BOSTON, MA – Partners HealthCare today reported operating income of $24 million (0.7% operating margin) in the second quarter of fiscal year 2017, which ended on March 31, 2017. Health care provider activity generated $19 million in operating income during the quarter, including activity for Wentworth Douglass Health System (Dover, NH), which joined Partners on January 1, 2017 (see Provider Activity). Insurance activity (Neighborhood Health Plan or NHP) generated operating income of $5 million (see Insurance Activity).

Partners total operating revenue increased $233 million (8%) to $3.3 billion in the 2017 second quarter, reflecting growth in provider activity ($230 million, 9% -- of which $87 million or 3% was contributed by Wentworth Douglass), partially offset by a contraction in insurance activity (-$13 million, -2.0%).

Total operating expenses increased $230 million (7%) to $3.3 billion, due to the inclusion of Wentworth Douglass ($86 million or 3%), higher wages ($69 million, 6%), benefits ($21 million, 6%), pharmaceuticals ($17 million, 14%) 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. After offsetting increased Medicaid payments funded by the assessment, the net unfavorable impact to operating income in the 2017 second quarter was $7 million.

“Our hospitals and physician organizations, including recently acquired Wentworth-Douglass hospital, generated strong revenue growth this quarter,” said Peter Markell, Chief Financial Officer and Treasurer, Partners HealthCare. “But in order to generate stronger operating margins we must streamline structures and processes across our system and re-examine our cost structure. We have recently launched a multi-year initiative called Partners 2.0, which will help us achieve this. The result will be an updated version of Partners that can compete in a challenging new regulatory, legislative and consumer-driven environment.”

Our hospitals and physician organizations, including recently acquired Wentworth-Douglass hospital, generated strong revenue growth this quarter

Peter Markell Chief Financial Officer and Treasurer, Partners HealthCare

In the 2016 second quarter, Partners reported income from operations of $21 million (0.7% operating margin), composed of $9 million income from provider activity and $12 million from insurance activity.

Partners reported an overall gain of $406 million in the 2017 quarter, including a non-operating gain of $382 million, of which $323 million (80% 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 philanthropy. In the 2016 quarter, Partners reported an overall loss of $73 million, including a non-operating loss of $94 million.

Health Care Provider & Other Activity (Provider Activity)
Revenue for provider activity increased $230 million (9%) to $2.8 billion in the second quarter of 2017. The addition of Wentworth Douglass accounted for $87 million (3%) of this increase. Net patient service revenue increased $170 million (8%) to $2.2 billion, reflecting the inclusion of Wentworth Douglass ($76 million) and overall growth in same-facility inpatient and outpatient activity, partially offset by an adverse shift in payer mix (to government payers from commercial payers). Research revenue increased $39 million (9%) to $463 million, driven by growth in government-sponsored and corporate-sponsored research activity. Other operating revenue, including royalty and intellectual property revenue (together, $12 million), increased $20 million (13%) to $173 million, as Partners continues to seek opportunities to expand its revenue base.

Operating expenses attributable to provider activity increased $219 million (9%) to $2.8 billion in the 2017 quarter. Wentworth Douglass accounted for $86 million (3%) of this increase. 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) and severance costs at North Shore Medical Center ($3 million) contributed to an increase in employee compensation and benefits of $85 million (6%) to $1.5 billion. Supplies and other expenses increased $67 million (11%) to $678 million, reflecting the new Medicaid assessment ($23 million) and increased costs for pharmaceuticals ($17 million, 14%). Depreciation increased $18 million (14%) to $153 million as several large capital projects became operational. Interest expense increased $18 million (56%) to $49 million due to additional debt and the cessation of capitalizing interest on projects that were completed.

Provider activity generated operating income of $19 million (0.7% operating margin) in the 2017 quarter, including $1 million contributed by Wentworth Douglass, compared with $9 million (0.3% operating margin) in the 2016 quarter.

Insurance Activity
Insurance activity resulted in an operating gain of $5 million in the 2017 second quarter compared to a gain of $12 million in the comparable 2016 quarter. These results include the impact of premium deficiency reserves, which increased NHP’s operating gains by $19 million and $10 million in the 2017 and 2016 quarters, respectively. Excluding the impact of premium deficiency reserves, NHP generated an operating loss of $14 million (-2.4% operating margin) in 2017 and an operating gain of $2 million (0.3% operating margin) in 2016.

Premium revenue decreased $13 million (-2%) to $619 million in the 2017 second quarter, reflecting an 11% decline in membership. In October 2016, NHP stopped accepting new MassHealth members to give management time to stabilize financial performance after experiencing significant operating losses for several years. As of March 31, 2017, NHP had 390,643 members, of which approximately 70% were in government-sponsored plans.

“NHP continues to make progress in terms of regaining a solid financial footing,” said Markell. “Right-sizing the Medicaid membership and related adjustments to NHP’s staff have helped, along with improved pricing in the merged market. New innovations like the recently announced money back guarantees for high quality service demonstrate a unique commitment to continued growth in commercial membership.”

Medical claims expense decreased $11 million (2%) to $572 million in 2017, reflecting the decline in membership. NHP’s medical loss ratio (the percentage of insurance premiums that are used to pay medical claims) was 96% in the 2017 quarter and 94% in the 2016 quarter (excluding the impact of the premium deficiency reserves). A change in hepatitis C protocols, which was implemented in 2016 to enhance patients’ access to treatment, contributed to an increase in pharmaceuticals costs of approximately $8 million in the 2017 quarter.

General and administrative costs increased $6 million (16%) to $42 million in the 2017 quarter, reflecting investments to facilitate growth in the commercial lines of business and severance costs ($1 million). As a result of these initiatives, the administrative expense ratio (the percentage of insurance premiums that are used to pay general and administrative expenses) increased to 6.7% in the 2017 quarter from 5.7% in the 2016 quarter.

Year-to-Date Consolidated Results
Partners reported income from operations of $7 million for the six months ended March 31, 2017. Provider activity generated operating income of $19 million and insurance activity generated an operating loss of $12 million. In the comparable prior year period, Partners reported income from operations of $34 million, composed of $23 million from provider activity and $11 million from insurance activity. Excluding the impact of premium deficiency reserves ($27 million in 2017 and $22 million in 2016), Partners generated a loss from operations of $20 million (-0.3% operating margin) for the six months ended March 31, 2017 compared to $12 million (0.2% operating margin) in the 2016 period. Total operating revenue increased $405 million (7%) to $6.5 billion for the six months ended March 31, 2017, reflecting growth in provider activity ($369 million, 7% -- of which $87 million or 1% was contributed by Wentworth Douglass) and insurance activity ($43 million, 3%). Total operating expenses increased $432 million (7%) to $6.5 billion, due to the addition of Wentworth Douglass ($86 million or 1%), higher wages ($128 million, 6%), benefits ($33 million, 5%), pharmaceuticals ($35 million, 15%) and the state’s new Medicaid tax ($6 million).

For the six months ended March 31, 2017, Partners HealthCare absorbed $705 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 $90 million (15%) over the shortfall absorbed in the comparable prior year period.

Partners reported an overall gain of $566 million for the six months ended March 31, 2017. This includes a non-operating gain of $559 million of which $323 million reflects the net impact of Wentworth Douglass joining Partners. The remaining non-operating gains reflect improved investment performance and an increase in the market value of interest rate swaps due to higher interest rates. In the comparable 2016 six-month period Partners reported an overall loss of $110 million, including a non-operating loss of $144 million.

Commitment to Community
Opioid overdoses kill six people in Massachusetts every day – five times more than car crashes. For those who survive an overdose, medication cuts their risk of death by half, but only 5 percent of overdose survivors are started on medicine.

Recognizing the chronic nature of this illness, Partners HealthCare recently joined with business, health care and community leaders including Governor Baker, Attorney General Healey and Boston Mayor Walsh to launch a statewide private-sector effort to battle opioid addiction in Massachusetts. The effort, RIZE Massachusetts, seeks to raise $50 million over the next three years to support innovative care designed to help people with substance abuse disorders adhere to their treatment and maintain their recovery. The fundraising effort, which has already attracted nearly $13 million in commitments, was announced a few weeks ago. RIZE will focus on proposed solutions that ensure immediate access to evidence-based treatment, improve adherence to treatment and achieve long-term remission.