Partners Healthcare

Partners Healthcare copy of case report that answers the questions listed below. Those questions are not meant to be exhaustive. So feel free to discuss other things you deem important. You are encouraged to collect facts and/or data to support your arguments. 1. As a healthcare organization, why does the Partners care so much about its nancial investments? How does the Partners manage its investments? Are there any chal- lenges when making investment decisions? What are the proposed changes and the motivations behind such changes? 2. Suppose dierent hospitals within the Partners choose dierent mixes of the \risk- free" STP and the baseline LTP, whose future expected returns and risks are shown in Exhibit 3. On a risk-return graph, plot the returns and risks of the various potential portfolios in Exhibit 3. What shape does a line drawn through these portfolios take? In contrast, what would the risk-return opportunities available to the hospitals be if they could invest only in the STP and US Equities? 3. Suppose the hospitals within the Partners can invest in the STP and only one of the two real assets (and nothing in the baseline LTP). Which real asset would provide the better risk-return tradeo? Explain your answer. 4. On a risk-return graph, plot a curve of the optimal portfolio combinations in the baseline 3-asset case detailed in Exhibit 5a: US Equities, Foreign Equities, and Bonds. (Hint: This curve should look just like the one in Exhibit 5b.) Then, on the same graph, plot a curve of the optimal portfolio combinations in the 4-asset case in Exhibit 6: US Equities, Foreign Equities, Bonds, and REITs. Do the same for the 4-asset case in Exhibit 7: US Equities, Foreign Equities, Bonds, and Commodities. Does the addition of each real asset improve the risk-return opportunities? If so, how? Which real asset brings more improvements? Can you reconcile your answer here with the one in part 3? 5. Plot a curve of the optimal portfolio combinations for the 5-asset case in Exhibit 7. Compared with the curves in part 4, do you get better risk-return opportunities by adding both real assets to the LTP? Should dierent hospitals choose dierent combinations of the ve assets (i.e., dierent LTP)? Why or why not? On the curve, which combination of the ve assets provides the best risk-return tradeo? (Hint: Graphically, nd the point with the highest Sharpe ratio on the 5-asset curve. No need to do any formal calculations.) 6. Suppose one member hospital wishes to invest in the STP and the LTP such that the total expected return on its portfolio is 8%. Graphically, illustrate the improvement in risk by switching from the baseline LTP to the new optimal LTP in part 5. Similarly, illustrate the improvement in return for a member hospital that targets a portfolio standard deviation of 12%. reproduced, stored in a retrieval system, us ed in a spreadsheet, or transmitted in any form or by any means—electronic, mechani cal, photocopying, recording, or otherwise—without the permission of Harvard Business School. JOSHUA COVAL Partners Healthcare In May 2005, Michael Manning, the deputy trea surer of Partners Healthcare System, was formulating a recommendation to the Partners Inve stment Committee. He had been asked to analyze the role that different “real assets” could play in Partners’ $2.4 billion long-term pool (LTP) of financial assets. He was then expected, on the basis of that analysis, to recommend both a size and a composition for the real-asset port folio segment within that LTP. Background Partners Healthcare System was the largest he alth-care network in New England, providing a range of primary, secondary, and tertiary health-care services to millions of patients from throughout eastern Massachusetts. The Massachusetts General Hospital and the Brigham & Women’s Hospital, two world-famous acute-care hospit als in Boston, had joined together in 1994 to found the Partners network. Both Mass. General and Brigham not only provided acute clinical care but were also research and teaching hospitals affiliated with the Harvard Medical School. Over the next few years, four suburban hospitals had also joined the netw ork, as had dozens of physician organizations (practices with multiple numbers of doctors) ac ross eastern Massachusetts. A variety of important staff functions, including treasury functions like asset management, had been centralized at Partners headquarters in downtown Boston, but all the c linical care and research took place in the decentralized network of hospit als and physician offices (see Exhibit 1 ). Partners’ Treasury Department, headed by Manning, reported up thro ugh a senior vice president of Treasury to the chief executive officer and the board. Importantly, there was also an investment committee consisting of well-known and respected investment professionals who determined the investment policy for Partners’ pools of investments, several of whom also served as directors and trustees of Partners and its affiliated hospitals. While Partners and each of its ho spitals were nonprofits, they none theless had significant financial assets that played a critical role in their overal l financial strategy. Like universities, the hospitals sought charitable contributions, often from gratef ul patients, and several of Partners’ hospitals had accumulated significant endowments that helped to fund some of their clinical, research, and teaching programs. To varying degrees, the hospit als also had accumulated other general long-term funds that served as both a financial buffer against the possibility of operating losses and as a general long-term store of value. Since it s founding, Partners’ operating resu lts had fluctuated, but operating margins had been quite modest on average relative to the 3% margin Partners management believed they needed to maintain a healthy rate of capital in vestment in new clinical and research facilities (see For the exclusive use of H. Gong, 2016. This document is authorized for use only by Hongfei Gong in FIN7041-16SS (Investments) taught by Chen Xue, University of Cincinnati from January 2016 to April 2016. 206-005 Partners Healthcare 2 Exhibit 2 ). Since its founding, the invest ment returns from Partners’ LTP had played a crucial role in maintaining the financial health of the organization (see Exhibit 2 ). In order to accommodate the differing needs of the various hospitals in the network, Partners Treasury had established several centrally managed pools in which the networks’ various hospitals and physician organizations could invest their fina ncial resources. For purposes of this portfolio analysis, Manning focused on two of these p ools, the short-term pool (STP) and the LTP. 1 The STP was managed internally by several fixed-income managers on Manning’s staff, who invested it in very high-quality, short-term fixe d-income instruments with an average maturity ranging from one to two years. Partners thought of this pool as a very safe pool that could be used by the various hospitals as the risk-free part of their holdings. In the spring of 2005, the average yield on this portfolio was 3.2%. The LTP, in contrast, held risk y assets, primarily different forms of equity. Over 30 different external asset management firms that were selected and monitored by the Partners Investment Committee and investment staff managed those equities. There was also a smaller fixed- income segment in the LTP that was invested prim arily in high-quality long-term bonds. The various hospitals in the Partners network each had very di fferent characteristics including their geographic target markets, their operating margins, their vu lnerability to underpayment by Medicaid and/or other various third-party payers, and especially the size of their endowment assets and other financial assets relative to thei r operating budgets. Manning and his Treasury staff worked with the CFOs of the network’s hospitals to determine appr opriate percentages of th eir financial assets to invest in the various pools. Not surprisingly, diff erent hospitals chose diffe rent allocations to the long-term and short-term pools as a function of th eir own unique financial characteristics and also their risk tolerance. Real Assets Over the last several years, the Partners Invest ment Committee had introduced a new category of assets called real assets into the LTP. Concerned about the future risks and returns from traditional financial assets such as stocks and bonds, the Investment Committee had searched for untraditional asset classes that might help divers ify the risks of the LTP. They were particularly interested in asset classes that might perform well in a rapidly expa nding global economy and/or a resurgence of inflation. As two initial steps in th is direction, they had invested a percent of the LTP in a diversified portfolio of publicly traded real estate investment trusts (REITs) and another percent in a diversified portfolio of commodity futures that approximat ely tracked the Goldman Sachs Commodity Index (GSCI). As it turned out, both of these newly a dded subportfolios had done extremely well in 2004, making the real-asset program a great initial succ ess. “Better to be lucky than smart,” thought Manning, for he knew that the more interesting questions concerned the long-run ways in which these two types of real assets might affect the ri sks and returns of the LTP, particularly if their allocations in the LTP were to be increased subs tantially. The Investment Committee was considering a major expansion of the real-asset segment of th e LTP, but they wanted Manning to analyze the potential implications of this decision very carefully before proceeding. 1 In addition, there was a money market pool for transact ional balances, an ERISA pool for pension assets, and an intermediate-term pool for funds with a three- to five-year ti me horizon. These other pools will be ignored for the sake of simplicity in this case. For the exclusive use of H. Gong, 2016. This document is authorized for use only by Hongfei Gong in FIN7041-16SS (Investments) taught by Chen Xue, University of Cincinnati from January 2016 to April 2016. 2 Partners Healthcare Harvard Business School Case #103-015 206005 Case Software # XLS-886