At the close of 2018, we noted that animal spirits had been roused in the capital markets, but the animal in question was a bear. The year ended with all three major stock market indices (the Dow Jones Industrial Average, S&P 500, and NASDAQ Composite) firmly in correction territory and volatility on the rise.

A year later, the bear had gone back into hibernation, as the longest economic expansion on record continued its run and the stock market reached new highs. By December 31, 2019, all three major stock market indices were up by more than 20 percent over the year, and volatility had subsided.

The question now is whether we are dealing with a bull or a new species altogether. Trends in the markets, and in the economy more broadly, are defying economists’ predictions. For healthcare finance professionals, the question more specifically is whether their balance sheets are prepared for the many different claims which are likely to emerge from strategic, operational, and financial perspectives.


2019: A Move into Uncharted Territory


Looking back over the past decade, few forecasts that were made as the economy began its climb out of the Great Recession in 2009 have proven accurate. Instead, we have experienced the following phenomena:1

  • The unemployment rate was expected to bottom out somewhere around 5 percent. It is now at 3.5 percent and may go lower.
  • Although this has been the longest period of expansion ever recorded, growth has been the most subdued of any period of expansion since the 1940s.
  • Despite declining unemployment and continued economic growth, inflation has run consistently below the Federal Reserve’s target rate of 2 percent. The Fed has thus had little reason to raise interest rates; to the contrary, it made three consecutive rate cuts last year (in July, September, and October).

The strong end to 2019 was also unexpected, arriving against stiff headwinds. Self-imposed trade wars and tariffs fueled fears through much of 2019 that both the U.S. and the global economy would slide into recession.

Volatility in the markets was down from 2018 (though still above 2017), with the VIX averaging 15.4 points for 2019, close to its post-2003 median of 15.6 points (see Figure 1).2 There are few signs, however, that volatility will continue to abate as 2020 begins. Although trade tensions with China have eased somewhat, the new year opened with a new crisis in the Middle East and will close with a presidential election, the outcomes of which are impossible to predict.


Figure 1: Changes in VIX, 2017 – 2019

Changes in VIX, 2017-2019
Source: Cboe, VIX Index Historical Data


2020: Questions for Healthcare Organizations


As healthcare organizations look ahead to 2020, they face several questions:

  1. Are we in a stable rate environment, or should healthcare organizations anticipate an upward bias as the year progresses? The Fed’s series of 2019 rate cuts sparked a run of debt issuance late in the year. Notes from the Fed’s December meeting indicate the likelihood of an extended pause in any rate actions for the near future, with officials agreeing that downward risks (including ongoing trade tensions, weak foreign economic growth, and softness in business investment and manufacturing production) are more prevalent than upward risks for both economic growth and inflation.3 Bloomberg Economic Survey consensus expectations for interest rates remain in check through 2020 (see Figure 2).


Figure 2: No Rate Changes Expected

No rate changes expected
Source: Bloomberg Economic Survey as of January 10, 2020


  1. Will volatility increase on the investment side? If the economic headwinds and geopolitical tensions noted above intensify, market volatility will likely increase. Although there are opportunities for investment gains in a volatile market, these opportunities are mitigated by the risk that healthcare organizations may be unable to generate reliable returns to enhance balance sheet strength.
  2. Is the Fed’s accommodative stance encouraging greater risk taking in capital markets? Several participants in the Fed’s December meeting expressed this concern, noting that excessive risk taking could make the next recession more severe than would otherwise be the case. Despite current indications of an extended pause in rate actions, the Fed has signaled its willingness to step in if problems materialize. Its ability to intervene will be limited, however, by low current rates, which leave little headroom for aggressive rate reductions.


How Healthcare Organizations Should Respond


In a climate of continued uncertainty, healthcare finance professionals have a dual mandate to maximize the returns realized from all of the financial and operating resources at their disposal while remaining inside appropriate enterprise risk guardrails. A strategic approach to resource allocation aligns core treasury functions—including debt and derivatives, treasury operations, and invested assets—with the organization’s broader strategic and operational goals.

A first step in strategic resource allocation is to assess and catalog the potential risks an organization faces and the resources it can deploy to offset or mitigate these risks. By pairing risks with resources in a common framework that accounts for liquidity needs, tolerance of volatility, investment policies, and market assumptions, healthcare organizations can develop a strategic approach to decision-making that enables them to identify and be positioned to manage, mitigate, or absorb risks before they cause outsized harm to the organization or its credit rating.

Organization leaders should also revisit their point of view on appropriate risk parameters for the organization, as defined by the organization’s relative strengths within its market, the most significant operational risks it faces, its short- and long-term priorities, and its appetite and tolerance for capital and credit risk.

With respect to specific resource tiers, healthcare organizations should consider the following:

  • Cash and short-term investments: Organizations should define a thoughtful medium between underinvestment and overinvestment of cash and short-term investments. The temptation to maintain a “fortress balance sheet” can limit an organization’s ability to realize the higher returns available from longer term investments. On the other hand, overinvesting cash can limit the organization’s ability to respond to an unforeseen risk.
  • Credit/debt capacity. A continued low-rate environment presents opportunities for additional debt capacity. These opportunities should be weighed against the organization’s revisited risk parameters and pursued as appropriate for the organization.
  • Invested assets. With volatility likely to persist in the markets, organizations should focus on long-term performance of a diversified asset portfolio over short-term fluctuations in the market. It may be appropriate to take profits from assets that have outperformed expectations and are at high valuations.
  • Non-liquid balance sheet and operating assets. Now may also be the time to evaluate the organization’s portfolio of real estate, equipment, and even business units with an eye toward divesting or monetizing any underperforming assets or businesses that are not central to the organization and its operating or strategic needs. In all events, the objective is to organize assets (financial or operating) in a way that supports an optimized risk-return equation. Organizations may also want to consider opportunities to optimize their balance sheet/income statement dynamic by, for example, pursuing sale and leaseback transactions that bolster liquidity.

Unexpected encounters are part of most journeys into uncharted territory. A comprehensive, coordinated approach that integrates treasury’s core functions within the organization’s strategic, financial, and capital planning processes helps ensure that the organization has the resources and flexibility to absorb any surprises and continue forward.


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1Ip, G.: “Economists Got the Decade All Wrong. They’re Trying to Figure Out Why.” Wall Street Journal, Dec. 14, 2019.

2Moody’s Analytics: “Overvalued Equities Increase Corporate Credit’s Downside Risk.” Weekly Market Outlook, Jan. 9, 2020.

3 Federal Reserve: “Minutes of the Federal Open Market Committee, December 10-11, 2019.”

Meet the Authors

Eric Jordahl

Managing Director, Treasury & Capital Markets Practice Leader
Eric Jordahl directs Kaufman Hall’s Treasury and Capital Markets practice and focuses on helping healthcare organizations nationwide by providing Treasury-related transactional, strategic, and management support across all financial assets and liabilities.
Learn More About Eric

Robert Turner

Managing Director
Robert Turner is a leader in the Treasury and Capital Markets practice. He consults with healthcare clients nationwide, focusing on issues related to capital structure strategy, and the analysis and implementation of debt transactions.
Learn More About Robert

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