Mayo Clinic's operating margin holds firm at 3.8% as slumping investments fuel $654M net loss for Q2 2022

Mayo Clinic’s steady 3.8% operating margin for the quarter ended June 30 was outweighed by hundreds of millions in investment losses, yielding a $654 million decrease in the nonprofit’s net assets before changes, according to a financial report released Thursday evening.

“At the midpoint of the 2022 fiscal year, performance results reflect the challenges facing both the healthcare industry and the nation,” Mayo’s management wrote in a summary of its financial performance. “Workforce shortages and inflation in both labor and non-labor costs have had an impact on the first and second quarter operating results but Mayo Clinic is well-positioned to enter the second half of 2022.”

The health system notched $155 million in net operating revenue during the most recent quarter, roughly a third of the $451 million it logged during the same time last year. Its operations have brought in $297 million year to date versus $694 million from the first half of 2021.

Revenue for the quarter increased 2.4% over the prior year to just over $4 billion. About $3.4 billion of that was comprised of net medical service revenue, which was also up 2.9% from the second quarter of 2021.

“The increase is notable considering that during 2021, Mayo Clinic experienced limited COVID surges, pent-up demand for services and limited travel by staff, whereas during 2022 Mayo Clinic is encountering workforce shortages, vacancies due to recurrent COVID transmission and restored travel for staff resulting in capacity constraints,” management wrote.

Volume metrics through the first half of the year were mixed for the Rochester, Minnesota, organization. Outpatient visits and surgical cases were up 2.7% and 1.3%, respectively, from the midpoint of 2021 (and 22.8% and 23% from the pandemic’s onset in 2020), reflecting “strong demand for services,” the system wrote.

Hospital admissions, on the other hand, were down 2.2% from last year. Mayo characterized the dip by highlighting a corresponding 7.6% increase in patient length of stay that kept its hospitals “operating at near capacity” to treat higher acuity patients.

Mayo also faced the expense hikes that have become commonplace throughout the industry.

During the most recent quarter, operating expenses grew 11.1% year over year to $3.88 billion. A $150 million (7%) pickup in salaries and benefits and a $225 million (20.8%) increase in supplies and services—which includes contract labor—made up much of the increase.

The main kicker to Mayo’s bottom line was $1.05 billion in net unallocated investment losses during the quarter, a stark turnaround from the $790 million net gain it had picked up a year prior. Unallocated investment losses for the year now sit at $1.53 billion and largely drove the $993 million decline in Mayo’s cash and investments since the end of 2021.

Although strained, Mayo’s positive operations place the system in a strong position compared to the second-quarter numbers of other major nonprofits. Providence, for instance, recently reported a $424 million operating loss for the quarter, while Mass General Brigham’s operations sank $120 million into the red.

Earlier this week, Fitch Ratings downgraded its outlook for the nonprofit hospital sector from “neutral” to “deteriorating” due to labor pressures and other expenses indicating a slow recovery from pandemic strain.