A Safety-Net Hospital's Strategy for Financial Success

Generating nonpatient service revenue such as grants and rental property income is key to keeping the black ink flowing, says the CFO of a two-hospital organization.

Patient services are the dominant source of operating revenue at the vast majority of health systems and hospitals, but academic studies and independent research have found that a small but significant portion of revenue comes from non-clinical sources.

At seven healthcare organizations contacted for an upcoming HealthLeaders magazine article, net patient service revenue as a percentage of total operating revenue ranged from 83% to 96% in recent years. All but two organizations posted net patient service revenue figures above 94%.

Kansas City, Missouri-based Truman Medical Centers, which operates two acute-care academic hospitals, posted a relatively low 83% figure for net patient service revenue as a percentage of net operating revenue in 2016 mainly because of its safety-net mission.

Last year, TMC generated $516 million in net operating revenue. Nonpatient operating revenue—a balance sheet category that accounts for revenue related to a health system's core mission—was 16% of net operating revenue.

The remaining 1% of TMC's net revenue was generated from financial activity unrelated to the health system's core mission.

At safety-net hospitals and other organizations that operate on thin margins, every source of revenue is precious, TMC CFO Allen Johnson says. "You have to look at opportunities that we probably have not taken advantage of before."

Strong Ties with Other Businesses
TMC has in recent years embraced partnerships with Walgreens pharmacies and U.S. Bank, which operate branches at TMC's pair of campuses. TMC also has a strong partnership with Cerner Corporation.

"Cerner is right in our backyard here in Kansas City, and we have a very close relationship... In fact, they use Truman as a client visit site. A lot of Cerner clients that come into a Truman facility look at our Cerner information technology products," says Johnson.

TMC does not receive direct revenue from Cerner for those client visits, but does receive credits against IT software expenses. "We are expanding that relationship now," says Johnson. "We want to get to the point where we are going to be Cerner's living lab."

Securing grant funding and charitable contributions are an essential element of financial success at safety-net health systems and hospitals, he says.

Grants and Philanthropy
"A major nonpatient revenue source for a safety net like TMC is grants and contributions. Because of mission-related financial challenges, TMC generates limited capital funding. TMC and its charitable foundation [have] developed strong relationships with both local and non-local foundations to fund capital projects."

TMC has recently drawn on grants and contributions to finance these capital projects:

1. A major renovation of TMC's oncology clinic.
   Funding source: A $2.3 million in grant funding from the R.A. Bloch Cancer Foundation and $1.8 million in match funding from the J.E. and L.E. Mabee Foundation.
    
2. An inpatient bed expansion and an inpatient mental health unit.
   Funding source: A $4.5 million in grant from The Health Care Foundation of Greater Kansas City.
    
3. The purchase of a NanoKnife surgical system for the treatment of pancreatic cancer.
   Funding source: A $500,000 grant from The Hall Family Foundation

The bottom line for safety-net health systems and hospitals is that every dollar of revenue is important to keep the organization financially sound, Johnson says. "We have all kinds of challenges here. So these other nonpatient revenue streams are very important for us to maintain our financial viability."