Dwindling donations

The weak economy continues to dampen expectations for one major source of capital for hospital construction or pricey technology: philanthropy.

Hospitals rely on cash reserves and debt to pay for construction and expensive new technology, but also depend on philanthropy to help cover major costs. Hospital revenue and margins are widely expected to be squeezed as the health reform law slows hospital payments from one major payer, Medicare, and expands insurance coverage, but hospital and health system executives say their capital plans won't rely any more on donors in coming years than they have previously.

At Johns Hopkins Health System in Baltimore, officials relied on donors to finance $520 million of its $1.1 billion campus redevelopment, which is scheduled to be completed in 2012, credit analysts with Moody's Investors Service noted favorably in a May report. The expanding system recently borrowed $150 million to replenish cash spent on construction, equipment and renovation and acquired

228-bed Suburban Hospital in Bethesda, Md., a little more than a year ago, though the deal involved no cash or philanthropy.

But as the system enters the uncertain era of health reform on the heels of the longest recession since World War II, Johns Hopkins Medicine officials do not expect to increase their dependence on philanthropy, says Rich Grossi, vice president and chief financial officer.

Donors can plug a shortfall when hospitals face minor financial difficulties, Grossi says, but such a strategy hinges on the strength of the economy. That works pretty well in a stable economic environment, he says, but “to assume that, in this environment, would not be prudent.” The health system's fundraising recently dipped as its latest capital campaign ended, he says, and officials reduced its medical school fundraising budget by 6% for 2011.

Johns Hopkins cannot project how the myriad health policy and insurance changes in coming years under health reform will affect hospital revenue and operations. “We know as little or as much about the new healthcare environment as anybody else does,” Grossi says. “It means you put a big asterisk next to everything you say.”

But he says he does expect health systems to be under pressure to reduce healthcare costs at the same time that providers can expect an influx of aging baby boomers and a flood of newly insured patients to increase spending. Johns Hopkins is expecting to see additional revenue as existing patients without insurance gain coverage under health reform, but executives cannot yet project whether overall changes will produce a gain, a loss or end up a wash for the system.

Grossi says he does not believe policymakers fully grasp the costs of reform. Johns Hopkins saw its $2 million-a-month income for its Maryland Medicaid managed-care business evaporate after the state expanded the program two years ago. He attributed the loss to upfront expansion costs as Johns Hopkins' health plan enrollment grew by roughly one-third. Grossi says the costs stemmed from the new enrollees' use of ambulatory services and emergency care.

Donors typically give to support research or capital projects, not operations, Grossi says, and the system will look to curb its operating costs should reimbursement or grants decline. Meanwhile, Johns Hopkins will have to “work harder for everything we get, and we may not get the same amount,” he says of its fundraising efforts. The medical school raised $103 million in 2009 and exceeded its $108 million fundraising budget in 2010 by $5 million, but has budgeted $102 million for its fiscal 2011, which began July 1, he says.

Donors have been affected by the nation's high unemployment, weak economy and troubled housing market, Grossi says.

Martin Arrick, managing director in U.S. healthcare not-for-profit ratings for Standard & Poor's, says healthcare executives appear more conservative in their expectations for philanthropy and capital spending after volatile markets in 2008 and 2009 prompted donors to scale back or slow down gifts.

Standard & Poor's Kevin Holloran, a director in U.S. healthcare not-for-profit ratings, says the recession has dampened fundraising expectations among hospitals and health systems rated by the New York-based agency. He says executives have not reported any change to expectations for philanthropy in response to the expected squeeze on revenue under reform.

Healthcare giving slid by 11% in 2009 to $7.64 billion from $8.59 billion in 2008, according to figures released last month by the Association for Healthcare Philanthropy.

Hospitals and health systems reported little to no change in the number of gifts and donors last year compared with 2008, the annual survey found. The median number of donors held flat after increasing 3.5% in 2008. The median number of gifts edged up 1% in 2009 compared with 3.4% the prior year. No median numbers on donation totals were provided.

Some hospitals and health systems increased development staff during the recession, which executives say may better position capital campaigns in coming years.

North Shore-Long Island Jewish Health System, Great Neck, N.Y., increased its development office in 2009 in advance of an uptick in the economy. “We needed more people to go out there and start to working with those who want to give,” says Robert Shapiro, the system's senior vice president and chief financial officer. He says the system found fundraising more difficult during the past two years but has seen giving return to historical levels in 2010.

The 11-hospital system has since raised its fundraising expectations, which ranged from $50 million to $80 million annually. If successful, the more aggressive efforts could boost its fundraising by $10 million to $15 million a year—and expand its capital budget. Philanthropy typically accounts for one-quarter of North Shore-LIJ's capital financing, Shapiro says. Cash from operations makes up another 50% of its capital budget, and the remaining costs are financed with debt.

North Shore-LIJ is expected to spend $1.9 billion on capital projects in the next five years. However, Shapiro stresses that the plan—which includes information technology projects, efforts to expand the system's geographic reach and ambulatory-care investments—could be adjusted should cash or donations slow so the system can maintain its 50% cash, 25% philanthropy and 25% debt financing percentages.

To do so, the system may slow down its spending, as was the case in 2008, he says. Similar to homeowners with a list of improvement projects, the system won't rush to begin its projects all at once, but will build as its budget allows. “We will undertake the projects we can afford to do,” he says.

Shapiro says the system's five-year strategic plan assumes slower revenue growth. Under a conservative estimate, he projects revenue to lag expense growth as Medicaid reimbursement stagnates and Medicare increases by 1% a year. Under a rosier estimate, revenue would increase by 4% a year at the same rate as expenses. North Shore-LIJ has aggressively analyzed the system's expenses and how it collects revenue, he says.

Still, hospitals and systems that increased development staff and budgets during the recession were in the minority. An e-mail survey of roughly 430 U.S. and Canadian hospitals and health systems, conducted in December 2009 by the Association for Healthcare Philanthropy, found that 13% increased their development office staff in 2009 and three-quarters reported an increase in donor-relations activities. But roughly one in five (23%) reported they cut development staff, and half reduced their fundraising office budgets.

At St. Luke's Hospital and Health Network, Bethlehem, Pa., the weak economy, not upcoming health reform changes, prompted changes to its capital planning and fundraising efforts, says Patrick Bower, vice president of development for St. Luke's. The four-hospital system increased its development staff during the downturn, which Bower describes as an investment in time and communication needed to cultivate donors.

St. Luke's is developing another campus with a 72-bed hospital, free-standing cancer center and medical office building that is expected to cost $120 million through 2011, of which operations and philanthropy will finance roughly $34 million, according to Moody's.

Bower says St. Luke's exceeded a $50 million, five-year fundraising goal this year, one year ahead of schedule with no change to its outreach efforts and has extended its efforts to raise another $10 million during the next 18 months.

Health reform may adversely impact healthcare giving should expanded insurance coverage or other policy changes alter donors' perception of hospitals or their experiences, he says. Individuals often choose to give to organizations based on personal experience or because they can see how donations make a difference, he says. He wonders whether the public will believe that expanded insurance coverage will mean hospitals no longer require donations.

Bower says donors recently questioned the need for St. Luke's $1.5 million campaign to replace four mobile clinic vans. Fundraising coincided with the March enactment of health reform, he says. Since the vans typically have a life span of about a decade, donors asked whether such outreach would be needed as insurance coverage expands. Bower says what donors did not realize is that patients enrolled with safety-net insurance struggle to find clinics to accept them. The hospital successfully raised the funds and has purchased two of the four vans and will soon buy the remaining vehicles.

The health reform law relies heavily on expanded Medicaid enrollment and subsidized private insurance for low-income households to broaden insurance coverage.

For some, fundraising success in coming years could affect credit ratings that influence how much hospitals pay to borrow.

Such fundraising efforts factored into greater credit strength for the Massachusetts Eye and Ear Infirmary in Boston. Moody's analysts says the upgrade to Baa3 from Ba1 for the 42-bed specialty hospital “heavily incorporates an assumption of increased philanthropy” as the hospital plans to increase its capital spending on depressed operating margins.

Credit analysts reported the hospital hired a new development director last year; set greater philanthropic expectations for its board; and has plans for a capital campaign of a yet-undetermined size and scope. A spokeswoman says the system's plans were preliminary and declined an interview request.

In California, Eisenhower Medical Center's heavy reliance on Medicare for revenue—the public program accounts for two-thirds of the organization's payer mix—will leave the hospital increasingly dependent on philanthropy as health reform slows Medicare payment increases, one ratings agency says. “Moody's believes that the long-term success of EMC is directly tied to the organization's fundraising success given the high reliance on Medicare,” analysts said in July.

Kimberly Osborne, vice president and CFO of Eisenhower, a 289-bed hospital in Rancho Mirage, says donors will continue to be important to the hospital under health reform. But its long-term strategic plan also seeks to boost its market share with an expanded primary-care physician network; curb operating expenses; and become a teaching hospital, which may further help boost its physician network, she says.

The hospital, which recently expanded its main campus and renovated its emergency room, has a $150 million capital campaign planned for next year, according to Moody's. And in February, Eisenhower opened a 92,000-square-foot health center in a bid to expand into a rapidly growing area southeast of the hospital, according to the ratings agency. The hospital used $51 million in debt to build the Eisenhower George and Julia Argyros Health Center in La Quinta, Calif., but received a $20 million cash donation in 2007 to cover start-up costs during the first five years. The hospital has not received a similar donation since, says Michael Landes, president of the Eisenhower Medical Center Foundation.

Philanthropy is under pressure to fill gaps created by increased pressure on the medical center's operating margins, Landes says, adding that the hospital did see the recession stifle giving. In 2008, Eisenhower's fundraising slid 30%, and last year it slipped another 20%, he says.

“People have less to give, and they're giving you less,” Landes says. “People are going to continue to give in a way that they have done in the past but lengthen out the giving.”

More donors have switched to planned gifts, such as bequests or charitable remainder trusts, from cash contributions, he says. That shift—which has left Eisenhower with half its donations in planned gifts in 2010 from roughly 10% in 2007—has reduced the cash available to finance capital projects, Landes says.

The hospital canceled construction of a planned underground parking garage because of the decline in cash donations. Landes says as the economy improves, cash donations will increase. “The question is when,” he says.