CAPITAL PERSPECTIVES
JUNE 2013
LIQUIDITY MANAGEMENT IN CHALLENGING TIMES: STRATEGIES AT OCHSNER HEALTH SYSTEM
The recent financial crisis, ensuing regulatory developments and
historically low interest rates have made for some challenging times for
corporate treasury managers with liquidity management responsibilities.
This case study highlights one company that has thrived despite the
crisis and showcases some of the best practices in liquidity and cash
flow management that have contributed to its success.
TAKING ADVANTAGE OF TAG
A strong focus on liquidity management has supported Ochsner
Health System’s rise — in less than a decade, in the wake of
Hurricane Katrina and in the midst of the global financial crisis —
from a single 440-bed hospital to a seven-hospital system with over
1,200 beds and 53 health centers.
Ochsner’s short-term portfolio consists of two primary buckets: a
money market fund and an operating account that has traditionally
been split between bank deposits and overnight repurchase
agreements. At the time of the 2008-2009 financial crisis, the
company had about $30 million in the money market account and
anywhere between $5 million and $30 million in the operating
account, although these days the operating account can rise to as
much as $50 million, says Frank Bocklud, Ochsner’s vice president
of treasury, who manages the company’s short-term funds.
It’s a climb that saw Ochsner catapult from about a 6% share to
about a 21% share of the southeastern Louisiana health care market
and $1.8 billion in annual revenue.
Maintaining ample liquidity is critical for New Orleans-based Ochsner
for a number of reasons.
CAPITAL FOR GROWTH AND INVESTMENT
Ochsner is in a low-margin business that’s also very capital intensive.
The company budgets for margins of 1%-3% and, as is typical with
health care providers, needs to make regular investments in expensive
equipment and facilities. Access to working capital is essential
both for continued growth and necessary ongoing investment in its
existing hospitals.
And, while health care is not a seasonal business, Ochsner has
seasonal cash needs, notes Bobby Brannon, executive vice president
and treasurer. Accounts receivable collections tend to drop a bit at the
beginning of the year, Brannon says. Additionally, in early February
Ochsner must make an annual multimillion-dollar payment to qualify
for coverage under the Louisiana medical malpractice statute, as well
as some other substantial yearly payments, he says. Then, in May,
another multimillion-dollar annual debt payment comes due on the
company’s outstanding bond issues. “The combination of seasonal
changes in patient bill-paying behavior and our annual front-end
payments creates some significant cash needs for us in the first half
of the year,” Brannon says.
What’s more, operating in the Gulf South, Ochsner must maintain a
sufficient pool of liquidity to manage through disasters such as the
many recent hurricanes the region has experienced, he says.
Key elements of Ochsner’s liquidity management strategy in recent
years have included the use of conservative short-term investment
vehicles and taking advantage of the federal government’s
Transaction Account Guarantee (TAG) program to enhance both
funds security and return on investment.
Prior to the financial crisis, at the end of each day, the company
was sweeping operating account funds that exceeded Federal
Deposit Insurance Corporation (FDIC) insurance limits into overnight
government-securities repos, Bocklud says.
Ochsner revised its strategy when the FDIC authorized the TAG
program in late 2008 to inject liquidity and confidence into the
marketplace, he says. The program guaranteed all funds held in
qualifying noninterest-bearing transaction accounts at participating
insured depository institutions. In other words, it offered unlimited
insurance on such accounts.
Ochsner responded by leaving greater balances in its Capital One
Bank® accounts, which did two things. First, due to TAG’s expanded
FDIC coverage, the strategy enhanced the security of a larger
portion of the company’s liquidity portfolio. Second, by increasing
its commercial checking account balances, the company was able
to increase its total earnings allowance to reduce analysis fees for
bank services.
In short, the TAG guarantee was used to yield unlimited coverage
and a reduction in fees.
“By increasing our checking account balances, we saved more
money in bank fees than we would have gained by investing that
cash in a money market account, because rates on those accounts
were so low at the time,” Bocklud says.
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Sound liquidity management requires financial managers to be
nimble. When Congress let TAG expire at the end of 2012, ending
unlimited FDIC insurance for qualifying noninterest-bearing
accounts, Ochsner reverted to its pre-crisis model of sweeping
operating account funds that exceeded the FDIC insurance limits
into overnight repos.
WHEN RATES EVENTUALLY RISE
Brannon echoes the common wisdom about the likely direction and
uncertain timing of future interest rate movements: “We expect rates
are going to rise,” he says. “We just don’t know when.”
Whenever rates do eventually ascend, his colleague Bocklud says it
will be time to re-evaluate short-term investment allocation.
“In a rising rate environment, we would probably be more aggressive
in terms of looking to shift more money out of our operating
account,” Bocklud says. “If we’re getting next to nothing in return
from the operating account, but we’re getting 3% in the money
market account, maybe we put more in the money market account.”
LONG-TERM PORTFOLIO AND LINE OF CREDIT
Ochsner’s focus on liquidity management extends beyond
short-term portfolio strategy. For instance, Brannon says the
company’s long-term portfolio is also a key part of its total liquidity
management picture.
The company has a long-term portfolio that since 2005 has typically
ranged between $200 million and $360 million. Ochsner’s fivemember investment committee, made up mostly of board members,
runs the long-term portfolio with the support of an investment
advisory firm.
“Occasionally, when you get into financial crises, you may need to
look at liquefying some of your long-term portfolio and moving it over
to Operations,” Brannon explains. “We had to do that during the
recent financial crisis a couple of times.”
Since 2005, in response to the crisis environment, the company
has taken some strategic actions with its long-term portfolio. For
example, Ochsner:
•
•
ver time reduced its hedge fund allocation from 15% to zero and
O
added other, more liquid diversifiers.
•
evised investment allocations with an eye toward minimizing
R
impairment losses that must be recorded on the income
statement prior to liquidation of the investment.
A second liquidity safety valve that Ochsner has established beyond
its robust long-term portfolio is its line of credit with Capital One.
During the company’s recent period of accelerated growth, it worked
with Capital One to increase the line from $33 million to $53 million.
“That gave us more flexibility,” Brannon says. “We use the line of
credit from time to time as we ebb and flow.”
IMPORTANCE OF A TRUSTED BANKING PARTNER
Having a bank that understands your business — including, in
Ochsner’s case, its seasonal cash shortfalls and ongoing need for
capital to buy expensive medical equipment — is critical to effective
liquidity management in these challenging times, Brannon says.
Ochsner has banked with Hibernia National Bank and Capital
One Bank, following its acquisition of Hibernia, since 1942. “We
have had a very close relationship with Capital One. The bank
understands our needs and how we look at things” he says.
OCHSNER AT A GLANCE
Ochsner Health System is southeast Louisiana’s largest
non-profit, academic, multi-specialty, healthcare delivery
system with seven hospitals and 53 health centers in the
state. Ochsner has been named the Consumer Choice
for Healthcare in New Orleans for 16 consecutive years
and is the only Louisiana hospital recognized by U.S.
News and World Report as a “Best Hospital” across 11
specialty categories.
Ochsner has more than 13,000 employees and almost
900 physicians in over 90 medical specialties and
subspecialties, and conducts over 300 clinical research
trials annually. For more information, visit ochsner.org.
L eaned on its investment advisory firm, with its deep research
team, to target investments with low beta, thereby reducing
volatility and risk.
Products and services offered by the Capital One family of companies, including Capital One, N.A., Member FDIC.
©2013 Capital One. Capital One is a federally registered service mark. All rights reserved.