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Cleveland Clinic operating income drops over 70%

March 26, 2017
  • Revenues at Cleveland Clinic increased by about 12% from $7.2 billion in 2015 to $8 billion in 2016, according to recently released bondholder documents.
  • Expenses at Cleveland Clinic increased by 19% from $6.1 billion in 2015 to $7.3 billion in 2016, which drove a 71% drop in operating income from $480.2 million in 2015 to $139.9 million in 2016.
  • Pharmaceutical costs increased 23%, labor costs increased 19%, and supply costs increased 13%, accounting for a significant portion of rising expenses.

Cleveland Clinic is feeling the same pain that many other health systems across the nation are experiencing. While Cleveland Clinic is still turning a profit, others have not been so lucky.

An earnings report released last November revealed that Catholic Health Initiatives (CHI) had suffered a $483 million operating loss through the fiscal year. Like Cleveland Clinic, CHI saw its revenues rise, but expenses rose more quickly for the health system. Rising labor and pharmaceutical costs coupled with lower reimbursement from government payers and lower patient volume contributed to the poor financial performance.

The situation is also dire at MD Anderson Cancer Center. It suffered a $266 million loss in fiscal year 2016 before losing another $67 million in the first two months of fiscal year 2017. Again, it was an increase in expenses and a decrease in patient revenues that drove losses. Both CHI and MD Anderson have cut their workforces to cope with the drop in operating income.

More than a half of hospitals (52%) in the U.S. last year lost money on operations, Cleveland Clinic CEO Toby Cosgrove said this week in Washington, D.C. during a panel for the release of the final Vital Directions for Health paper. Hospitals have been asked to completely transform care delivery system, but are inadequately funded to accomplish this, he said. Additionally, regulatory and administrative burdens introduced by reporting programs and shifting policies have strained health systems.

Technology has potential to help ease the transition to new delivery systems, but barriers remain. Cosgrove pointed to radiology as an example. For a radiologist to remotely read imaging exams performed in another state, he or she would have to be licensed in the state where she is physically present and in the state where the exam was performed.

“Big data represents a challenge and it also represents an enormous opportunity,” Cosgrove added, stating, “The total amount of knowledge of healthcare is now doubled every 73 days…I think that AI and IT are going to be vital.”

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