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Dive Brief:

• The Cleveland Clinic reported a second-quarter operating loss of $183.5 million, compared to income of $339.5 million in the prior-year period, mainly due to sharp growth in labor expenses to address staffing shortages, the hospital system said in its financial documents. Its operating margin fell to negative 5.9%, from a margin of 10.5% a year ago.
• Costs for salaries, wages, benefits, overtime pay and greater use of agency nurses and other temporary personnel caused a 15.1% jump in the system’s second-quarter operating expenses from a year ago, the Cleveland Clinic said.
• Supplies, pharmaceuticals and other non-labor expenses have also grown costlier, while a soft recovery in volumes after patients postponed nonessential care during the omicron surge at the start of the year also dragged on operations. Cleveland Clinic said its revenues fell 2.7% to $3.13 billion in the second quarter.

Dive Insight:

Rapidly rising labor costs have become a familiar culprit behind the steep drops in operating results across the hospital sector in the first half of the year. One after another, systems including Advocate Aurora Health, Mayo Clinic, Intermountain Healthcare, Sutter Health, Kaiser Permanente, Providence and Mass General Brigham have reported weaker results in the second quarter.

With staffing expenses still marching higher and federal relief no longer available to help offset declining income, hospitals nationwide are reporting some of the worst operating margins since the COVID-19 pandemic began, advisory firm Kaufman Hall said in a report out this week. Fitch Ratings, in revising its outlook for the hospital sector earlier this month to “deteriorating,” said the biggest impediment has been labor.

The Cleveland Clinic reported that its elevated expenses in the second quarter were primarily due to higher personnel costs. Salaries, wages and benefits rose 15.8% from a year ago, with salaries alone up 16.7%, lifted by higher overtime, premium pay and agency costs. The system boosted its number of full-time equivalent employees by 4.4%, while annual salary adjustments averaged 3%.

Supply expenses increased 11.5% in the second quarter, and pharmaceutical costs rose 11.7%, reflecting both inflation and greater use in outpatient areas including retail and specialty pharmacy. Purchased services and other fees increased 26.2%, mainly related to information technology initiatives.

The system’s non-operating losses were $603.5 million in the second quarter, mainly due to lower investment returns, reversing a non-operating gain of $564.9 million in the year-ago period.

Net patient service revenue rose 1.1%, benefiting from rate increases on managed care contracts that became effective this year. Acute admissions decreased 4.1%, total surgical cases increased 1.9% and outpatient evaluation and management visits increased 2.9%.