“The nature of fund-raising for District Hospitals must change with the times to encourage greater community support.” —Kelly Mather, Sonoma Valley Hospital
In a climate where changing patient trends, reduced Medicare reimbursements, Affordable Care Act disciplines and a state mandate for costly seismic upgrades are forcing small hospitals all over California to regroup and reinvent themselves, many are turning from traditional fund-raising to high-level philanthropy to stay viable and keep up with the changing role of community hospitals.
Why small hospitals are struggling
A primary change in the business model for small hospitals today has been the steady decline—nationwide—in inpatient volumes. People don’t spend as many expensive nights in the hospital as they used to. Instead, because of advanced surgical efficiencies, it’s now possible to have a total knee replacement surgery and walk out of the hospital three days later. While this is great for patients, it means less revenue for hospitals. It also presents an increased opportunity for outpatient services—which hospitals need to finance and develop.
In some communities, especially those attractive to retirees, the “payor mix” can include as much as 65 percent Medicare/Medi-Cal patients, and that number increases as their population ages. This hurts hospitals in two ways: Not only has the Medicare reimbursement rate been reduced, so that the hospital may end up bearing part of the cost of treatment, but the complexity of filing for Medicare reimbursements requires highly experienced staff, which presents a further strain on small hospital budgets. Further, disciplines imposed by the Affordable Care Act (ACA, otherwise known as “Obamacare”) to guarantee good care can mean penalties if a patient is readmitted within 30 or 90 days after discharge, depending on the original ailment. So revenue management for small hospitals can be tricky and costly.
On the side of capital expenditures, all California acute care hospitals, by state mandate, were required to undergo seismic retrofit by 2013. This represents millions of dollars in capital expenditure and, in the case of Sonoma Valley Hospital, the impetus to a nearly 10-year journey that resulted in a $46 million, state-of-the-art Emergency Care and Surgery Center. Construction was complete in November 2013 and it’s been hailed by the community as a success made possible by visionary management, community support and unprecedented levels of philanthropy. The story of how the community came together—and the manner in which the money was raised—could well become a model for future fund-raising for small, rural hospitals.
How it’s done
Before 2008, when the Sonoma community overwhelmingly passed a General Obligation Bond measure assuring the hospital the $35 million needed for the mandatory seismic retrofit, it was an open question whether the hospital, strapped for funds, would survive. Since then, both the prior and current administrations have been working to stabilize finances and create public confidence in the hospital as a key and necessary component to a healthy community—and also a worthy investment.
SVH needed an additional $11 million in capital funds to complete the new emergency and surgical centers, which, as plans developed, had become a logical and necessary addition to the retrofit construction. This was a defining moment. “We knew we had the right project for our community,” says CEO Kelly Mather, “but we were $11 million short. It was overwhelming. The need had never been so big and yet it was embraced by the board, medical staff and community.”
Bill Boerum, who was chairman of the Sonoma Valley Health Care District Board of Directors during the resulting capital campaign, explains the options Sonoma Valley and other hospitals have to bring in funds: “The approach some hospitals have taken—and that we’ve done successfully—is to have a parcel tax to offset operating losses. And that’s really what keeps the place going. Another source of money is the Sonoma Valley Hospital Foundation, which usually brings in relatively small amounts for very specific purposes, such as new equipment or beds. But when you get the large-scale projects, such as building a new wing, you need philanthropy—and by that, I mean substantial and major donors contributing much of the money.”
What motivates hospital philanthropy?
Gary Nelson, founder of the Nelson Family of Companies, who, with his wife, Marcia, in May 2012 presented Sonoma Valley Hospital with $3 million, the largest gift in its history, describes three motivations for their donation: “Our infant son was saved there 32 years ago,” he says. “We’ve never forgotten that and feel that the emergency room services need to be available 365 days per year for all of us.”
The Nelsons had been supporters of SVH for years, making regular donations to the existing emergency room. But the size and timing of this gift, which effectively launched the capital campaign to complete the new wing housing the emergency room and surgical center, is a testament to the stable leadership of the hospital through times of crisis. “[Former CEOs] Bob Kowal and Carl Gerlach and Kelly Mather all kept a vision alive: ‘Yes, we do need a new emergency room.’” When the hospital needed $11 million to finish the building, the Nelsons were ready to step up and serve as an example for others to do the same.
“I felt that the board and Kelly [Mather] were finally in a place where they could manage and operate the business effectively,” says Nelson. “Not that it’s a slam dunk now, but we have the ability to make the tough decisions—what we can and can not offer. In the meantime, maintaining the emergency services that we need, plus the operating rooms, will certainly attract physicians who want to practice here. It’s a combination of all those factors.”
The capital campaign had been carefully planned and managed by a team of professional consultants, and it took a completely different approach from the traditional foundation fund-raising activities. “It was about meeting potential donors, telling them about the plans for the future and engaging their interest and generosity,” says Boerum. “It was a one-on-one ask conducted mainly by CEO Kelly Mather. Then, those people enlisted others who were willing to tap other major donors and, in a very one-on-one way—again, very much by Kelly—generate their commitment.”
“It was an easy sell,” says Nelson. “Some people really support one nonprofit organization or another, but how can you argue against an emergency room that serves everybody? You can’t.” The motivation and the need were convincing enough that, by November 2013, they’d completed the campaign and raised the whole $11 million. The roster of donors includes the whole community, with a very high proportion of hospital employees and physicians participating.
North Bay hospitals adapt
To meet the challenges facing Palm Drive Hospital in Sebastopol, CEO Tom Harlan is guiding the hospital toward sustainability by upgrading its technology, adding a state-of-the-art electronic health records system and a 3-D mammography system, one of only two in the county. Like Sonoma Valley Hospital, Palm Drive is affiliated with Marin General Hospital, which enables it to share the services of CFO Rick Reid and call on the expertise of Marin General staff as needed. Traditionally, Palm Drive has raised funds through the Palm Drive Health Care Foundation (now called Palm Drive Hospital Foundation), an independent nonprofit, created in 1998 to purchase the hospital when the corporate owner threatened closure.
After the creation of the Health Care District, the foundation took on the role of fund-raising. In 2013, according to a statement prepared by Harlan, the foundation’s annual contributions came in at an “all time high” of $255,000. “A significantly improved and more collaborative fund development program will be essential to meet future operational and capital needs of Palm Drive Hospital,” Harlan wrote. “Philanthropy has become a basic necessity for any successful health care organization to be able to offer top-level patient care, incorporating modern facilities and up-to-date information and medical technology.”
Like Sonoma Valley Hospital, Palm Drive enlisted the services of a consultant team; the team’s report, delivered in September 2013, recommends refocusing and reorganizing Palm Drive’s fund-raising efforts. As of this writing, the recommendations are being considered by the district board and the foundation board.
Facing new realities
At Healdsburg District Hospital, CEO Nancy Schmid is working to stabilize the hospital financially and move forward to best serve the community, making the necessary improvements including state-mandated seismic upgrades.
“Our job is to figure out how to operationalize revenue and expenses, and then we have to raise funds for buildings and grounds, advancing technology and providing better health care. I believe this hospital is going to be fund-raising all the time—but we’re fund-raising for a purpose.”
Schmid’s first step, although “difficult and heartbreaking,” was an 8 percent layoff, to right-size the organization to accommodate the realities of declining inpatient volumes (as experienced throughout the country). “On a positive note, we’re experiencing an increase in outpatient volumes,” says Schmid, who continues, “We’re a small rural hospital; our goal is to break even. But we still need money for capital, so we have to go out and raise money.”
This is done through the Healthcare Foundation Northern Sonoma County, which supports organizations in Windsor, Healdsburg, Geyserville, Cloverdale and the area extending to Mendocino County.
“This community has done everything it can to value and keep the hospital. It’s just incredible,” says Schmid. “My goal is to use donations to develop better health services to serve our community and improve equipment and technology.
“I think the whole donor process has sped up as the philanthropic role continues through the generations,” says Schmid. “It used to be you developed relationships and they lasted a lifetime, but that’s changed. Some members of the younger generation want to be involved in the entire process, while others just want to learn about the project, make a decision and move forward with a donation rather than establishing lifetime relationships.”
In Napa, Queen of the Valley Medical Center, part of the St. Joseph Health system, is also dealing with the changing model of health care delivery by placing a new emphasis on philanthropy. “As hospitals are preparing for declining revenues, and greater numbers of patients are enrolled in government plans that currently don’t cover the actual cost of most services, like Medicare and Medi-Cal patients, the hospital administration is looking to philanthropy to help sustain the level and the quality of services we all expect,” says Elaine John, vice president for philanthropy at Queen of the Valley Medical Center and president/CEO of Queen of the Valley Foundation.
“Our foundation, which is a separate, nonprofit corporation, was established exclusively to raise funds to support programs, services and capital needs for Queen of the Valley Medical Center. This means philanthropic proceeds were traditionally viewed as an enhancement to the needs of the hospital rather than essential.”
This is no longer the case. “While the lion’s share of the money we raise continues to benefit capital projects, our projected revenues—funds that would specifically impact hospital programs and services—are now included in the hospital’s operating budget. So they’re counting on these funds.”
John says the community has been extraordinarily responsive in the past, and she expects it will continue to be. “I think if the community is educated about the needs of its hospitals, it will respond,” she says. “And right now, one of our challenges is educating people about the wonderful services we provide and helping them to understand why hospitals need philanthropic support.”
A highly visible result of its fund-raising success is the Medical Fitness Center, which is open to the whole community and includes a cardiac rehabilitation facility, a breast center with screening and mammography, and a full complement of services focused on wellness.
The foundation is currently completing funding (it’s achieved 84 percent of a $30 million campaign goal) for a new surgical pavilion that features six new surgical suites, including a hybrid surgery lab, a new clinical laboratory and pathology services department and 20 new ICU suites. The hospital also has a Cancer Wellness Program and deploys a lot of resources toward people who are either in active treatment or who have completed their cancer treatment, so they can rebuild their lives. (See “Targeted Treatment and Gentler Care”). The Foundation is able to fully fund this program through philanthropic support so that no one need pay to participate.
In her experience, once people understand how their investment can help the community, they want to give. “In my more than 20 years in executive leaderships in hospital foundations, I’ve found that altruism—trying to make a difference—is the donor’s primary motivation,” she says. “If you can bring potential donors up close to whatever it is you’re trying to get them to invest in, if they can perceive it as real value to the community and that it’s going to be rewarding to them personally to see it happen, that’s usually the biggest motivator.”
People don’t do it because their name is going to be on it. “For example, Timothy Herman gave $11 million for our new 72,000-square-foot diagnostic and surgical pavilion, which is opening in the spring of 2014. But we really had to work with him to let us name it the Herman Family Pavilion,” she says.
“We wanted to do that, because we felt the community would like to know that Tim had played a significant role in getting the pavilion built. He was grateful for the care the hospital had given to him and his family, and he wanted to make a difference.
“And of course, for our part, it’s always hoped that showcasing a donor’s generosity will inspire generosity from others.”
Making the shift
“The Napa Valley community is very generous,” John continues. “A wide range of services that support quality of life here are supported philanthropically—the schools, the hospitals, the arts. If the community is educated about the need and benefits of investing, it will respond.” For that to happen, she’s finding that educating people about both the hospital’s services and the challenges it faces are necessary for generating philanthropic support. “We’re trying to do that by educating our board and having community presentations on just what it takes to maintain a full-service, high-quality medical center in our region. It’s really something that should matter to everyone who lives and works here.”
To achieve their goals, she continues, the fund-raising style must change. “We’re relying much less on special events,” she says, “which are very time-intensive and expensive and the proceeds aren’t as great. We’re not going to do away with events, but I’m spending a lot more time building personal relationships with people. If you can find out what motivates them, you can connect them with the many different opportunities where they can make a difference in the hospital.”
“The nature of fund-raising for District Hospitals must change with the times to encourage greater community support,” says SVH’s Mather. “District Hospitals, such as Sonoma Valley, are very dependent upon their community for financial support in the form of bond measures and philanthropic contributions.”
“I think it all has to do with having the right people in leadership roles and making sure the people in the community know that we can do this—without the big hand of government overseeing it,” adds Nelson. “If you have the right message and the right service, people will respond. So it can be done by local people just deciding it’s something they want to do.”
“The only way to have success,” says Boerum, “is to fully engage all of the stakeholders—and all of those who should think of themselves as stakeholders—and have a wide community involvement. That’s my overall prescription. It’s the magic.”
