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Banking on Donations

February 25, 2008
by Richard Rogoski
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With revenues and profits ever shrinking, philanthropy can go a long way to bolstering hospitals’ bottom lines

Catherine Jacobson

Catherine Jacobson

Catherine Jacobson knows that if a hospital is going to serve the needs of the community, it also needs to grow philanthropic roots within that community.

As senior vice president of strategic planning and finance at Rush University Medical Center in Chicago, Jacobson says her institution is in the midst of a drive to raise $300 million over a seven-year period.

To date, over $220 million has been donated. About $180 million of the total collected will go toward the construction of a new hospital to replace the outdated 680-bed facility on the main campus. “We have some buildings dating back to the 1880s,” Jacobson notes.

But while the entire $300 million has been figured into the medical center's long-term financial plan, she says, “Very little will go into our operating budget.”

Bill McGinly

Bill McGinly

That seems to be true for many large healthcare organizations that have active philanthropic campaigns, says Nick Hilger, a former hospital CEO who is now senior vice president of business development at Eden Prairie, Minn.-based Ingenix. “For private academic centers and faith-based systems, most donations are going to program development or research. Almost none is going to supplement operating costs.”

John Sandstrom, senior vice president and general manager of the Healthcare Finance Unit of Siemens Financial Services Inc. in Iselin, N.J., says hospitals can strengthen their bottom lines through receiving larger and more frequent gifts. “Those with brand names and large, well-established foundations get more donations,” he explains.

Bill McGinly, president and CEO of the Association for Healthcare Philanthropy (AHP) in Falls Church, Va., says that while the recipients may have big names, those making the donations are usually not well-known organizations. “Foundations and corporations are not big givers to hospitals. Eighty percent of gifts in 2006 came from individuals.”

So how can organizations get people, especially those being served by smaller hospitals, to give? “There needs to be a ‘cause celeb,’” Sandstrom says. “New construction is always a good thing to build your philanthropic strategy around.”

Brian Keely, president and CEO of Coral Gables, Fla.-based Baptist Health System of South Florida, says the effects of philanthropy can be dramatic. “It allows us to transition from a good health system to an excellent health system.” A case in point, Keely says, is the $120 million emergency center designed to treat over 100,000 patients a year.

“We got a $10 million gift from one person in the community, and in return, we've decided to name it after him.” Plus, Keely says, “One of our board members gave half a million for a new free children's clinic in South Miami.”

With six hospitals stretching from Miami to the Florida Keys, and numerous clinics, Baptist Health is the largest nonprofit health system in South Florida with annual revenues of over $1.7 billion. Yet Keely stresses that being a faith-based nonprofit changes the financial landscape. “We don't exist to make money,” he says. “When we do well, we have an obligation to give more back to the community.”

The tax-exempt debate

In state legislatures and the halls of Congress, a debate is raging over a requirement that could jeopardize the tax-exempt status of many hospitals. And should a hospital lose its tax-exempt status, its philanthropic gifts could be drastically reduced.
Brian Keely, president and CEO of Coral Gables, Fla.-based Baptist Health System of South Florida

Brian Keely, president and CEO of Coral Gables, Fla.-based Baptist Health System of South Florida

Francine Machisko

Francine Machisko

“People don't decide to give because of a tax break, but they'll give more because of a tax-break,” says McGinly.

What is being proposed would require nonprofit hospitals to provide “an appropriate” level of charity care or community benefit, with a designated percentage of the hospital's total revenue or expenses being allocated for that care.

What is of greater concern, though, is a report issued in 2006 by the Minority Staff of the Senate Finance Committee. One recommendation in this report that is being considered by Congress would put hospitals that do not provide minimum charity care levels into a special category that would preclude them from issuing tax-exempt bonds or from receiving donations that qualify as charitable deductions, says Atlanta, Ga.-based Francine Machisko, a senior principal with the Noblis Center for Health Innovation in Falls Church, Va. In addition, the IRS recently revised Form 990 which now requires hospitals to include information about charitable care and executive compensation, she says.

Given that this is an election year, Machisko doubts that any federal legislation will be proposed, but she says changes by the IRS will require hospital CEOs and CFOs to look closer at their bottom lines. “What they should be doing is putting systems in place to capture data as to what charity care they provide,” she says.

But the larger issue is not as clear-cut, Machisko says, because hospitals then need to decide what charity care is and what community benefit is.

Community benefit could be research, operating a free clinic, publishing a newsletter, setting up educational programs or providing any other outreach program designed to benefit the community, and which is subsidized by the hospital, she says. And if emergency care is sometimes provided to those who cannot pay, that should be differentiated from bad debt, she adds.

Rick Gundling, vice president of the Westchester, Ill.-based Healthcare Financial Management Association, says that while charity care is only one component of what can be considered community benefit, it's up to each hospital to establish a clearly defined policy as to what charitable programs they provide based on community need.

But hospitals also can receive tax-exempt status by providing essential services to low-income patients such as emergency rooms and outpatient clinics, as well as unprofitable services like neonatal, burn or community mental health centers where high operating costs and low volume make them unprofitable but essential. These, Gundling says, are more examples that fall under the heading of community benefit.

However, differentiating charity care from bad debt can be a stumbling block for many hospitals.

In 2006, HFMA's Principles and Practices Board updated its “Statement No. 15,” which not only provides a basis for differentiating between charity care and bad debt, but also addresses congressional and legal issues concerning the reporting of bad debt by tax-exempt hospitals.

In explaining bad debt versus charity care, HFMA states, “Bad debts result when a patient who has been determined to have the financial capacity to pay for healthcare services is unwilling to settle the claim, whereas charity care is provided to a patient with demonstrated inability to pay.”

Rick Gundling

Rick Gundling

Determining who can pay often is subjective, says Gundling, but most eligibility criteria for charity care are based on a percentage of the federal poverty guidelines set by the Department of Health and Human Services, or those guidelines used for Housing and Urban Development (HUD) programs.

Echoing the 1996 Audit Guide of the American Institute of Certified Public Accountants, HFMA also states that hospitals need to classify bad debts as an operating expense and eliminate charity care from both revenue and receivables.

Keeping the two separate is crucial because, as HFMA points out in Statement No. 15, “Bad debt expense is one key measure of the organization's revenue cycle effectiveness. This is particularly important because additional credit risk is being placed on providers as patient co-payments increase.”

Interestingly, the major push for setting minimum requirements on charity care has been coming from individual states including Illinois, Texas, Florida and Massachusetts. Jacobson says the attorney general of Illinois proposed legislation that would have required nonprofit hospitals to earmark at least 8 percent of their expenses for charity care. The legislation did not pass.

While Jacobson says most hospitals come close to meeting that mark, Rush University Medical Center expends less than 5 percent on what can be narrowly considered as charity care. “But if you took our total outreach, then it's over 15 percent of our total expenses,” she explains.

Baptist Health System's Keely says he saw this coming and has put together a “Community Benefit Report” that not only describes what can be classified as charity care, but provides information on all outreach programs run by the system. And to get the word out to the community, this report is available online and as a DVD, he notes.

Should hospitals run afoul of any new charity care requirements, losing tax-exempt status would be a devastating blow for many small community hospitals that rely on philanthropy when there's not enough operating capital, says McGinly, who adds, “Some really believe that nonprofits don't need contributions in order to operate.” That, many experts agree, certainly isn't the case.

Courting donors

Reaching out to the community is the best way to establish a network of donors. “We tell hospitals to tell their stories better and describe what services they offer,” says Gundling. “We suggest that hospitals say what they need the money for.”

McGinly agrees. “You have to educate your community about what your hospital is doing,” he says.

And that strategy works, says Jacobson. “Our overall strategy has been to emphasize the importance of Rush University Medical Center, and to build relationships with grateful patients.”

Up until the start of the current fund raising effort, Jacobson says her institution was averaging about $20 million in gifts per year. Now it's between $30 million and $40 million a year. “We have a very active advertising campaign that uses TV, radio and print,” she says. But she emphasizes that the advertising is part of a marketing campaign for the medical center, not just for the building fund. Reaching out to donors also began at home, with members of the board of trustees, the medical staff and executive staff being among the first to give, she says. Other sizable donations have been coming from leading community members, corporations and foundations.

Hilger of Ingenix says hospitals need to understand that there is an enormous amount of competition for donated dollars and that they need to develop relationships with foundations and “create good public relations with the well-heeled in the community.”

Not only is competition a factor, but a faltering economy also can decrease levels of funding.

“Angel investors,” who traditionally help bankroll start-up companies prior to an infusion of funds from a venture capital firm, pay close attention to the value of their individual portfolios. When the stock market tanks and the economy sour, they have less money and less incentive to invest in new companies. That's also true for those who may otherwise donate millions of dollars to a hospital.

“We're still cautiously optimistic,” says Keely. “You expect donations to slow down when the economy slows.” But Keely admits that two corporations that regularly gave to Baptist Health recently filed for bankruptcy under Chapter 11.

With many hospitals also having to cut spending, it's becoming more important for CEOs and CFOs to become actively involved in philanthropic efforts. “It's definitely becoming a line item in their annual budgets and a large part of a CEO's job description,” Machisko says.

But McGinly says most CEOs and CFOs are just now getting actively involved. “They did not see the role of philanthropy as a part of operations,” he says. To remedy this oversight, McGinly's organization is pushing to have philanthropy added to the basic job description of all CEOs. With a membership of over 2,200 nonprofit hospitals, AHP's goal is to achieve this among 50 percent of CEOs by the end of 2010.

Richard Rogoski is a contributing writer based in Durham, N.C.

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