Cleveland Clinic's operating margin dropped significantly in the first half of this year after the academic health system felt the squeeze from rising drug prices and labor costs as well as treating patients with high-deductible health plans.
Lower reimbursement from Medicare, Medicaid and commercial insurers also pressured the not-for-profit system, said Steve Glass, Cleveland Clinic's chief financial officer. Cleveland Clinic ended the first six months of 2016 with a 1.2% operating margin (PDF), compared with a 5.6% mark during the same time last year.
Glass said Cleveland Clinic expected a smaller margin this year, especially as it made more investments in new care-delivery models, such as its Medicare accountable care organization. Hiring consultants to help design those projects added to the system's expenses.
But a handful of issues continued to have an outsized financial impact. Cleveland Clinic has detailed the challenges of high-deductible plans candidly in its financial statements over the past several years. People pay lower monthly premiums in those types of plans, but they have to pay more upfront if they seek care, often $2,000 or more before insurance kicks in.
High-deductible plans are the dominant options in the Affordable Care Act marketplaces, and more companies are raising deductibles for their employees as well. Hospital systems like Cleveland Clinic have noticed that sometimes detrimental effects can follow.
“They are very popular with employers and insurance companies, but they create burdens on the patients,” Glass said. “And it's very difficult for healthcare providers to get these deductibles collected.”
Pharmaceutical costs also have plagued the hospital industry. The price of EpiPens and the practices of Turing Pharmaceuticals and Valeant Pharmaceuticals International have sparked national outrage and led to multiple congressional hearings.
But those drugmakers are not the only ones that have hiked their prices heavily over the past few years. Higher costs for drugs that treat cancer, rheumatoid arthritis and multiple sclerosis have affected Cleveland Clinic.
“We're seeing price increases that are absolutely significant,” Glass said. A lack of competition for generics has been a major barrier to lower costs, he added.
Cleveland Clinic also gave raises to its physicians, nurses and other employees this year, which Glass called an investment, not an expense. The tightening job market has encouraged employers to increase compensation to keep their top employees. And Cleveland Clinic plans on hiring more physicians and nurses, building on the healthcare industry's two-year hiring binge.
“Every market that I talk to out there, they are competing in order to fill the vacancies that they have,” Glass said. “We need the services of physicians and nurses, and there's just not enough of them in the marketplace.”
Cleveland Clinic's revenue increased 17% in the first half of 2016 compared with the same timeframe last year, totaling $3.93 billion. Expenses rose 23%. Glass said the two periods are somewhat skewed by the system's acquisition of Akron (Ohio) General Health System, which officially became a full member of Cleveland Clinic last November.