Children’s Minnesota is a nonprofit pediatric health system, which I explain in more detail in this blog. In other words, we’re a charitable organization. We don’t pay taxes. We’re accountable to our community instead of owners. As “nonprofit” implies, we don’t earn a profit. Money left over in a given year, after all the expenses are paid, is called a margin. Unlike a profit, a margin is not paid to owners because we don’t have any. Instead, our margin is reinvested into our mission and our community.
It may seem obvious why a nonprofit can’t lose money year after year, but why not just aim to break even? We need our margin, however slim it may be. In 2021 our margin was 1.5%. As this Star Tribune editorial recently addressed, many hospitals and health systems in Minnesota and around the country are facing negative margins.
Our margin matters
We count on our margin for several important things. The margin funds are put into reserve, and those reserves are invested. The income from those investments provides a stream of money to apply to the mission. Those proceeds, along with philanthropy from donors, can be used to fund those parts of our operation that lose money, the many services that are essential to caring for kids but for which we do not get paid at all, and our community benefit. These reserve savings also give us the ability to fund capital projects. Just like families try to save money for when they need to replace their car or do home repairs, we need to put aside money to maintain our equipment and facilities. In any given year, we need to reinvest around $30-50 million in capital for things like replacing monitors and pumps, refurbishing clinical spaces or installing the latest lab and imaging equipment. And for large projects, such as major equipment or buildings, we would need to borrow the money by issuing debt in the form of bonds. It’s not too different from taking out a mortgage to buy a home. And if you’ve ever applied for a mortgage, you know that the banks look at your income and your savings to determine if you qualify. Similarly, bond rating agencies expect nonprofit hospitals to have a certain margin and a certain amount of reserves. Finally, the reserves also help us weather unexpected storms, like the COVID-19 pandemic.
Optimize vs. maximize
Another difference between the profit in an investor-owned company and a non-profit margin is that we don’t necessarily aim to maximize our margin. We seek to optimize it. It may seem counterintuitive why a nonprofit can’t simply break even each year or aim for a very small positive margin. But the fact is that over time, the value of our organization would erode without the necessary reinvestment. So we aim for a margin that allows us to keep up with the declining value of our facilities and equipment, and that allows us to maintain our ability to borrow when we need to. Based on those considerations, we’ve calculated our target range at 3-5%.
In short, having a positive margin is what allows us to stay in business. It’s what ensures that as we approach 100 years of serving this community and improving children’s health, we can continue doing so for the next 100 years. Or as the old saying goes, no margin, no mission.
If you’re interested in learning more, take a look at our most recent annual report.