Dr. Marc Gorelick, president and CEO, progressive pediatrics blog

Nonprofit health systems: what's good to know

The headline of a recent Star Tribune editorial summed it up well: “Vital signs poor at Minnesota hospitals.” Yes, many hospitals in our state and around the country are struggling. Federal COVID-19 funds helped. But those are now ending, and hospitals are seeing operating losses. There are many reasons for this, and the editorial reviews those in more detail, as well as possible solutions. It’s an important discussion to have. Our hospitals and health systems must be financially sound so they can best serve patients for many years to come.  

But I’d like to back up a minute. What’s missing from this discussion are some basics. Like the fact that nearly all hospitals and health systems in our state, including Children’s Minnesota, are nonprofit. What does that mean and why does it matter? 

What is a nonprofit health system?

A for-profit health system is owned by investors. A nonprofit health system like Children’s Minnesota is “owned” by the community. We’re accountable to our community, instead of investors. So instead of making a profit for the financial benefit of those investors, we invest excess earnings back into our mission and into our community, always with the goal of improving children’s health through highest-value clinical care, research, education and advocacy. As a charitable organization, in exchange for providing a community benefit, we are exempt from many taxes. The various forms of community benefit we provide are listed in the image below, from our most recent annual report. Community benefit includes uncompensated and charity care, community health, research and education. 

The number you see listed for charity care may strike you as very low. That’s because we can only use that term to refer to providing free care to someone who has no other means of paying for it. In Minnesota, we are fortunate to have a Medicaid program that allows nearly all children with the need to be covered by insurance. However, one result is that the reimbursement rates for Medicaid are lower than the actual cost of providing that care – on average, it covers only about 70% of that cost. So, the health system must make up the difference. And because as part of our mission we do not turn anyone away, nearly half of our patients are on Medicaid. The resulting loss, which exceeds $100 million a year, is labeled as “uncompensated care.”

Why does nonprofit status matter? 

Here’s an important point to remember. Though we are nonprofit, we’re still a business. We don’t exist to make a profit for owners, but we still need to run in a financially sustainable way so we can remain open and accomplish our mission of helping children in our community to thrive.  

So it matters that many nonprofit hospitals and health systems are facing operating losses. They are a necessary counterbalance to for-profit systems whose profits go to their owners. Nonprofit systems need to be sustainable so they can continue to serve their patients, to earn a margin so they can reinvest those funds back into their mission and their communities. I’ll talk more about that margin reinvestment in another blog. Even slim margins, like what we have earned recently at Children’s Minnesota, are needed to ensure we are here for our patients and families for generations to come. 

If you’re interested in learning more, take a look at our annual report. 

Marc Gorelick, president and CEO

Marc Gorelick, MD
President, chief executive officer

Marc Gorelick, MD, is the president and chief executive officer (CEO) at Children's Minnesota. He is deeply committed to advocacy issues that impact children's health, sustainability and advancing diversity, equity and inclusion.

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Julianna Olsen