BOSTON, MA – Partners HealthCare today reported operating income of $53 million (0.4% operating margin) in fiscal year 2017, which ended on September 30. Health care provider activity generated operating income of $7 million (see Provider Activity) and insurance activity (Neighborhood Health Plan or NHP) resulted in operating income of $46 million (see Insurance Activity). In 2016, Partners reported a loss from operations of $108 million (-0.9% operating margin), including a loss from provider activity of $4 million and a loss from insurance activity of $104 million.

Operating results for both fiscal years include several new and non-routine items, including components of Partners’ intense efforts to meet the fiscal realities and regulatory pressures of the new health care landscape:

  • Costs associated with a voluntary retirement offering by Brigham Health to certain employees: $88 million in 2017;
  • The state imposed annual assessment on hospitals in 2017 to help fund MassHealth, of which the net impact to Partners was $31 million;
  • Costs associated with the installation of Partners eCare (an integrated, electronic health and administrative information system) and investments in ‘Partners 2.0’ a multi-year, system-wide initiative to optimize efficiency across Partners HealthCare and its institutions: $68 million in 2017 and $73 million in 2016;
  • Impact of early exit from leases in connection with administrative space consolidation plans: $26 million in 2016;
  • Operating income contributed by Wentworth-Douglass Health System (Dover, NH) which joined Partners on January 1, 2017: $6 million.

 

This is a period of intense redesign and restructuring at Partners HealthCare. The steps we are taking are aimed at improving the clinical care we offer our patients while also putting our organization in the best position possible to remain financially healthy into the future.

Peter K. Markell Chief Financial Officer and Treasurer at Partners HealthCare

Partners total operating revenue grew $853 million (7%) to $13.4 billion in 2017, reflecting an increase in provider activity ($827 million, 8% -- of which $272 million or 2% was contributed by Wentworth-Douglass) and a slight decrease in insurance activity ($21 million, -0.8%).

Total operating expenses increased $693 million (5%) to $13.3 billion, principally due to the inclusion of Wentworth-Douglass ($266 million or 2%), the impact of Brigham Health’s voluntary retirement offering ($88 million) and the state’s new Medicaid assessment ($92 million).

In fiscal 2017, Partners HealthCare absorbed $1.4 billion in Medicare, Medicaid, and Health Safety Net shortfalls due to government reimbursements that failed to pay the full cost of providing care to Medicare, low-income, and uninsured patients, an increase of $150 million (12%) over the shortfall absorbed in fiscal 2016.

Partners reported an overall gain of $659 million in 2017, including a non-operating gain of $607 million of which $321 million (approximately 50% of the overall gain) represents the net impact of adding Wentworth-Douglass to the Partners system. Accounting rules require the fair value of acquired net assets to be recognized as non-operating gains. Non-operating activity also includes gains and losses on investments and interest rate swaps, which can vary significantly year to year due to volatility in the financial markets, and philanthropic activity. In 2016, Partners reported an overall loss of $249 million, including a non-operating loss of $141 million.


Health Care Provider & Other Activity (Provider Activity)

Provider activity generated operating income of $7 million in 2017 compared with a loss of $4 million in 2016. The 2017 results reflect the net impact of the new Medicaid assessment ($31 million), Brigham Health’s voluntary retirement opportunity ($88 million), eCare implementation costs and Partners 2.0 investments (together, $68 million) and the addition of Wentworth-Douglass ($6 million). The 2016 results reflect the impact associated with preparations for a nursing strike at Brigham and Women’s Hospital ($24 million), which was averted with agreement on a 3-year contract extension, an administrative lease consolidation effort that required early exits from various leases ($26 million) and eCare implementation costs and Partners 2.0 investments (together, $73 million). Excluding these non-routine items, Provider Activity generated operating income of $188 million (1.7% operating margin) in 2017 and $119 million (1.1% operating margin) in 2016.

Revenue for provider activity increased $827 million (8%) to $11.3 billion in 2017, including $272 million (3%) for Wentworth-Douglass. Net patient service revenue increased $706 million (9%) to $8.8 billion, reflecting the inclusion of Wentworth-Douglass ($264 million or 3%) and overall growth in same-facility inpatient and outpatient activity. Research revenue increased $96 million (6%) to $1.8 billion, driven by growth in government-sponsored and corporate-sponsored research activity. Other operating revenue, excluding patient care and research revenue, increased $25 million (4%) to $673 million.

Operating expenses attributable to provider activity increased $816 million (8%) – of which $266 million or 3% was due to the addition of Wentworth-Douglass – to $11.3 billion in 2017. The inclusion of Wentworth-Douglass ($156 million) and the impact of Brigham Health’s voluntary retirement opportunity ($88 million) contributed to an increase in employee compensation and benefits of $397 million (7%) to $6.3 billion. Supplies and other expenses increased $226 million (9%) to $2.7 billion, reflecting increased costs for pharmaceuticals and clinical supplies ($75 million, 8%) and the new Medicaid assessment ($92 million, 4%), partially offset by a slight decrease in eCare implementation costs and investments to help achieve cost and productivity efficiencies (together, -$5 million, -8%). Depreciation increased $71 million (13%) to $625 million. Interest expense increased $47 million (35%) to $182 million, reflecting additional debt and the cessation of capitalizing interest on projects that were completed.

Insurance Activity
Insurance activity resulted in an operating gain of $46 million in 2017 compared to an operating loss of $104 million in 2016. These results reflect the net impact of recording and amortizing premium deficiency reserves. The impact was a decrease in claims expense of $52 million and an increase in claims expense of $19 million in 2017 and 2016, respectively. Excluding the net impact of premium deficiency reserves, insurance activity resulted in an operating loss of $6 million (-0.2% operating margin) in 2017 and a loss of $85 million (-3.4% operating margin) in 2016.

Premium revenue decreased $21 million (1%) to $2.5 billion in 2017. NHP’s membership declined by 19% from September 30, 2016 to September 30, 2017, reflecting an agreement that NHP and MassHealth made under which NHP would stop accepting new MassHealth members to give it time to stabilize financial performance after experiencing significant operating losses for several years. On September 30, roughly 66% of NHP’s 368,252 members were in MassHealth.

“NHP is generating growth in the commercial marketplace, fueled by the introduction of innovative, employer friendly products,” said Markell. “We are pleased with the progress NHP has made toward stabilizing its financial performance and will continue to work closely with the state to continue to address some of the uncertainty we had been experiencing in the Medicaid market in years past.”
Medical claims expense decreased $175 million (-7%) to $2.3 billion in 2017, reflecting the decline in membership as well as the impact of premium deficiency reserve amortization ($52 million). Excluding the impact of premium deficiency reserves, NHP’s medical loss ratio (the percentage of insurance premiums that are used to pay medical claims) was 94.0% in 2017 and 97.3% in 2016.

General and administrative costs increased $5 million (3%) to $156 million in 2017. The administrative expense ratio (the percentage of insurance premiums that are used to pay general and administrative expenses) increased to 6.3% in 2017 from 6.0% in 2016.

Fourth Quarter Consolidated Results
Partners reported a loss from operations of $4 million for the quarter ended September 30, 2017. Provider activity generated an operating loss of $28 million and insurance activity generated operating income of $24 million. In the comparable 2016 quarter, Partners reported a loss from operations of $109 million, including operating losses of $34 million and $75 million from provider and insurance activity, respectively.

Total operating revenue increased $177 million (6%) to $3.4 billion for the three months ended September 30, 2017, reflecting growth in provider activity ($251 million, 9% -- of which $93 million or 3% was contributed by Wentworth-Douglass) and a decrease in insurance activity (-$94 million, -14%). Total operating expenses increased $72 million (2%) to $3.4 billion, as the addition of Wentworth-Douglass ($89 million) and the impact of the state’s new Medicaid tax ($23 million) and Brigham Health’s voluntary retirement offering ($69 million) were more than offset by a decline in medical claims expense ($188 million).
Partners reported an overall gain of $40 million for the three months ended September 30, 2017, including a non-operating gain of $44 million. In the comparable 2016 quarter, Partners reported an overall loss of $95 million, including a non-operating gain of $14 million.

Commitment to Community
Serving and investing in the community is a major focus for Partners. In order to improve the health and well-being of our communities, Partners makes targeted, effective investments in three priority areas: access to health care, educational and economic opportunity, and prevention. Last year, Partners served more than 164,000 low-income patients and reported to the Massachusetts Attorney General investments of $223 million through a wide-range of community commitments.

Beginning in 2018, Partners HealthCare has chosen to participate in the MassHealth Accountable Care Organization (ACO) to help solve the care delivery and cost challenges associated with the state’s Medicaid program. Partners will join a select group of organizations in the biggest restructuring of the MassHealth Medicaid program in twenty years. Similar to federal ACO programs, the MassHealth ACO aims to move from a fee-for-service model, where providers are paid for each service, to an accountable care model where care is better coordinated and physicians are rewarded for providing high quality care while keeping costs under a target. As a MassHealth ACO, Partners will provide coverage to more than 100,000 MassHealth patients across the Partners system.