Reserves Are Essential for the Financial Survival of Nonprofit Hospitals

Significant financial reserves are required to support the day-to-day operations of nonprofit hospitals. For many years, the financial reserve requirements were partially accommodated by the period interim payment (PIP) procedure under the Medicare program. But, with the implementation of the Prospective Payment System (PPS) for Medicare inpatients, PIP was replaced with a delayed payment mechanism based on diagnosis-related groups (DRGs). Nonprofit hospitals must have their own financial reserves to support operations while waiting for payment from diverse third-party payers. Donations, contributions, gifts and transfers assist in establishing reserves, but a 5 percent return on net patient revenue is essential for maintaining a financially viable nonprofit hospital.