Volatile market eats into El Camino Hospital budget

Massive fluctuations in the stock market are taking a toll on El Camino Hospital’s finances, a sign that the record-breaking years of investment earnings may be coming to an end.

But despite the latest budget documents showing the local Mountain View hospital lost money on its nearly $1 billion portfolio, El Camino is still turning a profit. And hospital officials say they’re inclined to take a conservative approach, and don’t expect to pull out of investments right before a predicted recession or market correction.

The hospital’s financial report for October — the latest to date — paints a pretty bleak picture. The hospital’s operating income turned a $8.7 million profit for the month, but was wiped out by a $34.3 million loss in “non-operating income,” referring to the hospital’s investments.

That’s because El Camino Hospital, a nonprofit corporation, invests large sums of “surplus cash” into an investment portfolio that earns — or in this case, loses — money each year. This pool of invested money has grown dramatically over the last five years, from about $500 million to nearly $945 million as of Sept. 30 last year. That means fluctuations in the market are going to have a big influence on the hospital.

Not surprisingly, the bad news in October tracks alongside significant drops in the major stock market indices, which shed anywhere from 5 to 7 percent in value. Future reports released by the hospital are unlikely to look a whole lot better: Despite several big swings, the market has declined overall since Nov. 1, and a plunge in December is going to look grim on the hospital’s December budget sheets.

Iftikhar Hussain, El Camino’s chief financial officer, said it’s true that the hospital’s investments took a big hit last year, but that it’s important to take a long-term view rather than get hung up on any one period’s performance. It’s worth remembering, he said, that the 2017-18 and 2018-19 fiscal years both returned $60 million each to the hospital’s earnings.

“Keep in mind that we’re having a bad year this year, but a bigger point really here is, over the long term, you’re getting a greater return,” Hussain told the Voice. “It’s only an issue if you’re immediately trying to get money out, and if you start timing the market you are taking a really speculative position.”

Pavilion Advisory Group, hired to monitor El Camino’s investments, does note several factors that could take a toll on the hospital’s portfolio. Global economic growth is slowing down, “emerging markets” are facing turmoil tensions over trade and tit-for-tat style tariffs on goods are among the factors that could drive down the market, according to the consultant’s November report.

Hussain said he believes the hospital’s investments are in good hands, and that El Camino has a “very sophisticated” roster of members on its investment committee that is monitoring what changes, if any, need to be made in order to adjust to the new market landscape.

El Camino has a board policy on the books for what to do with its so-called surplus cash, which states it ought to be “prudently invested with a focus on preserving the liquidity and principal necessary to meet known and reasonably unforeseen operational and capital needs.” In other words, invest the money until it’s needed to upgrade facilities or offset red ink. It’s then up to the investment committee to review the risk tolerance for investing that money, with an overall goal of being “sufficiently diversified in order to reduce volatility.”

Hussain acknowledged that nearly $1 billion in surplus money is “fairly high,” but said that the hospital is going to need $560 million to build new facilities at the Mountain View campus, including a parking garage expansion, upgrades to the Women’s Hospital building and a brand-new seven-story medical office building.

Larger hospital institutions like Kaiser Permanente or Sutter Health have a pool of cash that’s available for these kinds of big upgrades, Hussain said, but for independent hospitals like El Camino, it helps to bank money that it can dip into for campus upgrades.

“If you’re a standalone facility, you need a higher volume of cash,” he said.

The large sum of cash also helped boost the hospital to a top-tier “AA” rating with Standard & Poor’s, which was upgraded last year based on the hospital’s “superior and improving financial performance and exceptional days’ cash on hand.”

Despite a rough month, the hospital was still $15.8 million in the black for the 2018-19 fiscal year as of Oct. 31.

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