May 5, 2004
Hospitals will depend heavily on cash from operations to fund future capital growth, according to survey findings published in the fourth report of Financing the Future -- a series led by HFMA in partnership with GE Healthcare Financial Services, with research conducted by HFMA and PricewaterhouseCoopers.
In all, 84 percent of hospital chief financial officers (CFOs) surveyed said they thought it would be more difficult to fund capital expenditures in the future. Sixty-three percent of hospital CFOs surveyed said they expect to be more dependent on cash from operations to fulfill future capital needs. If the number of uninsured increases and government reimbursement doesn't keep up with costs, however, this major source of capital could evaporate.
Hospitals also plan to increasingly seek philanthropic dollars. Forty-five percent of CFOs surveyed said they intend to be more dependent on philanthropy for their capital needs in the future. By contrast, six years ago philanthropy made up less than 1 percent of a hospital's revenue, according to Bill McGinly, Chief Executive Officer (CEO) of the Association for Healthcare Philanthropy.
The cost of capital will be higher for the "have-nots," pushing them further and further behind hospitals with easy access to capital. Hospitals and health systems with lower credit ratings are likely to pay higher interest rates for capital than hospitals with better credit ratings. The "have-nots" may have access to alternative sources of capital, although, that can generate operational and financial benefits that exceed the higher cost of capital associated with lower credit quality.
Fundraising Turnaround at Methodist Health System
As capital from operations and borrowing dries up, hospital executives are increasingly looking to their foundations to come to the rescue. But what attributes will ensure a foundation's success in a highly competitive market where everyone is chasing after the same dollar?
In Dallas, the foundation for the Methodist Health System traditionally had been fairly passive. Most of the Methodist Hospitals Foundation's donations were sent from a small number of "grateful patients," and the foundation staff was a skeleton crew of two. All of that changed 18 months ago when Methodist's CEO, Howard Chase, decided to reinvigorate the foundation by hiring an executive director with nearly 15 years of experience in the local market.
"The CEO was the driver of the vision," says April Box, foundation President and CEO. "Within 12 months, we grew the foundation from two to 7.5 FTEs. I only hired very experienced staff who had been in the business for a long time."
The investment paid off. In the past 12 months, the foundation dollars increased 217 percent. That's an 87 percent increase in the number of gifts and a 66 percent increase in the number of donors. "With an expense ratio of 17 cents for every dollar raised, this has been a profitable investment for the Methodist Health System," Box adds.
A successful fundraising strategy begins with a strong message. Box explains: "Your story as an institution is the product, and you must keep it simple. Ours is based on the fact that we provide quality health care to an underserved community, so when you help MHS you help the whole city."
However, building a philanthropic base is not an easy or instant undertaking. Box says that it often takes five to seven years to build a fruitful development office. "There are always spikes from big gifts and grants and, conversely, from expenses when you are building the program. All of this takes time, because it's based on developing relationships, and relationships that result in donations take time."
Other tips from Box include:
Put the right reporting structure in place. The development officer should be a direct report to the CEO.
Create opportunities for donors. The hospital's organizational structure needs to facilitate fundraising. No donor wants his or her name on a parking garage, so the development officer should steer the organization's fundraising before mistakes are made.
Don't overpromise or use artificial numbers. Typically, CFOs and development officers are of two different mindsets and speak two different languages, so the use of credible facts helps build trust. On the other hand, the C-suite should be realistic and understand that fewer than 1 out of every 100 potential donors has sufficient assets to donate $1 million or more.
Synchronize the message. Hospital PR departments and the foundation should be coordinated and communicating the same message.
Invest in the relationships. The C-suite, trustees and foundation staff must be actively involved and connected in the community. Trustees with powerful access and relationships are critical to fundraising efforts.
Conclusion
Hospitals' need for capital in coming years will be intense. Hospitals facing difficulties in profitability, liquidity and capital structures will find access to capital more daunting and the cost of capital higher than will hospitals without such problems. Hospital leaders will find the ability to "think outside the box" especially valuable in finding creative forms of capital access. Other success strategies include emphasizing philanthropy as a source of funds, accentuating the focus on operating margins, and working to improve disclosure policies. All can help hospitals broaden their chances of obtaining capital for needed projects.
SOURCE:
Financing the Future Report 4: "How Are Hospitals Financing the Future? The Future of Capital Access." HFMA members will receive a summary of the report with their May issue of hfm. Members can access the full report for free, and nonmembers can purchase a copy, from the Financing the Future web site.
Additional Resources
- Financing the Future Reports
- The Future of Not-For-Profit Healthcare Capital Financing
- Internet Guide to Capacity Planning (members only)
- Black Ink - Capital Articles
- Black Ink - Capacity Planning Articles
- Capital: Comprehensive List of HFMA Products and Services
If you have questions or comments about HFMA Wants You to Know, contact editor Laura Noble at lnoble@hfma.org.
HFMA Wants You to Know ISSN: 1540-0697. Volume III, Issue 10. Copyright 2004, Healthcare Financial Management Association. All rights reserved.