Mayo's record financial results run counter to health care trends

To financial analysts, the outlook for hospitals has been tilting negative.

Demand for inpatient care is soft. Insurers and the government want to pay less for each service. New payment arrangements ask hospitals to take a degree of financial risk that patient costs exceed expectations.

Against that backdrop, the record-setting financial results the Mayo Clinic released last week stand out.

Operating income of $834 million in 2014 was up 36 percent from the previous year and set an all-time high for the Rochester-based system.

Clinic officials say that operating income as a percentage of revenue — what investor-owned hospitals would call the operating profit margin — hit its highest mark since 1986. Revenue grew some, while labor costs actually declined.

The success did not stem from a rising tide that raised all boats in the hospital sector, said Martin Arrick, a financial analyst with Standard & Poor's.

"It is unusual for folks to have an improvement at the magnitude and level in operations that we're seeing with Mayo," Arrick said. "They really had a good year."

Revenue for 2014 grew by about 3.6 percent, to nearly $9.8 billion. Expenses, meanwhile, grew by just 1.3 percent, which drove the higher income from operations.

What might look like subtle shifts at first glance help explain the results.

Hospital admissions were down slightly last year at the Mayo Clinic, as were the number of surgical patients and even outpatient visits. The reduced admissions are in keeping with one of the challenges facing the hospital industry, analysts say.

But the average length of stay for a Mayo Clinic hospital patient increased from 4.6 days in 2013 to 4.8 days last year. The change was significant because it signified that patients were sicker last year, and needed more revenue-producing services, said Jeff Bolton, the clinic's chief administrative officer.

"The increase in length of stay is really reflective of pretty significant growth or increase in the acuity of patients," Bolton said in an interview. "And that always indicates higher revenue associated with that — more complexity among the patient population."

Of the two factors, expense control was probably the bigger one, Bolton said. For about three years, the clinic has been focused on trying to standardize care in ways that improve patient outcomes while generating savings, he said.

The impact of those efforts came through in 2014.

"We were able to really control growth in head count," Bolton said.

One question mark in the financial results was a decrease in net assets due to a pension adjustment, said Allan Baumgarten, an independent hospital analyst in St. Louis Park. Mayo Clinic officials attributed the change to the discount rate for the clinic's pension plan, plus an actuarial adjustment to projections for how long people will live.

One consequence is more pension costs for 2015, said Kedrick Adkins Jr., Mayo Clinic's chief financial officer. Also this year, Mayo Clinic projects more spending on infrastructure, including a new electronic health record system.

The financial outlook for hospitals, in general, isn't all gloom. Stephen Parente, a health finance expert at the University of Minnesota, noted that hospitals are benefiting from the expansion of health insurance coverage under the federal Affordable Care Act.

"It's not like it's a rout," said Arrick of Standard & Poor's. "We're tilting negative, as opposed to 'Omigod' negative."

Parente said Mayo Clinic's financial performance last year seems in keeping with its unique status.

"They're a rare entity in that they are truly a national, premier provider," he said.

Last year, the clinic saw growth in its Mayo Clinic Care Network, which provides virtual consultations to providers and patients in 18 states, Puerto Rico and Mexico. Mayo Clinic currently is contemplating an expansion of services provided to hospitals in the network by way of an "E-ICU" service that's already in place for intensive care units at the clinic's outlying hospitals.

In most cases, the care network means patients get care at hospitals close to home rather than traveling to Mayo, Bolton said. But some patients ultimately do get care in Rochester.

"In 2014, network members have submitted nearly 2,000 eConsults, and the volume is rapidly increasing," wrote Dr. David Hayes, a Mayo Clinic physician, in a blog post in the Harvard Business Review that was published in December. "Of these eConsults, less than 15 percent of those patients were referred to Mayo Clinic for additional assessment or specialty care."

Arrick of Standard & Poor's said the network is one example of Mayo Clinic's continued focus on caring for patients with the most specialized needs. Mayo isn't the only hospital trying to capture those cases, which "tend to be more profitable," Arrick said.

But Mayo is in a select group of hospital systems like Cleveland Clinic and Johns Hopkins that can try to cast a net not just across a region, but across the country.

"It gives those institutions a lot more flexibility in their pricing," Arrick said. "The higher up the specialty chain you go, it's just more money involved."