The Cleveland Clinic's hospitals were busier in the third quarter, which boosted the Ohio system's revenue—but not enough to offset the cost of new hires, higher wages and more expensive pharmaceuticals.
The system—which operated 11 hospitals in the third quarter and acquired Akron (Ohio) General Hospital this month—ended the third quarter with a slightly softer operating margin (7.2%) compared with the same three months the prior year (7.4%.).
Despite the weaker margin, the Cleveland Clinic ended the quarter with strong operating performance thanks to more demand. Higher volume during the three months that ended Sept. 30 led to the 6.3% increase to revenue and strong operating performance for the quarter, the system said in financial statements.
Medicaid expansion in Ohio contributed to revenue gains as the percentage of the system's revenue from self-pay patients dropped to 3% from 5% a year earlier.
But expenses increased 6.6% year over year as inflation pushed salaries and benefits higher and hiring increased the system's full-time workforce by 1%. The rise in labor costs matches a trend seen across the U.S. as the improving economy lifts demand for healthcare workers.
Soaring drug costs contributed to the escalating expenses. The system's pharmaceutical costs increased 24% for the quarter. Higher prices, more demand and the launch of the Cleveland Clinic's new specialty pharmacy for chronically ill patients drove spending upward. The new pharmacy accounted for about $19 million of the quarter's $35 million increase in drug costs.
That left the system with an operating sur of $128 million on revenue of $1.77 billion for the three months. That's compared with a $124 million operating sur on revenue of $1.67 billion during the third quarter of 2014.
Executives at the Cleveland Clinic have intensified efforts to manage operating costs in recent years, and ongoing initiatives helped wring $200 million from its spending in the last five years. That comes as the system has expanded and launched several capital improvement projects, including a $92 million expansion at its Weston Hospital and a $276 million outpatient cancer center.
Still, the system reported a net loss of $179 million for the quarter as poorly performing investments dragged down the Cleveland Clinic's overall results.
For the nine months that ended with September, the system has operated more hospital beds and at higher occupancy than during the first nine months the prior year. The system's operating margin for the year through Sept. 30 was 6.2% compared with 5% in the first nine months of 2014.