Anyone unfamiliar with the financial structure of not-for-profit hospitals and health systems may question why these organizations carry often significant financial reserves on their balance sheets. The answer is straightforward: with limited sources of funding, hospitals and health systems rely on financial reserves to maintain their financial stability and support their growth. These reserves ensure that hospitals and health systems can continue to serve their communities through good times and bad and can continue to invest in the highly skilled professionals and lifesaving technologies that define modern healthcare.
Many hospitals and health systems today are relying on the strength of their reserves to navigate a difficult environment; without these reserves, they would not be able to meet their expenses and would be at risk of closure. Financial reserves, in other words, are serving the very purpose for which they are intended—ensuring that hospitals and health systems can continue to serve their communities in the face of challenging operational and financial headwinds. When these headwinds have subsided, rebuilding these reserves should be a top priority to ensure that our not-for-profit hospitals and health systems can remain a vital resource for their communities.
This report looks, first, at the primary functions within the financial structure of not-for-profit hospitals and health systems and the role these functions play in generating financial reserves. It then looks at the significance of financial reserves in credit management efforts and in serving as a buffer in times of operational disruption or financial distress.
This report was prepared at the request of the American Hospital Association.