BOSTON, MA – Partners HealthCare today reported an operating loss of $108 million (-0.9% operating margin) in fiscal year 2016, which ended on September 30, 2016. Health care provider activity generated an operating loss of $4 million and insurance activity generated an operating loss of $104 million. Partners total operating revenue increased $794 million (7%) to $12.5 billion in fiscal 2016, reflecting continued growth in both provider ($320 million, 3%) and insurance ($474 million, 23%) activities. However, total operating expenses increased $1.0 billion (9%) to $12.6 billion, due to higher medical insurance claims ($365 million, 22%), higher wages ($205 million, 5%) and benefits ($127 million, 11%), and clinical supplies ($89 million, 13%).
In the comparable 2015 period, Partners reported income from operations of $106 million (0.9% operating margin), composed of $122 million income from provider activity and a $16 million loss from insurance activity.
Both fiscal years include various non-routine items, including:
- Costs associated with the installation of Partners eCare, an integrated, electronic health and administrative information system: $66 million in 2016 and $75 million in 2015;
- Preparations for a nursing strike at Brigham and Women’s Hospital, which was averted with agreement on a 3-year contract extension: $24 million in 2016;
- Impact of early exit from leases in connection with space consolidation plans: $26 million in 2016;
- Historically harsh winter: $34 million in 2015;
- Net impact of establishing and amortizing NHP’s premium deficiency reserves: -$20 million in 2016 and $59 million in 2015.
Excluding the impact of the non-routine items listed above, Partners income from operations was $28 million (0.2% operating margin) in 2016 and $156 million (1.3% operating margin) in 2015.
In 2016, 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 $126 million (10%) over the shortfall absorbed in 2015.
“Our academic medical centers and their physicians generated strong revenue growth, but that growth was eroded by rising pension and pharmaceutical costs along with several one-time expenses,” said Peter K. Markell, Chief Financial Officer and Treasurer for Partners HealthCare. “In addition, losses due to inadequate reimbursement from Medicaid and the Health Safety Net are a growing concern. These factors -- along with weaker than expected performance from our community hospitals and insurance operations -- contributed to significant financial losses in fiscal 2016. The impact of historically low interest rates on pension costs and commercial rate increases that do not keep pace with inflation will continue to put pressure on our performance into 2017.”
Partners reported an overall loss of $249 million, including a non-operating loss of $141 million, in 2016. Non-operating activity 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 philanthropy. In 2015, Partners reported an overall loss of $92 million, including a non-operating loss of $198 million.
Fiscal 2016 Results – Health Care Provider & Other Activity (Provider Activity)
Revenue for provider activity increased $491 million (5%) to $10.4 billion in 2016. Net patient service revenue increased $425 million (6%) ($171 million of which reflects an increase in services provided to NHP members) to $8.0 billion, reflecting higher inpatient acuity at Partners’ academic medical centers and growth in outpatient activity, partially offset by lower than expected volume at some of Partners’ community hospitals. Research revenue increased $61 million (4%) to $1.7 billion, reflecting growth in government-sponsored and corporate-sponsored research activity. Other operating revenue, excluding patient care and research revenue, increased $6 million (1%) to $648 million.
Operating expenses attributable to provider activity increased $618 million (6%) to $10.4 billion in 2016. Higher pension costs ($53 million, 16%) and health benefits expenses ($39 million, 8%) contributed to an increase in employee compensation and benefits of $324 million (6%) to $5.9 billion. Supplies and other expenses increased $166 million (7%) to $2.4 billion, reflecting increased costs for specialty pharmaceuticals and medical devices (collectively, $89 million, 13%). Depreciation and interest increased $81 million (13%) to $689 million, as eCare became operational at more sites across Partners.
Health care provider activity generated an operating loss of $4 million in 2016 and operating income of $122 million in 2015. Excluding the impacts of non-routine items previously noted, Provider activity generated operating income of $112 million (1.1% operating margin) in 2016 and $231 million (2.3% operating margin) in 2015.
Fiscal 2016 Results - Insurance Activity
Insurance activity resulted in an operating loss of $104 million in 2016, reflecting a deterioration in medical trend for MassHealth and merged market commercial activity over the course of the fiscal year similar to many other health plans in Massachusetts. The results also reflect an increase in premium deficiency reserves, which increased NHP’s 2016 operating loss by $20 million. In 2015, NHP reported an operating loss of $16 million.
Premium revenue increased $475 million (23%) to $2.5 billion in 2016, reflecting membership growth (12%) and higher premium rates. As of September 30, 2016, NHP had 454,033 members, of which approximately 67% were in government-sponsored plans.
“Neighborhood Health Plan’s strong commercial membership growth was driven by management’s concerted efforts,” said Markell. “However, NHP has experienced rapid growth in its Medicaid population – an 80% increase in the last three years – which has resulted in significant operating losses. As a result, NHP stopped accepting new MassHealth members while we work with state officials to ensure that MassHealth provides reimbursement that more realistically reflects the medical needs of the population that NHP covers.”
Medical claims expense increased $536 million (28%) ($171 million of which reflects an increase in claims paid to Partners’ clinicians and providers) to $2.5 billion in 2016. NHP’s medical loss ratio (the percentage of insurance premiums that are used to pay medical claims) was 97% in 2016 and 98% in 2015.
General and administrative costs increased $26 million (21%) to $152 million in 2016, consistent with membership growth. The administrative expense ratio (the percentage of insurance premiums that are used to pay general and administrative expenses) remained low at approximately 6.0%.
Excluding the impact of establishing and amortizing the premium deficiency reserves, insurance activity generated operating losses of $84 million (-3.3% operating margin) in 2016 and $75 million (-3.7% operating margin) in 2015.
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 absorbed a shortfall of $1.2 billion due to government reimbursements that failed to pay the full cost of providing care. Partners served more than 159,000 low-income patients and reported to the Massachusetts Attorney General investments of $210 million through a wide-range of community commitments.
This month Partners HealthCare was selected by the Commonwealth of Massachusetts as one of six organizations to participate in the MassHealth Accountable Care Organization (ACO) Pilot program. The program is part of the state’s biggest restructuring of the Medicaid program in over twenty years.
As part of this Pilot, Partners will implement a flexible model of care for MassHealth members, called Partners Care Connect, that is tailored to their individual needs and supported by new and existing population management health programs across the Partners network. To meet the needs of MassHealth members, these services will be expanded to address substance use disorders, housing, food insecurity, trauma history, and other social determinants of health. Partners Care Connect will meet patients where they are and work with them to identify a care plan that addresses all of their health-related needs, including building strong relationships between patients and providers.
This press release contains certain “forward-looking statements” concerning financial and operating plans and results which involve known and unknown risks and uncertainties. In particular, statements preceded or followed by, or that include the words, “believes,” “expects,” “estimates,” “anticipates,” “plans,” “intends,” “scheduled,” or similar expressions are forward-looking statements. Various factors could cause Partners’ actual results to differ materially including, but not limited to, federal and state regulation of healthcare providers, changes in reimbursement policies of state and federal government and managed care organizations, competition in the healthcare industry in our market, general economic and capital market conditions, and changes in our labor and supply costs and in our ability to retain personnel. For more information on these and other risk factors, please refer to our most recent bond official statement or annual disclosure statement filed on the Electronic Municipal Market Access (EMMA) website maintained by the Municipal Securities Rulemaking Board. We undertake no responsibility to update any such forward-looking statements except as expressly required by law.