Not-for-profit hospitals and health systems represent a unique combination of a complex operating company and a large investment company. The operating perspective includes both a clinical subsidiary (the strategic clinical or research portfolio that is the heart of the organization’s mission) and a financing subsidiary, which generates and manages the capital required to maintain and grow the clinical core. The investment side oversees a pool of retained unrestricted cash and investments that provides credit support and generates isolated returns. Both sides are critically important, but they are frequently managed as different resource pools that share only a loosely connected definition of day-to-day success.

The Need for an Integrated Approach to Resource Management

COVID-19 has produced tremendous dislocation across every component of the not-for-profit healthcare business model. Hopefully, we are headed toward recovery, but it is likely that disruptions of varying severity will continue to flare up and that it will be a while before we find a “new normal.” In this challenging time, executives and boards need a management framework that allows them to integrate the deployment of every available resource in order to find the right balance between return, growth, and risk. In periods of relative business model stability, fragmented decision-making and resource deployment can be tolerated. But in periods of dislocation—especially periods as fundamentally disrupted as what we are experiencing now—success requires relentless integration. This is true regardless of the size of the organization, its complexity, or even how it defines success.

 

Strategic Resource Allocation: An Integrated Healthcare Management Framework

Strategic resource allocation is a business management framework that is responsive to both the unique elements of the healthcare business model and the challenges that business model must confront. Its “big picture” objective is to dynamically integrate the management of whatever set of operating and investment resources a management team and board have under their purview. The integration occurs by declaring the primacy of the operating company – and even more specifically of the clinical subsidiary – such that the prioritized role of the investment company is first to actively hedge operating company risk and second to pursue independent return.

This prioritization changes everything for the investment company and all those involved in its management and governance. Moreover, it transforms the total company by forcing it to define what the first step—actively hedging operating company risk—actually means. What, in other words, are the operating company risks that need to be taken into consideration by the investment company, both today and as the business moves forward and is reshaped by new business conditions, new strategic initiatives, and new capital requirements?

Accomplishing this task does not mean eliminating the decision-support infrastructure that has traditionally supported healthcare management, but it does mean establishing a framework that can consolidate the key outputs from these tools and create a truly enterprise-wide resource deployment plan.

  • Integrated strategic and financial plans should continue to be used to set the future business framework and to define rolling capital capacity, but they should also be used to identify key operating company risks and to quantify the forward liquidity claims the investment company needs to hedge.
  • Clinical portfolio or service-line optimization should continue to be used to review whether the operating company is in the right businesses, but it should also be used to assess whether portfolio acquisitions or divestitures might adjust the net resources available to the investment company or impact the risks or claims the investment company needs to hedge.
  • Capital structure portfolio management should continue to be optimized, but the supporting analytics should also be used to identify how adjustments might create debt-based liquidity claims that the investment company needs to hedge.
Strategic Resource Allocation

There are a variety of discrete steps in a good strategic resource allocation framework, but the key integrator is a tiered liquidity hedging map. This pulls in and organizes the risk and liquidity inputs from the operating company into a format that can then be used to actively shape investment company resource deployment.

Using the tiered liquidity construct, the investment company is fully equipped to develop “risk-balanced asset allocation,” which emerges by matching the risk profile embedded in the operating business with key guardrails such as volatility tolerance and diversification parameters that are typically used to govern invested asset deployment.

Risk-balanced asset allocation closes the tactical integration loop, such that investment resources respond to the hedging and return mandates. But it also creates a scorecard the organization can use to test the systemic impact of new initiatives. Any strategic initiative will change components of the risk and resource map, which will change the tiered liquidity map, which will change risk-balanced returns. The net result is a decision-support infrastructure that can test initiative performance at both a unit and an enterprise level. It is this enterprise testing and balancing that is transformative and completely responsive to the imperatives created by the COVID-19 pandemic.

 

The Ongoing Value of Strategic Resource Allocation

The complexity of the healthcare business model can easily create points of fragmentation, each of which is like a crack in a foundation that becomes a problem as loads increase. COVID-19 is a massive stress that will change in shape and intensity over time. Strategic resource allocation creates clarity about the integrated role enterprise resources should play in responding to this stressor while still pursuing appropriate risk-balanced returns. The power of the framework is that it drives unification, which leads to resource rationalization that can improve an organization’s ability to move through and beyond COVID-19-scale business dislocation.

The value proposition of strategic resource allocation extends beyond points of disruption and the idea of playing defense against COVID-19. The framework also offers a foundation in more stable times for guiding growth and new investment while still ensuring that the balance sheet responds to maintain an acceptable level of parity across the growth-risk-return continuum.

 

For more information, please contact Eric Jordahl by email or phone at (224) 724-3134.

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eric-jordahl

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.
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