Chicago healthcare systems earn nearly as much from investments as operations

Several hospital systems in America's third-largest city enjoyed a profitable 2013, but primarily because of the outsized performance of their investment portfolios.

Crain's Chicago Business reported that Northwestern Memorial HealthCare reaped a $309.1 million profit from investments last year. By comparison, its income from operating two hospitals, medical offices and other facilities was $312.4 million.

And Northwestern was just one of three Chicago-area systems that realized gains of at least $100 million last year.

Investment income "provides a cushion for downturns in operations that may occur when cash flows become unpredictable," Dominic Nakis, chief financial officer for Advocate Health Care, another nine-figure investment winner last year, told Crain's Chicago Business.

Investment income for hospitals has become more important as reimbursements from payers decline, admissions drop and expenses continue to rise, according to Crain's.

Hospital finance executives say their portfolios are professionally managed and that they use the investment income for strategic vision, not to plug cash flow gaps. Experts warn it is fiscally dangerous to rely on the investment income to a large extent. Although the markets gained a remarkable 30 percent last year, most experts say a 6 percent gain in 2014 is more realistic, and could prompt investors for hospitals and hospital systems to take more risk with portfolios.

Indeed, a 2012 study by the CommonFund Institute of 86 hospitals and hospital systems found that 21 percent of their assets were in "alternate" investments such as hedge funds. That compares to 15 percent in 2009, a bump upward of 40 percent. The study cited the falling reimbursements as driving such risk-taking

"You have to fight against thinking, 'We can operate at breakeven and make it up on investment income.' That's not always going to be there," Adam Lynch, a a vice president at Principle Valuation LLC, a Chicago-based healthcare appraisal firm, told Crain's.

To learn more:
- read the Crain's Chicago Business article