The Mayo Clinic is the largest integrated, not-for-profit group practice in the world, providing clinic and hospital services at locations in Rochester, Minn.; Jacksonville, Fla.; and Phoenix and Scottsdale, Ariz. Mayo ended 2009 with income from current activities of $333 million, including practice, research, education, and diversification activities. In a tough economic year across the United States, Mayo Clinic’s expenses remained flat as compared to 2008, while revenues grew by 5 percent.
Healthcare Finance News editor Richard Pizzi spoke recently with Mayo’s CFO Jeffrey Bolton and Jim Francis, the organization’s chair of supply chain management, about navigating the world renowned institution through recession and healthcare reform.
What has been the biggest financial impact of the recession on Mayo Clinic?
JB: From the macro level view, there are a couple of dimensions that have impacted Mayo, on both the operating and the investment side.
In 2008, we began to see some softening in our volumes, particularly toward the second half of the year. That continued into the early part of 2009. We saw our revenue growth slow pretty significantly in 2008 and early 2009. Since then, it has picked up.
The markets have definitely been a challenge, particularly the fourth quarter of 2008. It’s been very volatile. We have about $6 billion in financial assets invested. We have a highly diversified portfolio and a team that’s dedicated to managing it.
Also in the latter part of 2008, we saw the credit environment become challenging. We have a significant amount of variable rate debt. That was largely resolved in early 2009. Since then we’ve really benefited from the low interest rate environment.
From a patient perspective, in some of the communities in which we operate we’ve seen some increases in bad debt and charity care. Our revenue cycle team has worked very closely with our patients, and we’ve been working hard to structure payment plans that meet their needs.
How important is patient education in this economic environment?
JB: It’s very important. Prior to the recession, our revenue cycle focused more on patient counseling, providing estimates of what care costs, and determining insurance eligibility. We’ve spent a lot more time on the early part of the process, as opposed to chasing dollars on the back end, which is quite expensive for the institution.
Is that a trend for a lot of health systems?
JB: Yes, it’s a trend in the industry. There’s much more attention to the front end now than there has been historically.
Will Mayo be starting capital construction projects that you put on hold during the recession?
JB: We constrained capital spending significantly from 2008 into 2009. We were focused on preserving cash because a lot of our debt is variable rate debt, and we do have some self-liquidity, so we wanted to ensure that we were in a strong position going forward. In 2010 we have begun to increase our spend, but at a very modest rate. Over the next 3-4 years we do anticipate capital spending to get back to more normal levels.
I think at the moment I would characterize our view on growth as being very conservative in the current environment. I’m not sure what the demand levels will be over the next 5, 10 or 15-year time frames and whether reimbursement levels will warrant significant capital investment and expansion.
How does Mayo use a group purchasing organization to manage supply costs?
JF: After I arrived at Mayo in 2000, we went through a very competitive process and selected VHA as our national alliance and Novation as our group purchasing organization. The traditional GPO relationships are largely transactional. What’s different about our relationship is that we have developed an integrated team. We have a fair number of VHA staff on site that works hand-in-hand with Mayo personnel. We try to maximize the total return for the institution. Over 10 years we’ve moved from about $130 million of purchasing under contract with VHA-Novation suppliers to just slightly over $800 million. A lot of that has been customized to meet the commitments that Mayo can make as an institution, from a volume and a market share standpoint. Recently we’ve worked with several other healthcare providers to create a regional aggregation group. That group has operated for a few years and completed more than 83 agreements, achieving an average savings of about 10 percent for the membership.
What are some of the toughest challenges you face annually in supply chain?
JF: Given the economic challenges, and in light of healthcare reform, our greatest challenge is to make the supply chain operation as efficient and cost-effective as possible. But we also try to keep it somewhat scalable, because as we develop services outside of Mayo with other healthcare organizations, we need to be able to scale up or scale down depending upon what the environment and economic situation dictates.
In the last few years we’ve seen clinicians agree to accept more in the area of standardization and utilization management. That’s probably true for a lot of institutions. Our intent is to integrate our services as much as possible with the clinical departments, especially the high spend ones. We want to benchmark internally and get a level of consistency in reducing variation and eliminating waste in the supply chain.
What is the largest supply spend at Mayo?
JF: Pharmaceuticals. About $400 million per year.
Do you have any suggestions for other supply chain executives who want to improve their cost control?
JF: It’s important to know from your leadership what kind of investment they’re willing to make in your supply chain operation. Many organizations don’t want to invest in supply chain. They would rather purchase those managed services in some other area. You should know whether or not your leadership will support your initiatives and invest in the technology and systems you’ll need in order to do comparative analyses of best practices in high spend areas.
You should also be working off of a strategic plan that is linked to the institutional plan. You have to be prepared to invest in technologies that are the fundamental backbone of a well-functioning supply chain. And you need to be prepared to invest in some talent. Not everyone can do this work. You should not be afraid to recruit people from other industries that have more advanced supply chains.
JB: It really is critical to engage your physicians and other providers in the process. It’s a critical element to gain buy-in on standardization and utilization issues.
What will healthcare reform’s impact be on supply chain?
JF: My concern is that we have the potential to move backwards as an industry, to move back toward more transactional activities, because it’s going to be all about cost. One of the philosophies we’ve tried to endorse is the concept of building strategic relationships and partnerships, but healthcare reform has the ability to eat away at that.
JB: Generally there won’t be more money on the table. Providers are going to have to become more cost effective. Looking at all of our processes and procedures to reduce cost related to personnel will be front and center, but supply chain will continue to be an area of focus institutionally, in terms of managing our expense base.