Making the Case for Investment in Philanthropy to C-Suite Leadership at Health Organizations

Health organizations are complex institutions with operating budgets that are comprehensive, nuanced, and meticulously created. While a health organization may be best known and considered for delivering patient care, executive leaders of these organizations have a tremendous obligation to ensure efficient operations and outcomes for responsibilities that extend far beyond patient care and encompass facilities, personnel, research, training, government relations, marketing, equipment and supplies, legal and compliance, billing and insurance, medical records, data systems, food service, security, parking, and a plethora of other initiatives. Each of these matters plays a vital role in the organization’s overall health and well-being, and each requires significant consideration, oversight, and resources.

Amidst the competing priorities necessary to run an efficient healthcare organization, philanthropy sometimes gets overlooked or deprioritized because, despite being one of few revenue drivers within a healthcare organization, the aggregate amounts raised through fundraising pale in comparison to clinical or other organizational revenue streams. Our historical experience and industry analysis has shown that philanthropy typically accounts for one to three percent of total health system revenue. Despite this, the return on investment for philanthropic activity is unparalleled and can result in significant unencumbered monies for a healthcare organization.

Fundraising leaders should consider the following three key points when encouraging their C-Suite Executive Leadership to maintain or increase the financial resources invested in their fundraising operations regardless of organizational size or financial position.

1. No other revenue stream within the organization can generate such outsized returns as philanthropy.

Several measures help to gauge the efficiency and effectiveness of healthcare organizations in raising philanthropic funds. One such metric is Return on Investment (ROI) that calculates the return, or profit, that an investment generates.[1] At many organizations, the fundraising team produces the highest ROI of any department. According to AHP’s 2019 Report on Giving, for every $1 invested in philanthropy, healthcare organizations return an average of $3.56, with the highest performers delivering as much as $5.53 per dollar invested. In comparison, for every $1 invested in patient care, hospitals and health systems will return on average between $1.01 and $1.03.[2]

2. Philanthropy is less resource-intensive than operational revenue streams.

A dollar generated by philanthropy takes less organization-wide effort, resources, and space to produce. It can cost up to 250x more to invest in clinical care than in philanthropy to net the same dollar amount. When your organization’s C-Suite is considering investment options to generate revenue, very few options will be cheaper than philanthropy.

Many hospitals and health systems are facing flat or declining profits due to increased headcount costs and investment in clinical innovation and population health initiatives, as well as the commoditization and decreased utilization of their core businesses. With the decrease in elective surgeries during the COVID-19 pandemic, these declining profits have been greatly exacerbated. As a result, increasing patient volumes may no longer be the answer to improving the organization’s operating margin, a profitability indicator that shows the income derived from patient care operations.[3]

However, philanthropy can have a significant impact on healthcare organizations’ operating margins. Industry analysis indicates that most healthcare organizations already have razor-thin operating margins of one to three percent. In view of these margin pressures, the quantity of clinical services that would need to be delivered to net even $1 million is significant.

According to AHP, the average fundraising cost-to-raise-a-dollar (CTRD)[4], a measure of fundraising efficiency, for a healthcare organization is $0.28, with the highest performers reducing that cost to $0.18. In comparison, a healthcare organization would need to invest closer to $0.97 – $0.99 in patient services to get a $1 revenue return. Using these metrics, the chart below illustrates the dollars that need to be delivered in patient services to net the same dollar value as philanthropy.

Net Return	Patient Services Costs[5]	Gross Patient Services Revenue	Total Fundraising Expenses[6]	Total Fundraising Revenue
$10 million	$323 million – $990 million	$333 million – $1 billion in services	$3.89 million	$13.89 million
$5 million	$162 million – $495 million	$167 million – $500 million in services	$1.94 million	$6.94 million
$1 million	$32 million –  $99 million	$33 million- $100 million in services	$388,889	$1.39 million

Utilizing the figures from the table above, if a hospital’s Chief Financial Officer (CFO) is asked to produce $10 million in new revenue, what would be the most efficient route to take? At a 1% operating margin, the hospital would need to provide $1 billion in services, costing $990 million, compared to investing $3.33 million in fundraising operations.

Of course, the argument is more nuanced than simply injecting additional capital into fundraising operations to produce a guaranteed result, and most healthcare organizations’ primary mission surrounds patient care, which will always come first. Generating fundraising revenue is distinctively different from the supply and demand transactional nature of patient services. Yet with payment cuts for care delivery on the horizon, philanthropy is likely to have a more substantial ROI, become an even cheaper investment opportunity, and play a larger role in alleviating margin pressures. Philanthropy provides undeniable value to healthcare executives looking for more complementary revenue sources.

Investments into fundraising operations should be monitored and reviewed to regularly discern metrics such as ROI and CTRD, and to ensure that the investments were made wisely.  Additional and continual investments in fundraising can be pressure tested until the long-term ROI and CTRD are diminished to the point that such investments are no longer an efficient or effective organizational practice.

3. In times of increased financial challenge or stress, philanthropy can be a good investment.

Philanthropy adds directly to an organization’s net operating margin, relieving margin pressure.

AHP’s 2019 Report on Giving shows that health systems average $16.23 million[7] in annual philanthropy, which may be marginal at billion-dollar health systems. At first glance, it is not surprising that fundraising might seem inconsequential within overall healthcare organizational finances. However, the healthcare industry’s low operating margins also indicate that philanthropy could play a role in whether a hospital ends up in the red or black in any given year. In fact, the American Hospital Association (AHA) Annual Survey reported that a staggering 32.6% of the community hospitals surveyed had negative operating margins in 2018. Given this statistic, philanthropy can be vital to the bottom line.

To illustrate how financially impactful philanthropy can be on a healthcare institution, here is an example of a West Coast-based nonprofit healthcare system.

Operating Data (includes only patient services, not philanthropy financials)

Operating Revenue	$3,243,046,000
Operating Expenses	$3,157,320,000
Operating Income (Operating Revenue – Operation Expenses)	$85,726,000
Operating Margin (Operating Income/Total Operating Revenue)	2.6%

Philanthropy Data

Fundraising Revenue (Contributions and Grants)	$50,586,862
Fundraising Expenses	$8,615,529
Fundraising Income (Fundraising Revenue – Fundraising Expenses)	$41,971,333
CTRD  (Fundraising Expenses / Fundraising Revenue)	$0.17

Operating and Philanthropy Combined Data

Total Revenue (Operating Revenue + Fundraising Revenue)	$3,293,632,862
Total Expenses (Operating Expenses + Fundraising Expenses)	$3,165,935,529
Net Income[8] (Total Revenue – Total Expenses)	$127,697,333
New Profit Margin (Net Revenue / Total Revenue)	3.9%

The $51 million in fundraising revenue accounts for only 1.5% of the organization’s $3.3 billion total revenue. Yet, the $42 million in net fundraising revenue represents an impressive 33% of the organization’s $128 million in net income. Given the organization’s low operating margin (2.6%), philanthropy is a significant contributor to the organization’s bottom line and overall fiscal health. At an organization with negative operating margins, philanthropy can be a critically powerful tool.

Health organizations are recognizing philanthropy as a core business strategy to provide operational and capital dollars for organizational advancement, particularly during recent changes in healthcare economics. For any CEOs, CFOs, and healthcare leaders looking to improve their financial performance and operating margins, philanthropy is a worthy investment to consider.

[1] For purposes of this article, ROI is based on cash, not production accounting. ROI is calculated by dividing gross funds raised by total fundraising expenses.

[2] Assuming an operating margin of 1-3% per section 2.

[3] The operating margin is calculated by dividing the difference between the total operating revenue and total operating expenses by the total operating revenue.

[4] CTRD is calculated by dividing total fundraising expenses by total fundraising revenue.

[5] Assuming an operating margin of 1-3%.

[6] Assuming a CTRD of $0.28.

[7] Based on cash accounting.

[8] Net Income is the equivalent of the Operating Income + Fundraising Income.