Medicaid-funded tax-exempt organizations are facing a very tumultuous time. There can be a temptation to only focus on “how do we survive if/when there are cuts to Medicaid?” While this is both an understandable and often necessary conversation to have, there are also opportunities. The following items will address both the question of “how do we survive?” as well as “how can we thrive?”
1. Diversify Revenue Sources
Reduce dependence on Medicaid by expanding:
- Foundation and government grants
- Individual giving programs
- Major donor cultivation
- Corporate partnerships and sponsorships
- Fee-for-service offerings
- Fundraising events
The most obvious benefit is that the less reliant an organization is on Medicaid funding, the less vulnerable it will be to reductions in that funding. However, diversification is often easier said than done. Tax exempt organizations frequently compete with many other organizations for the same donor dollars and grant opportunities. Building meaningful relationships with donors, foundations, and other funding sources takes time, consistency, and investment. As a result, the full benefits of these strategies are often not realized for several years, making them important long-term initiatives rather than quick solutions to immediate funding challenges.
2. Build Operating Reserves
Create a reserve fund that can support operations during revenue disruptions.
- Target 3 to 6 months of operating expenses
- Establish board-approved reserve policies
- Reinvest any annual surpluses into reserves
This is another recommendation that is much easier said than done and often comes with its own set of challenges. Building reserves can be difficult if an organization is not generating operating surpluses. In addition, programs funded through a cost reimbursement model generally do not provide opportunities to accumulate reserves. For programs with rates based on actual costs, there can be pressure to maintain, or even increase, spending to preserve future reimbursement rates. Despite these challenges, maintaining reserves equal to at least three to six months of operating expenses can provide a valuable financial cushion, helping organizations weather funding disruptions, including potential Medicaid or other funding cuts.
3. Improve Operational Efficiency
Conduct a comprehensive review of costs and workflows.
- Streamline administrative processes
- Automate repetitive tasks
- Optimize scheduling and staffing
- Consolidate vendors and purchasing
Improving operational efficiencies is one of the strategies that can be both relatively low-cost to implement and highly beneficial over the long term. When implemented thoughtfully, efficiencies can reduce overhead costs while preserving resources for direct services. In addition, every hour saved through a more efficient process can be redirected to higher-value activities. In program operations, this can translate into additional direct care hours, increasing both service capacity and billable revenue.
4. Strengthen Data & Outcomes Reporting
Funders increasingly support organizations that can clearly demonstrate impact.
- Develop outcome dashboards
- Track client improvements
- Quantify cost savings generated by programs
- Publish annual impact reports
While this can be a costly endeavor, it doesn’t have to be with the abilities of AI and other technology. This also goes hand in hand with improving operational efficiencies. How do you know what to improve without knowing how each of your programs are performing? In addition to helping identify operational improvements, having reliable data can enhance an organization’s credibility with funders and donors by demonstrating strong performance, informed decision-making, and responsible stewardship of resources.
5. Conduct Scenario Planning
Prepare for multiple funding reduction scenarios.
- Model 5%, 10%, 15%, and 20% Medicaid cuts
- Assess impacts on programs, staffing, and cash flow
- Identify trigger points for action
Knowing the financial impact of various funding cut scenarios allows an organization the ability to plan its response to various scenarios in advance. For example, a 5% reduction may be manageable without significant changes, while a 10% reduction could require more substantial action. By modeling these scenarios ahead of time, organizations can make informed decisions and avoid the uncertainty and urgency that often accompany unexpected funding cuts.
6. Advocate & Build Coalitions
Work with industry associations and peer organizations to influence policy.
- Engage legislators regularly
- Share client outcome stories
- Participate in statewide (and potentially national) advocacy efforts
- Educate community stakeholders
Remember the phrase “there is power in numbers” and that is never more evident than in politics and policy making. Ensure your community, lawmakers, funders, and other stakeholders understand the value your organization provides and its impact on the individuals, families, and the community as a whole.
7. Develop Strategic Partnerships & Shared Services
Collaborate with other nonprofits and providers.
- Share administrative functions
- Pursue joint grant applications
- Coordinate referrals and care management
- Explore mergers or affiliations when appropriate
Consider opportunities to share services, collaborate, merge, or affiliate with other organizations. Larger organizations may be able to leverage administrative capacity to support others, while smaller organizations can reduce costs by sharing resources such as compliance, HR, or finance personnel. These arrangements can improve efficiency and strengthen long-term sustainability for all parties involved.
8. Invest in Workforce Retention & Flexibility
A stable workforce is critical during periods of financial uncertainty.
- Cross-train employees
- Assess employee morale
- Develop succession plans
- Enhance retention efforts
- Increase use of flexible staffing models
Investing in your workforce does not always require significant spending. While increased compensation and benefits can improve retention, those costs should be weighed against the high cost of employee turnover, including lost productivity, reduced service capacity, and replacement expenses. Organizations can also make low-cost investments, such as cross-training, flexible staffing models, and succession planning, which can strengthen operations and improve long-term sustainability.
Bonus: Board-Level Focus Areas
To monitor preparedness, boards should regularly review:
- Medicaid revenue concentration (% of total revenue)
- Days cash on hand
- Operating margin
- Program profitability by service line
- Staff turnover rates
- Grant pipeline and fundraising performance
- Payer mix diversification
- Legislative and reimbursement trends
Keeping your board informed about the organization’s challenges enables it to better support leadership, align around strategic priorities, and help ensure key initiatives are successfully implemented. Organizations with strong leadership alignment and governance are better positioned to navigate Medicaid reductions, maintain critical services, and emerge stronger from the experience.
If you have any questions or are interested in learning more, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
