3 Reasons C-Suite Leadership at Health Organizations Should Invest in Philanthropy

Health organizations are complex institutions with comprehensive, nuanced, and meticulously created operating budgets. While perhaps best known for delivering patient care, executive leaders are obligated to ensure efficient operations and outcomes for wide-ranging responsibilities, including but not limited to:

• Facilities
• Personnel
• Research
• Training
• Government Relations
• Marketing
• Equipment and Supplies
• Legal and Compliance
• Billing and Insurance
• Medical records
• Data systems
• Food Service
• Security
• Parking

Each function is vital to the organization’s overall health and well-being and requires significant consideration, oversight, and resources. Amid the competing priorities necessary to run an efficient healthcare organization, C-suite leadership sometimes overlooks or deprioritizes philanthropy.

Despite being one of the few revenue drivers within a healthcare organization, the aggregate amounts raised through fundraising pale compared to clinical or other organizational revenue streams. Our historical experience and industry analysis have shown that philanthropy typically accounts for 1-3% of total health system revenue. Nonetheless, the philanthropic activity return on investment is unparalleled and can result in significant unencumbered monies for a healthcare organization. 

Consider These 3 Healthcare Fundraising Points

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

1. No other revenue stream within the organization can generate philanthropy’s outsized returns.

Several measures help gauge healthcare organizations’ efficiency and effectiveness in raising philanthropic funds. One such metric is Return on Investment (ROI), which calculates the return, or profit, generated by an investment.[1] At many organizations, the fundraising team produces the highest ROI of any department. According to AHP’s 2022 Report on Giving, for every $1 invested in philanthropy, healthcare organizations return an average of $5.41, with the highest performers delivering as much as $7.78 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.

When your organization’s C-Suite considers investment options to generate revenue, very few options are cheaper than philanthropy. A philanthropy-generated dollar 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. 

Many hospitals and health systems face flat or declining profits due to increased headcount costs, clinical innovation and population health initiative investment, and core business commoditization and decreased utilization. COVID-19 pandemic-related elective surgery decline also greatly exacerbated declining profits. Consequently, increasing patient volumes may no longer improve the organization’s operating margin, a profitability indicator showing patient care operations income. [3] 

Industry analysis indicates that most healthcare organizations already have razor-thin operating margins of 1-3%. In view of these margin pressures, the quantity of clinical services needed to net even $1 million is significant.

However, philanthropy can significantly impact healthcare organizations’ operating margins. According to AHP, the average healthcare organization’s fundraising “cost-to-raise-a-dollar” (CTRD)[4], a measure of fundraising efficiency, is $0.19, with the highest performers reducing that cost to $0.13. 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 patient service dollars needed to net those of 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	$2.34 million	$12.34 million
$5 million	$162 million – $495 million	$167 million – $500 million in services	$1.17 million	$6.17 million
$1 million	$32 million –  $99 million	$33 million- $100 million in services	$230,000	$1.23 million

Utilizing the table figures from above, if a hospital’s chief financial officer (CFO) needs to produce $10 million in new revenue, what would be the most efficient route? At a 1% operating margin, the hospital would need to provide $1 billion in services, costing $990 million, compared to investing $1.9 million in fundraising operations. 

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

Fundraising operations investments should be monitored and reviewed regularly discern metrics such as ROI and CTRD, and to ensure that investments were wise. Organizations can pressure test additional and continual fundraising investments until the long-term ROI and CTRD diminish to the point that such investments are no longer an efficient or effective organizational practice. 

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

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

At first glance, it is not surprising that fundraising might seem inconsequential within overall healthcare organizational finances; AHP’s 2022 Report on Giving shows that health systems average $16.42 million [7] in annual philanthropy, perhaps marginal at billion-dollar health systems. However, the healthcare industry’s low operating margins also indicate that philanthropy could determine whether a hospital ends up in the red or black in any given year. In fact, according to the Kaufman-Hall analysis of 900 hospitals nationwide, 2022 closed out with operating margins at just 0.2% for December, with an average annual margin of -1.3%.  Given this statistic, philanthropy can be vital to the bottom line. 

Case Study: A West Coast-Based Nonprofit Healthcare System

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%

Philanthropy can be a critically powerful tool for an organization with negative operating margins. The $51 million 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 net income. Given the organization’s low operating margin (2.6%), philanthropy significantly contributes to the organization’s bottom line and overall fiscal health. 

Philanthropy Is a healthy Investment for Healthcare Organizations

Health organizations now recognize 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.

[1] For the 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 $0.19.

[7] Based on cash accounting.

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