The Business of Philanthropy

Like many larger sectors of the economy, health care philanthropy took a major hit during the global recession of 2008-2009. Tumbling stock markets, double-digit unemployment and a general tightening of credit all combined to hit the overall economy hard.

The bad times clearly had a trickle-down effect on health care donations that, the Association for Healthcare Philanthropy estimates, dropped by as much as 30 percent last year. In dollars, total giving to health care institutions fell from $8.5 billion to just over $6 billion between 2008 and 2009.

"It's going to be an ugly year," William C. McGinly, president and CEO of the Falls Church, Va.-based association, says of preliminary returns on charitable giving for the 2009 fiscal year. McGinly notes that the last time health care philanthropy saw such a drastic drop was in 2002, during the previous recession. "The overall decrease in giving then was just over 30 percent, but some institutions went from $30 million in gifts to $3 million. That's the kind of environment we're in right now."

Gifts Shrink, Expenses Grow

The drop in donations couldn't come at a worse time for most health systems. Tighter reimbursements from both government and managed-care payers placed pressure on hospital margins even when the economy was thriving. Aging facilities need to be updated or replaced. Rapidly advancing health care technology also requires massive investment. But the recession has closed doors on many traditional capital sources.

"As credit markets have contracted, it's more difficult for hospitals to borrow for new buildings, new technologies and expanded service lines," says Rick Gundling, vice president of financial practices for the Healthcare Financial Management Association, Westchester, Ill. "It would be nice to turn to philanthropy to make up some of the difference. But as the recession has hit people's investments personally, that funding source has been squeezed as well."

At the same time, hospitals are seeing certain operating costs rise for reasons that are directly related to the economy.

"One challenge that hospitals are seeing is that, although difficult economic times are creating a greater need for charity care, you're getting fewer donations when you need them the most," says Harry Kraemer, former CEO of Baxter International and current chairman of NorthShore University HealthSystem in Evanston, Ill. "It would be great to see the amount of philanthropy go up when you have a greater need for charity care, but instead you're seeing more pressure on operating budgets."

If the previous recession is any indication, health care philanthropy will have a difficult road ahead. After dropping from $8.01 billion to $5.53 billion between 2001 and 2002, charitable donations to health care organizations didn't return to their pre-recession levels until 2007. Conventional wisdom suggests that many potential donors will wait until their portfolios recover and their personal situations are more secure before they ramp up their own giving efforts.

But some positive signs indicate that recovery might come more quickly than pessimists fear. For one, philanthropy is no longer an afterthought, having emerged as a crucial agenda item for hospital executives and their boards over the last decade.

"In the days of 8 percent to 12 percent margins, philanthropy was important but wasn't viewed as important," says the AHP's McGinly. "It was more 'nice to have' than a real strategic priority. But now, when a hospital making a 2 percent or 3 percent margin is doing pretty well, and when agencies like Moody's consider what you're doing with philanthropy relative to ratings, CEOs are more inclined to focus on charitable giving."

With this renewed interest, health systems' efforts to foster philanthropy have emerged from an ad hoc function into a critical part of the health care business.

"Over the last 10 years we've seen a tremendous maturation in philanthropy as a sophisticated business," says John Bluford, president and CEO of Truman Medical Centers in Kansas City, Mo., and chair-elect of the American Hospital Association. "The contributions that come through are very important and material to what we are doing, but the education and ambassadorship that givers offer are just as important as the money generated from gifts. If philanthropy is not a major initiative at your institution yet, I would argue that it should be."

Waiting It Out

The high priority that health systems are placing on charitable giving should help philanthropy recover from this recession more quickly than it did after the last recession. But certain key actions must follow for an oft-repeated "commitment to philanthropy" to prove successful.

First, hospitals must have patience. Philanthropic efforts that might have far exceeded expectations a couple years ago are more than likely to come up short in the current environment. Bluford cites a Truman Medical Centers campaign that ended in 2006 and yielded twice its goal of $27 million as a crowning achievement for his development staff. He also notes that Truman would be hard-pressed to repeat that performance during the best of times, much less during a recession.

Tom Sullivan, president of the Children's Memorial Foundation, reported that his organization took in more than $100 million in 2006 and more than $180 million in 2007, totals that were largely due to two extraordinary major gifts. The foundation, which supports Chicago's Children's Memorial Hospital, eased its 2008 goal back to $70 million but still fell short.

"We only hit $37 million, but we understood that was due to the significant financial discombobulation in this economy," Sullivan says. "Many people told us, 'We're not saying no, we're just saying come back to us later; now is not the right time.' So we have to keep pushing forward with the knowledge that there will be a 'right time' again."

A second key component is flexibility. "We've had to become creative with how donors can give and the length of time of a pledge," says Lisa Hillman, chief development officer at Anne Arundel Health System in Annapolis, Md. "For example, for the first time in more than a decade, we are allowing people with seven-figure gifts to extend those gifts out over 10 years. That's just the reality of this economy."

The third and perhaps most critical component of philanthropic success in a down economy is continued investment in, and expansion of, the development office—even in the face of across-the-board cuts among other non-mission-critical staffing.

On a short-term level, these efforts are needed to counter the decreased size of gifts. "Whereas someone might have contributed $100,000 a couple years ago, now they can only afford $25,000," Hillman says. "So we have to meet and engage more people to make up that difference. Our development staff is now working harder than ever."

Another reason for continued investment is less obvious, but may ultimately have a greater impact. Philanthropy is inherently a long-term business that's more about building relationships than making a one-time sales pitch. During the last recession, when many health systems instinctively cut their development staffs, they may have inadvertently caused philanthropy to lag far behind the overall economy's recovery.

"If you have two or three major gift officers and let them go, you've lost relationships, and then you're not positioned to make a comeback," says the AHP's McGinly. "We saw this after 2002, we learned the lesson, it's easy to avoid this. And yet, it's a stretch for many organizations to justify this because it requires a financial investment now."

As hospitals and health systems have gotten more sophisticated about the business of philanthropy, McGinly hopes they can avoid the mistakes of the last decade.

"The ones who are doing this smartly are holding on to their staffs and maintaining relationships and staying connected, and that costs money," McGinly says. "Those who are going to weather this storm are maintaining their positions and continuing to build relationships. Once the economy starts to turn around, they'll kick their efforts into high gear and be at an advantage compared to those who weren't in position to come back."

Trustees' Unique Position

Experts, health care executives and board members all agree that the future of health care philanthropy must include a prominent role for hospital trustees. That hasn't always been the case.

"Board members haven't always been used as ambassadors for the hospital to the public, which is a shame," says HFMA's Gundling. "Most trustees are business and community leaders with a lot of great connections within the community. They can be a great resource for the hospital by reaching out to civic groups, business groups and individuals who may also want to donate funds to the hospital."

Board members can also advance charitable giving by opening their Rolodexes to friends and business contacts and helping the system's development office build relationships.

"Networking is one of the four things we ask of prospective board members," says the Children's Memorial Foundation's Sullivan. "Some trustees are actively engaged and have raised significant dollars; others are less proactive but still helpful at identifying potential donors. They all know that they're expected to help in some way, whether it's a personal appeal or a simple lunch introducing our staff to someone who might believe in our mission."

A second way that board members can help increase philanthropy is by being effective spokespeople for their hospitals in their communities. Executives and trustees alike cite the value of having board members take prominent roles advancing a health system's mission in front of community organizations and business groups. The best opportunities are often not tied to specific fundraising campaigns, but are simply informational sessions that underscore the reasons why the hospital is so important to the community and why it is deserving of that community's support.

"Good governance should include recruiting board members who are influence leaders," says Bluford, the AHA's chairman-elect. "These are people who are not only well-informed about the priorities of the institution, but who can speak about its mission and its needs in the broader community. When you're approaching community leaders who may become donors down the road, that message may resonate better coming from a peer as opposed to the same message coming from your staff."

A third major way for trustees to increase philanthropy at their institutions is through increased, improved communication and cooperation between the hospital and foundation boards.

"Hospital trustees' primary function is to run the hospital, but the philanthropy element is becoming more important," says the AHP's McGinly. "The programs that the foundation is doing should be shared with the hospital board members, and vice versa, so they can figure out ways to support each other's efforts."

Health system boards have established several different ways to encourage this communication: joint meetings, shared members, meetings with donors that include a staff member and a member of each board. Some of the best opportunities for cross-pollination between boards may be some of the less-formal ones.

Anne Arundel Health System has gathered its hospital and foundation boards together for several social and educational meetings. These have included a philosophy seminar at a nearby college and a tour of a local building that incorporates a high level of green construction technologies.

"Board membership is not just about serving the hospital's needs, it also fulfills members' social needs to network and interact with other like-minded people," says Anne Arundel's Hillman, who helps organize these events. "Don't forget that social aspect. If you can make service enjoyable and build camaraderie between the hospital and foundation boards, you'll be much better off."

Taken in isolation, none of these three board-member roles seems especially burdensome for an individual trustee. And yet, when all three roles are collectively filled by the board, a health system can find itself well on its way toward the next level of philanthropic efforts.

"Philanthropy has always played an important role in helping fund our operations and our capital projects, but not nearly as important as we see it going forward," says Barbara Wilson, board chair of St. Luke's Medical Center in Boise and Meridian, Idaho. "Now we're trying to create a whole educational culture of philanthropy, and that starts with our boards and our physician leadership. It's not all about the capital campaign but about the philosophy of philanthropy."

The concept of building that "culture of philanthropy" is catching on as the ideal not just in health care, but in not-for-profit circles around the country. At St. Luke's, the quest for that ideal stems from some very practical concerns. Cash flow has always been sufficient to cover the hospital's operational needs as well as most of its capital investment, with only a modest, 2 to 3 percent annual contribution from philanthropy. Leaders see that changing, and they see philanthropy as the only way to guarantee sufficient funding down the road.

"Over the next 10 years we will need $1 billion of new capital for facilities and for investment in high-quality health care," says Rich Raimondi, chair of St. Luke's external relations and advocacy committee. "Philanthropy has to become part of our strategic plan, in terms of how the community will partner with St. Luke's. Instead of funding that 2 to 3 percent of our capital budget needs from philanthropy and seeking big-ticket donors to step forward only when there's a big need, we're going to plan on 10 percent of our capital budget coming from our community partners: everything from major gifts down to our employees and doctors, and even our grateful patients."

That type of expansion may seem like a stretch, but it's critical given the uncertainty surrounding the future reimbursement environment.

"When we talk about the culture of philanthropy in this organization, to me that implies that people understand that philanthropy is not just a 'nice thing to do,' but how much it truly shapes this organization," says Sullivan of the Children's Memorial Foundation, which is currently in the midst of a $600 million campaign to fund a new hospital. "Philanthropy is just about the cheapest revenue source you can find. Since philanthropy is cost-effective and accessible, you'd better go after it."

Sullivan echoes the feelings of many other health care development professionals when he affirms his faith in the long-term prospects for philanthropy despite the depressing results of 2009.

"As the population ages there will be a greater need for really good hospitals, and enlightened self-interest will lead people to support them because they're going to need them at some point," Sullivan says. "I'm very optimistic because hospitals have a unique and very special role to play in impacting the quality of lives in their communities. If they can demonstrate their commitment to quality and excellence, then philanthropy has a great chance to grow."

Chris Serb is a freelance writer who lives in Chicago.