Bolstered by federal aid, Mayo Clinic saw operating income of $153 million in Q2

Even after the pandemic forced a statewide shutdown of elective medicine, the Mayo Clinic managed to make money between April and June and is now considering a giveback of millions in federal funds that helped hospitals struggling with the spread of COVID-19.

Financial results released this week detail the surprising financial turnaround at Mayo, and could bolster concerns that funding in the federal CARES Act wasn't well targeted to the clinics and hospitals with the greatest needs.

Dennis Dahlen, the clinic's chief financial officer, said the $303 million in federal funds that started arriving in April were critical as Mayo was trying to pay workers and make investments for the pandemic — all while experiencing a dramatic halt to many revenue-generating procedures.

The pandemic didn't hit as hard as expected, however, and Mayo generated enough income that the clinic might return up to $130 million of the federal assistance.

"We are considering a return of some part of those funds, and potentially all of those funds," Dahlen said. "It's a matter of what have we used the money for [and] what does our performance trajectory look like going forward. … There may be better uses for those moneys than at Mayo Clinic."

To help hospitals deal with the pandemic, the federal CARES Act and related programs allocated $175 billion for grants to health care providers that do not have to be paid back. About $116 billion already has been allocated, including $50 billion to Medicare providers proportionately based on their total net patient revenue, according to the California-based Kaiser Family Foundation.

The foundation issued a report in May that found the revenue-based formula for allocating funds disproportionately directed money to hospitals that are relatively well-off financially due to a higher number of privately insured patients. Policymakers should consider changes so that funding is tied to measures of need rather than revenue, researchers concluded in a study published this month in the Journal of the American Medical Association.

"Tying relief funding to revenue resulted in allocations largely unrelated to health or financial needs," they wrote.

Mayo should be congratulated for its operating success at a difficult time, as well as for considering a giveback with some of the CARES Act funding, said Dr. Ziad Obermeyer, a health policy researcher at the University of California-Berkeley who was part of the study published in JAMA.

But he added via e-mail: "This is a striking illustration of how the funding could have been better targeted to hospitals in need, rather than hospitals with high revenue."

Dahlen of Mayo Clinic defended the program, which provided $173 million to Mayo during the second quarter.

"Those moneys were expended for exactly the purposes intended," he said. "It was an infusion of confidence and support, in the form of support from our federal government, at a time when it was desperately needed."

Beginning in March, hospitals and clinics across Minnesota halted elective surgeries and procedures to conserve supplies for an expected surge of COVID-19 patients. At Mayo Clinic, that resulted in a revenue cut of more than 50%, the clinic said, and projected that losses could hit $3 billion for the year.

Modeling at the time suggested the surge could "use up our supply of ICU capacity, our ventilator capacity and our hospital capacity," Dahlen said. The CARES Act funding helped the clinic maintain pay and benefits for workers through April, he said, as Mayo faced expenses to prepare for the expected influx of patients, invest in research for possible treatments and grow its lab operation to address severe shortages in coronavirus testing.

By the time the state in May lifted a ban on elective procedures, doctors at Mayo had figured out ways to safely care for patients despite the novel coronavirus, Dahlen said, including strategies to conserve the supply of personal protective equipment.

On Thursday, the clinic's second-quarter financial statement showed operating income of $153 million on $3.22 billion of revenue. The results include recognition of $173 million in CARES Act funding.

Revenue was down just 6% from the year-ago quarter, while earnings were down about 50%.

"It's a surprise to us, certainly given what we expected the quarter to look like," Dahlen said.

"In the depths of the pandemic … our outpatient practice was essentially closed," he said. "At that point, we were looking at revenue declines of monumental proportions."

Because of that bleak outlook at the time, Mayo in April announced it would cut pay for more than 20,000 workers. Temporary furloughs and reduced hours for some employees resulted in reductions in the equivalent of 9,800 full time workers in May and 8,600 full-time workers in June. The clinic employs nearly 70,000 people overall.

Taken together, the moves reduced expenses during the quarter by about $300 million. But by late June, business at Mayo had picked up so much that the clinic announced an end to the pay cuts and furloughs.

"It looks as though we've determined a way to coexist with COVID and maintain our clinical practice at relative near-normal levels," Dahlen said. "If that continues through the end of the year, the chances that we'll do something to remediate the sacrifices made by employees is reasonably high."

Dahlen said final decisions about returning CARES Act funding and providing financial remediation to workers "is all in the mix of discussions that are going on. … There are no promises, no commitments."

Mayo Clinic is Minnesota's largest employer. For 2019, Mayo reported revenue of about $13.8 billion and paid expenses of about $12.8 billion, leaving $1.06 billion of income from clinic operations.

Christopher Snowbeck • 612-673-4744

Twitter: @chrissnowbeck