July 13, 2021

Ken’s Blog: Being A Not-For-Profit

Big Picture

As a not-for-profit, balancing our margin and mission is necessary to serve the needs of our communities. Every now and then, I get asked about how an organization our size can be considered a not-for-profit. So let’s break down who we are, how we’re structured, and why that matters.

Not-for-profit

CentraCare is a 501c3 organization. What does that mean? Every American company has a legal structure that determines who owns the company, what the overall purpose of the company is and whether that purpose qualifies the company to be tax exempt from certain types of taxes. In general, organizations can be lumped into one of two groups: for-profit or not-for-profit:

• For profit: These organizations are owned by individuals or shareholders. The goods and services sold have a financial benefit directly back to the owners. Examples of for-profit organizations would be Home Depot, lawyers, doctors, family farms, small businesses, etc. Sometimes, the owners are individual people, while others are owned by partners or shareholders of the company.
• Not-for-profit: These organizations exist for a common good specifically spelled out in the tax code. No single individual or group of shareholders owns them and they are not owned by a group of partners either. Like for-profits companies, they have a board of directors with accountability for the direction of the organization. Examples include charities, churches, United Way, MN Orchestra, Boy Scouts, CentraCare, etc.

How this works

CentraCare is a large, complex, not-for-profit 501c3 organization. Here’s an overview of our structure and how it works:

• Since we do not have “shareholders” who own us, we serve our public stakeholders, which include communities, patients, consumers, providers, employees, staff, etc. 
• The overall direction of the organization is established by the Board of Directors which is comprised of community members (15 voting members). These board members reflect our diverse community and include bankers, nurses, doctors, accountants, farmers, teachers, etc. They are chosen by a Governance Committee approved by the entire Board of Directors.
• Our board is self-perpetuating, which means they are their own boss and accountable to the law and their own bylaws (rules) to keep CentraCare serving the community into the future. They can serve up to three, three-year terms and they’re accountable to our stakeholders.  The CentraCare Board establishes the overall guidance of the organization and the CEO of CentraCare reports to the Board. The board meets five times a year with frequent committee meetings as well (e.g., Executive, Finance, Investment, Governance, Audit/Corporate, and Compensation committees). Since CentraCare is held in public trust, there are no shares held by board members or executives.
• Since CentraCare has several different, but related entities, there are other operating committees/boards that fall under the overall guidance of CentraCare. This includes our regional sites, Carris Health, St. Benedict’s, St. Cloud Hospital, etc. There are nearly 30 entities that are a part of CentraCare.
• As a 501c3, we pay a lot of taxes and are heavily regulated and scrutinized by State and Federal agencies, public “watchdogs”, and news media.

Profit and loss

So all of us who work for CentraCare are employed by a not-for-profit 501c3 organization.  All the services and goods that we provide for our patients, communities, employees fall under this structure.  We exist to serve the broad needs of our stakeholders and community, and the IRS confirms our not-for-profit status because we exist for the sake of the public good. 

All of us who work for CentraCare are employed by a not-for-profit, 501c3 organization.

Despite our not-for-profit 501c3 status, we need to make an operating margin for reinvestment to carry out our mission. This is our version of “profit” (revenue-expenses = profit, or margin). The operating margin each year has two basic components: 

1. Profit/loss from our core operations (surgery, clinic visits, patient care, etc.). This is called our net operating margin and we aim for a margin between 2-4%. This allows us to demonstrate to our stakeholders that we are achieving our mission and are financially stable. Here is the complex part – CentraCare is made up of hundreds of smaller entities and programs. Some are “profitable” and others require investment, but they are all important to the whole of what we do, every day. We are always evaluating the performance of the many entities of CentraCare as we pursue our Quadruple Aim objectives.
   • Our total revenue from all entities is approximately $1.9 Billion (almost all of it related to patient care). Our expenses include two large bins: 60% goes to wages/salaries; 40% goes toward “stuff” (drugs, buildings, medical supplies, electricity, mortgage payments and interest (yes, we do borrow money!).
2. Profit/loss from investment returns. We have investment reserves (just like you have a savings account or retirement plan) that accumulate over time. These returns are typically positive, but as we saw last year, they can fall precipitously. This is called our investment income. The combination of net operating margin plus investment income is our total operating margin (profit). 

Together with our leaders, the board of directors and board committees, we establish strategic and operational goals for CentraCare each year. Each goal is meant to serve our community and our purpose: To listen then serve, to guide and heal – because health means everything. So while CentraCare generates significant revenue, that money is meant ensure we can continue serving an even greater purpose. Thank you for your work, your time, and attention to making that possible every day.

To learn more about the role of CentraCare’s Board of Directors and the efforts to balance mission and margin, check out this video podcast discussion featuring Ken Holmen, MD and Steve Laraway, CentraCare Board Chair: