Economy slows financial growth at Mayo Clinic

By Bill Boyne

Mayo Clinic officials offered a sobering report on the institution's financial outlook during its annual community update meeting Thursday. About 200 guests attended.

Jeff Korsmo, the Rochester clinic's administrator, said economic and demographic changes have slowed the clinic's growth and will hold its net income well below past levels.

Korsmo cited the following:


A reduction in Medicare payments, which amount to about 60 percent of the cost of providing service.

Three years of declining value of clinic investments as a result of the drop in the stock market and interest rates.

A decline in philanthropic contributions, also as a result of the stock market decline.

Continued low interest rates, which trigger added contributions to its defined benefit pension programs on the order of $170 million to $180 million a year.

A significant post-9⁄11; decline in the number of international patients and U.S. patients from outside the Midwest.

A shortage of health-care workers with special skills, driving up wages for those departments.

Future demographic shifts that will result in an increase in Medicare patients and a decline in the number of younger patients whose health-care payments offset low payments provided by Medicare.

Dr. Hugh Smith, chairman of Mayo Rochester's Board of Governors, said low Medicare payments are a major factor in the steady double-digit increases in overall health-care costs. Because Medicare pays only 60 percent of the costs, Smith said the remaining costs have to be shifted to other patients having private health-insurance plans.


He added that Medicare covers close to 100 percent of the cost of service in the metro area but well below that in outstate Minnesota. That is one reason hospitals in Zumbrota and Spring Valley have closed and that other rural areas "face a meltdown" in hospital services in the future. He said Mayo hospitals' emergency room patients used to come from an area within 30 miles. Now they are coming from 70 or 80 miles away.

Smith said an additional problem is that Medicare does not pay for results. If a patient has an infected hip prosthesis that must be replaced, the payment is the same as for an initial hip replacement, despite the fact that the actual cost of replacing the infected hip joint is many times higher. He said the extra cost could reach $30,000 for each such operation.

Smith added that the medical provider tax the clinic pays is scheduled to increase from $20 million a year to around $30 million Jan. 1, and that tax cannot be passed on to Medicare patients or to out-of-state patients.

He said Medicaid payments also are far below the cost of service, and members of Congress and of the Minnesota Legislature need to act on reforms.

Smith and Korsmo said Mayo has a strategy for dealing with the problems. It involves making sure that Mayo uses the most cost-effective methods and concentrates on services that are most in demand by patients. They also said further steps will be needed in the next few years when the baby boom generation begins to retire, placing even greater demands on the health-care system.

In recent years, Mayo has grown at a rate of about 800 employees a year, but there will be lower growth in the next few years. However, Smith said that, unlike some major medical institutions, Mayo has no plans for layoffs.

In answer to questions, Smith said that, contrary to public belief, Mayo pays substantial property taxes on its properties offering clinical services. Properties used for research or education are tax-free. He said Mayo is the largest property taxpayer in Olmsted County and pays a sum equal to the total of the payments of the next nine taxpayers.

Smith also outlined plans for Mayo's partnership with the University of Minnesota in conducting research in genomics and biotechnology. He said the first steps will be an inventory of the two institutions' staff and equipment and a joint plan for seeking research grants from the National Institutes of Health. In the next four or five years, the partnership is expected to produce spin-off companies and up to 5,000 jobs, he said.


Karel Weigel, Mayo's director of community relations, spoke about the clinic's partnership with the community in such programs as First Homes, the Salvation Army medical and dental clinics, and the Multicultural Health Care Alliance.

A version of this story appeared in some editions Thursday.

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