BOSTON, MA – Partners HealthCare today reported an operating loss of $17 million (-0.5% operating margin) in the first quarter of fiscal year 2017, which ended on December 31, 2016.  Health care provider activity generated breakeven operating results, and insurance activity (Neighborhood Health Plan or NHP) resulted in an operating loss of $17 million.  Partners total operating revenue increased $171 million (6%) to $3.2 billion in the first quarter of fiscal 2017, reflecting continued growth in both provider ($138 million, 5%) and insurance ($55 million, 9%) activities.  However, total operating expenses increased $201 million (7%) to $3.2 billion, due to higher medical insurance claims ($45 million, 10%), wages ($59 million, 5%), benefits ($13 million, 4%), pharmaceuticals ($18 million, 15%) and the state’s new hospital assessment ($23 million).  On October 1, 2016, the state imposed a $250 million aggregate annual assessment on hospitals to help fund MassHealth, the state’s Medicaid program.  After offsetting increased Medicaid payments funded by the assessment, the net unfavorable impact to operating income in the first quarter was $8 million.

In the comparable 2016 quarter, Partners reported income from operations of $13 million (0.4% operating margin), composed of $14 million income from provider activity and a $1 million loss from insurance activity.

“Our academic medical centers and their physicians continued to generate strong revenue growth in the first quarter of this fiscal year, but pension and pharmaceutical costs continue to rise at a faster pace,” said Peter K. Markell, Chief Financial Officer and Treasurer for Partners HealthCare. “In addition, we are bearing an increased burden for caring for the Medicaid population due to the state’s new hospital assessment.”

Our academic medical centers and their physicians continued to generate strong revenue growth in the first quarter of this fiscal year, but pension and pharmaceutical costs continue to rise at a faster pace.

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

In the first quarter of fiscal 2017, Partners absorbed $368 million 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 $57 million (18%) over the shortfall absorbed in the comparable 2016 quarter.

Non-operating Results
Partners reported an overall gain of $160 million, including non-operating gains of $177 million, in the 2017 first quarter.  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.  The gains recorded in the 2017 quarter were primarily driven by higher interest rates which improved the market value of interest rate swaps ($135 million).  In the fiscal 2016 first quarter, Partners reported an overall loss of $37 million, including a non-operating loss of $50 million.

Health Care Provider & Other Activity (Provider Activity)
Provider activity generated breakeven operating results in the 2017 first quarter compared with operating income of $14 million (0.6% operating margin) in the 2016 first quarter.

Revenue for provider activity increased $138 million (5%) to $2.6 billion in the first quarter of 2017.  Net patient service revenue increased $123 million (6%) ($22 million of which reflects an increase in services provided to NHP members) to $2.1 billion.  Increases in the volume and severity of patient activity – particularly at the academic medical centers – contributed to the growth in net patient service revenue, but was partially offset by softer-than-expected volume at some community locations and an adverse shift in payer mix (to government payers from commercial payers).  Research revenue increased $16 million (4%) to $432 million, reflecting growth in government-sponsored and corporate-sponsored research activity.  Other operating revenue, excluding patient care and research revenue, was flat at $155 million.

Operating expenses attributable to provider activity increased $152 million (6%) to $2.6 billion in the 2017 quarter.  Labor costs associated with the operation of Partners eCare (an integrated, electronic health and administrative information system, which is live at more sites across the System), wage increases associated with new nursing contracts entered into during FY16, and higher pension expense contributed to an increase in employee compensation and benefits of $70 million (5%) to $1.5 billion.  Supplies and other expenses increased $43 million (7%) to $629 million, reflecting the new Medicaid assessment ($23 million) as well as increased costs for pharmaceuticals ($18 million, 15%).  Depreciation increased $16 million (12%) to $150 million as several large capital projects became operational.  Interest expense increased $12 million (37%) to $45 million due to additional debt and the cessation of capitalizing interest on projects that were completed.

Insurance Activity
Insurance activity resulted in an operating loss of $17 million in the 2017 first quarter compared to a loss of $1 million in the comparable 2016 quarter.  These results include the impact of premium deficiency reserves, which decreased NHP’s operating losses by $6 million and $11 million in the 2017 and 2016 quarters, respectively.  Excluding the impact of premium deficiency reserves, NHP generated operating losses of $23 million (-3.6% operating margin) in 2017 and $12 million (-2.2% operating margin) in 2016.  A change in hepatitis C protocols, which was implemented in August 2016 to enhance patients’ access to treatment, contributed to an increase in pharmaceuticals costs of approximately $7 million in the 2017 quarter.

Premium revenue increased $55 million (9%) to $644 million in the 2017 first quarter, reflecting a 7% increase in membership.  As of December 31, 2016, NHP had 441,799 members, of which approximately 66% were in government-sponsored plans. 

“NHP and the state mutually agreed to a freeze on MassHealth enrollment in October 2016 to give management time to stabilize financial performance after experiencing significant operating losses due to an 80% increase in its Medicaid population over the past three years,” said Markell. “Because of the lag between utilization of services and the processing of claims, it will take some time for the membership freeze to impact NHP’s results.  In addition, the Health Connector’s decision to retrospectively alter Blue Cross Blue Shield’s risk adjustment calculations as part of the Affordable Care Act resulted in unfavorable adjustments to NHP’s prior year receipts and is also expected to reduce NHP’s share of these funds going forward.”

NHP and the state mutually agreed to a freeze on MassHealth enrollment in October 2016 to give management time to stabilize financial performance after experiencing significant operating losses due to an 80% increase in its Medicaid population over the past three years.

Peter K. Markell Chief Financial Officer and Treasurer, Partners HealthCareChief Financial Officer and Treasurer, Partners HealthCare

Medical claims expense increased $67 million (12%) ($22 million of which reflects an increase in claims paid to Partners clinicians and providers) to $621 million in 2017.  NHP’s medical loss ratio (the percentage of insurance premiums that are used to pay medical claims) was 97% in the 2017 quarter and 96% in the 2016 quarter.

General and administrative costs increased $4 million (11%) to $41 million in the 2017 quarter, reflecting membership growth and investments to facilitate growth in the commercial lines of business.  The administrative expense ratio (the percentage of insurance premiums that are used to pay general and administrative expenses) remained low at 6.4%.

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 $185 million through a wide-range of community commitments.

A recent example includes NHP’s new community-based initiative to promote health of at-risk members and prevent costly hospitalizations, called ‘Neighborhood Care Circle.’  The innovative program identifies and addresses the complex needs of critically at-risk members who account for a large percentage of emergency room visits, lengthy hospital stays, and other acute interventions that contribute to the rising cost of health care.

The program will target vulnerable and difficult to reach members who often suffer from chronic conditions and behavioral health issues.  Once members are designated for special care, the Neighborhood Care Circle teams will then arrange for services available within the community to help them recover and stay healthy so as to prevent costly interventions later, such as emergency room visits and hospital admissions.  NHP will work with these members to help them apply for jobs, secure housing, arrange for transportation to keep doctor appointments, take needed medications, and locate community resources that meet their particular medical or behavioral health needs. 

NHP’s effort complements another model of care launched as part of the state’s Medicaid ACO pilot, called Partners Care Connect, that is tailored to patients’ individual needs and supported by population health management programs across the Partners network.  To meet the needs of MassHealth members, population health management 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.