Philanthropy has always been a strategy for nonprofit community hospitals to address their capital needs. But in today’s economic climate, many finance executives are finding ways to make fund-raising more integral to their financial planning efforts. They realize that having an operating budget funded in part by philanthropy can help strengthen their financial resolve.

The seeds of this thinking began even before the current crisis hit. A report by Jan Haderlein in a 2006 issue of Health Affairs cites that philanthropy is “rising on the
executive agenda,” with more CEOs, board members, and other leaders realizing its role as an alternative source of capital.

“It’s Not a Good Time”

Of course, the challenge is finding the funding in a period when corporate and consumer wealth is declining. Nearly three out of four hospital’s philanthropy efforts have been squeezed by the current recession, according to the Association for Healthcare Philanthropy (AHP).

Many healthcare organizations have reduced their giving forecasts. Of these, more than one-third are holding off on philanthropy-funded expansion or renovation projects, according to an AHP survey in December. In addition, about one-third of negatively affected hospitals are postponing the purchase of new equipment funded by philanthropy. And more than 20 percent report scaling back on specific development programs—events, capital campaign programs, and the like.

The Silver Lining

But the outlook isn’t all grim. AHP says about half of their members are
going to meet their giving projections. Some of the ways they’re doing
it:

• Increased efforts at major gifts
• Emphasis on building donor relationships
• Heightened focus on planned giving.

The reality is that, although donors are more cautious, not all giving is on lock-down. Take, for example, charitable gift annuities, which tend to be more attractive when the economy is in a downturn. These can be attractive for donors who seek planned giving tools that can provide be attractive for donors who seek planned giving tools that can provide fixed-rate payouts in the short term.

Case Study 1:

Securing Better Bond Ratings

Hospitals are struggling all across the country, but especially in New York State. The average hospital bottom line was -2.2 percent in 2008, according to the Greater New York Hospital Association and the Healthcare Association of New York State (HANYS). This drop represents a loss of more than six percentage points from 2007, making it the worst one-year decline in the state’s history.
The groups say nearly four out of five New York hospitals are scaling back their capital projects. Nearly half have reported less access to capital.

Still Growing at Glens Falls

While many organizations have been under the gun, Glens Falls Hospital, a 410-bed community hospital, has fared better than most, despite losses and job cuts in 2008.

With an operating budget of about $300 million, the hospital serves six counties in upstate New York. Recently, Glens Falls built a new $65- million, six-floor tower to expand its cancer, cardiology, and vascular care services. Fund-raising not only raised $14.1 million, but it also helped ensure that credit was there to complete the project.

“We were able to attain a AAA-bond rating because the hospital has
been able to hold its own, in part because of our fundraising history,” says Mike Niles, CFO. As part of the bonding process, the hospital’s foundation became part of the obligated group for the bond insurance.

In March, Moody’s Investor Services released a report on the importance of fund-raising for not-for-profit hospitals to secure favorable bond ratings. When assessing an organization, Moody’s says it considers factors such as annual unrestricted gifts, which can help support operations by supplying a steady stream of revenue. It also looks at restricted gifts earmarked for specific capital initiatives.

The Tag Team

Currently, the hospital is trying to raise $1 million toward a new project: a $5-million primary care and imaging center just east of Lake George in Washington County.

“It’s not a great time to do capital campaigning,” says F. Raymond Agnew, CFRE, vice president, community relations at the hospital and executive director of its foundation. “But if you only tried to raise money during good times, you’d be stuck in your tracks. There is a real need to do this project.”

In addition, the hospital hopes to raise $5 million for surgical improvements, including a new center for robotic surgery at the Glens Falls location. To make this happen, development and finance have to work as a “tag team,” Agnew says.

“We have developed a meaningful and effective relationship not just to raise money, but also in the management of funds once they are here,” he says. This means that finance needs to help the development team by providing meaningful  financial information that they can share with the board at quarterly meetings.

What Works?

In addition, comparing hospital data with national benchmarks can help an organization measure its fundraising performance. For example, a hospital needs to know what it costs to raise a dollar. At Glens Falls, they measure this based on a three-year average. “During campaign years, the cost to raise a dollar is somewhat deflated because the gifts are so large,” Agnew says. “On the other hand, the costs may spike during other years where we’re focused on annual gifts. That’s why a three-year rolling average makes a difference.”

Finance and development should also share a goal to protect their philanthropy dollars through responsible stewardship, CFO Niles says. “We work together to track donor funds tied to the donor’s intent. If we can demonstrate a good experience for the donor upfront and then demonstrate the funds were used appropriately as intended, we have a happy donor. “

His advice for CFOs trying to protect their philanthropy dollars: Make sure that the budget for capital expenditures is based on needs, not just because a department is fortunate enough to have access to a pool of restricted funds. In other words, use funds judiciously. “The use of restricted funds has to complement the hospital’s strategic vision,” he says.

Case Study 2:

Securing the Safety Net

For hospitals in California, the recession has made a bad situation worse. The state ranks dead-last nationally when it comes to Medicaid (Medi-Cal) funding, according to the California Hospital Association (CHA). In addition, hospitals have been pressed to meet the state’s upcoming 2013 and 2015 deadlines for seismic upgrades—a mandate that doesn’t come with any government funding.

The CHA says more than one quarter of California hospitals can’t get financing for much-needed construction, equipment, or working capital. More than 40 percent have shut down construction or halted their  major equipment buys. And like other hospitals across the country, the state’s hospitals have seen their portfolios take a hit. Bond rules concerning cash and liquidity have hospitals wondering if they can
keep up their financial end of the bargain.

A Safety Net for a Safety Net

White Memorial Medical Center in East Los Angeles is one California hospital that is relying on philanthropy, in part, to deliver care to its community. Eighty-five percent of patients at this safety-net hospital are covered by some kind of public insurance, says Blin Richards, director of finance. With state payments shrinking, the recession is only adding to the problem.

“If we didn’t have philanthropy, our corporate office would be very reluctant to proceed with our projects because of the current financial environment,” Richards says.

The hospital is finishing a $220-million campus construction and equipment project, which includes a new main facility to meet the seismic guidelines. Now, the current push is to raise $1.8 million for a $13.1-million renovation of the hospital’s outpatient surgery and imaging services.

The Push for Performance

As it moves forward, the philanthropy team will be working closely with finance to get the numbers they need to track their performance. This includes providing readable data and comparison tools that the development staff can use to garner additional funds.

In addition, WMMC has been using analytics as well as national benchmark data to help establish development “best practices,” with the help of finance’s number-crunching skills. Over the last four years, WMMC has participated in the Association for Healthcare Philanthropy’s benchmarking initiative. The service compares a hospital’s performance to its peers’ using indicators such as ROI, cost to raise a dollar, size of endowment, pledge-conversion ratios, and program-specific measures, such as return on events.

“It’s important that we employ the same rigor to measure development as we would other financial metrics,” says Mary Anne Chern, FAHP, ACFRE, president of the WMMC Charitable Foundation. Using the benchmark data, Chern’s development team has a tool to evaluate the effectiveness of their efforts and to identify opportunities for improvement. And so does the corporate office of Adventist Health, which includes 17 hospitals besides WMMC. In fact, dollars raised through philanthropy is one of 45 measures on the system’s monthly
operating reports.

Sharing and Caring

Adventist Health has formed a philanthropy council so that development officers can share best practices across the system. Coming up with common definitions—an issue familiar to finance—has been a major step forward. “It’s very important that we all use the same definitions to establish our baselines so that we can allocate the necessary resources and get a good return on our investment,” Chernsays.

When data is compiled by different departments and hospitals, it’s critical that everyone defines a metric the same way. “Developing a  standard definition is important so that you’re comparing apples to apples. For example, if I get a planned gift of $100,000 today, should we count the present value, say $93,000, or the value of the gift, which is $100,000? So there is cash versus the present value,” Chern says.

“By applying AHP standards, we can ensure the hospitals are counting
philanthropy in the same way.” By working collaboratively, the finance and development staff at WMMC have been able to answer some of these questions. In the end, the teams share the same goal, Chern says. “We all want to be
accountable.”

What CFOs Can Do

• Include fundraising performance measures in the organization’s monthly “dashboard” reports. View philanthropy as an indicator that needs to be tracked in the same way as other profit centers like EP, OB, etc. When evaluated on net return, philanthropy is like EP, OB, etc. When evaluated on net return, philanthropy is often the hospital’s most valuable revenue producer.
• Invite philanthropy to meet with the finance team to explain why donors give to the organization. In a “Donor 101” session, ask the development team to outline the many reasons people give to hospitals. The finance team should understand the value of the donor-hospital relationship and understand how they personally can support philanthropy.
• Don’t slash and burn. Help development staff cut costs in ways that make sense. Just cutting headcount, direct mail, or events isn’t a comprehensive strategy. \ AHP’s Performance reveals notably stronger, statistically valid relationships between spending on direct fundraising activity and net returns. Among AHP’s benchmarking partners, bottom line returns grow along with spending on key areas of staffing and compensation.
• Help the fundraising team evaluate information systems that can track their fundraising efforts. According to Moody’s, such systems can determine the success of a philanthropy initiative.
• Set a good example and motivate. Show leadership by making a personal donation and supporting the philanthropy team’s events, such as golf outings, or dinners, and help them solicit vendors and other key stakeholders. Make sure that your CEO is out with your fundraising executives—no one can sell the hospital better than the person in charge.

Remember that philanthropy is about more than raising money. Yes, money is important, but it only gives a partial view of the value of philanthropy. Building long-term community and government relationships for the hospital is just as critical and is often harder to measure.