Nonprofit hospitals are embracing high-risk, high-reward investment portfolios. Is that a problem?

Nonprofit hospitals’ substantial securities holdings have yielded substantial year-to-year swings in reported investment income, and through 2023 have become increasingly concentrated in non-publicly traded vehicles like private equity, hedge funds, venture capital or other closely held companies, according to a new study of nearly 2,400 nonprofits’ tax returns. 

In 2023, the nonprofit hospitals had investment portfolios totaling $296 billion, well above the $189 billion of 2010 (adjusted for inflation) but down from a high of $374 billion in 2021, reflecting a “surge in financial markets during the COVID-19 pandemic [that] then declined during the 2022 market downturn,” researchers from the University of Chicago wrote the study published in the journal Health Affairs. 

Nonprofit, tax-exempt hospitals maintain investment portfolios to weather downturns in patient revenues and ensure long-term financial stability, or to help fund capital investments. 

Though those portfolios’ totals moved downward since 2021, the investments appear susceptible to substantial income volatility that “poses potential risks to hospitals’ operations,” the researchers noted. Average annual investment income growth jumped from -16% in 2022 to 113% in 2023, raising questions on how these organizations are responding in respect to their communities' needs. 

“When hospitals experience investment gains, they may channel those funds into new technologies, infrastructure, and quality of care. Alternatively, they may increase executive pay or reinvest the earnings back into their investment portfolios,” researchers wrote in the journal. “But when investments fall, as they did in 2022, hospitals may respond by scaling back services, deferring capital improvements, increasing prices, or laying off staff. This may occur particularly in communities with growing health care needs and high concentrations of socially and economically vulnerable populations.”

While the growth in investment returns was varied, researchers noted that in most years it outpaced relatively stagnant (inflation-adjusted) net patient revenue growth.

The analysis, which reviewed publicly available IRS Form 990 tax returns from 2010 through 2023, the most recent year available, tended to find that high-asset hospitals held “far greater” securities investments than their peers, and that this subset of hospitals tended to drive overall trends.

Behind the warning on investment return volatility, the researchers pointed a spotlight on the growing presence of “complex investment instruments” in their portfolios. From 2012 onward, publicly traded securities investments remained relatively stable at roughly 16% of a nonprofit hospital’s total assets. Investment in other securities steadily rose from 6.3% to 9.3% of their total assets, and in 2023 tallied $99 billion. 

The trends suggest that nonprofit hospitals “are not merely passive participants in this transformation but are themselves becoming financial actors, allocating substantial resources to complex investment instruments and increasingly resembling institutional investors,” the researchers wrote. 

The other types of securities playing a greater role in hospitals’ portfolios also tend to be higher-risk, higher-return investment choices, they noted, and compared to publicly traded securities “often have limited liquidity, less regulatory oversight and less transparency.”

Nonprofit hospitals’ substantial portfolios and millions-to-billions of dollars in returns have not gone unnoticed by their critics. Investment income is often cited by organizers during labor disputes, while large systems in particular have had their investment activities juxtaposed by lawmakers against the community benefits they’re intended to be delivering in order to maintain tax breaks. 

The University of Chicago researchers, in the study, wrote that their findings add to the policy debate and raise questions over whether nonprofits, for instance, should be permitted to invest in more risky vehicles, or whether protections to their service lines should be put in place when the market comes up short. 

“Ultimately, answering these difficult questions will require more empirical evidence linking investment portfolio decisions to patient outcomes and community health,” they wrote. “As nonprofit hospitals’ dependency on financial markets grows, ensuring both their financial security and the safety of the patients they serve remains a critical task for policy makers, regulators and hospital leaders.”