Friday, August 21, 2009

Nonprofits: Size DOES matter!

Staying with my theme of ways to differentiate and better understand the nonprofit market, let's look at important differences in size, specifically revenue and assets. A surprising percentage of nonprofits in the U.S. are actually quite small.

As an illustration, Duke University Health System in Durham, NC has net assets of $1.7 billion while Senior PharmAssist, also in Durham, has a little over $450,000 in net assets.

So what are some key differences between these two organizations that helps account for these huge differences? Duke is like any other health system - its primarily source of revenue is earned income - third party payments (private insurance, HMOs, Medicare, Medicaid) and patient fees (copayments, coinsurance and deductible amounts). It is operationally very similar to any other health care system, non OR for profit, except that its profit margins are a tad less than for profits (but not much).

Conversely, Senior PharmAssist meets a more "classic" definition of a nonprofit as an entity doing something thoroughly charitable - helping lower income older adults with their prescription medication needs - and raising contributed income to help fund it (donations, grants).

I would argue that Duke is only "partially" charitable in the truest sense of the word. The part of their business that involves a range of community health programs fits what most of us think when we say "charitable" as does their charity care program (which it doesn't like to advertise too broadly) and of course their role as an academic health care entity. Otherwise, it looks and acts like a for profit health care corporation, particularly wiht executive compensation.

Conversely, Senior PharmAssist has no for profit counterpart because it is meeting "needs", not market "demands".

Why does this matter? When we talk about the financial challenges confronting nonprofits, certain nonprofits like Duke have far greater economic resilience than nonprofits like Senior PharmAssist. From a public policy standpoint, we should really be looking out for the Senior PharmAssists out there, unless they happen not to be making impact (which is definitely not the case with Senior PharmAssist).

Also, in public policy discourse, we need to talk about gradations of "charitable" purpose. Duke and Senior PharmAssist both fit in the same IRS category of "public charities", but clearly only one of these acts thoroughly charitable.

In fact, this is an impending discussion on the Senate Finance Committee - re-examining legislative intent under Section 501c of the Internal Revenue Code, which hasn't been done in about 40 years! Of course, SFC has their hands full right now with fixing (or not) our health care system, so don't hold your breath...

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