Hospitals rely on big donors to help ease margin pressure

Modern Healthcare – Thursday, November 21, 2024
By Alex Kacik

Nonprofit health systems, cancer centers and pediatric hospitals are increasingly depending on big donors to boost oncology, cardiology and other services.

Many nonprofit providers have ramped up investment in fundraising campaigns, often targeting high-profile donors, as operating margins have been slow to recover in the wake of the COVID-19 pandemic. Philanthropy is poised to play a bigger role in those systems’ finances as other sources of revenue wane and expenses remain relatively high, analysts and provider executives said.

A number of factors have led providers to seek out potential donors who can help fund research, recruitment, infrastructure improvements and construction.

The National Institutes of Health, which is a major source of grant funding, faces uncertainty under President-elect Donald Trump’s incoming administration. Inflation increased for the third consecutive month in October. Physicians and home health agencies are facing Medicare pay cuts in 2025, and Medicare Advantage insurers have decreased reimbursement.

“Giving is a ripe avenue at the moment,” said Kevin Holloran, senior director at the credit ratings agency Fitch Ratings. “Generally, operating margins have been low, so providers have looked to philanthropy to feed the beast, which is the capital-intensive healthcare industry.”

City of Hope, for example, has moved from more of a grassroots fundraising model to one that focuses on large, transformative donations that tend to move the needle more than smaller contributions, City of Hope CEO Robert Stone said.

In September, City of Hope received a $150 million donation for pancreatic cancer treatment from entrepreneur and philanthropist Emmet Stephenson Jr. and his daughter Tessa Stephenson, whose family member died from pancreatic cancer. The Duarte, California-based cancer care provider plans to use the investment for a fellowship program, a research symposium, immunotherapy treatments and a pancreatic biorepository.

The donation also includes an annual $1 million prize for the researcher who makes the biggest impact on pancreatic cancer research, even if they are not affiliated with the City of Hope.

“The topic of philanthropy will become an increasingly bigger part of the story going forward,” Stone said. “There will likely be less reimbursement available to fund research.”

Grants also help offset reimbursement shortfalls, Stone added. City of Hope received $91 million in NIH grants in the 2024 fiscal year, accounting for about a third of its total grant funding.

Healthcare executives said they are cautiously optimistic the NIH will continue its grant support under the new administration, despite the looming uncertainty.

Still, tight reimbursement levels have muted hospital operating revenue growth. The national median hospital operating margin was 4.3% in September — 13% lower than the September 2021 operating margin, according to data from the consultancy firm Kaufman Hall.

That means Henry Ford Health needs additional philanthropic support to tackle its ambitious expansion plans, said Mary Jane Vogt, chief development officer at Henry Ford.

“We have some audacious goals in building a new hospital in Detroit, a new bed tower in Macomb and a new research building. We cannot do this with the margins we currently have,” she said. “When we are in a large campaign such as this, we need to share this vision with dedicated donors, who have stepped up in a meaningful way.”

Henry Ford has set out to raise $750 million by 2028 as it maps out roughly $5 billion in capital spending over the next decade.

The Detroit-based health system teamed up with Michigan State University and Detroit Pistons owner Tom Gores to expand Henry Ford hospitals, build a medical research center, develop housing and build stores and public spaces around the system’s main campus. The approximately $3 billion project is in addition to the estimated $2 billion integration plan stemming from the Ascension Michigan venture, in which Henry Ford took over eight Ascension hospitals.

Henry Ford has raised $510 million since the campaign began in 2021, and the organization is on pace to exceed its target, Vogt said. Part of the total includes a $36 million donation from an anonymous philanthropist to fuel the Henry Ford Pancreatic Cancer Center, she noted.

Other health systems, including Cleveland Clinic, Phoenix Children’s and Memorial Hermann Health System have also garnered big donations.

This month, Cleveland Clinic received $30 million from Cleveland Browns owners Jimmy and Dee Haslam to expand cardiovascular genetics research. Part of the funding will be used to provide genetic testing for family members of patients at Cleveland Clinic diagnosed with inherited heart conditions.

“Our operating budget is faced with increasing costs of labor, supplies and pharmaceuticals,” said Lara Kalafatis, chair of Cleveland Clinic’s Philanthropy Institute. “Philanthropy is more important than ever as a catalyst for new ideas, innovations and capital.”

Donations like the Haslam’s contribution to Cleveland Clinic are often earmarked for specific purposes. However, health systems like Phoenix Children’s are also using philanthropic funding to support general needs such as new equipment, updated technology and recruitment efforts.

Phoenix Children’s Foundation raised about $25 million this year in unrestricted funding through its Hope Fund, up from about $15 million in 2018, said Steve Schnall, chief development officer for Phoenix Children’s Foundation.

“The health system has an insatiable appetite for philanthropy because of our growth focus, and in a market like ours, we need to add more sites, beds and providers to meet the growing demand,” he said.

Other parts of Phoenix Children’s philanthropy are also growing. The foundation has doubled its prior fundraising goal to $500 million, which the organization is on track to hit in 2028, Schnall said. Large donations this year for congenital heart disease treatment and research, a new hospital in Glendale, Arizona, and mental health services have propelled that campaign, he said.

“Outreach has been a top priority over the past three years,” Schnall said. “We’ve invested a lot in direct marketing.”

Memorial Hermann Foundation raised $52 million in its most recent fiscal year that ended in June, up about 200% from the prior year, said Anne Neeson, CEO of the Memorial Hermann Foundation, the foundation arm of Houston-based Memorial Hermann Health System.

Increasing the pipeline of nurses is one topic that has resonated with philanthropists, she said.

In August, Memorial Hermann in partnership with the Aldine Independent School District, welcomed its first class in the Health Education and Learning High School in Houston, which is funded by a $31 million grant from Bloomberg Philanthropies.

The program offers high school students curricula on nursing, imaging, physical therapy, healthcare administration and other roles.

“In Texas, we will be short roughly 30,000 nurses over the next few years,” Neeson said. “The [Health Education and Learning High School] gives them an opportunity to start working in healthcare right away. Donors want to know that they are making a difference.”

Funding training programs for nursing and other roles is part of a five-fold philanthropy focus for the Memorial Hermann Foundation, which is also fundraising for specialty care such as heart and vascular treatment, care provided at community and neighborhood clinics for patients without insurance, women and children’s care and trauma services, she said.

“We’re constantly looking to build our pipeline of donors,” Neeson said.

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