Cleveland Clinic Health System Obligated Group - FMSbonds.com

PART IV.MANAGEMENT’S DISCUSSION AND ANALYSIS OFRESULTS OF HEALTH SYSTEM OPERATIONS AND FINANCIAL POSITIONA. RESULTS OF OPERATIONS – FISCAL YEAR 2007 COMPARED TO FISCAL YEAR 2006The System’s revenues exceeded expenses by $486.4 million in 2007, compared to $519.4 million in 2006.Income from operations, defined as revenues over expenses before investment income and other nonoperating gainsand losses, was $349.1 million in 2007 versus $372.2 million in 2006.In the fourth quarter of 2006, the Cleveland Clinic acquired Tenet’s 51% interest in the joint venture (the“Weston JV”) that originally owned the Weston Hospital. Because this acquisition did not occur until the fourthquarter of 2006, the following income statement discussion and analysis excludes the first nine months of 2007Weston Hospital activity for comparative purposes. (Weston Hospital reported net operating revenues of $110.4million, operating expenses of $101.1 million and net operating income of $9.3 million in the first nine months of2007).Revenues. The System’s net patient service revenue in 2007 increased by $275.0 million (6.9%)(excluding the first nine months of Weston Hospital activity of $110.4 million), compared to 2006. Volumesremained primarily flat from 2006. The increase in revenue was due to cross-regional and local revenuemanagement projects initiated throughout 2006 and 2007 and commercial payor rate increases effective for thesecond half of 2006 and January 2007. Additionally, the increase can be attributed to revenue improvementsinitiated in 2007, prior year settlements, disproportionate share recognition, credit balance resolution and payor mix.These positive changes were partially offset by an unfavorable case mix adjusted length of stay and increases in selfpayrevenue relative to other payors. Management has initiated several improvements in the front-end financialclearance process on the System’s main campus to ensure appropriate patient care access to the System.Gains and losses from nonoperating activities resulted in a net gain to the System of $137.1 million in 2007(excluding the first nine months of Weston Hospital activity of $0.2 million), compared to $147.2 million in 2006.The decrease was $10.1 million (6.9%), resulting primarily from a decrease in net realized and unrealized gains of$23.4 million and a decrease in interest and dividends of $5.5 million, offset by an increase in income from equityinvestments of $19.3 million which is included in “Other, net” on the Statement of Operations.Expenses. Total expenses in 2007 increased by $330.2 million (8.2%) (excluding the first nine months ofWeston Hospital activity of $101.1 million), compared to 2006. Salaries and benefits increased $171.2 million(7.3%) (excluding the first nine months of Weston Hospital activity of $40.1 million), compared to 2006. Salaries,excluding benefits, increased $144.9 million (7.6%) in 2007 as compared to 2006, due to an increase in the numberof employees and annual salary adjustments (averaging 3-4% across the System). FTEs increased by 3.3%(including agency personnel) from December 2006 to December 2007. The FTE increase occurred mainly at theClinic’s regional Family Health Centers, nursing, neuroscience and research programs, and reflects higher patientvolumes and research activities at those programs. The System utilizes agency personnel as temporary support tosupplement the employed physicians and nurses as well as to contend with issues in the healthcare industry relatedto recruitment and retention of qualified staff. Agency costs decreased by $2.9 million (4.4%), compared to 2006.Employee benefit costs increased by $26.3 million (5.9%) in 2007, compared to 2006. The increase was comprisedlargely of increases in FICA costs of $9.4 million (8.2%), retirement costs of $5.2 million (5.2%) and healthcarecosts of $4.7 million (3.3%). Increased employee benefit costs are directly related to the growth in employees andsalaries, while healthcare costs increased due to growth in utilization of services.Other operating expenses (all categories other than salaries, benefits, interest, depreciation, and specialcharges) increased $148.8 million (10.5%) in 2007 (excluding the first nine months of Weston Hospital activity of$55.8 million), compared to 2006. Medical Supplies and pharmaceuticals increased a combined $40.7 million(excluding the first nine months of Weston Hospital activity of $28.3 million). Medical supplies increased $21.6million (5.2%) and pharmaceuticals (excluding the first nine months of Weston Hospital activity of $3.7 million)increased $15.2 million (6.3%). The increase in medical supplies was mostly driven by higher surgical supply costs,reagent costs, blood products, and implants. Pharmaceutical cost increases were the result of higher costs andincreased utilization of more costly drugs. The increase in supplies cost was moderated by management initiatives toreduce costs through contract negotiations. Provision for uncollectible accounts increased $38.4 million (38.7%)A-33