Both nonprofits and for-profits need to generate positive operating margins, and nonprofits are becoming more like for-profits in pursuing growth.
This article appears in the July/August 2019 edition of HealthLeaders magazine. It is a sidebar to the feature story, 3 Strategic Differences Between Nonprofit and For-Profit Hospitals.
To remain financially viable, all health systems must generate a positive operating margin to reinvest in their organization, which can pose challenges to nonprofits from a mission perspective.
"There is natural tension with being a nonprofit and being able to maintain the organizational vitality to further our mission," says CFO Rob McMurray, MBA, CPA, of Wilmington, Delaware-based Christiana Care Health System.
While operating margin targets are in a "constant state of flux" depending on the capital needs of any given year, Christiana Care must generate a positive margin year to year, McMurray says.
"We know that we want to maintain a margin that will provide us with the resources to continue to invest in our infrastructure to deliver optimal services. And we need to continue to invest and develop the people who will lead us in our strategic aims as well as continue to invest in innovative tools and strategic partnerships. It requires a certain margin to do those things," he says.
The necessity to post a positive operating margin can be a hard sell to board members who are laser-focused on nonprofit status, McMurray says. However, Christiana Care's board recognizes the importance of both fulfilling the nonprofit mission and business needs. "We spend a lot of time educating the board and ensuring that we have a board with the proper level of sophistication to understand how our business strategies support our mission. It's critical."
Mary Ann Freas, senior vice president and CFO of Southwest General Health Center in Middleburg Heights, Ohio, says the financial reality of operating a hospital "muddies the water" at nonprofit organizations.
"I'm the CFO. I'm always worried about making sure we have the resources available to stay viable, to make sure we have a steady workforce, to have the ability to reinvest, and to do all the things that are necessary to maintain ourselves in perpetuity. I know that means my revenues must exceed my expenses."
"It gets fuzzy and it gets confusing trying to explain this to caregivers if I'm asking to cut their budget, or to live with the same budget they had last year. Reimbursement is not growing; if anything, it's flat or declining from year to year, so we have to become more efficient. Sometimes, it's a hard equation to articulate," she says.
Depending on patient volume, which varies from year to year, Freas says Southwest General sets an operating margin target from 2.5% to 4.0%. Meeting those targets can lead to hard choices and pointed conversations.
"Sometimes, I challenge some of the resources that clinical leaders want to bring on board. We can't be everything to everybody. There's more clarity in the for-profit world. They can say, ‘This is our business, and this is how we're going to do it.'"
Three strategies have helped Southwest General generate positive operating margins, says Freas.
First, Southwest General has a large outpatient footprint, including ambulatory facilities in Middleburg and Strongsville, Ohio, that feature physician offices and outpatient services. "That strategy has allowed Southwest to grow its outpatient revenues to a level that is nearly two-thirds of the total," she says.
Second, Freas says Southwest General's employed physician group has contributed to the organization's financial success. Third, Southwest General has made steady investments in new services such as hyperbaric wound care and outpatient physical medicine, she says.
Banking on growth
Growth has always been important at for-profit health systems because investors demand it, but growth has become equally essential at nonprofit health systems in recent years, says Paul Keckley, managing editor of The Keckley Report in Washington, D.C., and former executive director of the Center for Health Solutions at New York–based Deloitte.
"Even in a community where you are the only game in town, the declining reimbursement rates for your core services require you to find new sources of revenue to create any kind of operating margin," Keckley says.
Christopher Cheney is the senior clinical care editor at HealthLeaders.
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Whether a health system is nonprofit or for-profit, generating a positive operating margin is essential to reinvest in the organization.
The necessity to post a positive operating margin can be a hard sell to board members at nonprofit health systems.