BOSTON, MA – Partners HealthCare today reported operating income of $50 million (1.5% operating margin) in the third quarter of fiscal year 2017, which ended on June 30, 2017. Health care provider activity generated operating income of $16 million 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) resulted in operating income of $34 million (see Insurance Activity).

In the 2016 third quarter, Partners reported a loss from operations of $33 million (-1.0% operating margin), including income from provider activity of $7 million and a loss from insurance activity of $40 million.

Partners total operating revenue grew $271 million (9%) to $3.4 billion in the 2017 third quarter, reflecting increases in provider activity ($207 million, 8% -- of which $92 million or 3% was contributed by Wentworth-Douglass) and insurance activity ($30 million, 5%).

Total operating expenses increased $188 million (6%) to $3.4 billion, principally due to the inclusion of Wentworth-Douglass ($91 million or 3%), the preliminary impact of a voluntary retirement opportunity offered by Brigham Health to certain employees ($19 million) 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 third quarter was $11 million.

Our hospitals and physician organizations generated solid revenue growth this quarter.

Peter Markell Chief Financial Officer and Treasurer, Partners HealthCare

“However, our operating performance reflects the impact of implementing various Partners 2.0 initiatives that are designed to generate cost and operational efficiencies over time. For example, we are incurring upfront costs in connection with Brigham Health’s voluntary retirement opportunity, but expect this program to yield savings beginning in fiscal 2018. We expect the total cost of this program to be $80-$90 million, of which $19 million was booked in the third quarter, with the balance expected to be booked in the fourth quarter of 2017. Also, our insurance operations have yielded improved performance,” said Peter Markell, Chief Financial Officer and Treasurer, Partners HealthCare.

Partners reported an overall gain of $55 million in the 2017 quarter, including a non-operating gain of $5 million. 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 philanthropic activity. In the 2016 quarter, Partners reported an overall loss of $44 million, including a non-operating loss of $11 million.

Health Care Provider & Other Activity (Provider Activity)
Revenue for provider activity increased $207 million (8%) to $2.9 billion in the third quarter of 2017, including $92 million (3%) for Wentworth-Douglass. Net patient service revenue increased $200 million (10%) to $2.3 billion, reflecting the inclusion of Wentworth-Douglass ($90 million or 4%) and overall growth in same-facility inpatient and outpatient activity. Research revenue increased $22 million (5%) to $471 million, driven by growth in government-sponsored and corporate-sponsored research activity. Other operating revenue, excluding patient care and research revenue, decreased $14 million (-8%) to $162 million. In the 2016 third quarter, other operating revenue included $19 million from the commercialization of intellectual property.

Operating expenses attributable to provider activity increased $198 million (7%) – of which $91 million or 3% was due to the addition of Wentworth-Douglass – to $2.9 billion in the 2017 quarter. The inclusion of Wentworth-Douglass ($53 million) and the preliminary impact of Brigham Health’s voluntary retirement opportunity ($19 million) contributed to an increase in employee compensation and benefits of $89 million (6%) to $1.6 billion. Supplies and other expenses increased $69 million (11%) to $703 million, reflecting increased costs for pharmaceuticals and clinical supplies ($27 million, 11%), the new Medicaid assessment ($23 million) and investments to help achieve cost and productivity efficiencies as part of the Partners 2.0 initiative ($9 million). Depreciation increased $9 million (6%) to $156 million. Interest expense increased $17 million (49%) to $51 million, reflecting additional debt and the cessation of capitalizing interest on projects that were completed.

Provider activity generated operating income of $16 million (0.6% operating margin) in the 2017 quarter, including $1 million contributed by Wentworth-Douglass. In the 2016 third quarter, provider activity generated operating income of $7 million (0.3% operating margin). The 2016 third quarter results reflect the financial 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, and a lease consolidation effort that required early exits from a handful of leases ($25 million).

Insurance Activity
Insurance activity resulted in an operating gain of $34 million in the 2017 third quarter compared to an operating loss of $40 million in the comparable 2016 quarter. These results reflect the benefit of premium deficiency reserve amortization of $17 million and $7 million in the 2017 and 2016 quarters, respectively.

Premium revenue increased $30 million (5%) to $651 million in the 2017 third quarter, primarily reflecting favorable risk adjustments as well as higher commercial rates relative to the comparable 2016 quarter. NHP’s membership declined by approximately 15% from June 30, 2016 to June 30, 2017, reflecting an agreement that NHP and MassHealth made in October 2016 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. As of June 30, 2017, approximately 68% of NHP’s 384,629 members were in MassHealth.

“NHP remains focused on stabilizing and improving its financial performance,” said Markell. “We have been pleased with the cooperation we have received from the state around Medicaid. NHP continues to grow its commercial large group segment while remaining cautious about the continuing uncertainty at the state and federal level.”

Medical claims expense decreased $43 million (-7%) to $579 million in 2017, reflecting the decline in membership as well as the impact of premium deficiency reserve amortization ($17 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 92% in the 2017 quarter and 101% in the 2016 quarter.

General and administrative costs decreased $1 million (-3%) to $38 million in the 2017 quarter. The administrative expense ratio (the percentage of insurance premiums that are used to pay general and administrative expenses) decreased to 5.9% in the 2017 quarter from 6.4% in the 2016 quarter.

Year-to-Date Consolidated Results
Partners reported income from operations of $57 million (0.6% operating margin) for the nine months ended June 30, 2017. Provider activity generated operating income of $35 million and insurance activity generated operating income of $22 million. In the comparable prior year period, Partners reported income from operations of $1 million, including $30 million income from provider activity and a $29 million loss from insurance activity. NHP’s results reflect the benefit of premium deficiency reserve amortization of $43 million and $28 million in the 2017 and 2016 periods, respectively.

Total operating revenue increased $676 million (7%) to $10.0 billion for the nine months ended June 30, 2017, reflecting growth in provider activity ($576 million, 7% -- of which $179 million or 2% was contributed by Wentworth-Douglass) and insurance activity ($73 million, 4%). Total operating expenses increased $620 million (7%) to $9.9 billion, principally due to the addition of Wentworth-Douglass ($177 million or 2%) and the state’s new Medicaid tax ($69 million).

For the nine months ended June 30, 2017, Partners HealthCare absorbed $1.0 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 $91 million (10%) over the shortfall absorbed in the comparable prior year period.

Partners reported an overall gain of $619 million for the nine months ended June 30, 2017. This includes a non-operating gain of $562 million of which $321 million reflects the net impact of Wentworth-Douglass joining Partners. Accounting rules require the fair value of acquired net assets to be recognized as non-operating gains. The remaining non-operating gains ($241 million) reflect improved investment performance and an increase in the market value of interest rate swaps due to higher interest rates. In the comparable 2016 nine-month period Partners reported an overall loss of $154 million, including a non-operating loss of $155 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.

At Camp Harbor View, Partners has committed $1 million in funding to support the summer camp and introduce underserved youth in Boston to the possibilities of a future they may have never envisioned. Partners commitment also offers hundreds of inner city teens an opportunity to learn about careers in health care while enjoying the beauty of the harbor islands in a safe and fun environment. Partners conducted two Health Care Career Exploration days at Camp Harbor View this summer. Thirty Partners clinicians and technicians, representing several hospitals, attended each of these sessions and provided an overview of careers and health care information to over 800 children. Occupations represented include nurses, occupational therapists, physical therapists, dentist and dental hygienist, nutritionists, medical technicians, and other health care specialists.