Combining funds to achieve investment efficiency - investments of healthcare organizations - Treasury Management

Healthcare Financial Management, August, 1998 by Alan G. Seidner

Many healthcare organizations have substantial investment pools segregated under different areas of management within the same organization. Although bringing all these funds into one centralized investment program would require some effort, the benefits could be significant. Among these benefits are increased returns, reduced risk, improved liquidity, improved staff efficiency, more accurate reporting for accounting and internal/external auditing purposes, reduced cost, and more efficient management control.

Increased returns. By combining all funds into one investment program, investment managers can more effectively apply investment techniques to optimize returns and coordinate investment activities to reduce transaction costs. If an external investment manager or custodian is used, an organization usually can negotiate more competitive fees when larger pools of funds are involved.

Reduced risk. It is easier to establish and administer an umbrella investment policy when all funds are combined under one broad program. Such a policy should be designed to limit exposure, provide for greater diversification of investments, and maintain more effective audit control over the investment program. Custodianship of the securities in the investment pools likewise may be consolidated for more efficient, cost-effective safeguarding of the total assets in the program.

Improved liquidity. Consolidating funds under the authority of the Finance/Treasury area will allow the controller or CFO to draw funds from one area to cover demands for cash in another. This ability can eliminate the need to invest large amounts in lower-yielding instruments with short maturities, borrow on bank lines of credit, or sell an investment instrument before it reaches maturity to finance an unexpected expenditure.

Improved staff efficiency. When investment activities are coordinated, it becomes possible to monitor total stag time used for investment-related activities, such as reporting, accounting, and auditing. Or if an external investment manager is used, the manager's time will be much more efficiently expended investing the combined pools and monitoring the investments' performance.

More accurate reporting for accounting and internal/external auditing purposes. Funds consolidation can encourage reporting standardization and accuracy.

More efficient management control. Once an investment program is properly consolidated, with the appropriate responsibility and reporting formats in place, proper management oversight by senior staff members and trustees or directors can be achieved.

EXHIBIT 1: POSSIBLE INVESTMENT POOLS TO CONSIDER FOR CONSOLIDATION

Investment Pool                   Area Where Usually Managed

Funded depreciation               Finance/treasury

Capitation reserves               Finance/treasury or risk
                                  management

Unexpended bond funds/bond        Finance/treasury or trustee for
reserves                          bond issues

Excess operating cash             Finance/treasury

Funded self-insurance programs    Finance/treasury or risk
(eg worker's compensation)        management

Foundation assets                 Foundation board's investment or
                                  finance committee

Securities from investment        Finance/treasury
pools used as collateral for
various state or Federal
programs

Pension/retirement funds (from    Human resources, pension
older defined benefit programs)   committee, or finance/treasury

Funds Consolidation Process

To initiate a funds consolidation program, it is important to gain the support of senior management and/or the organization's board to execute a review of all existing investment pools. This support is necessary to minimize possible opposition by various stag managers who may feel their authority or management responsibilities are being challenged.

A competent, diplomatic member of the Finance/Treasury stag should conduct a systematic review of the various areas where pools of funds may be managed. Exhibit 1 suggests how these pools may be distributed; however, each organization's structure is unique, and pool management may be more or less fragmented. The individual conducting the review should work first with internal accounting and audit staffs to more quickly identify not only the location of these investment pools, but also their size and current status, that is, whether an internal or external investment management procedure exists for each pool.

Once identification of the investment pools has been completed and contact has been made with the managers responsible for each pool, the management of the pools then should be consolidated to the extent practical. Such consolidation usually occurs gradually, starting with departments that have good working relationships with Finance/Treasury and/or that wish to be relieved of their investment management duties.

In creating an umbrella investment policy and guidelines for the consolidated funds pool, it is important to coordinate the preexisting investment objectives and risk parameters of the various pools to be consolidated. These guidelines must adhere to applicable law, trust, or debt indenture requirements.