Cleveland Clinic sees profit increase in third quarter

Diving brief:

• Cleveland Clinic ended the quarter ended September 30 on a strong note, increasing its operating income by more than 375% year over year to total $206.2 million.
• Total revenue climbed to $4.5 billion, fueled largely by higher patient volumes, strong demand for outpatient services and favorable Medicare Advantage premium and delegated risk arrangements that took effect earlier this year.
• Yet like many of its peers, the Ohio-based academic medical center is struggling with rising costs. Operating expenses increased 10.2% year over year to $4.1 billion as inflation and increased patient volumes increased spending on labor and pharmaceuticals.

Dive overview:

Inpatient admissions increased 2.1%, patient days increased 3.4%, and surgical cases increased 4% year over year. Emergency department visits remained essentially stable, but outpatient visits continued to increase, contributing to an improved case mix.

Cleveland Clinic also entered into two-year risk delegation agreements with two national Medicare Advantage insurers, which provide system responsibility for care coordination and population health management for certain MA members.

Under the agreement, insurers pass a percentage of the premium they receive from CMS to the clinic as a “delegated premium,” which the system uses to cover medical costs and associated administrative activities. If medical claims are lower than the delegated premium, the clinic and insurers share the proceeds; if they exceed it, both share the costs. Cleveland Clinic reports that the deal has been a revenue generator for the organization so far.

Increased volumes and new agreements helped offset rising costs. Management wrote in a financial report that growth in personnel costs has stabilized compared to previous years, but labor costs remain the organization’s largest portion of expenses, generating $2.3 billion for the Cleveland Clinic for the quarter.

“The system continues to implement cost reduction and efficiency initiatives to appropriately capture scale synergy opportunities within its global business and to develop a lean cost structure aligned with the patients served,” management wrote.

Cleveland Clinic is the latest nonprofit health system to make spending management a priority. CommonSpirit Health and Kaiser Permanente both highlighted cost pressures in their own results, released earlier this month. CommonSpirit, relatively more struggling, embarked on an organization-wide transformation project to help address rising costs.

Cleveland Clinic ended the quarter with $1.1 billion in cash and cash equivalents and $5.1 billion in long-term debt.