The most overlooked opportunity for Rural Hospitals - One State’s example
Hospitals have traditionally focused on operating revenue for much of their ability to reinvest in the resources needed to care for a community—the day-to-day revenue (and resulting income) from patient care, procedures, and eventual reimbursements. But beneath these obvious revenue streams lies a potentially transformative opportunity that many healthcare institutions overlook: the strategic management of their balance sheet and investable assets.
A recent study of 37 Minnesota hospitals reveals a striking picture of this untapped potential. These institutions collectively manage nearly $1 billion in investable assets. Yet, the cautious investment approaches may leave significant value on the table—value that could be reinvested in patient care, staff development, and crucial equipment and infrastructure improvements.
The Hidden Opportunity in Hospital Finance
When examining the financial landscape of these 37 Minnesota hospitals, the numbers tell a compelling story. These institutions control substantial financial resources, with $316.4 million in cash, $66.7 million in market securities, and $550.4 million in investments. However, their current investment strategy yields just a 1.49% return, raising essential questions about the balance between prudent financial management and missed opportunities.
This becomes particularly striking when considering current and recent market conditions. With short-term Treasury bonds offering yields between 4.5 - 5% (5+% in late 2023), these hospitals could potentially more than triple their investment income through even the most conservative investment vehicles. The opportunity for governmental (as well as private, non-profit) hospitals in Minnesota—including city, county, and district hospitals—is even more significant, as state law permits them to invest in equity securities, opening up additional avenues for potentially higher returns while maintaining appropriate risk management.
The impact of this cautious approach becomes clear when we examine the numbers. At current rates, these hospitals generate approximately $13.9 million in annual investment income. However, consider the transformative potential of optimized investment strategies:
Incremental Investment Return Improvement over 1.49%
The potential for improvement becomes even more compelling when we consider that simply shifting to short-term Treasury bonds at current rates could generate returns between 4.5% - 5% with minimal risk. As mentioned earlier, governmental hospitals can now include equity securities in their portfolios (Minnesota Statute 144.581, Subdivision 1(6)); that approach could potentially yield even stronger results while maintaining appropriate risk management protocols.
Despite these clear opportunities—including historically high Treasury yields and, for governmental hospitals, the ability to invest in equity securities—many hospitals hesitate to adjust their investment strategies. The reasons are understandable: concerns about market volatility, capital preservation, limited internal investment expertise, and the paramount need to maintain financial stability. However, these challenges aren't insurmountable.
The solution often lies in partnering with firms that understand investment management and healthcare institutions' unique needs. This balanced approach typically involves creating tiered investment pools with different risk profiles and time horizons. Short-term pools maintain the liquidity needed for operational flexibility, while longer-term pools can pursue higher returns through more diversified investment strategies. The result is a portfolio that can generate more substantial returns while still ensuring hospitals have access to the funds they need, when they need them.
A Strategic Approach to Change
The transformation of hospital investment strategy isn't about making dramatic shifts or taking unnecessary risks. Instead, it's about taking a more nuanced, strategic approach to managing these substantial assets. Success stories from across the healthcare sector demonstrate that modest adjustments to investment strategy can yield significant benefits without compromising financial stability.
For hospital leaders considering this opportunity, the first step is often a comprehensive assessment of their current investment approach. This evaluation should consider not just current returns, but also the following:
The institution's specific liquidity needs and risk tolerance
Recognition of interim and long-term capital needs
The potential impact of enhanced returns on strategic initiatives
The alignment between investment strategy and long-term organizational goals
This opportunity becomes even more striking when compared to the effort hospitals invest in other financial initiatives. Consider this: if a legislative or advocacy issue offered similar potential gains or losses—ranging from $14 million to $47 million annually—healthcare institutions would mobilize significant resources. The response would be immediate and intense:
Leadership teams would dedicate countless hours to strategy and planning sessions
Government relations teams would schedule endless meetings with legislators
Staff would spend weeks writing advocacy letters and making calls
Development teams would launch extensive campaigns
Boards would communicate to and from their legislators to address the issue
Systems and organizations would hire consultants and lobbyists
Teams would travel to the state capitol repeatedly
The intensity of effort would be justified, given the financial stakes. Yet here lies an opportunity of comparable magnitude—or even greater—that requires relatively straightforward implementation: optimizing the balance sheet through more effective investment strategies. The contrast is stark. While advocacy requires sustained, intensive effort with uncertain outcomes, enhancing investment returns represents a more direct path to strengthening an institution's financial foundation.
Think about it: the same $14 million to $47 million impact that would trigger months of advocacy work could be achieved through thoughtful adjustments to investment strategy. No lobbying is required. No letters to write. No uncertain legislative outcomes. Just strategic financial management with the right partners.
Looking Forward
As healthcare continues to evolve and face new challenges, hospitals need every available tool to support their mission of providing excellent patient care. Strategic investment management represents one such tool—generating additional resources without compromising financial stability or mission focus.
The data from Minnesota's hospitals highlights both the challenge and the opportunity. While current investment approaches may feel safe, they may also limit institutions' ability to fully support their mission and invest in their future. By taking a more strategic approach to investment management—whether through higher-yielding Treasury securities or, for governmental hospitals, carefully managed equity investments—hospitals can potentially unlock significant additional resources to support their staff, upgrade their facilities, and enhance patient care.
The path forward doesn't require radical change or excessive risk-taking. Instead, it calls for a thoughtful, balanced approach to investment management—one that recognizes both the opportunities and responsibilities inherent in managing hospital assets. For institutions ready to explore this opportunity, the potential impact on their mission and community could be transformative.
About Frontier Strategy Partners
Frontier Strategy Partners specializes in helping healthcare institutions recognize the benefit of the balance sheet and work with a partner investment/advisory firm to optimize their investment strategies while maintaining appropriate levels of liquidity and risk management. Our healthcare-focused approach combines deep industry knowledge with sophisticated investment professionals to help hospitals achieve their financial and mission-driven goals.
For more information about how we can help your institution optimize its investment strategy, contact us at contact@frontierstrategypartners.com or visit www.frontierstrategypartners.com.
Disclaimer
Frontier Strategy Partners is not a registered investment advisor and does not directly provide investment advice. Instead, we partner with a leading financial firm specializing in healthcare investments to deliver tailored strategies that align with your organization's mission and financial goals. Our role is to facilitate the connection and implementation of these expert services for optimal results.
