Research by Kaufman Hall created for the American Hospital Association states that financial reserves are essential for not-for-profit hospitals and health systems to maintain their operations and serve their communities. The report emphasizes that financial reserves enable these institutions to invest in new technologies, cover operating expenses, borrow at affordable interest rates, and remain available to communities. With year-to-date median operating margins in negative territory, the report argues that financial reserves are more important than ever as not-for-profit hospitals and health systems face surging labor and supply costs, investment losses, and other challenges.
In recent years, not-for-profit hospitals and health systems have been facing challenging operational and financial headwinds. Financial reserves have become increasingly important for these institutions to continue serving their communities. According to recent research by Kaufman Hall for the American Hospital Association (AHA), financial reserves help struggling not-for-profit hospitals and health systems make crucial investments, borrow money at reasonable interest rates, pay operating costs, and continue serving their communities.
The report emphasizes the significance of financial reserves, particularly during 2022, when year-to-date median operating margins for not-for-profit hospitals and health systems remained in negative territory throughout the year. More than half of the hospitals providing data for Kaufman Hall’s monthly National Hospital Flash Report ended the year with negative operating margins and have not seen an improvement as they move into 2023. Some of the nation’s largest not-for-profit health systems experienced net losses in 2022 well above $1 billion, with some cases approaching $2 billion.
In a commentary written for Fierce Healthcare, Ashley Thompson, senior vice president for public policy analysis and development at the AHA, and Lisa Goldstein, senior vice president at Kaufman Hall, addressed the report’s components.
The Importance of Financial Reserves
Not-for-profit hospitals and health systems play a critical role in providing healthcare services to underserved populations, including those who are uninsured or underinsured. Unlike for-profit healthcare organizations that focus on shareholder value, not-for-profit hospitals prioritize serving their communities. However, not-for-profit hospitals and health systems operate under financial constraints due to lower reimbursements from public and private insurers and the high cost of medical supplies and equipment.
Financial reserves provide not-for-profit hospitals and health systems with the ability to address their operational and financial challenges and continue providing critical care to their communities. Financial reserves are a source of capital that not-for-profit hospitals can use to finance operations, investments, and strategic initiatives without relying on debt financing. By building financial reserves, not-for-profit hospitals can weather financial downturns and maintain the necessary resources to provide essential healthcare services.
The report identifies several reasons why financial reserves are crucial for not-for-profit hospitals and health systems, including:
- Covering Operating Expenses: Financial reserves allow not-for-profit hospitals and health systems to cover their operating expenses, including salaries, medical supplies, and equipment, without compromising patient care. Financial reserves also help hospitals avoid cutting costs in areas that would negatively impact patient care.
- Investing in New Technologies: Financial reserves enable not-for-profit hospitals and health systems to invest in new technologies and equipment that improve patient outcomes and experience. These investments can include upgrading electronic health records systems, implementing telemedicine programs, or purchasing new medical equipment.
- Borrowing at Affordable Interest Rates: Financial reserves provide not-for-profit hospitals and health systems with a source of capital that can be used to borrow at affordable interest rates. With financial reserves, hospitals can secure favorable loan terms and avoid high-interest debt financing.
- Remaining Available to Communities: Financial reserves allow not-for-profit hospitals and health systems to remain available to their communities, particularly in rural and underserved areas. Without financial reserves, hospitals may need to reduce services or even close, leaving their communities without access to essential healthcare services.
