Not-for-Profit Hospitals: An ESG Check-Up | Lord Abbett
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Fixed-Income Insights

These healthcare providers, an important line of defense in the pandemic, play a vital role in their communities. Here’s how their operations align with key ESG criteria.

Read time: 4 minutes

This article, from the forthcoming edition of The Muni Quarterly, is the third in a series of pieces exploring ESG considerations in different sectors of the municipal bond market.

Not-for-profit (“NFP”) hospitals represent a significant component of the municipal bond market, accounting for 9.3% of the Bloomberg Barclays Municipal Bond Index. The COVID-19 pandemic has highlighted the essential nature of healthcare providers and the important role they play in keeping their communities safe and healthy. Not-for-profit (“NFP”) hospitals have been at the forefront of the crisis, delivering care to COVID-positive patients while also maintaining key services for other patients. During the post-holiday surge in early January 2021, there were at times over 130,000 patients in the United States hospitalized with COVID-19. But even before the pandemic, hospitals provided vital social benefits. According to the American Hospital Association, NFP hospitals in the US provided around $100 billion in community benefits in 2017 (most recent data available). This equates to roughly 14% of hospitals’ total expenses.[1]

Social and governance factors tend to be more material than environmental considerations in our ESG analysis of hospitals, although increasingly some hospitals are taking important steps to mitigate environmental risks and have committed to creating healthier environments for their patients and communities. Here we discuss the key ESG factors we consider when analyzing hospitals.

 

Figure 1. U.S. Hospitals Have Been a Bulwark in in the Year of the Pandemic
COVID-19 hospitalizations in the United States, March 1, 2020–March 1, 2021

Source: The COVID Tracking Project. Note: Florida began reporting this figure on July 10.

 

Environmental

For hospital ESG assessments we consider external environmental risks – such as wildfire, hurricane, flood, and seismic events – as well as actions management teams are taking to create healthier environments for the communities in which they operate.

In terms of external environmental risks, we consider a hospital’s location to be a critical component in our analysis. Single-site facilities are particularly at risk if located in areas prone to climate events. Larger health systems with more than one hospital benefit from geographic diversification and the ability to shift patient volume (and revenue) if one facility should be compromised due to an environmental event.

We also consider the actions management teams take to respond to these external environmental risks. Mitigating factors can result in a more favorable view of a hospital’s ESG profile. For example, in 2001 Tropical Storm Allison resulted in major flooding and severe damage to several hospitals at Texas Medical Center (“TMC”) in Houston. Following this event, TMC created a vast and sophisticated floodgate network to protect this very large medical complex. In 2018, when Hurricane Harvey dropped 51 inches of rain on the city in only five days, TMC was able to continue operations with only minimal flooding.

On the flip side, some hospitals are taking steps not just to protect their facilities from environmental risks, but to protect the environment from the waste and greenhouse gases created by their facilities. Seattle Children’s Hospital has dedicated itself to creating a healthy environment for children and families. The hospital has committed to being carbon neutral by 2025 and recently issued taxable Green Bonds to reflect the sustainable nature of the initiatives that are funded with bond proceeds. Projects funded with bond proceeds included the construction of LEED Gold certified clinical buildings, energy-efficient windows, and high efficiency plumbing.

Social

To maintain their tax-exempt status, non-profit hospitals must demonstrate to the Internal Revenue Service that they are providing community benefits such as extending financial assistance to patients without insurance, addressing social determinants of health, and funding medical education and research. In our view, many hospitals in which we invest provide indispensable social benefits to their patients and their communities.

We take into account various factors when determining the level of social benefit a hospital provides. We consider the organization’s financial assistance policy, the percentage of indigent care being provided, the percentage of Medicare and Medicaid patients the hospital treats, and the level of bad debt expense and charity care. In our analysis we balance these social benefits with the higher financial risk of a hospital with above-average levels of uncompensated care.

Some health systems have even gone as far as developing affordable housing units for their communities, as homeless individuals tend to have higher hospital readmissions. In 2018 Kaiser Permanente established a $200 million Thriving Communities Fund to address homelessness and housing instability, which should in turn help to improve patient care and reduce costs.

Hospitals in rural communities are often critical access hospitals or sole community providers – without their presence these communities would be “healthcare deserts” and patients would have to travel many miles for care. The federal government recognizes the important role of these providers and seeks to reduce their financial vulnerability by offering higher, cost-based reimbursement for Medicare services.

We also view hospitals that train physicians and have strong research programs as providing important social benefits. Brigham and Women’s Hospital in Boston has been a clinical research leader for many years, and during the past year pivoted to conduct research on COVID-19 treatments and Phase 3 vaccine trials for the mRNA vaccine manufactured by Moderna.

Hospitals have increasing social responsibilities to their communities. The pandemic has exposed severe health inequities: Black Americans have died at 1.4 times the rate of white people.[1] Some hospitals and health systems are taking steps to help address the inequities in healthcare that the pandemic has exposed. While recognizing there is much work to be done, NFP health systems like Intermountain Healthcare in Utah have added equity as one of their core values, hired an equity advocate to address issues or concerns of inequity among caregivers and the patients they serve, and are working with other organizations in their communities to address racism as a public health crisis.

Governance

In terms of governance, incorporate numerous factors in our analysis. Generally, most NFP hospitals have good governance practices and tend to score high in this category. We examine the level of diversity and inclusion on the board and senior leadership team. We review the background of board members, the number of directors on the board, and whether there are term limits and conflict of interest policies. Other governance factors include whether actual performance is in line with budgeted expectations, management teams’ actions to address pricing transparency and surprise billing regulations, the frequency of financial disclosures, and steps the board and management team are taking to protect the organization from cyber risks.

Maintaining strong employee engagement has been critical during the COVID-19 pandemic. Many staff members are physically and mentally exhausted from battling ongoing surges of COVID hospitalizations over the past 11 months. Given the shortage of specialized nurses and respiratory therapists, upholding employee satisfaction and retaining staff is critical to hospitals’ ability to deliver patient care. Management teams have taken various actions to support staff during the pandemic, some more successfully than others. At a minimum, good governance practices would suggest that staff should have adequate supplies of personal protective equipment to safely do their jobs. We also assess whether unions are present, if there has been a recent history of work stoppages, nursing staff retention rates, and external recognition of best places to work.

Conclusion

Indispensable and essential by any measure – but especially during this pandemic – we believe our nation’s NFP hospitals and health systems are excellent examples of municipal entities whose debt makes a strong case for inclusion in an ESG strategy.

 

1 https://www.aha.org/system/files/media/file/2020/07/aha-2017-schedule-h-reporting.pdf - published July 2020.

2 https://covidtracking.com/race - updated February 28, 2021.

 

IMPORTANT INFORMATION

This commentary may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

References to specific securities and issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in portfolios managed by Lord Abbett and, if such securities are held, no representation is being made that such securities will continue to be held. This is not a representation of any securities Lord Abbett purchased or would have purchased or that an investment in any securities of such issuers would be profitable.

A Note about Risk: The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems.

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially- conscious investors use to screen potential investments.

As defined by the World Bank, green bonds are fixed-income securities that support the financing of climate-friendly projects worldwide.

Bloomberg Barclays Index Information:

Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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