Dive Brief:
- Nonprofit giant Cleveland Clinic posted operating revenue of $3.1 billion in the third quarter, up 13% year over year as net patient revenue swelled on an influx of patient activity. The Ohio academic medical center's topline was also helped by higher outpatient pharmacy revenue, as utilization of outpatient and specialty drugs increased.
- Many systems reported expense growth sharply outpacing revenue growth in the quarter ended Sept. 30. Cleveland Clinic didn't buck the trend but mitigated it slightly, as expenses grew 14% year over year to $2.7 billion, with higher patient volumes requiring greater spend on staff and supplies.
- Cleveland Clinic's operating income bumped up slightly to $148 million, though its operating margin of 4.8%, compared to 4.9% same time last year, stayed relatively stable. However, milder investment returns resulted in the nonprofit reporting net income of just $422 million, down 30% year over year.
Dive Insight:
In March 2020, S&P revised its outlook for the U.S. nonprofit healthcare sector from stable to negative due to the threat of the COVID-19 pandemic. The ratings agency changed it back to stable in June this year due to revenue recovery and balance sheet stability, in a bright spot for the industry.
However, pandemic pressures weighed heavily on nonprofits in the quarter ended Sept. 30, as spending drove down operating incomes for systems like Providence Health, CommonSpirit and Kaiser Permanente, which shelled out more on overtime and staffing agencies, pharmaceuticals and medical supplies to respond to increased volumes.
The trend was common but not universal: Minnesota-based Mayo Clinic is an outlier, reporting a robust operating margin of 8% as revenue growth kept well above costs.
Cleveland Clinic operates 19 hospitals and a number of outpatient and ambulatory surgery centers, along with physician offices. Its network is most concentrated in northeast Ohio and Florida, though the system also operates centers in Toronto, Las Vegas and Abu Dhabi.
The highly infectious delta variant strained many hospital operators including Cleveland Clinic in the quarter, with many reporting a renewed surge in hospitalizations. Cleveland Clinic saw its daily admissions peaks in December, though the system elected to resume most nonessential surgeries in January.
The summer surge was particularly acute in the nonprofit's Florida region, where the system elected to continue some restrictions on nonemergent procedures and outpatient care to allow for adequate staffing and bed capacity.
Although most nonessential services resumed, patient levels have yet to return to budgeted levels, Cleveland Clinic management disclosed. But the system reported healthier patient activity in the third quarter of 2021 as compared to the same time last year.
Inpatient admissions were up 11%, patient days up 18% and emergency room visits up 26% year over year. Outpatient surgeries were also up 14%, though inpatient surgeries trended down by 2.1%.
But expenses also grew, with salaries, wages and benefits up 14% in the quarter as Cleveland Clinic brought on more employees, both full-time and temporary, to provide adequate staffing for the surge. Supplies expense and pharmaceutical costs also increased, by 9% and 12%, respectively.
Though the summer surge mitigated in September, experts are wary of another seasonal increase in cases in the winter months as the weather and holiday celebrations cause more people to congregate indoors. In a bid to prevent that outcome, the FDA greenlit boosters to all adults one week before the Thanksgiving holiday.
In its third-quarter results, Cleveland Clinic said it expects COVID-19 to continue pressuring its operations in various areas. The system expects COVID-19 to contribute to significant cost pressure in the payer environment due to decreased commercial insurance and increased reliance on government programs; suppressed patient volumes resulting in more services being delivered in low-cost settings, such as virtual or in-home care; greater competition for physicians; and workforce attrition as a result of low patient volumes.
That latter concern has been in the spotlight as nonprofit and for-profit systems alike report acute labor strains and employee turnover, as workforce unrest and burnout bubble to 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 contract agreement.
Cleveland Clinic also disclosed it had renegotiated contracts with payer giant UnitedHealthcare, which is the largest private insurer in the U.S covering some 50.4 million people. The two reached an agreement in October, meaning the system will remain in-network for UnitedHealthcare's Medicare Advantage, Medicaid and employer-sponsored plans in Ohio, Florida and Nevada.
Losing UnitedHealthcare's contract would have been a blow to the system: In 2020, UnitedHealthcare made up roughly 11% of Cleveland Clinic's net patient service revenue.