Partners HealthCare Reports Third Quarter 2018 Financial Results

BOSTON, Massachusetts, Aug. 17 -- Partners HealthCare issued the following news release:

Partners HealthCare today reported operating income of $91 million (2.7% operating margin) in the third quarter of fiscal year 2018, which ended on June 30, 2018. Health care provider activity generated operating income of $96 million during the quarter (see Provider Activity) and insurance activity (Neighborhood Health Plan or NHP) resulted in an operating loss of $5 million (see Insurance Activity). In the 2017 third quarter, Partners reported income from operations of $50 million (1.5% operating margin), including operating income of $16 million from provider activity and $34 million from insurance activity.

Partners total operating revenue declined $120 million (-3%) to $3.3 billion in the 2018 third quarter, as growth in provider revenue ($259 million, 9% -- including revenue received by Partners providers from NHP) was offset by a decline in insurance revenue (-$418 million, -64%). The decline in insurance activity reflects the transition of members from Medicaid managed care programs into the new MassHealth Accountable Care Organization (ACO) program on March 1, 2018. Total operating expenses decreased $161 million (-5%) to $3.2 billion, as increases in wages and benefits ($81 million, 5%) and supplies and other expenses ($69 million, 10%) were offset by a reduction in medical insurance claims (-$334 million, -68%).

Partners reported an overall gain of $275 million in the 2018 quarter, including a non-operating gain of $184 million of which $170 million reflects the preliminary net impact of Mass Eye & Ear joining Partners on April 1, 2018. 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 the 2017 quarter, Partners reported an overall gain of $55 million, including a non-operating gain of $5 million.

Health Care Provider & Other Activity (Provider Activity)

Provider activity generated operating income of $96 million (3.0% operating margin) in the third quarter of 2018 and $16 million (0.6% operating margin) in the third quarter of 2017.

Revenue for provider activity increased $259 million (9%) - of which $109 million or 4% was contributed by Mass Eye & Ear, which joined Partners on April 1, 2018 - to $3.1 billion in the 2018 third quarter. Net patient service revenue increased $198 million (9%) to $2.5 billion, reflecting higher patient acuity, growth in utilization of certain services and the inclusion of Mass Eye & Ear. Research revenue grew $22 million (5%), including $13 million (3%) for Mass Eye & Ear, to $493 million. Other operating revenue, excluding patient care and research revenue, increased $39 million (24%) to $200 million, reflecting activity for Mass Ear & Ear ($11 million), Partners recently opened specialty pharmacy ($8 million of non-patient revenue) as well as intellectual property ($7 million) and Medicaid ACO non-patient revenue ($7 million).

Operating expenses attributable to provider activity increased $179 million (6%) - of which $107 million or 4% was due to the addition of Mass Eye & Ear - to $3.0 billion in the 2018 third quarter. Employee compensation and benefits increased $85 million (5%) to $1.7 billion. Supplies and other expenses increased $71 million (10%) to $774 million reflecting continued pressure on costs for pharmaceuticals ($16 million or 11%) and medical supplies ($9 million or 7%). Depreciation and interest expense increased $9 million (4%) to $215 million.

Insurance Activity

Insurance activity resulted in an operating loss of $5 million (-1.9% operating margin) in the 2018 third quarter compared to an operating gain of $34 million (5.3% operating margin) in the comparable 2017 third quarter. The 2017 quarter reflects the benefit of premium deficiency reserve amortization, which increased NHP's operating gain by $17 million, as well as the timing of favorable risk adjustments.

Premium revenue decreased $419 million (-64%) to $232 million in the 2018 third quarter. NHP's MassHealth membership declined by 230,537 (-88%) from June 30, 2017 to June 30, 2018, reflecting the transition of members from Medicaid managed care programs into the new MassHealth ACO program on March 1, 2018. Under the new MassHealth ACO program, NHP is partnering with an ACO called My Care Family in Greater Lawrence as well as providing administrative services to approximately 100,000 patients in the Partners ACO. As of June 30, 2018, approximately 77% of NHP's 139,190 members were in commercial plans.

Earlier this month, NHP announced the launch of a major rebranding initiative and effective January 1, 2019 will be known as AllWays Health Partners. The new brand reflects the company's evolution as a customer-focused health plan with multiple lines of business committed to accelerating the growth of its large-group commercial membership.

"NHP is well positioned for further growth on the commercial side through the continued introduction of innovative products and first-to-market programs for employers, earning the administrative service business for 100,000 members through the Partners employee health plan, and the launch of a new brand identity," said Markell. "NHP's deep commitment to serving MassHealth members continues to evolve as they partner with and support Medicaid ACOs, including our own."

Medical claims expense decreased $374 million (-65%) to $205 million in the 2018 third quarter, reflecting the decline in membership and more efficient claims management. NHP's medical loss ratio (the percentage of insurance premiums that are used to pay medical claims) was 88.1% in the 2018 quarter and 91.5% in the 2017 quarter, excluding the impact of premium deficiency reserves.

General and administrative costs decreased $6 million (-14%) to $33 million in the 2018 second quarter. The administrative expense ratio (the percentage of insurance premiums that are used to pay general and administrative expenses) increased to 13.3% from 5.9% in the 2017 second quarter, relating to reductions in membership.

Year-to-Date Consolidated Results

Partners reported income from operations of $275 million (2.7% operating margin) for the nine months ended June 30, 2018. Provider activity generated operating income of $231 million and insurance activity generated operating income of $44 million. In the comparable prior year period, Partners reported income from operations of $57 million, including $35 million income from provider activity and $22 million income from insurance activity. NHP's 2017 results reflect the benefit of premium deficiency reserve amortization, which increased its operating income by $43 million.

Total operating revenue increased $33 million (0.3%) to $10.0 billion for the nine months ended June 30, 2018, as growth in provider activity ($635 million, 8% -- of which $109 million or 1% was contributed by Mass Eye & Ear) was substantially offset be a decline in insurance activity (-$689 million, -36%). Total operating expenses decreased $185 million (-2%) to $9.7 billion, as the decline in insurance activity exceeded growth in all other expenses, including the addition of Mass Eye & Ear ($107 million).

For the nine months ended June 30, 2018, Partners HealthCare absorbed $1.1 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 $46 million (4%) over the shortfall absorbed in the comparable prior year period.

Partners reported an overall gain of $691 million for the nine months ended June 30, 2018. This includes a non-operating gain of $416 million of which $170 million reflects the net impact of Mass Eye & Ear joining Partners. The remaining non-operating gains ($246 million) reflect improved investment performance and an increase in the market value of interest rate swaps due to higher interest rates. In the comparable 2017 nine-month period Partners reported an overall gain of $619 million, including a non-operating gain of $562 million of which $321 million reflects the net impact of Wentworth-Douglass Health System joining Partners.

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 158,000 low-income patients and reported to the Massachusetts Attorney General investments of more than $200 million through a wide-range of community commitments. Some examples include:

* At Camp Harbor View, Partners has committed $1 million in funding to support the summer camp 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.

* Partners is a primary sponsor of Summer Eats, a program administered by the Massachusetts Department of Elementary and Secondary Education, with technical assistance provided by Project Bread, to provide meals to the many children across Massachusetts who receive school lunches during the school year. This summer the program has 1,100 locations and will serve approximately 60,000 children.