Cleveland Clinic reported an operating loss of $39.9 million in the first quarter of this year, which the system's chief financial officer attributes "entirely" to COVID-19.
That loss compares with a $36.2 million net income for the like period last year.
Though the system was tracking ahead of budget through mid-March, nearly all of the losses transpired in the final two weeks of March, putting its first-quarter revenue $184 million below budget, said Steven Glass, the Clinic's CFO, citing the shutdown of nonessential services to prepare for the ramping up of COVID-19 cases.
Glass does not expect the Clinic to return to profitability in this calendar year.
Adding April — which was a full month of limited services — into those numbers, the Clinic experienced net patient service revenue shortfalls of more than $500 million for the first four months of the year compared to plan.
"You can see that that's a pretty challenging environment financially for the bottom line, particularly in an organization like the Clinic that is committed to our caregivers," Glass said.
The Clinic avoided laying off or furloughing any caregivers in an effort to maintain its workforce. Instead, the system has made efforts to save elsewhere, cutting "just about every nonessential cost that we could identify in the organization," Glass said. But healthcare organizations typically are quite people-intensive. About 60% of the Clinic's cost structure is its caregivers, he noted.
Even while trying to cut costs, it's also seen some increased expenses as a result of the pandemic. The system incurred about $100 million in COVID-19 preparedness costs, including equipment, labor and supplies, as well as converting the Health Education Campus, a joint venture by the Clinic and Case Western Reserve University, into a fully functioning temporary surge hospital.
"The best thing we could do here in Northeast Ohio and South Florida was be prepared," Glass said, noting other major cities across the country whose health systems struggled to keep up with the surge. "There are significant costs associated with doing that while, at the same time, we were seeing significant drop-off in revenue as a result of the cancellation of all of our cases."
With all of those infrastructure costs and little revenue to support it, Glass said those losses continue through April and May.
May has seen an uptick in overall volume and revenues as restrictions have been lifted. The system is still "significantly short of where we budgeted to be," he said, "but moving in the right direction."
Where possible, the system has reduced costs by restricting travel and cutting purchased/administrative service expenses and other costs, including postponing noncritical expenditures.
Glass said the system is asking everyone to look at opportunities to cut or manage costs outside of labor costs, as it remains committed to not furloughing any caregivers.
The timeline for returning to profitability depends heavily on a myriad of factors: What happens as the economy opens back up? Will the region see another spike in cases as a result of that or later in the year? What happens when flu season kicks in? How quickly will patients' comfort levels bring them back?
"These types of things certainly create a lot of pressure in getting back to profitability," Glass said. "We do not anticipate that for 2020 we will be able to recover from the losses that we've incurred to date, so it will likely be in 2021."
The system's profitability supports future capital investments as well as research, innovation and growth, making a return to profitability "critically important," Glass said.
The Clinic had a strong year financially in 2019, with an operating margin around 4%.
"Even in a good year, it's a very challenging business," he said. "So returning to profitability will be a challenge, but the organization will get there. We will be able to make the improvements in order to get there."
This article was originally published in Crain's Cleveland Business.