has changed considerably in recent years. Not only do they perform a vital strategic role overseeing enterprise planning and performance, by necessity they have become more involved in the clinical aspects of healthcare.

This is not to say that CFOs are taking blood pressure readings or prescribing medications. Rather, in the aftermath of the Affordable Care Act, finance has realized that to improve business outcomes, they must be more involved in enhancing patient outcomes – partnering with physicians in the development of initiatives that attract patients and ensure their experiences are positive.

“The role of the CFO has changed significantly in the last few years and will continue to evolve,” said Mark Bogen, senior vice president and CFO at South Nassau Communities Hospital (SNCH) in Oceanside, N.Y. “In today’s world, you cannot be an effective CFO if you do not have an appreciation of the clinical side of healthcare.”

Finish the article at Healthcare Finance.


Guiding HR’s Transformation

Over the past generation, the people heading up HR in many organizations have become key strategic partners to their respective CEOs, entrusted to lead diverse workforce initiatives to improve talent acquisition and retention, spur business growth, enhance sustainability practices and cultivate a workforce culture that differentiates the organization.

These CHROs are transforming HR in an era where vital skill sets are increasingly difficult to come by and hold, when global outsourcing decisions have never been more complex and challenging, and when the economic environment has demanded greater cost-effectiveness, particularly with respect to finding a balance between retained labor and outsourcing. Workforce innovation is now a strategic imperative at many enterprises, and it is the CHRO who is in charge of achieving and nurturing it.

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Seeking Sustainability

Corporate responsibility initiatives are becoming part of the human capital management equation.

More companies are asking outsourcing service providers about their corporate responsibility and sustainability philosophies and initiatives before putting ink to paper. In some cases, their responses can be a deal breaker.

This transactional environment emphasizes the extraordinary movement toward more ethical, environmentally aware, and socially active positions taken by corporations around the world. Type the words “corporate responsibility and sustainability” into a search engine and it will yield more than 4.4 million hits. A who’s who of companies are on the first page alone— McDonald’s, Coca-Cola, and Monsanto to name a few.

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Small Businesses Dive In to Cyber

According to a 2013 survey by the National Small Business Association, 44% of small businesses have been victims of at least one cyber attack, costing an average $8,700 per breach.

Last year, a survey by the Ponemon Institute reported that 55% of small businesses had experienced a data breach, and 53% had endured multiple breaches. Survey respondents were limited to small businesses with revenues under $10 million.

“It’s not a matter of ‘if’ small organizations will be attacked—it’s a matter of ‘when,’ ” says Leah Montgomery, Western territory cyber security specialist at Chubb. “Any company that stores, transmits or collects proprietary information is at risk.”

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