The Cleveland Clinic's operating margin through September this year is significantly smaller than the like timeframe in 2015, which Clinic CEO Dr. Toby Cosgrove touted as "the best financial year" in the system's history.
The Clinic ended its third quarter of 2016 with a 1.8% operating margin, compared with a 6.2% mark for the like period last year.
Clinic CFO Steve Glass said he expects the total operating performance for all of 2016 will be pretty close to the trend line seen so far this year. The system closed the first quarter with an operating margin of 0.4% and recorded a margin of 1.2% for the first half of the year.
"And that's probably very consistent to what we're going to be seeing next year as well," Glass said.
It's the result of an economic environment the health care industry has been anticipating for several years: Inflation in operating expenses is outpacing reimbursement rates.
Revenues through Sept. 30 were up 13% in 2016 compared with the like period of 2015, while expenses grew by 18% during that time.
Numbers for Akron General, which officially joined the Clinic Nov. 1, 2015, weren't captured in 2015, which in part accounts for the growth on both sides, but "it's not the reason you're seeing the big decline in the operating margin of the organization," Glass said.
Revenue increases are "significantly" compressed by slim reimbursement rate increases for Medicare (less than 1%) and Medicaid from the state, which Glass said has been around 0% to even slightly negative.
"One of the big challenges in health care today is providers are experiencing this depression of increases on top line revenue, but at the same time they're experiencing historical inflations on the cost structure," Glass said.
Glass said about 60% of the Clinic's cost structure is its caregivers, who receive annual merit increases. Just based on the inflation of salaries alone, Glass said that line item is increasing 3% to 4% annually.
"Part of that is driven by the fact that it's still a challenge to find enough nurses, doctors, mid-level practitioners to staff our organizations, so we really need to be competitive from a salary structure," he said.
The Clinic also is feeling the inflation in pharmaceuticals, which is driven some by utilization, but heavily by price increases, Glass said. Even the system's own employee benefit plans are affected by rising drug costs.
"For every 1% that your expenses grow that your revenue doesn't, it closes that gap on the operating margin," Glass said. "Obviously that impacts straight to the bottom line of the organization."
A decade or so ago, Glass said, the Clinic saw operating margins closer to what he expects it will record for 2016.
The health care industry has been talking about the declines in operating margins for several years, Glass said. And that's why the Clinic has been focusing on initiatives to reign in costs and to increase care affordability.
Anticipating these numbers, the Clinic was able to get ahead of some of the challenges, which strengthened its performance in 2014 and 2015, he said. But some of that influence is catching up now, and it's becoming more challenging to find places to take out costs.
"I think the organization has done a sensational job over the last several years of focusing on how we can become more efficient, drive efficiencies across the organization," Glass said. "As we move forward, those opportunities require a lot more work, a lot more transformation, a lot more effort and (are) more challenging in order to achieve."
Uncertainty hangs over the industry as everyone waits to see what a Donald Trump presidency holds for health care policy. And it's hard to plan for uncertainty.
"It's always going to concern us when there's uncertainty in what happens," Glass said. "What we can plan for is trying to continue to look for opportunities to reduce the cost of providing care to our patients, looking for efficiencies in the organization and as we sit down and look at the challenges in trying to anticipate what's coming out of D.C., the one thing we do know is it's going to continue to be a very challenging environment."
"Rising operating costs, small reimbursement hurt Cleveland Clinic finances" originally appeared in Crain's Cleveland Business.