Rethinking philanthropy

Hospitals, systems use income from donations for broader range of purposes

The turnaround in the financial markets—and an overall improving economy—means charitable giving has improved at hospitals at a time when their investment portfolios are also seeing greater returns.

Healthcare systems typically have a number of vehicles into which they direct charitable gifts, some of which will fund specific programs while others will go into an endowment, with only the interest available for spending.

But an improvement in the stock market, and increased optimism from benefactors, mean more money is available for not only capital improvement plans, but also more ambitious projects related to healthcare reform and, more specifically, population health management.

“Fundraisers are being asked to redefine what philanthropy will mean in healthcare,” says David Flood, chief development officer at Intermountain Healthcare, a 21-hospital not-forprofit system based in Salt Lake City.

He notes that systems have also been shifting their focus from projects such as building new hospital wings to installing health information technology and expanding outpatient services. “A server might not have been very sexy, but it’s critical,” he says, adding that fundraisers have to rethink how they’re communicating with potential donors.

Flood joined Intermountain in June from Meridian Health in Neptune, N.J. His arrival capped off a strategy that began about two years ago to consolidate each of the foundations at Intermountain’s individual campuses into one systemwide fundraising group.

Bert Zimmerli, Intermountain’s executive vice president and chief financial officer, says that having a single foundation allows Intermountain to eliminate many of the administrative costs associated with having multiple funds—costs such as filing additional tax returns, maintaining a separate board for each organization and auditing financial documents.

But another, equally important objective, he says, was rethinking how it has been putting its charitable dollars to work. And that means new initiatives that speak directly to providers’ evolving mission as stewards of population health.

“It’s not unusual to have donations made to support building projects,” Zimmerli says, referring to the bread and butter of hospital fundraising efforts. “I’d say we covered the gamut, historically. We want to absolutely continue to do that, but we also want to raise our vision a bit.”

Zimmerli notes that Intermountain is working on a yet-to-be-announced “major initiative” around children’s cancer research. That project—and others promoting health and wellness—are part of its “Healthy Utah” campaign, which focuses on improving health in the state.

Intermountain, which has a Dec. 31 fiscal year-end, has about $130 million in its endowment. In 2012, it saw a rate of return of about 10%, “a little bit ahead of our benchmark,” Zimmerli says. “Our goal is to fund worthy community projects,” he says. “We want to raise our vision for what we want philanthropy to do.”

Setting a record

According to the most recent numbers from the Association for Healthcare Philanthropy, charitable giving increased 8.2% in 2011 over the previous year. Gifts to healthcare organizations reached a record $8.94 billion that year, surpassing even the $8.59 billion raised in 2008.

The AHP found that major giving has increased steadily since 2002, when it took a nosedive after the 2001 terrorist attacks and subsequent market crash, with only an isolated decline in 2009, in the aftermath of the 2008 financial crisis.

But systems also say the funds are coming in none too soon—with margins shrinking and medical centers transitioning into integrated delivery systems.

Greg Klugherz, vice president and CFO at CentraCare Health System, St. Cloud, Minn., says that with healthcare reform expected to limit volume and reimbursement, the system isn’t planning to increase its capital expendi- tures as its endowment grows. Nevertheless, “there are some islands that are particularly interesting to donors,” he says, citing behavioral health and adolescent behavioral health, where it saw a $1 million gift in 2011, as one example.

In addition, an increase in donations at the system has allowed it to go outside its usual mission and become what Klugherz describes as a “health protagonist” in its community. “It’s the opposite of treating conditions as they come here,” he says.

One of the programs that receives funding from the CentraCare Health Foundation is an initiative known as BLEND (or Better Living: Exercise and Nutrition Daily), which supports programs such as a food labeling and nutritional scoring system to help promote healthy lifestyles. “It enables us to be more of a protagonist outside of our normal healthcare operations,” Klugherz says.

Klugherz notes that CentraCare has seen “tremendous” endowment returns of 12.6% over the three-year period ended March 31 despite a conservative investment strategy. The system puts about 11% of the donations it receives into its endowment.

“The trajectory is moving away from the whole brick and mortar model,” says William Jarvis, managing director of the Commonfund Institute, the research and education arm of investment firm Commonfund.

Walter Dillingham Jr., managing director of foundations and endowments at financial services firm Wilmington Trust, notes that unlike other not-for-profit organizations, hospitals tend to have other major sources of funding from

operations—which means that philanthropy represents about 3% of revenue at the average hospital. “Philanthropy tends to be a very small piece of the pie,” Dillingham says. “But it really takes a hospital from good to great.”

Systems that do fundraising well are able to draw on their endowments for new initiatives, particularly as revenue declines and expenses grow. But not all fundraising efforts are created equal, and Dillingham points to a “Tale of Two Cities” when describing the current environment.

Large medical centers have been “doing well,” he says, pointing to NYU Langone Medical Center and Memorial Sloan-Kettering Cancer Center in New York, each of which has recently raised $1 billion in capital campaigns.

But small and mid-sized hospitals are “not seeing the same accomplishments in terms of philanthropy,” he says. “Our belief, and the belief of many others, is that as margins (get thinner at hospitals) philanthropy will be even more important going forward.”

A report earlier this year from Commonfund, which provides fund management to not-forprofit organizations, found that small and midsize healthcare providers are investing their endowment funds too conservatively at a time when they’re most likely to need those returns to make up for shrinking margins.

Smaller organizations—which are also likely to have the greatest operating challenges—have an incentive to keep their assets relatively liquid in order to improve their credit ratings and borrow money more cheaply. But the strategy comes at a cost, with Commonfund pointing out that while their portfolios suffered the nearly same losses during the 2008-09 financial crisis, they tended to recover more slowly than organizations that were invested more aggressively.

And there’s another issue: donors generally want to give money to healthy, well-performing organizations with a solid investment strategy.

Less focus on endowments

Dillingham, who last year conducted a study of philanthropy at New York-area hospitals, found that about 70% have a foundation, while 30% manage charitable giving within the hospital.

Smaller hospitals are increasingly looking to start foundations as a way to build relationships with potential donors who serve as trustees, help with marketing, separate finances from the parent hospital and limit their liability, he notes.

Those foundations might include an endowment fund, but Dillingham says most funds are directed toward specific programs. He cites 2010 figures from the AHP that found that endowment returns represented just 4.9% of the average hospital’s fundraising activities.

The largest piece of fundraising activities, at 20%, is a hospital’s annual fund.

Intermountain’s Flood similarly notes that hospitals have been de-emphasizing their endowments, which are restricted funds where only the interest is available for use, in favor of other investment vehicles. That’s in contrast to universities, which are continuously working to grow their endowments. “With hospitals, you are dealing with real time,” he says.

CentraCare, for instance, has about $20 million in its endowment, but the system has $350 million in reserves and another $1 billion in operating revenue.

Mark Larkin, executive director of the CentraCare Health Foundation, notes that the system’s endowment is its long-term investment fund, while it also has a separate pool of philanthropic funds for capital projects.

The system recently wrapped up a $35 million, five-year capital campaign in December. The funds will be used for an addition to its flagship campus, 467-bed St. Cloud (Minn.) Hospital, which will have all private rooms and expanded women and children’s services.

Larkin says charitable donations continued to come in even during the economic downturn, but the system saw more planned gifts—those made after a donor’s death—and no stock gifts.

“We’re starting to return to more normal levels of giving,” Larkin says.