With $29 million in bank, HMC embarks on new investment strategy

Hardin Medical Center has decided to invest $20 million of its $29 million in cash reserves, hoping for beefier returns.
(Editor’s note: This story was first published in the Nov. 15 print edition.)
At a hospital board meeting last Thursday, three voting members of the board unanimously agreed to take $10 million of the hospital’s reserve cash out of extremely low-risk investments such as certificates of deposit, money market funds and similar instruments and embark on a more aggressive investment strategy.
Another $10 million of HMC reserve cash will be invested sometime after the first of the year.
Three board members were recused from voting because of possible conflicts of interest, due to ties with either of the two financial firms involved.
HMC Chief Executive Officer Nick Lewis says the strategy will likely slightly increase risk – but also increase the hospital’s return. He said the increased risk is worth it in the long run, because the anticipated increased returns will strengthen the financial health of the hospital. They would also help the hospital finance future capital projects without putting a burden on the county government, which owns the hospital.
Although the county government owns the hospital, under state law the hospital board is autonomous in making financial decisions for the hospital and is not required to consult with the county commission in deciding the financial direction of HMC.
Lewis noted that the hospital will be keeping approximately $9 million in reserve funds readily available to meet expected expenses such as payroll or routine maintenance – enough to keep the hospital running for months even if no revenue were to come in.
Investment strategy
In an interview Monday, Lewis explained the new investment policy and what the hospital hopes to achieve.
“We’re not going to take this money and run it into the stock market and junk bonds. What we’re doing is putting funds into more diversified investments that will give us a better return, and we can use that return to finance future improvements and projects,” Lewis said.
He said that “increased risk” shouldn’t be perceived as gambling with the hospital’s – and ultimately, the county’s – money. Risk in this instance should be understood as market fluctuation.
Whether money is invested in stocks or bonds, “blue chips” or U.S. Treasury bonds or notes, their value fluctuates over time depending on many economic factors.
If an investment portfolio is carefully diversified into a number of generally secure investments, an investor can target a hoped-for return, while minimizing the length and severity of those fluctuations.
The general idea is that the higher the return an investor shoots for, the more risk they have to be willing to accept – meaning suffering through possible long down–turns, waiting for the market for their particular investments to turn back up positive.
Lewis said he’s not looking for the higher end returns that are possible, because he believes there would be too much risk involved.
“I don’t think we should be doing that with the hospital’s capital,” he said, adding, “We might need funds for unexpected blips or expenses, and we can’t afford to ride out a prolonged downturn.”
But, he said, it would be financially irresponsible for the hospital to not invest some of its reserve funds with a higher return in mind. So, what kind of returns is the hospital looking for, and why hasn’t it taken this action before?
Hardin County Bank
For well over a decade, HMC has placed reserve funds with Hardin County Bank, and invested in extremely low-risk, low-return investments. While the money was placed in those instruments, HMC has averaged about 1.5 percent return, annualized, based on their mix of products and maturities, hospital officials say.
During that time, HMC has also requested that Hardin County Bank collateralize those holdings, which is similar to insuring them, and is required for public funds. The collateralization was done at a cost to the bank.
Lewis said that was exactly what the hospital had asked for, but now what HMC is hoping to earn is closer to what Henry County Medical Center, in Paris, Tennessee, and Blount Memorial Hospital in Maryville, Tennessee, have averaged, and their investments are not required to be collateralized.
The two hospitals are similar in situation to HMC, and they’ve reportedly been averaging about 4.5 percent returns on their reserve funds.
An additional 3 percent on reserves would net HMC about $600,000 extra per year – and any of that not needed for improvements or other expenses could be folded back into the investment capital and reinvested.
As for why the board hasn’t previously sought higher returns, Lewis said HMC had been operating under a stricter set of investment rules that attorneys and advisers recently discovered don’t really apply to HMC, such as requiring only very low risk, low return investments and collateralization.
They’ve also been building cash reserves over the last decade, and just reached a position where reevaluating their investments make sense, he said.
HMC Chief Financial Officer Leigh Ann Hughes said in an interview Monday that the hospital, through a series of financial belt-tightening policies, has increased its cash reserves from just over $4 million in 2007 to the over $29 million it has now.
The hospital is required to be audited by an outside firm every year, and over the past couple of years the auditing firm has suggested that the hospital invest those reserves in higher-yielding investments.
So, in late 2016, the hospital board formed an investment committee to investigate the possibilities.
According to an attorney for the board, due to the way the hospital was initially formed, HMC can actually invest in anything the board wants, so long as they make investment decisions carefully and in the best interests of the hospital, following the “prudent man” rule.
Also, Hughes said, Henry County Medical Center and Blount Memorial Hospital were set up the same way, in what are called “private act hospitals,” and have been investing more aggressively for a long time – so the HMC Investment Committee was able to learn from their experience.
After last Thursday’s vote, the board will be spending time with the selected investment adviser, Mike Hill of SunTrust Bank, who is SunTrust’s managing director of Consulting Services in Nashville. Hill will assess each board member’s risk tolerance.
According to Hughes, Hill and SunTrust were suggested to the board by the Investment Committee because one of his main presentation points was managing risk, and because of his experience. Hill handles the investment account for Henry County Medical Center.
As for the hospital’s relationship with Hardin County Bank, Lewis spoke highly of the service the bank has given the hospital over the years, and said their relationship remains strong.
“This isn’t anything about Hardin County Bank – we still have a great relationship, and they are fine bank. This is entirely about doing what’s in the best interest of the hospital at this time,” Lewis said.
President and CEO of Hardin County Bank Gordon Majors said of the move, “The Hardin County Bank holds Hardin Medical Center in high esteem. HMC is absolutely vital to our community. We stand by and respect their right to conduct business as they see fit.”
Hughes, as part of the Investment Committee, said the new policy has exciting possibilities for HMC, especially with the reality of so many rural hospitals facing financial difficulty and even closures, but wanted to underscore to the community that HMC remains a community hospital.
“This is an opportunity to focus on a strategic plan to ensure the long-term financial health of the hospital. With this we’re looking at future improvements, but even though our financial performance has improved, we still need the support of the community, and are constantly looking at how we can improve our services to the community,” she said.

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