5 Surprising Truths About How Nonprofits Are Actually Funded

Have you ever looked up a nonprofit's tax form, seen a revenue figure in the millions, and wondered where all that money really goes? Maybe you’ve heard someone claim a local charity is "keeping 97% of donations" and felt a sense of skepticism or confusion. It’s a common reaction, but it’s often based on a fundamental misunderstanding of how modern community healthcare services are funded.

The numbers on a tax document rarely tell the whole story. What looks like a massive pile of public donations is often something entirely different: a complex, highly regulated, and performance-based system of contracts and grants.

This article will reveal the surprising reality behind those figures by breaking down five counter-intuitive truths about nonprofit funding. We’ll clarify what’s really happening with Medicaid contracts, healthcare grants, and community services funding to demystify the system designed to support our most vulnerable neighbors.

1. That "$800,000 in Contributions" Isn't from Donations

The first and biggest source of confusion starts with a single line on a nonprofit's tax form (the Form 990): "contributions and grants." This label is deeply misleading. For many health and human service organizations, the vast majority of that money comes from payments for Medicaid services through programs like Washington State's Foundational Community Supports program, contracts with healthcare systems like Kaiser Permanente, and other government-funded initiatives.

This is not a pool of unrestricted donations that can be used for any purpose. It is restricted contract revenue paid for the delivery of specific, documented services to eligible individuals. These contracts are governed by strict federal rules, such as 2 CFR 200, which mandates specific practices like accrual accounting, separation of duties, and board oversight. Many of these contracts also include explicit caps on administrative costs, often limiting them to just 10-15% of the total funding.

So when someone says "they're profiting off 97% of donations," they're mixing up two completely different things: restricted contract revenue that's unit-billed and audited, and small unrestricted community donations that might be only 5% of the total revenue.

Understanding this distinction is crucial. It shifts the entire frame from one of charitable giving to one of a formal, accountable service delivery system where organizations are paid for the work they do, not just given money to do good.

2. High Personnel Costs Mean the Program Is Working

Another common point of confusion is seeing a large portion of a nonprofit's budget go toward personnel costs. "Why are salaries so high?" is a frequent question. The answer is simple but counter-intuitive: in people-based care models, salaries are not overhead; they are the program service itself.

The "service" these organizations deliver is the time, expertise, and relationship-building provided by their staff. It’s the peer specialist with lived experience spending an hour helping a client navigate a complex housing application. It's the community health worker navigating Medicaid enrollment and coordinating transportation to medical appointments. It’s the employment specialist providing on-the-job coaching during the first week of employment to ensure someone succeeds in their new role. This human-to-human work is the core of the program.

In a people-based care model, salaries are the program. The service is staff time.

This model is essential for delivering services that address complex social and health issues. Building trust with someone who has been chronically homeless or is navigating recovery from addiction takes time and consistent, professional support. High personnel costs don't mean money is being wasted; they mean the organization is investing its resources directly into the human intervention that creates change.

3. Every Dollar Is Earned in 15-Minute Increments

To receive payments under programs like Apple Health (Washington State's Medicaid program), an organization must first enroll as an official Medicaid provider. From there, the process for earning revenue is incredibly rigorous and accountable.

Staff must document their work in 15-minute units. These billable activities can include anything from housing search and landlord outreach to job development, interview preparation, and tenancy stabilization. For example, an hour spent helping a client secure a lease for a new apartment becomes four billable units. Each of those units must be meticulously documented before a claim can be submitted. The documentation must include the client’s information, the date and time, the specific activity performed, and a clear explanation of how that activity connects to the client’s official care plan. Only then can a claim be submitted under a specific Medicaid code.

This meticulous, time-based billing is why personnel costs are the core of the program, as we saw in the previous section. The system is designed to pay for one thing: a trained professional's documented time spent helping someone.

The fundamental rule of this system is absolute:

No documented service equals no billable claim.

Furthermore, the payment rates for these services are not set by the nonprofit. They are established by the state and are subject to regular monitoring and audits. This ensures that every dollar of public funding is tied directly to a proven, documented service delivered to an eligible person.

4. These Programs Are Designed to Save Public Money

The rise of programs that fund Health-Related Social Needs (HRSN)—which emerged from state-level initiatives like Washington's 1115 Medicaid Transformation Project 2.0—isn't just about providing better care; it's about being fiscally responsible. The premise is simple and evidence-based: it is far more expensive to repeatedly treat people in crisis than it is to address the root causes of their health issues.

An illustrative example makes the math clear: a single emergency room visit for a health crisis caused by homelessness can cost $1,200, whereas providing three months of supportive housing services to prevent that crisis might cost $900. By funding supports like housing navigation or transportation to appointments, the state is making a strategic investment.

This principle of accountable, preventative care extends to new initiatives like Washington’s Community Health Worker Medicaid benefit, launched in 2025, which also operates under a system of defined codes and documentation. The state invests in these integrated care models because they work. By helping people achieve stability, these programs reduce long-term costs for taxpayers, decrease the strain on emergency systems, and address the health inequities that hold communities back.

5. The Positive Results Are Proven by Independent Data

The success of these models isn't just a hopeful theory; it is measured and verified by independent evaluations. This data provides objective proof that the investment is paying off.

A key example is the Kaiser Permanente evaluation of Love Overwhelming's intensive community services program. The evaluation documented concrete, measurable outcomes for people who were experiencing chronic homelessness. The results included:

• Successfully housed people experiencing chronic homelessness in a housing market with a vacancy rate of 0.8%.
• Reduced the risk of people sleeping outside by approximately 50%.
• Decreased utilization of hospital emergency departments.
• Led to a decrease in arrests.
• Increased people's access to necessary medical, dental, and mental health care.

These are the exact results that health systems and Medicaid are paying for. The data shows a clear return on investment: healthier people, more stable communities, and a reduction in the use of costly emergency services. This evidence is what sustains and justifies the funding for these critical programs.

Conclusion

What appears as a single, perhaps suspicious, number on a tax form is actually the result of a complex, highly regulated, and evidence-based system of care. It’s a system where restricted public and private contract funding is directly tied to meticulously documented services.

This model is designed to produce measurable, positive outcomes for individuals and the community as a whole—reducing the strain on emergency systems, saving public money, and helping people achieve the stability they need to lead healthier lives.

Now that you see the system behind the numbers, how does it change the way you think about the role of nonprofits in community health?