Re­think­ing phi­lan­thropy

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

Modern Healthcare - - FINANCE - Beth Kutscher

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.

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