How Healthcare CIOs Are Investing Capital Through a Public Health Crisis

Market Context & Client Scope (2020–2021)

• Target clients are non-profit US hospital systems; ~6,000 total hospitals exist, with ~3,000 in non-profit systems.
• Top 10 non-profit systems represent 30% of all non-profit hospital assets.
• Large health systems are the largest employer in 16 US states (e.g., Cleveland Clinic is the largest employer in Ohio).
• Investment offices manage over $1 trillion in assets across pension plans, insurance pools, and liquidity reserves.
• Investment returns in some years generate multiples of operational revenue to fund research and operations.
• 2020 saw elective surgeries halt, causing revenue drops while PPE, ventilator, and staffing costs surged.

2020 Healthcare CIO Diagnostic Findings

• Survey included 42 Chief Investment Officers and Treasurers; results formed the basis of the "Healthcare Diagnostic."
• Asset Allocation: Strategies remained largely consistent with the prior year, demonstrating portfolio resilience.
• Alternatives: Continued high focus on private equity and private credit; hedge fund sentiment improved.
• Market Outlook: Respondents were more bearish than in previous years due to:
  • Near-zero interest rates hindering return objectives.
  • Recession concerns (a new trend for the group).
  • Ongoing operational pressures.
• ESG Implementation: 50% of respondents reported implementing ESG in their programs, up from 29% two years prior.

Cleveland Clinic Specifics & Investment Strategy

• Mission & Scale: Celebrating 100th anniversary (founded 1921); non-profit entity with no owners/stockholders.
• Community Benefit: Spent $1.16 billion on community efforts in FY2019 (charity care, education, research); 2020 expected to be higher.
• Investment Pools: Manages three distinct pools:
  • Long-term investment pool (approx. 85% of capital).
  • Traditional defined benefit pension plan.
  • Captive portfolio for offshore proprietary insurance assets.
• Global Expansion: Investing in a new research center in Florida, brain health expansion in Las Vegas, a 184-bed hospital in London (opening next spring), and cancer centers in Abu Dhabi.
• Operational Response to Pandemic: Liquidity became critical as hospital capacity emptied and revenue dropped; scenario was outside previous risk models.
• Portfolio Construction: Increased use of Separately Managed Accounts (SMAs) to gain position-level transparency and minimize impact of other investors' decisions.
• Return Expectations: Forecast lower absolute returns for the intermediate period due to compressed treasury yields and spreads; cannot simply ramp up risk to match historical equity-like returns.

Innovation & Technology Focus

• AI/ML Application: Critical for survival; used to model virus spread (down to specific blocks), prevent readmissions, and manage chronic conditions.
• Business Model Transition: Technology is essential to navigate the shift from fee-for-service to bundled payments and population health (shared revenue risk models).
• Operational Efficiency: AI applied to electronic medical records and robotic process automation to replace manual data entry in revenue cycle management.
• Internal Synergy: Investment office acts as a bridge, deploying technology from portfolio companies directly into the health system to avoid building solutions in-house.

ESG & Diversity, Inclusion (D&I)

• Strategic Alignment: ESG and mission investing are viewed as critical for successful returns and mission fulfillment.
• D&I Metrics: Conducted biennial D&I surveys of investment partners; 2020 survey results were encouraging.
• Hiring & Due Diligence: D&I analysis is embedded in the hiring process and manager due diligence from the office's inception.
• Accountability: Established a specific statement of purpose and four measurable goals for D&I and ESG to share with partners.
• Impact Investing: Using mission-based investing to achieve community goals not possible through traditional investment modes.

Future Outlook & Industry Trends (Post-Vaccine)

• No Major Allocation Shifts: No expectation of full-scale reallocation changes immediately following vaccine distribution.
• Accelerated ESG/D&I Standardization: Expectation of greater data availability and industry standardization for measuring ESG and D&I factors' impact on sustainable returns.
• Remote Operations: Investment teams must adapt diligence processes and manager communication to virtual environments; risks associated with remote evaluation are being managed.
• Telemedicine: Adoption accelerated by the pandemic, influencing how services are delivered and potentially valued.

Leadership Backgrounds & Team Building

• Stefan Strein (CIO, Cleveland Clinic):
  • Former VC for 15 years (seed/early stage); transitioned to asset allocation for mission-driven organizations.
  • Personal motivation: Family member saved by Cleveland Clinic oncology team after misdiagnosis elsewhere.
  • Team Philosophy: Focus on "cognitive diversity," generalist rotation for all staff, and equal voting power for all team members.
  • Retention Goal: Aiming for 10+ year tenures; low staff turnover is a key to high-performing portfolios.
  • Partner Engagement: Regular communications, access to subject matter experts, and invitations to clinics' events (e.g., bike ride to cure cancer, medical innovation summits).
• Paget McCall (Co-Head, GSAP Institutional):
  • Career path driven by family background in Wall Street and a sister who is a physician/policy expert.
  • Market Opportunity: Identified a gap in the market where healthcare CIOs were underserved by traditional pension/foundation asset managers.
  • Strategy: Leveraging Goldman Sachs' research, investment banking, and client strategy teams to provide specialized support.

Event Logistics

• Program recorded: Tuesday, February 16, 2021.
• Host: Jake Seward, Global Head of Corporate Communications, Goldman Sachs.
• Participants: Stefan Strein (Cleveland Clinic CIO) and Paget McCall (Goldman Sachs Asset Management).