Mayo sees profit margin fall amid spending on technology, expansion

The Mayo Clinic loosened a tight grip on expenses last year with spending on technology and expansion efforts that markedly eroded its profit margin. Executives said the outlays would position the health system to thrive amid changing markets and health policy.

Mayo Clinic, based in Rochester, Minn., ended last year with a margin of 4.5% with operating income of $395.4 million on revenue of $8.84 billion. That's a drop of roughly one-third compared with the health system's operating income of $610.2 million on revenue of $8.32 billion the prior year, or a margin of 7.5%.

Mayo Clinic's investments come at a time when hospitals and health systems are squeezing operating expenses in response to a weak economy, sluggish growth in demand for hospital care and payment cuts from private and public insurers.

Dr. John Noseworthy, Mayo Clinic president and CEO, said the system's investments would better prepare Mayo for changes under health reform. But the system has also halted roughly one-fifth of its planned projects in response to projections that show Mayo Clinic will be paid roughly 20% to 40% less for services in the next five years, he said.

Shirley Weis, Mayo Clinic vice president and chief administrative officer, said last year's strategic investments by Mayo were in information technology and startup costs for its Mayo Clinic Care Network and research centers in healthcare delivery, genetics and regenerative medicine.

Weis said continued investments will keep expenses growing faster than revenue through this year.

Mayo Clinic's expenses increased 9.6% last year to total $8.44 billion and outpaced its accelerating revenue growth of 6.3%. Mayo Clinic's revenue last year totaled $8.8 billion. Revenues grew more modestly in the three prior years, but also more quickly than expenses. Mayo Clinic sharply curbed spending after the system broke even in 2008.

Noseworthy said the health system has signed 14 organizations that may seek consultations with Mayo Clinic specialists and refer patients under its care network. He said the system expects to sign another 10 organizations this year to the network, which Noseworthy described as an alternative to consolidation efforts under way among other healthcare providers.