Weak investment markets cause Cleveland Clinic revenue to drop 30%

Diving Brief:

  • Nonprofit giant Cleveland Clinic reported operating revenue of $3.1 billion in the third quarter, up 13% year-on-year as net patient income swelled due to an influx of patient activity. Revenue at the University of Ohio Medical Center was also boosted by rising outpatient pharmacy revenue as the use of outpatient and specialty medications increased.
  • Many systems reported expense growth significantly outpacing revenue growth in the quarter ended Sept. 30. The Cleveland Clinic did not reverse the trend, but moderated it slightly, with spending up 14% year-over-year to $2.7 billion, with higher patient volumes requiring higher expenses for personnel and supplies.
  • Cleveland Clinic’s operating profit edged up to $148 million, although its operating margin of 4.8%, from 4.9% in the same period last year, remained relatively flat. However, weaker investment returns resulted in the nonprofit’s net income of just $422 million, down 30% year-over-year.

Overview of the dive:

In March 2020, S&P revised its outlook for the US nonprofit healthcare sector from stable to negative due to the threat of the COVID-19 pandemic. The rating agency cut it back to stable in June this year on the back of recovering earnings and balance sheet stability, in a positive for the industry.

However, pandemic pressures weighed heavily on nonprofits in the quarter ended September 30, as spending dented operating revenue from systems such as Providence Health, CommonSpirit and Kaiser Permanente, which disbursed more overtime and recruitment agencies, pharmaceuticals and medical supplies to meet increased volumes.

The trend was common but not universal: Minnesota-based Mayo Clinic was an exception, reporting a strong operating margin of 8% as revenue growth remained well above costs.

The Cleveland Clinic operates 19 hospitals and a number of ambulatory and outpatient surgery centers, as well as medical offices. Its network is most concentrated in northeast Ohio and Florida, although the system also operates centers in Toronto, Las Vegas and Abu Dhabi.

The highly infectious delta variant put a strain on many hospital operators, including the Cleveland Clinic during the quarter, with many reporting a further increase in hospitalizations. The Cleveland Clinic saw its daily admissions peak in December, although the system opted to resume most non-essential surgeries in January.

The summer surge was particularly acute in the Florida nonprofit region, where the system opted to maintain some restrictions on non emergent procedures and outpatient care to allow for adequate staffing and bed capacity.

Although most non-essential services have resumed, patient levels have not yet returned to budgeted levels, Cleveland Clinic management revealed. But the system reported healthier patient activity in the third quarter of 2021 compared to the same period last year.

Hospitalizations increased by 11%, patient days by 18% and emergency department visits by 26% year over year. Outpatient surgeries also increased by 14%, although inpatient surgeries fell by 2.1%.

But spending also rose, with wages, salaries and benefits rising 14% in the quarter as the Cleveland Clinic hired more staff, full-time and temporary, to provide adequate staffing for the ramp-up. . Supply costs and pharmaceutical costs also increased, by 9% and 12% respectively.

Although the summer surge eased in September, experts are wary of a further seasonal increase in cases during the winter months as weather and holiday conditions force more people to congregate indoors. In an effort to avoid this outcome, FDA boosters lighted all adults a week before the Thanksgiving holiday.

In its third-quarter results, the Cleveland Clinic said it expects COVID-19 to continue to pressure its operations in various areas. The system expects COVID-19 to contribute to significant cost pressure in the payer environment due to reduced commercial assurance and increased reliance on government programs; removing patient volumes, resulting in more services being delivered in low-cost settings, such as virtual or home care; greater competition for physicians; and workforce attrition due to low patient volumes.

This latter concern has been in the spotlight as both not-for-profit and for-profit systems report acute labor tensions and staff turnover, as labor unrest and the burnout are at the fore after more than a year and a half of COVID-19. Kaiser narrowly avoided what would have been a historic strike earlier this month when union members and management reached a tentative agreement.

The Cleveland Clinic also revealed that it had renegotiated contracts with paying giant UnitedHealthcare, which is the largest private insurer in the United States covering some 50.4 million people. The two reached an agreement in October that means the system will remain networked for UnitedHealthcare’s Medicare Advantage, Medicaid and employer-sponsored plans in Ohio, Florida and Nevada.

The loss of the UnitedHealthcare contract would have been a blow to the system: in 2020, UnitedHealthcare accounted for about 11% of Cleveland Clinic’s net patient services revenue.