Mayo Clinic reports a large decline in its bottom line last year, but officials are still calling the results a solid financial performance.
Clinic officials say the drop in income was by design, but is also due in part to a large payment to its pension plan.
Mayo brought in a lot of money last year, nearly $8.8 billion across its system. That's 6 percent more than the year before. But the Clinic also spent more money.
Mayo officials report the hospital system had $395 million in net income last year, 35 percent less than the health system's bottom line for the same period the previous year. Net income was $610.2 million in 2011.
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Mayo's income from its own operations dropped even more if unearned revenue such as gifts is excluded. CEO Dr. John Noseworthy said the Rochester-based Mayo ended 2012 on target and the drop in net income was by design. (See performance chart)
"The fact that our expenses exceeded our revenues in 2012 was part of our plan," Noseworthy said. "That was not poor performance; that was exactly on our plan because we decided to make investments in our future at this time to position ourselves to be ready for the next changes in health care reform."
Examples include growth of the Mayo Clinic Care Network spanning 10 states and the Caribbean, as well as development of mobile applications to connect patients with doctors as examples.
But part of what is draining the Clinic's profits is its pension obligation. Last week, Standard & Poor's cited that as one factor when the credit rating agency announced it could cut Mayo's rating slightly.
The Clinic currently has an AA rating, which S&P defines as "very strong capacity to meet financial commitments." But S&P cited the Clinic's weaker operating performance in the second half of 2012 and additional debt as reason for revising its outlook for the clinic from stable to negative.
Without improvements in its cash flow or less capital spending in the next two years, Mayo might see a one-notch downgrade.
Mayo's Chief Financial Officer Jeff Bolton said the Clinic had to divert nearly half a billion dollars to the pension fund. The need is a byproduct of low interest rates. Bolton says the Clinic's pension fund is 84 percent funded.
"We want to stay in the range of fully funded. But we don't want to get into a position where we have our capital stranded in the pension fund," Bolton said. "So 84 to 90 percent is about the range that we're looking at, this point in time. Again, we feel as interest rates increase, that funding level will go up to 100 percent. That is the long-term target.
Mayo leaders also highlighted the clinic's proposal to become a medical destination and the related bill making its way through the state Legislature. Mayo wants to invest $3 billion of its own money to become an even bigger global medical hub.
Noseworthy reiterated the clinic's push for a state contribution of half a billion dollars to help redevelop the city of Rochester.
"This destination medical center plan that's been under study for three years is essentially trying to project what kinds of service will be likely grow in the local community," Noseworthy said, "And what sort of private investments we'll need to bring the amenities to the town so that we create a city that's intentionally designed to be very livable, great for our patients and their families who visit, and great for the people who live here."
Mayo contends the initiative could add tens of thousands of jobs in Minnesota. But Mayo reported today that it is already adding jobs at a decent clip. Mayo's Minnesota workforce grew by 2,100 jobs last year.