CHICAGO -- A belief in innovation and flexibility helped the Mayo Foundation build a $1 billion-plus pile of money for itself. With the resources and outlook needed for risk taking, the nonprofit has seized on investment opportunities in a way most hospitals cannot.

Last year the Rochester, Minn., nonprofit boasted financial statements that are a picture of financial health: revenues topping $1.3 billion and net operating income above $35 million.

The foundation controls the finances of the Mayo Clinic, a complex of more than 30 buildings that in 1991 drew former President Reagan, King Hussein of Jordan, and about 400,000 other patients to the cornfields 90 miles south of Minneapolis/St. Paul. Satellite clinics operate in Scottsdale, Ariz., and Jacksonville, Fla.

The center's specialties include endocrinology, cardiology, neurology, and cancer treatment. Its drawing cards are high standards and a team approach to treatment.

A commitment to innovation goes back to the center's founder, Dr. William Worrall Mayo, who created a hospital in Rochester after a tornado devastated the city in 1883. Dr. Mayo and his sons, James and Charles, operated the clinic under a philosophy of patient-centered care, emphasizing openness and flexibility in medicine and management.

All this shows up in the foundation's finances. It has about $540 million of outstanding debt, which includes $200 million of refunded hospital revenue bonds that were priced earlier this month. All of the debt is rated AA-plus with a positive outlook by Standard & Poor's Corp. Moody's Investors Service does not rate the foundation's debt.

Elissa Granick, an associate director at Standard & Poor's, said the foundation's creditworthiness reflects, among other things, excellent management, a strong industry position, and exceptional financial flexibility with restricted and unrestricted resources of over $1 billion.

John H. Herrell, treasurer of the foundation, said it has no immediate plans to issue more bonds. However, he said it may be involved in a $20 million bond issue by Eau Claire, Wis.-based Luther Hospital, which it acquired earlier this summer.

Mr. Herrell said that almost half of the foundation's debt has variable interest rates.

"There is great risk in the floating rate. We've been through seven years of it and it's an extraordinarily cheap form of debt. If the current rate spikes up to 15%, even that period of pain wouldn't negate the gains that we experienced in differentials in floating rates," Mr. Herrell said.

He added that the foundation's strong financial standing allows it to be more aggressive with its investments.

"Our indentures look more like an IBM indenture than a [hospital] indenture," Mr. Herrell said. "We have played the yield curve fairly aggressively in the last year and it obviously has worked out extraordinarily well."

He explained that the foundation's financial strength has allowed it to retain flexibility in its bond indentures. This has allowed the foundation to be more aggressive in the investment of trusteed funds, he added.

Strength and Stress

Investment returns net of interest costs and management fees totaled $151.9 million in 1991, according to the foundation's annual report. Returns of more than 25%, combined with falling interest rates on the foundation's variable-rate debt, provided these returns.

The foundation's business and debt management strategies have received praise from officials familiar with public finance.

"People see that the [foundation] treats the Ronald Reagans and sheiks and think that they only serve the rich. But when you look at their costs, they are a low-cost provider. Their financial strength springs from their business strength," said one investment banking analyst.

Troy A. Gerlemen, a tax-exempt fixed-income research analyst at Kemper Securities Inc., gave the foundation high marks for its healthy financial statements and its strong presence in Minnesota, Florida, and Arizona. "As long as management continues to be savvy, the trend is certainly positive," Mr. Gerlemen said.

Still, the foundation is not immune from economic stress.

Last year net operating income for the foundation declined 15.3% to $35.3 million, the lowest level since 1987, when Mayo Clinics were built in Jacksonville and Scottsdale.

Mr. Herrell said the decline began in July 1990 when the foundation added over 50 new employees, including 50 new physicians, but did not see an increase in revenues.

When the outlook did not appear rosy after about six months, the foundation deployed its clinical practice committee. The in-house team of analysts discovered that many of the new employees had been distributed in special clinics and laboratories that did not experience an increase in the number of patients. After streamlining operations in those areas, the foundation losses began to dwindle.

Mr. Herrell said additional demands on the foundation's revenues will affect the foundation's bottom line. Most notably, the implementation of a new federal Medicare payment mechanism this year will reduce revenues by more than $30 million in 1992 and by more than $55 million by 1996. The Medicare program requires the clinic to provide services to Medicare patients below costs.

In January, Minnesota plans to initiate MinnesotaCare, its new universal health insurance plan. The program will impose a 2% tax on hospitals, physicians and Minnesota-based health-care organizations, to be phased in over two years.

Foreseeing changes in the medical industry, the foundation recently expanded and diversified its operations closer to home in the Midwest.

Branching Out in the Midwest

In an effort to tap into acute-care referrals in Wisconsin, the foundation in May acquired Midelfort Clinic, consisting of 100 physicians in Eau Claire, Wis. In July, to supplement the care provided by its Midlefort physicians, it acquired Luther Hospital in Eau Claire.

"Our challenge is to reach out and become part of a continuum of care we feel comfortable being a part of," Mr. Herrell said.

In addition, the foundation in June joined an alliance that won a contract to provide health care for 14 major Minneapolis/St. Paul companies, including General Mills, Pillsbury and Honeywell. Known as the GroupCare Consortium, the alliance consists of the foundation, and three other medical organizations.

"The way medicine is moving toward managed-care systems, we cannot sit here isolated as [an acute-care] center in a farm field without tapping into these managed-care systems," Mr. Herrell said.

The foundation is also talking with IBM in Rochester about providing primary and specialty care for its employees and recently signed a deal with John Deere, a farming equipment company, in the Quad Cities area on the Illinois-Iowa border.

The financial strength of the foundation, which employs 17,000 people, has spilled over into the local economy. Stevan Kvenvold, city administrator for Rochester, said the foundation is the city's largest taxpayer and largest employer. "They are well-run and a class act," he said.

Paul Utesch, the city's finance director, said the foundation plays an integral role in the maintenance of the triple-A ratings the city's $35.8 million of outstanding general obligation debt receives from both Moody's and Standard & Poor's.

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